Chapter 4 Exhibits

1. Chapter 4 Exhibits from Strategy and the Business Landscape

2. The Pharmaceutical Payoff Matrix (Millions of Dollars)

3. A Framework for Competitor Analysis What the Competitor Is Doing and Can Do What Drives the Competitor Current Strategy Future Goals How the business is currently competing At all levels of management and in multiple dimensions Competitor’s Response Profile Is the competitor satisfied with its current position? What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? What will provoke the greatest and most effective retaliation by the competitor? Assumptions Capabilities Held about itself and the industry Both strengths and weaknesses Source: Michael Porter, Competitive Strategy, (New York: Free Press, 1980), Chapter 3

4. The Limits to Sustainability 40 30 ROI% 20 10 0 1 2 3 4 5 6 7 8 9 10 Year Source: Pankaj Ghemawat, Commitment (New York: The Free Press, 1991)

5. The Four Threats to Sustainability Imitation Substitution Added Value Appropriated Value Slack Holdup

6. Trends and Success in the Programming of New Television Series Source: Robert E. Kennedy, “Strategy Fads and Competitive Convergence: An Empirical Test for Herd Behavior in Prime Time Television Programming,” Unpublished working paper, Harvard Business School (January 1998)

7. The Economics of Brokerage Business Models, Early 1996 Source: Rajiv Lal, “ E-Trade Securities, Inc.” Stanford University Graduate School of Business Case No. M-286, 1996

8. Asset-Specificity in the Automobile Industry Source: Jeffrey H. Dyer, “Does Governance Matter?,” Organization Science, Vol. 7, No. 6, Nov-Dec 1996

9. Market Value versus Cumulated Strategic Investments at General Motors 100 Market Value 50 0 -50 -100 Strategic Investments 0% $ Billion -150 -200 -250 -300 10% -350 -400

10. Responding to Threats to Sustainability • Responses to Imitation • Building Barriers • Economies of scale and scope • Learning/private information • Contracts and relationships • Network externalities • Threats of retaliation • Time lags • Strategic complexity • Upgrading • Responses to Substitution • Not responding • Fighting • Switching • Recombining • Straddling • Harvesting Added Value Appropriated Value • Responses to Slack • Gathering information • Monitoring behavior • Offering performance incentives • Shaping norms • Bonding resources • Changing governance • Mobilizing for change • Responses to Holdup • Contracting • Integrating • Building bargaining power • Bargaining hard • Reducing asset-specificity • Building relationships • Developing trust

11. Chapter 4 Text Related Slides from Strategy and the Business Landscape

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. GOALS State-ownership Lower Profits Growth Objectives CAPABILITIES Tosoh/DSM Technology DSM Size/Deep Pockets Political Access Behavioral Analysis of HSC • STRATEGY • Migrating Downstream • Legal Skirmishing • Likely to Expand into US • ASSUMPTIONS • Different Home Base • Chemical Company Parents • Thinks NutraSweet Will Accommodate

15. Behavioral Profiles Resources and Capabilities Competitor Profile Current Strategy Apparent Assumptions Future Goals Source: Michael Porter, Competitive Strategy, (New York: Free Press, 1980), Chapter 3

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 Analyze titles & responsibilities: Chair & CEO Chair, CEO & COO Chair & chief scientist ...

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 39% 3% Bottom Half Top Half

32. Sustainability Analysis Advantage (% ROI)

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

34. Threats to Sustained Advantage Yes Continued Appropri- ability No • Hold-up • Slack Yes No Continued Scarcity • Imitation • Substitution Yes No Competitive Advantage

35. Threats to Sustainability Imitation Slack Substitution Hold-Up

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 (4 Years) 386 (3 Years) 486 (2 Years) Pentium (1 Year) Pentium Pro (3 Months) MMX

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 Procurement and Logistics Operations Marketing B&N Offline Amazon Original B&N Online Amazon Response

41. Substitution: Steel Sheet steel Steel Quality Structural Steel Other bars & rods Quality of minimill-produced steel Rebar 1990 1975 1980 1985 Source: Clayton Christensen and Bret Baird, “Continuous Casting Investments at USX Corporation,” HBS #5-697-066, April 24, 1997.

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 40% 30% Operating Margin 20% 10% software other components personal computers peripherals services microprocessors Share of Industry Revenue Source: Orit Gadiesh and James L. Gilbert, “Profit Pools: A Fresh Look at Strategy,” Harvard Business Review, May-June 1998, p.145

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