Transcript Metso needs global partnerships

Overview : Industry Analysis
Wai Chamornmarn
Thammasat university
2006
International Trade Theory
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Industry Analysis
Why do nations trade with each-other?
How do different theories explain trade flows?
How does free trade raise the economic welfare of all participating
nations? Any disagreements?
Can government actively influence a country’s competitive advantage?
Why is an understanding of trade theory important for managers?
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An Overview of Trade Theory
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Free Trade occurs when a government does not attempt to influence,
through quotas or duties, what its citizens can buy from another
country or what they can produce and sell to another country.
The Benefits of Trade allow a country to specialize in the manufacture
and export of products that can be produced most efficiently in that
country.
The Pattern of International Trade displays patterns that are easy to
understand (Saudi Arabia/oil or China/crawfish). Others are not so
easy to understand (Japan and cars).
The history of Trade Theory and Government Involvement presents a
mixed case for the role of government in promoting exports and
limiting imports. Later theories appear to make a case for limited
involvement.
Industry Analysis
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© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Capitalism Requires
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Consumers.
Monopolies and imperfect forms of competition to facilitate the accumulation of
capital. Pure competition feeds the market economy, not necessarily capitalism.
Capital and credit have always been the surest way of capturing and controlling a
foreign market. True in all forms of capitalism since the 15 th century Florentines.
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Industry Analysis
13th century - Florence.
16th century - Augsburg, Antwerp, Genoa,
18th century - Amsterdam and London
19th and 20th centuries - New York
21st century - Beijing??
Amartya Sen – The Modern Face of Capitalism?
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1998 Nobel Prize winner in Economic Science.
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Developed and developing nations face the persistence of poverty, hunger, violations of basic
freedoms, environmental issues and concerns about sustainability of economic and social lives.
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Overcoming these problems is central to development.
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“Expansion of freedom is viewed…both as the primary end and as the principal means of
development.”
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“Development consists of the removal of various types of unfreedoms that leave people with little
choice and little opportunity of exercising their reasoned agency.”
Industry Analysis
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Sen’s Prescription
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What people can achieve is influenced by:
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Economic opportunities (process vs. opportunity freedom).
Political liberties.
Social power.
Conditions of good health.
Basic education.
Encouragement and cultivation of initiatives.
Freedom to enter labor markets and exchange freely.
Industry Analysis
Rod’s 21st Century Synthesis
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Capitalism is becoming more accessible with the advent of globalization
and technology.
Knowledge and human capital are becoming the most important sources of
capital (knowledge capitalism).
Increase transience and fragmentation in “centers of gravity” of capitalism.
Decreased periods of competitive advantage.
More freedom in the world.
Industry Analysis
Free Trade
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Free trade refers to a situation where a government does not attempt
to influence through quotas or duties what its citizens can buy from
another country or what they can produce and sell to another country.
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USA imports most of the sneakers and jeans consumed although these
can be produced at home. Why???
Industry Analysis
International Trade Theory
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What is international trade?
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Classical trade theories:
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Industry Analysis
explain national economy conditions--country advantages--that enable
such exchange to happen
New trade theories:
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Exchange of raw materials and manufactured goods (and services)
across national borders
explain links among natural country advantages, government action,
and industry characteristics that enable such exchange to happen
Classical Country-Based Theories
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Mercantilism
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Emerged in England in the mid-16th century
It is in a country’s best interest to maintain a trade surplus, to export more
than it imports.
Takes an us-versus-them view of trade; other country’s gain is our country’s
loss
Government intervention to achieve a surplus in the balance of trade.
Neo-mercantilism views persist today
Industry Analysis
Free Trade supporting theories
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Show that specialization of production and free flow of goods
grow all trading partners’ economies.
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Absolute Advantage (Adam Smith, The Wealth of Nations, 1776)
• countries differ in their ability to produce goods efficiently, and
that a country has an absolute advantage in the production of a
product when it is more efficient than any other country in
producing it.
• countries should specialize in the production of goods for which
they have an absolute advantage and then trade these goods for
the goods produced by other countries.
Industry Analysis
Absolute Advantage
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Adam Smith: The Wealth of Nations, 1776
Mercantilism weakens a country in the long run and
enriches only a few segments
A country should specialize in and export products for
which it has absolute advantage; import others
A country has absolute advantage when it is more
productive than another country in producing a particular
product
Cocoa
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Ghana
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G'
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Industry Analysis
S. Korea
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Rice
Free Trade supporting theories, cont’d.
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When each country has an absolute advantage in one of the
products, it is clear that trade is beneficial. But what if one
country has an absolute advantage in both products?
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Industry Analysis
Comparative Advantage (David Ricardo, Principles of Political
Economy.1817)
• it makes sense for a country to specialize in the production of
those goods that it produces most efficiently and to buy the
goods that it produces less efficiently from other countries,
even if this means buying goods from other countries that it
could produce more efficiently itself.
• Many assumptions
Comparative Advantage
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David Ricardo: Principals of Political Economy, 1817
Country should specialize in the production of those goods in
which it is relatively more productive... even if it has absolute
advantage in all goods it produces
Absolute advantage is really a special case of comparative
advantage
Cocoa
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Ghana
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S. Korea
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Industry Analysis
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Rice
Classic Theory Limitations
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Fundamentally: Free Trade expands the world “pie” for
goods/services
Theory Limitations
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Simple world (two countries, two products)
no transportation costs
no price differences in resources
resources immobile across countries
constant returns to scale
each country has a fixed stock of resources and no efficiency
gains in resource use from trade
full employment
Industry Analysis
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Simple Extensions of the Ricardian Model
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Immobile resources:
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Diminishing returns:
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More a country produces, at some point, will require more resources
(diminishing returns to specialization).
Different goods use resources in different proportions.
However:
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Resources do not always move easily from one economic activity to
another.
Free trade might increase a country’s stock of resources (as labor and
capital arrives from abroad), and
Increase the efficiency of resource utilization.
Industry Analysis
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ghana’s PPF under Diminishing Returns
Cocoa
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Figure 4.3
G’
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Industry Analysis
Rice
The Influence of Free Trade on the PPF
PPF2
Cocoa
PPF1
G’
Figure 4.4
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Industry Analysis
Rice
Heckscher (1919)-Ohlin (1933) Theory
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The pattern of international trade depends on differences in factor
endowments not on differences in productivity
Absolute amounts of factor endowments matter
Products differ according to the types of factors that they need as inputs
A country has a comparative advantage in producing products that
intensively use factors of production (resources) it has in abundance
Factors of production: labor, capital, land, human resources, technology
Leontief paradox:
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US has relatively more abundant capital yet imports goods more capital
intensive than those it exports
Explanation(?):
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Industry Analysis
US has special advantage on producing new products made with innovative
technologies
These may be less capital intensive till they reach mass-production state
International Product Life-Cycle (Vernon)
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As products mature both the location of sales and the optimal
production location will change affecting the flow and direction of
trade.
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Most new products initially conceived and produced in the US in 20th
century
US firms kept production close to the market
• Aid decisions; minimize risk of new product introductions
• Demand not based on price yet; low production cost not an issue
Limited initial demand in other advanced countries
• Exports more attractive than production there initially
With demand increase in advanced countries
• Production follows there.
With demand expansion elsewhere
• Product becomes standardized
• production moves to low production cost areas
• Product now imported to US and to advanced countries
Industry Analysis
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The Product Life-Cycle Theory
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120
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production
United States
Export
Import
s
s
Other Advanced Countries
Exports
Imports
Developing Countries
Exports
Imports
New Product
Maturing Product
Standardized Product
Stages of Production Development
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Industry Analysis
consumption
McGraw-Hill/Irwin
Figure 4.5
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
4-25
The New Trade Theory
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Began to be recognized in the 1970s.
Deals with the returns on specialization where substantial
economies of scale are present.
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In addition to economies of scale, learning effects also exist.
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Specialization increases output, ability to enhance economies of
scale increase.
Industry Analysis
McGraw-Hill/Irwin
Learning effects are cost savings that come from “learning by
doing”.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
4-26
Application of the New Trade Theory
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Typically, requires industries with high, fixed costs.
World demand will support few competitors.
Competitors may emerge because “they got there first”.
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First-mover advantage.
Some argue that it generates government intervention and
strategic trade policy.
Industry Analysis
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
4-27
First-Mover Advantage
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Economies of scale may preclude new entrants.
Role of the government.
