Chapter 4 Exhibits

1. Chapter 4 Exhibits

2. The Pharmaceutical Payoff Matrix (Millions of Dollars)

3. A Framework for Competitor Analysis

4. The Limits to Sustainability

5. The Four Threats to Sustainability

6. Trends and Success in the Programming of New Television Series

7. The Economics of Brokerage Business Models, Early 1996

8. Asset-Specificity in the Automobile Industry

9. Market Value versus Cumulated Strategic Investments at General Motors

10. Responding to Threats to Sustainability

11. Chapter 4 Text Related Slides

12. Outline I. Approaches to competitor analysis II. The purposes of competitor analysis III. The process of competitor analysis

13. I. Approaches to Competitor Analysis Structural analysis Behavioral analysis Game-Theoretic analysis

14. Behavioral Analysis of HSC GOALS State-ownership Lower Profits Growth Objectives CAPABILITIES Tosoh/DSM Technology DSM Size/Deep Pockets Political Access

15. Behavioral Profiles

16. Competitors’ Goals Market share vs. profitability Growth vs. dividend pay-out Technological leadership vs. cost leadership Long run vs. short run performance Non-economic vs. economic goals

17. Personality Profiles Conservative vs. aggressive Risk takers vs. risk adverse Operational focus vs. visionary Analytical vs. emotional Profit-oriented vs. growth

18. Diagnosing Competitor Goals and Assumptions Profiles of key management Organization structure Advisors Public statements Results of recent past History Parent company strategy Position in the portfolio

19. Competitor Incentives Look ahead and reason back Recognize linkages across markets Pay attention to uncertainties Narrow uncertainties by projecting profits and implied courses of action

20. Pulling It All Together Is the competitor satisfied with its current position? What likely future moves or strategy shifts, will the competitor make and how dangerous are they? Where is the competitor vulnerable? What will provoke the greatest and most damaging retaliation by the competitor?

21. II. The Purposes of Competitor Analysis Linking Analysis to Action Offense Defense Influence Cooption Concession

22. Interaction: Reality & Perceptions Common Perceptual Biases Ascribing inertia to competitors, while assuming you will act Assuming competitors have no options Underestimating the intensity of retaliation

23. Classic Good Moves ... Hard to match; cost them more than it costs you -- builds on strategic asymmetries Have commitment value; costly to reverse, so intentions will be believed Help\improve industry structure Lower costs and\or create value for customers Aim at competitor’s blind spots Anticipate the competition (it is easier to keep them out than kick them out)

24. Classic Bad Moves ... Can be easily copied (when you think its unique) Show a lack of commitment Raise costs without creating value; lower prices without expanding volume Undermine industry structure Ignore a firm’s capabilities Needlessly provoke or mindlessly hurt competitors

25. A Broader Perspective: Influencing Competitors The right competitors can be good Influence the competitors’ entry and mobility Influence the competitors’ incentives Avoid creating desperate competitors

26. III. The Process of Competitor Identification Whom do I analyze? Common approach: Companies with similar strategies and competitive positions Often forgotten: Companies able to: change industry structure or evolution leverage related capabilities to enter the industry offer substitute technologies provide complementary assets or products

27. Procedural Guidelines A lot of information already in house One time efforts rarely succeed Cost/benefit of data collection Data without analysis = low benefit … More than a planning tool and, a framework for self analysis ...

28. Sources of Information on Competitors

29. Protecting One’s Own Information Decide what needs to be protected Recognize the range of overt sources of information Recognize the possibility of covert action telephone and fax intercepts trash analysis employee subversion/insertion Protecting information requires protecting people

30. Anticipating Competitive and Cooperative Dynamics The detailed analysis of individual competitors The evolutionary analysis of threats to sustainability

31. Predicting Profits

32. Sustainability Analysis

33. Imitability of the Product/Service Low Sustainability: Resources and Products

34. Threats to Sustained Advantage Want to integrate this positive view of sustainability with the negative view around which we have structured the day-to-day class discussions. Have examined four principal threats to sustained advantage Quick review: In module on Creating Competitive Advantage, we talked about creating value and capturing value. Stressed the role of scarcity in both creating and capturing; appropriability in capturing. Challenge is to perpetuate scarcity and appropriability. Two threats to each What threat do you consider the most severe? How would we think about saturation of demand in this context? How would we think about Intel’s problem with cheap PCs?Want to integrate this positive view of sustainability with the negative view around which we have structured the day-to-day class discussions. Have examined four principal threats to sustained advantage Quick review: In module on Creating Competitive Advantage, we talked about creating value and capturing value. Stressed the role of scarcity in both creating and capturing; appropriability in capturing. Challenge is to perpetuate scarcity and appropriability. Two threats to each What threat do you consider the most severe? How would we think about saturation of demand in this context? How would we think about Intel’s problem with cheap PCs?