Industry Analysis
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Competitive Advantage
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Porter’s “National Diamond”
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“Advantages throughout the
‘diamond’ are necessary for
achieving and sustaining
competitive success … [but]
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Advantage in every
determinant is not a
prerequisite…” (73)
Industry Analysis
Competitive Advantage
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Factors matter but may enhance CA through their absence:
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“an abundance of factors may undermine instead of enhance
competitive advantage. Selective disadvantages in factors,
through influencing strategy and innovation, often contribute to
sustained competitive success.” (74)
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Second factor also important for Dutch flowers:
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Home demand
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Opposite of economic theory belief
- Gives example of Holland’s advantage in flowers “despite its cold,
grey climate”…
Industry Analysis
Quality more important than quantity
Discerning consumers drive product innovation
Competitive Advantage
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“Nations gain competitive advantage … where the home
demand gives local firms a clearer or earlier picture of buyer
needs…
if home buyers pressure local firms to innovate faster…” (86)
“A product’s fundamental or core design nearly always
reflects home market needs.” (87)
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“small nations can be competitive in segments which represent
an important share of local demand but a smaller share of
demand elsewhere, even if the absolute size of the segment is
greater in other nations.” (88)
Industry Analysis
Competitive Advantage
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Related & supporting
industries
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Suppliers assist
“process of
innovation and
upgrading…
Suppliers help firms
perceive new
methods and
opportunities to apply
new technology.”
(103)
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Industry Analysis
The full pattern of interlinking industries
is very complex…
Competitive Advantage
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A more disaggregated view…
Industry Analysis
Competitive Advantage
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Competitive advantage in suppliers means spinoffs from one
industry can be means to develop new ones
“Italian world leadership in gold and silver jewelry has been
sustained … because other Italian firms produce two-thirds of
the world’s jewelry-making machinery.” (101)
Related industries give strength to each other…
Industry Analysis
Competitive Advantage
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Competitive advantage in related industries
TABLE 3-1 Internationally Competitive Related Industries
Nation
Denmark
Germany
Italy
Japan
Korea
Singapore
Sweden
Switzerland
United Kingdom
United States
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Industry Analysis
Industry
Dairy products, brewing
Chemicals
Lighting
Cameras
VCRs
Port services
Automobiles
Pharmaceuticals
Engines
Electronic test and measuring equipment
Related Industry
Industrial enzymes
Printing ink
Furniture
Copiers
Videotape
Ship repair
Trucks
Flavorings
Lubricants, antiknock preparations
Patient monitoring equipment
Competitive Advantage
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“Japan's strength in long-filament synthetic textile fibers reflects a long
tradition of success in silk, as does a leading export position in silk-like
continuous synthetic weaves, woven from long-filament synthetic fibers.
Carbon fibers employ technology closely related to synthetic filament
fibers and many of the same competitors participate in both.
Also, while not
overall leaders in
textile machines,
Japanese firms are
leaders in water jet
weaving machines,
used to weave
long-filament
synthetic fibers into
synthetic weaves.
Such groups of
linked competitive
industries in a
Industry Analysis
nation are
Competitive Advantage
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Firm strategy structure & rivalry
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“No one management system is universally appropriate”
But character of national management structure needs to suit
needs of industry.
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Industry Analysis
“Nations will tend to succeed … where the management practices
and modes of organization favored by the national environment are
well suited to the industries’ sources of competitive advantage.
Italian firms … are world leaders in a range of fragmented industries
… operating in small niches…
In Germany … the engineering and technical background of many
senior executives produces a strong inclination towards methodical
product and process improvement…” (108)
Competitive Advantage
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National goals
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Short term focus of US firms—advantage in accounting
Long term focus of German/Japanese—advantage in
engineering…
Domestic rivalry
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Desire to beat own national competitors often drives innovation
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Industry Analysis
Italian supercars; Japanese electronics; US software, computers…
- “With little domestic rivalry, firms are more content to rely on the
home market.” (119)
Competitive Advantage
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Japan in particular has large number of internationally
TABLEcompetitive
3-2 Estimatedfirms
Number
of Japanese
Rivals in Selected Industries, 1987
in different
industries:
Air conditioners
Audio equipment
Automobiles
Cameras
Car audio
Carbon fibers
Construction equipment
Copiers
Facsimile machines
Lift trucks
Machine tools
Mainframe computers
Microwave equipment
13
25
9
15
12
7
15
14
10
8
112
6
5
Motorcycles
Musical instruments
Personal computers
Semiconductors
Sewing machines
Shipbuilding
Steel
Synthetic fibers
Television sets
Truck and bus tires
Trucks
Typewriters
Videocassette recorders
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4
16
34
20
33
5
8
15
5
11
14
10
Competitive Advantage
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National competitive advantage therefore tends to occur in
clusters
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Geographic clusters: “Many of the Italian jewelry firms, for
example, are located around two towns, Arezzo and Valenca
Po…” (120)
Industry clusters
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Industry Analysis
Related industries and supplier-buyer chains
Competitive Advantage
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“The individual
determinants that
define the national
environment are
mutually dependent
because the effect of
one often depends on
the state of the
others…” (129)
Example of clustering: Denmark
Industry Analysis
Competitive Advantage
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Industry Analysis
Competitive Advantage
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Geographic clustering
also strikingly obvious:
Clustering of
internationally
competitive industries
in Italy:
Industry Analysis
Competitive Advantage
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Interactions in the
“Diamond” for Italian Ski
Boot industry:
Industry Analysis
Implications for Business
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Location implications:makes sense to disperse production activities to
countries where they can be performed most efficiently.
First-mover implications:It pays to invest substantial financial
resources in building a first-mover, or early-mover, advantage.
Policy implications:promoting free trade is generally in the best
interests of the home-country, although not always in the best interests
of the firm. Even though, many firms promote open markets.
Industry Analysis
Export orientation
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Specialization on comparative advantage
Requires successive stages of comparative
advantage (flying geese model)
Supported by export subsidies which are only given
temporarily
Industry Analysis
Characteristics of developmental state (Gerschenkron, 1962)
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Vertically integrated enterprises
Development of investment banking
Major role for government in investment decision making
Resolve problems on asymmetric information by finance for
industrialization, mobilize savings and develop infant industries
 Hence: a large role for government and a strong orientation towards
industrialization
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Industry Analysis
Rethinking the East Asian Miracle (Stiglitz and Yusuf, 2001)
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Optimal macroeconomic management depends on range of countryspecific factors
Slower accumulation of human & physical capital gives greater role
for TFP & technology assimilation
Exports as engine of productivity growth is questionable, whereas
imports and investment are more often seen as driving forces
Interventionist policies are increasingly difficult with global capital
markets and free trade
With increased complexity of economic relationships, market-based
rules for contracting, property and other rights emerge
Industry Analysis
“So What” for business?
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There are at least three main implications of the material discussed in this chapter for
international businesses:
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First mover implications
• invest to be first, particularly in global industries or in markets which can support a few firms
Location Implication
• if countries have comparative advantages MNEs want to locate appropriate activities in those
countries…
Government Policy implications
• companies generate imports and exports. Thus can influence government decisions on trade
policy...
Foreign Investment Decisions
Industry Analysis
Which factors influence a host country’s national competitiveness?
National competitiveness
Foreign subsidiary characteristics
•subsidiary strategy
•level of technology
•training (formal, informal)
•international
Firm level resources
Nation-level
resources
•technical and managerial skills
•product and process technology
•skilled workforce
•innovative capability
interdependence
Published in: S. O’Donnel, T.Blumentritt/Journal of International Management 5 (1999)
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Industry Analysis
•unemployment rate
•standard of living
•competitiveness of local firms
Cluster Analysis: What Is It?
“Clusters are geographically close groups of interconnected companies
and associated institutions in a particular field, linked by common
technologies and skills.”
Michael Porter, Clusters of Innovation, 2002
“Binding the cluster together are ‘buyer-supplier relationships, or common
technologies, common buyers or distribution channels, or common labor
pools.’ Competitive firms make a competitive cluster … and economic selfinterest is ultimately the glue that binds the cluster together.”
Edward M. Bergman and Edward J. Feser,
Industrial and Regional Clusters: Concepts and Comparative Applications, 1999
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Industry Analysis
Case Study
Diamond-Framework contents additional factors
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Industry Analysis
Cluster Characteristics
• Critical Factors for Cluster Emergence
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Strong, diverse and tech-savvy talent pool
• Florida’s three ‘T’s
Presence of established pillar companies with global reach
Strong knowledge infrastructure
• research university, government labs etc.
Risk tolerant venture capital and angel investors
Sustained development strategies by civic entrepreneurs and
local governments (civic capital)
Industry Analysis
Flying Geese model of trade structures in East Asia
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Industry Analysis
Behind the shifting structure
Period of
liberalization;
Importance of OFWs
% of total production
Stress on industrialization
through protectionism;
financed by foreign loans
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Agriculture
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Industry Analysis
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Industry
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Services
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OO
Successive stages of comparative advantage in East-Asian trade structure
1) Primary import-substitution: replace labour intensive
manufacturing imports with domestically produced goods
2) Primary export-“substitution”: replace agricultural exports
by labour-intensive manufacturing exports
3) Secondary import-substitution: production of intermediate
and capital goods for domestic market
4) Secondary export-“substitution”: shift from labour-intensive
to capital- and knowledge intensive production
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Industry Analysis
Conclusions on industrialization
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Industrial development requires productivity growth beyond
exploitation of capital
Export orientation is more supportive growth, but requires
strong developmental state
Careful balance between transferring resources from
agriculture and supporting development within agriculture
Support of “informal” sector can be potential source of growth
Industry Analysis
Macro Environment
Regulatory Climate
Government Spending
Interest Rates
Inflation Rates
Employment Levels
Consumer Spending
Duties & Tariffs
Currency Exchange Rates
International Cultural Differences
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Industry Analysis
Tax Policy
Rate of Innovation
Research Funding
Levels
Societal Norms
Social Values
Consumer Characteristics
Competitive Analysis
A Changing Competitive Landscape
Digitalization
Communication is faster, information availability is vastly extended, coordination
cost are reduced, integration of work tasks is eased, customer reach is extended.
Globalization
Travel, transportation and exchange of media content (news and cultural events) extends
the globe. Some tastes and consumer behaviors emerge toward a global standard.
Deregulation
National markets are being deregulated (privatized), e.g. financial services, transportation,
telecommunication, energy, etc., and cross-border business transactions are liberalized.
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Industry Analysis
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Industry Analysis
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Industry Analysis
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Industry Analysis
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Industry Analysis
Internet Industry
What is an Industry?
Web Browsers
ISPs
Media Companies
Internet
Portals
ASPs
Content Providers
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Industry Analysis
Macro-Environment
Industry & Competitive Analysis
5 Forces Model of Competition
Key Success Factors
Driving Forces
Strategic Group Maps
Company Analysis
SWOT Analysis
Value Chain Analysis
Competitive Strength Assessment
Identify
Strategic
Options
for the
Company
Select the
Best
Strategy
for the
Company
Micro-Environment
Industry Analysis
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FUNDAMENTAL ANALYSIS QUESTIONS
1. What are the characteristics of my industry?
2. Who are/will be my competitors?
3. What are the current/likely positions of my competitors?
4. What moves are/will my competitors make?
5. What moves can/should I take to achieve a competitive
advantage?
62
Industry Analysis
Natural and Strategic Competition
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Natural Competition
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Strategic Competition
Industry Analysis
Sources of Competition
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Customer need
Industry competition
Product-line competition
Organizational competition
Industry Analysis
Competitive Advantage
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Outperform competitors
Grow despite competitors
Develop own distinctive competencies that hold potential for
competitive advantages
Industry Analysis
Competitive Advantage:
Two Analytical Tools
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Industry analysis:
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Comparative analysis:
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market attractiveness based on economic structure
likely future performance of an individual firm in a particular
market given the structure of the industry
Industry Analysis
Factors Contributing to Competitive Rivalry
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Opportunity potential
Ease of entry
Nature of product
Exit barriers
Homogeneity of market
Industry structure
Industry Analysis
Factors Contributing to Competitive Rivalry II
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Industry structure
Commitment to industry
Technological innovations
Scale economies
Economic climate
Diversity of firms
Industry Analysis
Existing Rivalry
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Involves jockeying for position.
Intensity of rivalry a function of -
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Number of competitors
Industry growth rate
Level of fixed costs
Diversity of competitors
Lack of product differentiation
Height of “Exit Barriers”
Industry Analysis
Entry/Exit Barrier Interaction
Exit Barriers
Low
Entry Barriers
Low
Low, Stable
Returns
Low, Risky
Returns
High, Stable
Returns
High, Risky
Returns
Porter, Competitive Strategy, 1980
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Industry Analysis
High
Competitive Intelligence
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Strategies, objectives, goals
Importance of specific markets
Level of commitment
Strengths
Limitations
Weaknesses
Future changes in strategy
Effects on industry, market, our strategies
Industry Analysis
Forces Influencing Industry
New
Entrants
Government
Policy
Suppliers
Industry
Rivalry among
Current Firms
Technological
Change
Buyers
Substitute
Products
Global Economic Factors
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Industry Analysis
การวิเคราะห์โครงสร้างอุตสาหกรรม Michael Porter
- improve price
performance trade-off
- produced by industries
earning high profits
Bargaining
power
of suppliers
Threat of substitute
products or services
Rivalry among
existing competitors
Threat of
new entrants
Industry Analysis
slow industry growth
lack of differentiation
numerous competitors
high exit barriers
Bargaining
power
of buyers
- bargaining leverage
- price sensitivity
- high concentration
- threat of forward
integration
- switching costs
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Entry barriers
- economies of scale
- product differentiation
- capital requirements
- brand identity
- access to distribution channels
Porter’s “5 Forces”:
Thinking about the balance of power
“Complementors”
Suppliers
Entrants
Rivals
Political,
regulatory and
institutional
context
Buyers
Substitutes
Industry Analysis
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.
Assets/Uniqueness speak to Rivalry and the Threat of Entry
Entrants
Suppliers
Rivals
Buyers
Substitutes
Industry Analysis
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Porter reminds us to think about the structure of the value chain:
Entrants
Suppliers
Rivals
Buyers
Substitutes
Industry Analysis
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Powerful suppliers and buyers may constrain profitability
Suppliers
Industry Analysis
Buyers
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Industry Analysis
Role of Competitive Strategy
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Create a defendable position against the 5 forces.
- Positioning
- Shifting the balance of forces.
- Exploit change resulting from shifts in the factors underlying the
forces.
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Industry Analysis
Business Level Strategies
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What do we need to understand?
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Key Success Factors
Generic Business Level Strategies
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Where to find business level advantages
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“Core” and “Distinctive” Competencies
Industry Analysis
Key Success Factors
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Each industry has certain areas that firms competing in
that industry must do well in in order to survive
•
Can be thought of as the bare minimum that must be
done in order to compete in that industry
Industry Analysis
Generic
Business Level Strategies
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Generic Strategies are general ways to classify
strategies
Examples:
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Miles & Snow (prospectors, defenders, analyzers, reactors)
Ansoff & Stewart (1st mover, 2nd mover, low cost producers, niche)
Industry Analysis
Why is Michael Porter important?
First strategy writer to analyze why information and IT can be critical to
competitive advantage
 Competitive Strategy, 1980
 Competitive Advantage, 1985
 What contributions is Porter best known for?
 Five forces model
What makes an industry “attractive” to compete in?
 2 x 2 matrix of core strategies
What are possible strategies for achieving advantage?
 The value chain
How can we analyze the core activities that firms perform?
83
Industry Analysis
Porter’s Generic
Business Level Strategies
•
Three (3) ways that a firm can compete and get above average
returns
Overall Cost Leadership
Differentiation
Focus
84
Industry Analysis
Porter’s Generic
Business Level Strategies
•
You can still be profitable without following one of these but
these profits usually will be below the industry average
-
85
squeezed by the Five (5) Forces
Industry Analysis
Overall Cost Leadership
86
•
Basic idea is that if you can produce it more cheaply than
anybody else, you will have the most profit at any price
•
Cost Leadership  Price Leadership
Industry Analysis
Overall Cost Leadership
•
Companies need to be extremely aggressive at finding
cheaper, more efficient ways of doing things
•
•
•
•
87
Industry Analysis
efficient scale facilities
pursuit of cost reductions
tight cost and overhead control
avoidance of marginal customers
Overall Cost Leadership and the Five (5)
Forces
•
Competitors
-
88
lower costs mean that it can still earn returns after its competitors
have competed away their profits through rivalry
Industry Analysis
Overall Cost Leadership and the Five (5)
Forces
•
Entry
-
•
Substitutes
-
89
potential entrants have to overcome greater entry barriers in
terms of scale economies or cost advantages
a better cost/benefit ratio than
its competitors
Industry Analysis
Overall Cost Leadership and the Five (5)
Forces
•
Buyers
-
•
Suppliers
-
90
can exert power only to drive down prices to the level of the next
most efficient competitor
more flexibility to cope with
input cost increases
Industry Analysis
The Risks Associated with Overall Cost
Leadership
91
•
Technological change nullifies basis for cost advantage
•
Low cost learning by new entrants
Industry Analysis
Differentiation
92
•
Rests on the creation of some product or service that
is perceived industry-wide as being unique
•
Perception is more important than substantive
differences
•
The firm still has to be cost conscious but this is not
its primary focus
Industry Analysis
Differentiation and
The Discipline of Market Leaders
•
Three (3) types of differentiation
-
93
Industry Analysis
Price
Product
Service
Differentiation
and the Five (5) Forces
•
Competitors
-
94
brand loyalty by customers and lower sensitivity to price prevents
buyer switching
Industry Analysis
Differentiation
and the Five (5) Forces
•
Entry
-
•
Substitutes
-
95
potential entrants must overcome the perceived
uniqueness of the firm
brand loyalty prevents buyers from switching to
substitutes
Industry Analysis
Differentiation
and the Five (5) Forces
•
Buyers
-
•
Suppliers
-
96
buyers lack comparable alternatives
differentiation yields higher margins to give firms more leeway in
dealing with suppliers
Industry Analysis
The Risks Associated with Overall Cost
Leadership
97
•
Customers may decide that the extra expense is not worth the
benefit
•
Imitation narrows perceived differentiation
Industry Analysis
Focus Strategies
and the Five (5) Forces
•
Same effects as overall cost leadership and differentiation but in
a smaller segment of the market
Differentiation Cost Leadership
Industry-wide
Market Segment
98
Industry Analysis
Differentiation Cost Leadership
Focus
Focus
Differentiation Cost Leadership
Stuck in the Middle
99
•
Describes firms that have failed to establish themselves
as following one of the above generic strategies
•
Loses high volume sales to cost leader and high margin
sales to differentiators
Industry Analysis
Where Do We Find These Competitive
Advantages?