35. Threats to Sustainability

36. Imitation Imitation increases the “supply” of what a firm uniquely provides Profits draw a crowd Imitation is pervasive and can be deadly Intel in DRAMs EMI in CAT scanners Apple in user-friendly PCs Netscape in browsers Ben & Jerry’s in super-premium ice cream Bridal registries on the Internet But imitation can be deterred Continental Lite vs. Southwest Airlines Child World vs. Toys “R” Us

37. Imitation:Duration of Intel’s Monopolies

38. Barriers to Imitation Scale or Scope Economies Experience/Learning (Tacit Knowledge) Relationships Reputation Retaliation Response Lags Upgrading/Investments Fit

39. Substitution Substitution reduces the “demand” for what a firm uniquely provides by shifting the demand elsewhere The better mousetrap Due to changes in technology, customer needs, input prices, etc. Substitution threats can be subtle and unexpected Videoconferencing vs. air travel Western Union vs. the telephone Conventional contact lenses vs. disposables For this reason, substitution is an especially effective way to attack dominant players

40. Substitution: Book Retailing

41. Substitution: Steel

42. Responses to Substitution Before Scan the landscape broadly for threats Understand underlying customer needs But be prepared to ignore the needs of current customers After: Your Options Fight the threat Incorporate their benefits (e.g., orange juice supplemented with calcium) Incorporate their cost reductions (e.g., private labeled items in supermarkets) Face up to your loss of added value, and reduce price before the substitute gets a foothold If you can’t beat them, join them Take the money and run

43. Responses to Substitution Not responding Fighting Switching Recombining Straddling Harvesting

44. Hold-up Hold-up diverts value to customers, suppliers, or complementors who have some bargaining leverage They have bargaining leverage because they have something you need and can’t get elsewhere (added value) Ex: Who makes all the profits from PCs? Hold-up is especially threatening when parties in a relationship have invested in assets that are specific to that relationship (so it’s hard to walk away) An electric plant built at the mouth of a coal mine A railroad spur laid to a particular factory Skills that are tailored to a particular employer

45. Hold-Up: Genex and G.D. Searle Codeveloped a process for making one of the two key amino acids used in NutraSweet Genex entered into a “long-term” contract to supply Searle and built a new bioprocessing facility Searle began to renegotiate price within months, and initiated internal production within one year Genex went bankrupt

46. Holdup In The PC Industry

47. Responses to Hold-up Multiple sourcing But investments in relationship-specific assets are important Tough negotiation Contractual arrangements But contractual incompleteness limits this option Vertical integration Don’t base your competitive advantage on specific assets you can’t own (like a particular individual)

48. Responses to Hold-up Contracting Integrating Building bargaining power Bargaining hard Reducing asset-specificity Building relationships Developing trust

49. Slack Slack, or waste within the firm, dissipates value Slack is hard to identify... Plush carpets for their own sake are slack But plush carpets to win customers and recruit talent might be wise investments …but slack is thought to be large 10-40% of revenues, typically!?! Slack tends to be worst under certain conditions Forgiving competitive environments Settings in which managers must have wide discretion over productive processes

50. Slack: The Theory of Free Cash Flow Principal-agent problems between managers and stakeholders Managers have incentives to grow the resources under their control Free cash flow enhances managers’ ability to Invest resources in negative-return activities Waste resources

51. Responses to Slack Monitoring of performance Benchmarking Time-motion studies Outsiders on Boards Managerial incentives On average, top executives get roughly $3.25 for each $1,000 of shareholder value created (Jensen and Murphy) Commitments to return cash to shareholders e.g., dividends Appeals to a higher calling, a sense of mission

52. Responses to Slack Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change

53. A Fifth Threat Nonmarket Pressures Government NGOs Media

54. Sustained Cooperative Advantage With cooperative or competitive interactions, unlikely to gain more than “added value” Sustained cooperative advantage: significant “added value” as partner

55. Building Sustainable Advantages Understand your own uniqueness Scan the environment for Technological changes Variations in input supply Demand shifts Invest in opportunities that fit

56. Protecting Sustainable Advantages Sustainability is not forever, nor is it free Investment can reinforce it by Amplifying advantages Multiplying their bases

57. Conclusions The best defense is a good offense That is, defend your advantage by continually upgrading it Seek out ways to increase willingness to pay without incurring commensurate supplier opportunity costs Seek out ways to reduce supplier opportunity costs without sacrificing commensurate willingness to pay Make yourself a moving target But remember that the landscape can shift under your feet Amplify existing advantage (e.g., Coke’s worldwide expansion) Multiply the number and sources of advantage (e.g., Intel Inside) Leverage into new markets (e.g., Disney into theme parks, Progressive into the standard segment)Amplify existing advantage (e.g., Coke’s worldwide expansion) Multiply the number and sources of advantage (e.g., Intel Inside) Leverage into new markets (e.g., Disney into theme parks, Progressive into the standard segment)

58. Countering Threats to Sustainability Sustained superior performance requires Scarcity Appropriability Two routes to sustainability Making lumpy commitments Building organizational or technical capabilities over time

59. A Dynamic Theory of Sustainability A dynamic theory of sustainability requires a link between what you did yesterday and what you can do well today a link between what you do today and what you can do well tomorrow

60. Sustainability and Investment Implications for investment The status quo cannot be sustained without investment Because of the moving competitive baseline, investment is required just to earn average returns Above-average returns require investments that retard the movement of the competitive baseline

61. Chapter 4 Case Related Slides

62. Structural Analysis of BSB vs. Sky High fixed costs/Upfront investment Inelastic supply: films, advertising Fixed demand Network effects/Switching costs Diverse competitors Inconsistent goals High strategic stakes Antagonism/emotion Substitutes: BBC/TV/Cable

63. Goals Murdoch’s nonpecuniary motivation A Behavioral Profile of News Corporation

64. Game-Theoretic Analysis of BSB vs. Sky

65. Chapter 4 Case Related Slides

66. De Beers Exhibit A: Value Appropriation

67. Exhibit A: Value Appropriation (cont’d)

68. De Beers Exhibit B: Supply Forecast 1986

69. De Beers Exhibit C: Demand Forecast

70. Exhibit C: Demand Forecast (cont’d)

71. Exhibit C: Demand Forecast (cont’d)