Support
Activities
The Value Chain
10
0
Industry Analysis
Porter’s Value Chain
(well suited for analyzing product/manufacturing firms)
Industry Analysis
www. wai .bangkaew.com
Property and Casualty Industry Value Chain
FIRM
INFRASTRUCTURE
-Financial Policy
HUMAN
RESOURCE
MANAGEMENT
- Legal
- Accounting
Agent
Training
Actuary
Training
Actuarial Methods
Investment
Practices
TECHNOLOGY
DEVELOPMENT
Product
Development
Market Research
Claims
Training
Claims
Procedures
I/T
Communications
PROCUREMENT
10
2
-Regulatory Compliance
•Policy Rating
• Underwriting
• Investment
•Independent
Agent Network
•Billing and
Collections
•Policy Sales
•Policy Renewal
•Agent Management
•Advertising
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETING
AND SALES
•Claims Settlement
•Loss Control
SERVICE
Included with permission of Michael E. Porter based on ideas in Competitive Advantage: Creating and Sustaining
Superior Performance, copyright 1985 by Michael E. Porter.
Industry Analysis
Figure 3-7
Technologies in the Value Chain
Information System Technology
Planning and Budgeting Technology
Office Technology
FIRM
INFRASTRUCTURE
Training Technology
Motivation Research
Information Technology
HUMAN
RESOURCE
MANAGEMENT
Product Technology
Computer-Aided Design
Pilot Plant Technology
TECHNOLOGY
DEVELOPMENT
Information Systems Technology
Communication System Technology
Transportation System Technology
PROCUREMENT
•Transportation
Technology
•Material Handling
Technology
•Storage and
Preservation
Technology
•Communication
System Technology
•Testing Technology
•Information
Technology
INBOUND
LOGISTICS
10
3
Software Development Tools
Information Systems Technology
•Basic Process
Technology
•Materials
Technology
•Machine Tools
Technology
•Materials Handling
Technology
•Packaging
Technology
•Testing Technology
•I/nformation Tech.
OPERATIONS
•Transportation
Technology
•Material Handling
Technology
•Packaging
Technology
•Communications
Technology
•Information
Technology
•Multi-Media
Technology
•Communication
Technology
•Information
Technology
•Diagnostic and
Testing Technology
•Communications
Technology
•Information
Technology
OUTBOUND
LOGISTICS
MARKETING
AND SALES
SERVICE
Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright
Industry
© 1985
by Analysis
Michael E. Porter., p. 167.
Figure 3-8
The Primary Activities
Inbound
logistics
Operations
Outbound
Logistics
Marketing
and Sales
The “Line” Activities of the Firm
10
4
Industry Analysis
Service
The Support Activities:
Firm Infrastructure
The Structure of the Organization
10
5
Industry Analysis
The Support Activities:
Human Resource Management
The People Considerations
of the Organization
10
6
Industry Analysis
The Support Activities:
Technology Development
What the Firm Creates
and How It Creates It
10
7
Industry Analysis
The Support Activities:
Procurement
Getting the Necessary Materials
for the Primary Components
From the Environment
10
8
Industry Analysis
The Underlying Idea Behind Porter’s Value
Chain
•
•
10
9
Break things down into components;
Maximize the value of each component;
•
Maximize the value of how they interact;
•
Be considered brilliant.
Industry Analysis
Comprehensive MNC Strategy Model
Organizational
Structure:
Centralized
Decentralized
Industry
Globalization
Drivers:
Market
Cost
Government
Competitive
Strategy:
Multidomestic
Global
International
Transnational
Formalization:
High
Low
Management
Processes:
Coordination
Configuration
11
0
Industry Analysis
Performance:
Market share
Profits
Responsiveness/Integration Framework
High
Global
Transnational
Global
Coordination
Integration
Low
International
Low
11
1
Industry Analysis
Multi-national
Local responsiveness
High
Integration/Responsiveness Framework
High
Worldwide
learning
Global
Global
Coordination,
Integration
Low
Technology
International
Low
11
2
Industry Analysis
Transnational
Multi-national
Local responsiveness
High
… But Remember, We Said There Are Two Major Schools of
Thought
1. The strategic “positioning” school of strategy
 Associated with Michael Porter
 Select the right “position” in an “attractive” industry
2. The Resource Based View of the Firm (RBVF)
 Originated with economist Edith Penrose; developed by strategy professors Jay Barney;
Dietricx & Cool
 Recently popularized by Hamel & Prahalad, Competing for Time (1990) but re-named “core
competencies”
 Develop and exploit your unique capabilities
11
3
Industry Analysis
What Do RBVF Strategists Say?
Innovative IT solutions are copied or imitated
 Most IT applications are imitable
 Some exceptions exist when IT can’t be imitated
Unless the capabilities to create the innovative IT solution are unique
and immobile, then second-movers may:
 copy your great ideas more cheaply
 learn from your mistakes
Customer “lock-in” does not really work
 Customers are too smart and will avoid becoming over-committed to you
 ..
11
4
Industry Analysis
“IT and Sustained Competitive Advantage: A Resource Based
Analysis,” MIS Quarterly 1995
Why do the authors argue that many of these
resources can’t create sustainable advantage?
Customer lock-in
Access to financial capital
Proprietary technology (patents, copyrights, etc.)
Technical IT skills (e.g., software developers)
Managerial IT skills
(e.g., IT managers, business unit managers, the ability to collaborate
in order to identify and deploy effective IT)
11
5
Industry Analysis
What Synchronized Business
Might Look Like!
Firm
Supplier
Scheduling
Planning
Supplier
Source
Supplier
Make
Supplier
Deliver
Transportation
Provider
Fab/Sort
Transportation
Transportation
Assembly
Provider
Provider
Test
Customer
Transportation
Provider
Box &
FHS
Transportation
Provider
X-Dock Transportation
Geo Hub
Provider
Customers
Source
Customers
Make
Strategic
Planning
Collaborative Strategic Plg
Strategic Business
InternalPlanning
Long Range Planning
Long Range Business/Capacity Planning
Long Range
Planning
Dmd/Supply
Collaborative
Planning
Planning
Demand and Supply Planning
Collaborative Dmd/Supply
Planning
Planning
Integration
Collaborative
Supply
Scheduling &
Management
Integrated SN Detailed
Scheduling For
Factory/Materials/Warehouse/Transportation
Collaborative
Supply
Scheduling &
Management
External
Collaboration
Execution
Customers
Deliver
End-to-End
Factory
Execution
Synchronization
Warehouse
Management
Integrated Factory,
Materials/Warehouse/Transportation Execution
Factory
Execution
Warehouse
Management
Enterprise Level Roadmap
Entry/Re-entry
Cycle
Long Term Cycle
Focus on the Value
Stream
Adopt Lean
Paradigm
•Build Vision
•Convey Urgency
•Foster Lean Learning
•Make the Commitment
•Obtain Senior Mgmt.
Buy-in
Decision to
Pursue
Enterprise
Transformation
Enterprise
Strategic
Planning
Initial
Lean
Vision
•Map Value Stream
•Internalize Vision
•Set Goals & Metrics
•Identify & Involve Key
Stakeholders
Develop Lean Structure &
Behavior
Detailed
Lean
Vision
•Organize for Lean Implementation
•Identify & Empower Change Agents
•Align Incentives
•Adapt Structure & Systems
+
Environmental
Corrective
Action Indicators
Short Term Cycle
Focus on Continuous
Improvement
Detailed
Corrective Action
Indicators
•Monitor Lean Progress
•Nurture the Process
•Refine the Plan
•Capture & Adopt New Knowledge
Lean
Transformation
Framework
Create & Refine
Transformation Plan
•Identify & Prioritize Activities
•Commit Resources
•Provide Education & Training
+
Outcomes on
Enterprise
Metrics
Implement Lean Initiatives
•Develop Detailed Plans
•Implement Lean Activities
Enterprise
Level
Transformation
Plan
One Last Important Concept
•
Core Competencies
-
•
Distinctive Competencies
-
11
8
Something a firm does well relative to its competitors
Something a firm does which makes it unique relative to its
competitors
Industry Analysis
Dynamic Competitor Analysis
•
•
•
11
9
While useful, the competitor table and the strategic groups are, like
Porter’s Analysis, essentially static.
Just as the Four-Arena Analysis is useful for using history to make
guesses about the future -- especially about how trends might stop and
the ground might shift -Hamilton et al’s Core Competency Strategic Intent matrix is useful for
tracing -- and predicting -- shifts in competitors’ relative power.
Industry Analysis
Tool: CCSI Matrix
•
•
•
The CCSI matrix works like a flip-book to bring inter-firm dynamics
alive.
Matrices are made at regular intervals
-
The two dimensions of the matrix are:
-
12
0
Yearly or quarterly depending on how fast things are changing
Core Competency: firms’ relative capacity -- as measured by Tobin’s Q
or market/book value or defect rates or as rated by industry experts.
Strategic Intent: firms’ relative aggressiveness -- as measured by R&D
expenditures or capital investments or analysis of press releases.
Industry Analysis
Average
Low
Core Capabilities
High
Tool: CCSI Matrix
12
1
Industry Analysis
Passiv
e
Average
Strategic Intent
Aggressiv
e
Tool: CCSI Matrix
•
Each competitor is mapped as a circle:
-
12
2
the size of which reflects sales or
capitalization or assets
and the pie slice in which reflects free
cash or other available resources
Industry Analysis
Case: CCSI Analysis of the early 90s Automobile Industry
•
Flip the through the following three slides fast, noting:
-
12
3
The decline of Honda & Toyota
The ascendancy of Ford
General Motors unsucessful run at leadership
Chrysler’s repositioning as an up and coming star.
Industry Analysis
High
Automobile Industry 1990
1.5
Toyot
a
Honda
Core Capabilities
1.0
.5
General
Motors
Chrysle
r
Ford
(.50
)
(1.0)
Low
(1.5)
.88
Passiv
e
12
4
Industry Analysis
.92
.96
1.04
Strategic Intent
Figure 1
1.08
1.12
Aggressiv
e
Automobile Industry 1991
High
Toyot
a
1.5
Honda
Core Capabilities
1.0
.5
Chrysle
r
(.50
)
Ford
(1.0)
General
Motors
Low
(1.5)
.88
Passiv
e
12
5
Industry Analysis
.92
.96
1.04
Strategic Intent
Figure 2
1.08
1.12
Aggressiv
e
High
Automobile Industry 1992
Toyot
Honda a
1.5
Core Capabilities
1.0
.5
Ford
General
Motors
(.50
)
Chrysle
r
(1.0)
Low
(1.5)
.88
12
6
Passiv
e
Industry Analysis
.92
.96
1.04
Strategic Intent
Figure 3
1.08
1.12
Aggressiv
e
Managing disruptions means managing the dynamics of the value chain
Maturity
Performance
Disruption
Takeoff
Can I reshape the dynamics of
power in the value chain?
Ferment
Time
Industry Analysis
www. wai .bangkaew.com
Making money from Innovation: Summary
•
•
•
•
•
Creating value is not enough:
It is important to capture value as well
Value can be captured through a variety of mechanisms, including
uniqueness and complementary assets
Value capture strategies change over the life cycle
Technology strategy and business strategy should thus be intimately linked
Industry Analysis
www. wai .bangkaew.com
Industry Equilibrium
•
•
•
12
9
Industry structure reinforces power relationships and patterns of
competition.
The nature of industries is to resist change and maintain stability.
Periods of instability provide both significant threats and
opportunities for organizations.
Industry Analysis
Stages of Industry Transformation
•
The Trigger - an event that significantly alters the way
business has been done before, major impact on cost or
buyer value.
-
13
0
Change in technology
Change in customer needs or wants
Change in regulation
Industry Analysis
Stages of Industry Transformation
•
Experimentation - a widespread “trial and error” search for a
winning response to a triggering event.
-
13
1
Period of high risk and uncertainty
Imitation is a popular response
Access to capital vital
Industry Analysis
Stages of Industry Transformation
•
Convergence - marks the emergence of “dominant” business
models as unsuccessful experiments are shaken out of the
industry.
-
13
2
Industry life cycles have gotten much shorter
Convergence begins to return industry to equilibrium
Industry Analysis
•
Why don’t the 5 competitive forces
affect businesses equally?
-
13
3
Industry Analysis
Strategic Groups
Industry Differences
Competitor Analysis
Competitor Analysis
“Mapping”
By identifying important competitive factors you may effectively
map your competitive position
(+)
Speed
to
market
“Strategic Groups”
(-)
(-)
13
4
Industry Analysis
After sales services
(+)
Group A
Full
Line
Full line, vertically integrated
low manufacturing costs,
low service,
moderate quality
Group C
Specialization
Moderate line, assembler
medium price, very high
customer service, low
quality, low price
Group B
Narrow line,
assembler,high price,
high tech, high quality
Narrow
Group D
Narrow line, highly
automated, low price,
low service
Line
High Vertical
Integration
13
5
Industry Analysis
Assembler
Vertical Integration
Types of Video Game
Suppliers/Distribution Channels
Example: Strategic Group Map of the Video Game Industry
Arcades
Arcade
operators
Publishers
of games on
CD-ROMs
Home PCs
Sony, Sega,
Nintendo, several
others
Video game
consoles
MSN Gaming Zone,
Pogo.com,
America Online,
HEAT, Engage,
Oceanline, TEN
Online/Internet
Low
(Coin-operated
equipment)
Medium
(Console players cost
$100-$300)
High
(Use PC)
Overall Cost to Players of Video Games
13
6
Industry Analysis
Strategic Groups
•
•
•
13
7
A group of firms in an industry following the same or a similar
strategy.
Present a more detailed analysis of the structure of an industry and
help explain differences in performance of individual companies
within the same industry.
Companies within groups are limited in their ability to adopt the
strategies of companies in other groups due to “mobility barriers”.
Industry Analysis
Industry Differences
•
Industry Life Cycle Model
-
13
8
Embryonic
Growth
Shakeout
Mature
Declining
Industry Analysis
การเปลี่ยนแปลงการแข่ งขันในช่ วงการเปลี่ยนแปลงอตุ สาหกรรม
Demand
ขั้นตอนพัฒนาการของอุตสาหกรรม
Embryonic
Growth
Shakeout
Time
13
9
Industry Analysis
Maturity
Decline
An Action-Based Model of the Industry Life Cycle
Firm Resource
&
Market Strength
Key Task
Key Task
Exploiting Open
Niches (Blind Spots)
and Competitive
Uncertainty
Exploiting Factors
of Production
Key Task
Exploiting Market
Position
Market-Power
Actions
Growth-Oriented
Actions
Entrepreneurial
Actions
Emerging Stage
14
0
Industry Analysis
Growth Stage
Time
Mature Stage
ey Framework: The industry life cycle
Era of Ferment/
Disruption
“Dominant design”
emerges
Maturity
Incremental
Innovation
Industry Analysis
www. wai .bangkaew.com
The S-curve Maps Major Transitions
Maturity
Performance
Disruption
Takeoff
Ferment
Time
Industry Analysis
www. wai .bangkaew.com
14
3
Industry Analysis
S curve
•
Can the S curve be predicted?
-
•
How do markets evolve as technologies change?
-
14
5
The product/process transition
Technological “exhaustion”
Basic segmentation
Crossing the chasm
New technologies, new needs
Industry Analysis
Can the Life Cycle be Predicted?
The product/process transition
Product innovation
Focus
of
attention
Process
Innovation
Time
14
6
Industry Analysis
Can the life cycle be predicted?
Technological exhaustion (1)
Physical limit?
Performance
Performance is ultimately constrained
by physical limits
Eg:
Sailing ships & the power of the wind
Copper wire & transmission capability
Semiconductors & the speed of the electron
Time
Industry Analysis
www. wai .bangkaew.com
Can the life cycle be predicted?
Technological exhaustion (2)
Established
technology
Emerging
technology
Performance
Performance is a non linear function
of effort expended: in mature
industries more and more effort may
lead to less and less progress, while
progress in emerging industries may
be “surprisingly” fast
Effort
Industry Analysis
www. wai .bangkaew.com
Market Evolution over the Life Cycle
•
•
•
Market segmentation
Crossing the chasm
New markets, new needs: The Innovator’s Dilemma
Industry Analysis
www. wai .bangkaew.com
Who buys a technology as it evolves?
Performance
Time
Industry Analysis
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Understanding market dynamics:
Basic segmentation (Rogers)
Units
Bought
Early
Majority
Late
Majority
Early
Adopters
Innovators
Laggards
Time
Adopters differ by, for example, social, economic status -particularly resources, affinity for risk,
knowledge, complementary assets, interest in the product
Industry Analysis
www. wai .bangkaew.com
Understanding market dynamics:
Crossing the chasm: (Moore)
Units
Bought
Crossing the chasm?
Early
Majority
Late
Majority
Early
Adopters
Innovators
Laggards
Time
Making the transition from “early adopters” to “early majority” users often
requires the development of quite different competencies: e.g. service,
support capabilities, much more extensive training.
Industry Analysis
www. wai .bangkaew.com
New Customers, New Needs
Who buys a technology
when it is first
introduced?
Performance
New technologies sell to:
- New customers
- With new needs
- Often at lower margins
Time
Industry Analysis
www. wai .bangkaew.com
New markets can be harder to manage than new technologies
New customer
Needs
Old technology
Competencies
15
4
New technology
Competencies
Old customer
Needs
Industry Analysis
Managing the change in customer groups may be the hardest task!
Performance
Leading edge customer
focused research may be
a critical capability
Effort
Industry Analysis
www. wai .bangkaew.com
Exercise: Market Evolution
•
•
Consider the three industries:
-
For each industry:
-
-
•
Ready to eat frozen dinners
Publishing (Books or music)
Handheld cameras for consumers
What was the dominant performance metric under the “old
regime”?
What is the dominant metric under the new?
Is the discontinuity a new market, or does it represent a threat to
the core business?
Choose one industry and be prepared to present your results to
the group
Industry Analysis
www. wai .bangkaew.com
Hypercompetition
A condition of rapidly escalating
competition based on
Hypercompetition
15
7
Industry Analysis
•
Price-quality positioning
•
Competition to create new knowhow and establish first-mover
advantage
•
Competition to protect or invade
established product or
geographic markets
Hypercompetition
First mover advantage eroded through:
rapid response and innovation;
enhancement of product features;
niche attacks
Advantage by building barriers eroded by:
technological advances;
building on home-based
economies of scale;
buying share;
different distribution channels (e.g. e-business);
niche attacks
15
8
Industry Analysis
Complexity of Analysis
ValueNet Phase
Focus on all the players
relevant to your operations
PARTS framework
Hypercompetition Phase
Focus on the competitive
interactions w.r.t. the four
competitive arenas
C-Q/T-K/S/D framework
The PLC Phase
Focus on the firm and
its strategies at different
stages of the PLC
SWOT framework
Industry Analysis
www. wai .bangkaew.com
Number of Players
The Cycle of Price-Quality Competition - Moving
Up the Escalation Ladder
Move to the next Arena
Return to Price Wars
Commodity like Market
Attempt to redefine Quality
Move to Ultimate Value
Niching & Outflanking
Full line Producers
Price-Quality Maneuvers
Price War
Industry Analysis
www. wai .bangkaew.com
Firm builds a Tech. Resource
Base to create advantage
Escalating costs &
risks each cycle
Then moves into a new market
first: Pioneer
Followers imitate products & overcome switching costs
and brand loyalties
Pioneer throws up impediments to imitation
Followers overcome impediments
and replicate pioneer’s resource base
First mover uses a Transformation
Strategy & abandons product design/
technology based approach
Builds resources to match followers
manufacturing skills
Industry Analysis
Price War
First mover moves
downstream into
higher value added
products
First mover uses a Leapfrog
Strategy to a new resource base
Cycle of Timing / Know-How
Competition
www. wai .bangkaew.com
Cycle
restarts with
entry into a
new market
Build entry barrier around market A
to exclude competition
Build entry barrier around market B
to exclude competition
Circumvent barriers and attack
niche in market B
Short Run: Withdraw from niche
or fail to respond
Entrant breaches barriers
or triggers price war in B
Incumbent’s stronghold in B weakens as it grows more competitive
Entrant responds in market A or in
market B
One firm
builds new
stronghold
Other firm
divests
Industry Analysis
Delayed Response: Barriers to
contain entrant to a segment of B
Standoff until one party gains the
upper hand in market A or B
If one firm dominates
Long Run:Incumbent attacks
entrant’s market A to punish
Both strongholds erode
or merge into one
STRONGmarket
HOLDS
ARENA
Price War
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Deep pocket develops
Antitrust laws
invoked - work
occasionally
Small firms forced
to outmaneuver
deep pocket
Cycle of Deep
Pockets
Competition
Industry Analysis
Buyers or
suppliers develop a
countervailing
force
Hostile takeover
of large firm
Small firm escalates
own resource base
Cooperative
strategy develops
Large scale
alliances form
with equally
deep pockets
Avoidance strategy
niching, etc.
www. wai .bangkaew.com
Deep pocket advantage is eliminated or neutralized
Launches attack to
drive out small firms
New attempt to escalate resources
Kroger becomes
large & powerful
Continued M&A in industry
Drops prices
Antitrust suits
filed by rivals
Many takeover attempts
from outside industry
lead to high leverage
Mergers
Kroger wins
suits
Acquisitions
Cycle of Deep
Pockets
Competition
Industry Analysis
Small chains seek
niches. Kroger also
niches geographically
to avoid competition
Industry
consolidation
www. wai .bangkaew.com
Deep pocket advantage is eliminated or neutralized
Large wholesalers
provide economies
to smaller stores
Vision for Disruption
Identifying and creating
opportunities for temporary
advantage via understanding
•Stakeholder satisfaction
• Strategic soothsaying
to ID new ways to serve current
customers better or serve
those not being served
Capability for Disruption
Sustaining the momentum by
developing abilities for:
• Speed
• Surprise
that can be applied across
many actions to build
a series of temporary
advantages
Industry Analysis
Market
Disruption
Tactics for Disruption
Seizing the initiative to
gain advantage by
• Shifting the rules
• Signaling
• Strategic thrusts
with actions that shape,
mould or influence
the direction or nature of
competitors’ responses
www. wai .bangkaew.com
A 4 Arena Analysis
Arena
Key Success Factors
Critical 7S
Cost / Quality
Understanding
customer needs
Cost reduction
S1: Stakeholder
satisfaction
S3: Speed
Know-how / Timing
Foster innovation
Quick market
penetration
S3: Speed
S4: Surprise
S2: Soothsaying
Stronghold creation /
invasion
Deterrence
Aggression
S6: Signals
S7: Strategic thrusts
Deep pockets
Brute force
Out-maneuvering big
opponents
S7: Strategic thrusts
S5: Shifting rules
Industry Analysis
www. wai .bangkaew.com
Limitations of the Hypercompetition Perspective
•
•
•
Ignores the point that competition and co-operation can co-exist.
may be in the best interests of players not to jump to the next level of
dynamic competitive interaction but into co-operative competition coopetition
requires looking at the firm’s valuenet
Industry Analysis
www. wai .bangkaew.com
The ValueNet
Customers
Substitutors
Company
Complementors
Suppliers
Industry Analysis
www. wai .bangkaew.com
Intel - A Partial ValueNet
IBM manufactures AMD
Customers limit
dependence - alternative
suppliers
NatSem / Cyrix
AMD / IBM
Microsoft
Digital CableTV Standards
NetPC Standards
Solaris Compatibility of
NetPC design & Merced
17
0
Industry Analysis
Limit customer
power & competitor
response via Motherboard manufacture
HP; Compaq; IBM
INTEL
Microsoft
HP (Merced)
Sun (Solaris + Merced)
Compaq (Digital TV
standards with M’Soft)
Suppliers
Limits Microsoft power in ValueNet
How can the game be changed?
The game can be changed by changing
• Players
• Added value
• Rules of the game
• Tactics employed
• Scope of the game
17
1
Industry Analysis
Changing the players
•
Bring in customers - Increase industry demand. This helps competitors, but may be worthwhile for
you. To do this…
•
•
•
•
•
•
•
•
Educate consumers about your product (Diapers in Japan;Whitening t’paste)
Pay customers (esp. early adopters) to play (Samples, Netscape)
Subsidize some customers, other full paying customers will follow (Initial discount to
lower risk)
Become your own customer (Soaps and cottonseed oil / Cyrix PC)
Be Inc. & the WWW
Bring in suppliers
•
•
Holland Sweetener Co. and Coca-Cola
Compaq / AMD / Intel
Bring in complementors
•
•
•
Do it yourself. Nintendo - both h/w & s/w. Intel
Pay complementors to play (at least initially)
Be Inc. & IBM / Motorola / PowerComputing
Bring in competitors
•
•
License technology to make money, avoid complacency
Create a second source to encourage buyers to adopt technology
Changing the added value
Your value added = Size of the pie when you are in the game - Size of the pie when you are not in the
game. How to increase added value?
• Limit your supply
•
•
•
•
•
DeBeers and diamonds; Nintendo & video games; Beanie babies
Downside: Shrinks the pie today; Leaves entry opportunity open
Raise amount consumers are willing to pay
•
Policies that build loyalty (frequent flier miles) increase willingness to pay - GM / Ford
credit cards; Intuit
Lower competitors’ value
•
Softsoap - by cornering the supply of pumps
Questions to ask:
•
•
•
What is your added value?
How can you increase value by changing supply, buyers, suppliers, complementors, or
substitutors in your value net?
What is the value added by other players? Should you be increasing or decreasing their
added values?
Changing the rules
Questions to ask are:
•
•
•
•
•
•
•
•
•
Which rules are helping you?
Which ones are hurting you?
Rules can be for pricing, advertising, product variety, satisfaction, etc.
What kinds of contracts are you willing to write with your buyers and
suppliers?
Do you want Match Competition Clauses?
What does this do for you?
Do you have the power to change the rules?
Does someone else have the power to overturn them?
Can you signal your commitment credibly (Kiwi Air)
Changing tactics
Questions to ask are:
• How do other players perceive the game? How do these perceptions affect the play of the game? (NY
Post vs. Daily News)
• Which perception do you want to keep, which to change?
• Do you want the game to be transparent or opaque (fee negotiation between investment banker and
firm - guarantee / % fee)? When do you want to send signals that benefit you? When do you want to
preserve the fog?
• To establish credibility (clear the fog)
•
Accept a pay-for-performance contract
Offer guarantees or advertise
Ask others to demonstrate their credibility to you
To preserve the fog
-
Create complexity (long distance calling rates)
Bluff: Ask yourself whether you will be believed and under what circumstances
Ask what others stand to gain by preserving the fog, and what they could be bluffing about
Changing the scope
Questions to ask are:
•
•
•
•
•
What is the current scope of the game?
Do you want to change it?
Games are linked over time and across markets (geographic and
product markets)
Do you want to link the current game to other games?
• When multi-market contact could be beneficial
Do you want to delink the current game from other games?
Industry Analysis
www. wai .bangkaew.com
Co-opetition
•
•
•
•
17
7
More about forming alliances to better compete.
Companies, competitors, customers and suppliers are participate in
(and compete in) “the value net”.
Key concept is “complementors”, companies that sell
complementary products and services.
These can often gain advantage by forming an alliance to provide a
more competitive
Industry Analysis
การแข่งขันคือการต่อสู ้ที่เคลื่อนไหวอยูต่ ลอดเวลา
17
8
Industry Analysis
Building sustainable advantages
•
Understand your own uniqueness
•
Scan the environment for
-
•
Technological changes
Variations in input supply
Demand shifts
Invest in opportunities that fit
Industry Analysis
Source: Ghemawat, 1999
www. wai .bangkaew.com
Building sustainable advantages (II)
•
The best defense is a good offense, i.e., 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
•
Remember that the landscape can shift under your feet
Industry Analysis
Source: Ghemawat, 1999
www. wai .bangkaew.com
In many situations anticipating competitors moves can critical to building and sustaining
competitive advantage
•
Where in the course do we see the importance of interactive incentives?
-
•
Interactive incentives tool kit
-
18
1
HSC vs. Nutrasweet
Barnesandnoble vs. Amazon.com
War of Attrition
Intel vs. OEMs
Game theory
Competitor analysis
Industry Analysis
A solution concept: the Nash Equilibrium
•
Fundamental tool for examining non-cooperative games
-
•
Definition
-
•
Idea: Every player does the best that he/she can, given that the other players are also doing
the best that they can
a Nash equilibrium is a set of strategies for each player in which no player can improve
his/her situation by choosing a different strategy, given the choices of the other players
Testing for a Nash equilibrium
-
Does any player have a profitable deviation? I.e., could any player improve his / her payoffs
by choosing a different strategy?
•
18
2
Industry Analysis
If there is a profitable deviation from a set of strategies, then this is not a Nash equilibrium
A famous example: The Prisoner’s Dilemma
Prisoner B
Don’t Confess
Don’t Confess
Prisoner A
1 year
1 year
Confess
Industry Analysis
No prison
10 year
10 years
No prison
18
3
Confess
9 years
9 years
An example of Game Theoretic Analysis:
Anticipating NutraSweet’s response in Europe
•
In the A case, we asked the question, how will NutraSweet respond in Europe
- Two scenarios:
• Accommodate (Price = $50); HSC sells 500 tons, NS sells 800 tons
• Fight / Price war (Price = $25); HSC sells 0, NS sells 1300 (estimated Europe / Canada demand in 1989)
Fight
NS
Enter*
Accommodate
($27 M, $56 M)
HSC
Don’t
Enter
18
4
(0, $20 M)
(0, $149 M)
But the real game was broader – it involved multiple players and
markets
Industry Analysis
*Assumes Entry with 500 Tons of Capacity
A Framework for Competitor Analysis
What Drives the Competitor
What the Competitor Is Doing
and Can Do
Future Goals
Current Strategy
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
Held about itself
and the industry
18
5
Capabilities
Both strengths
and weaknesses
Industry Analysis
Source: Michael E. Porter, Competitive Strategy, p. 49
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)
Industry Analysis
www. wai .bangkaew.com
Classic Bad Moves ...
•
•
•
•
•
•
Can be easily copied (when you think it’s 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
Industry Analysis
www. wai .bangkaew.com
So what can we say about making these
strategic choices and how they should fit
together?
Internal consistency
Fit among strategic
choices and policies
Strategy
External consistency
Fit between the strategy
and the outside world
Industry /
Business
Environment
Industry Analysis
Dynamic consistency
Fit between the strategy and the
firm’s capabilities and resources
over time
Capabilities
& Resources
www. wai .bangkaew.com
Internal, external, and dynamic consistency at
Coors
Procurement
Internal
Manufacturing
Backward
Integration


Plant
Scale
One
Product
One
Location
Intermediate
Price
High
Capacity
Utilization
Limited
Advertising
18
9
Industry Analysis
Distribution
Regional
Distribution
Distribution
Controls
Cans
Other inputs
Unique Process
• Asset-Intensive
• Long
• Unpasteurized
External
Marketing
Product
• Attributes
• Rocky Mount.
Image
Post-1980s
• National Advertising
• Incursion of competitors in the West
Pre-1980s
• Regional / Local Advertising
•Capacity Shortfall in the West
Dynamic
Internal consistency
•
Activity maps can be helpful in assessing internal
consistency of a strategy
•
Question: Are activities chosen in such a way that they
reinforce one another, or do they work at cross purposes?
-
which are the key choices
•
-
which are the links between choices?
•
19
0
are they consistent with one another
Industry Analysis
if there aren’t a lot of links, or if the links are very tenuous, this raises
questions about the internal consistency of the firm’s strategy
Southwest Airlines’ Activity Map
No baggage
transfers
No meals
No seat
assignments
Frequent,
reliable
departures
High
compensation
of employees
Flexible
union
contracts
Industry Analysis
© 1999 Pankaj Ghemawat
15-minute
gate
turnarounds
Lean, highly
productive
ground and
gate crews
High level
of employee
stock
ownership
Limited
passenger
amenities
Limited use
of travel
agents
No
connections
with other
airlines
Standardized
fleet of 737
aircraft
Short-haul,
point-to-point
routes between
midsize cities
and secondary
airports
Automatic
ticketing
machines
Very low
ticket prices
High
aircraft
utilization
“Southwest,
the low-fare
airline”
www. wai .bangkaew.com
Source: Michael E. Porter “What is Strategy” Harvard Business Review, Nov-Dec 1966
External consistency: The manager’s
problem
•
•
To craft an effective strategy, you must take account of the external
environment
-
To decide whether to put your firm in an environment (entry)
To decide whether to extricate your firm from an environment (exit)
To position your firm to succeed in a given environment
To assess the effect of a major change (e.g., deregulation)
To shape the environment
But the environment is enormously complex

Need structured ways of thinking about the environment
– …that capture the richness of the real business world
– …but separate signal from noise
19
2
Industry Analysis
Industry Analysis: Factors to Consider
Threat of New Entry
Bargaining Power
of Suppliers
• Differentiation of inputs
• Switching costs
• Presence of substitute
inputs
• Supplier concentration
• Importance of volume to
supplier
• Cost relative to total
purchases
• Impact of inputs on cost or
differentiation
• Threat of forward
integration
• Economies of scale
• Proprietary product
differences
• Brand identity
• Switching costs
•
•
•
•
•
Capital requirements
Access to distribution
Absolute cost advantages
Government policy
Expected retaliation
Rivalry Among
Existing Competitors
• Industry growth
• Fixed costs / value
added
• Overcapacity
• Product differences
• Brand identity
•
•
•
•
•
•
Switching costs
Concentration and balance
Informational complexity
Diversity of competitors
Corporate stakes
Exit barriers
Threat of Substitutes
• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute
Bargaining Power
of Customers
•
•
•
•
•
•
•
•
•
•
•
Buyer concentration
Buyer volume
Buyer switching costs
Buyer information
Ability to integrate
backward
Substitute products
Price / total purchases
Product differences
Brand identity
Impact of quality /
performance
Buyer profits
Source: Michael E. Porter,
Competitive Advantage
(New York: Free Press, 1985)
Crown’s strategy explicitly addressed a
number of the factors that made the metal
container industry unattractive
THREAT OF ENTRY
• Focus
• Efficiency
SUPPLIER POWER
• Steel vs. Aluminum
Responses
of
Crown Cork
SUBSTITUTES
• Hard to Hold
• Avoid Diversification
19
4
Industry Analysis
BUYER POWER
• Multiple Customers
• Specialization
• Service/Responsiveness
INTENSITY OF RIVALRY
• International Expansion
• Segment Selection
Each of the five forces is subject to major
shifts over time
Some Common Long Run Dynamics
Threat of New Entry
• Decline in economies of scale + customer heterogeneity
 fragmentation of market into niches
• Escalation of sunk costs  concentration
• Emergence of switching costs  entry deterred
Bargaining Power
of Suppliers
• Concentration or
fragmentation of suppliers
• Forward integration
• Improvement in supplier
information
• Surge or decline in supply
• Emergence of substitute inputs
• New means for coordinating
with suppliers
Rivalry Among Existing Competitors
•
•
•
•
•
Shift in industry growth
Change in mix between fixed and variable costs
Emergence of dominant design or product
Consolidation
Fragmentation / new entry
Bargaining Power
of Customers
• Concentration or fragmentation of
buyers
• Backward integration
• Improvement in buyer information
• Surge or decline in demand
• Emergence of new distribution
channels
• New means for coordinating with
customers
• Shifts in customer tastes
Threat of Substitutes
• Emergence of new substitute
• Improvement or decline in relative price performance
of substitute
• Increase in buyer comfort with substitute
• Change in barriers to entry in substitute market
Industry Analysis
www. wai .bangkaew.com
Source: Jan W. Rivkin
The value net provides a complementary
perspective on industry analysis
A player is your competitor with
respect to customers if customers
value your product less when they
have the other player’s product as
well
Competitors
A player is your competitor with
respect to suppliers if it is less
attractive for a supplier to provide
resources to you when it is also
supplying the other player
Customers
Firm
Suppliers
A player is your complementor with
respect to customers if customers
value your product more when they
have the other player’s product as well
Complementors
A player is your complementor with
respect to suppliers if it is more
attractive for a supplier to provide
resources to you when it is also
supplying the other player
Source: Adam Brandenburger and Barry Nalebuff,
Co-opetition (New York: Currency Doubleday, 1996)
Nintendo, Microsoft, and Intel’s strategies
display keen awareness of the value net
•
Complements with respect to customers
-
•
Nintendo’s licensing strategy prevented complements from
gaining power
Microsoft’s support of ISVs to produce software for Windows
Microsoft’s development of its own applications for Windows
Intel’s support of the development of processing-intensive
applications
Complements with respect to suppliers
-
Intel’s participation in R&D consortia
•
•
19
7
Industry Analysis
funding
technology supply
The Value Net perspective highlights a sixth
force, which also changes over time
Threat of New Entry
• Decline in economies of scale + customer heterogeneity
 fragmentation of market into niches
• Escalation of sunk costs  concentration
• Emergence of switching costs  entry deterred
Bargaining Power
of Suppliers
• Concentration or
fragmentation of suppliers
• Forward integration
• Improvement in supplier
information
• Surge or decline in supply
• Emergence of substitute inputs
• New means for coordinating
with suppliers
Rivalry Among Existing Competitors
•
•
•
•
•
Shift in industry growth
Change in mix between fixed and variable costs
Emergence of dominant design or product
Consolidation
Fragmentation / new entry
Bargaining Power
of Customers
• Concentration or fragmentation of
buyers
• Backward integration
• Improvement in buyer information
• Surge or decline in demand
• Emergence of new distribution
channels
• New means for coordinating with
customers
• Shifts in customer tastes
Threat of Substitutes
• Emergence of new substitute
• Improvement or decline in relative price performance
of substitute
• Increase in buyer comfort with substitute
• Change in barriers to entry in substitute market
Industry Analysis
Availability of Complements
• Emergence of new complements
• Change in barriers to entry in
complement market
www. wai .bangkaew.com
Source: Jan W. Rivkin
From the Value Net to Competitive Advantage
Two Major Routes to Competitive Advantage
Low
Cost
Decrease cost to
serve a given set of
customer needs
19
9
Competitive
Advantage
Differentiation
Increase customers’ WTP
through product quality
enhancements, product
positioning, after-market
service, advertising, etc. +
ability to capture this
increase in WTP
Addressing the concept of competitive advantage
through the lens of value added is quite useful
Industry Analysis
Value Creation
Customer
Willingness
to Pay
Added Value
Firm
Supplier
20
0
Industry Analysis
Opportunity
Cost
Value Division
Customer
Customer’s Willingness to Pay
Value
Appropriated
by Customer
Price to customer
Company’s WTP for Supply
Value
Appropriated
by Firm
Firm
Price to supplier
Company’s Opportunity Cost
for Production
Supplier
20
1
Industry Analysis
Supplier’s Opportunity Cost
Value
Appropriated
by Supplier
Competitive advantage is achieved through
increasing overall value added (and capturing
more value than competitors)
Customer
Willingness to Pay
Value
Appropriated
by Customer
Value
Appropriated
by Firm
Firm
Supplier
20
2
Industry Analysis
Opportunity Cost
Value
Appropriated
by Supplier
Value Creation and Appropriation by Nintendo
Retailers
Nintendo
Chip
Suppliers
20
3
Industry Analysis
Scarcity
Software quality certification
Resale price maintenance
Value
Appropriated
by Nintendo
Value Appropriation in the PC Industry
Operating Margin
40%
30%
20%
10%
other components
personal computers
software
peripherals
services
microprocessors
Share of Industry Revenue
Industry Analysis
www. wai .bangkaew.com
Source: Orit Gadiesh and James L. Gilbert, “Profit Pools: A Fresh Look at Strategy,” Harvard Business Review, May-June 1998, p.145
Activities and resources: complementary
views about the creation and sustainability of
competitive advantage
•
Activities view:
-
Porter (1996), “What is Strategy?”
•
•
•
Resources view:
-
Hamel and Prahalad (1990), “Core Competence of the Corp.”
•
-
difficult-to-imitate core competences should be built
Collis and Montgomery (1995), “Competing on Resources”
•
20
5
Strategy requires tradeoffs
systems of interlocking, complementary activities which are guided
by these tradeoffs generate sustainable competitive advantage
Industry Analysis
Source: Ghemawat, 1999
possessing unique, valuable resources, which cannot be procured
in efficient factor markets, is the key to sustainable out-performance
Global Issues: How Far Can a Competitive
Advantage Travel?
•
•
Is the destination market structurally attractive?
-
Does the advantage apply in the destination market?
-
•
-
A formula for success in one market can be a recipe for disaster in
another
Strategy is highly dependent on context
Can the advantage be transferred?
-
•
After considering the effects of entry
-
The very factors that block imitation at home may prevent transfer to the
destination (e.g., resources or capabilities build up over a long period)
Transfer may take a long time
Do the benefits of transfer outweigh the costs?
-
Including benefits and costs to home business
Industry Analysis
www. wai .bangkaew.com
Dynamic fit / sustainability of competitive
advantage is difficult to achieve
40
ROI in Year 0
39%
ROI%
30
20
10
3%
Bottom Half
Top Half
0
1
2
3
4
5
6
7
8
9
10
Year
Industry Analysis
www. wai .bangkaew.com
Source: Pankaj Ghemawat, Commitment (New York: The Free Press, 1991)
Four types of threats to the sustainability of
competitive advantage
Substitution
Imitation
• Wal-Mart, K-mart & Target
• Nutrasweet vs HSC
• BSB vs. Sky
Added Value
• Barnes & Noble v Amazon
• Netscape vs. Microsoft
(The Browser)
• Sun vs. Microsoft
(Platform-independent SW)
• Linux vs. Microsoft
(Open source SW)
Appropriated
Value
• Corporate overhead at CCS after Connelly
• Talent at Microsoft
20
8
Slack
Industry Analysis
Source: Ghemawat, 1999
• Unions at Wal-Mart
• Players in MLB
• Intel (if you are one of
their suppliers)
Hold-up
Responding to Threats to Sustainability
Responses to Imitation
Building Barriers
Responses to
Substitution
• Economies of scale and scope
• Learning/private information
• Contracts and relationships
• Network externalities
• Threats of retaliation
• Time lags
• Strategic complexity
• Upgrading
• Not responding
• Fighting
• Switching
• Recombining
• Straddling
• Harvesting
Added Value
Appropriated
Value
Responses to Slack
Responses to Holdup
• Gathering information
• Monitoring behavior
• Offering performance incentives
• Shaping norms
• Bonding resources
• Changing governance
• Mobilizing for change
• Contracting
• Integrating
• Building bargaining power
• Bargaining hard
• Reducing asset-specificity
• Building relationships
• Developing trust
© 1999 Pankaj Ghemawat
In many situations anticipating competitors
moves can critical to building and sustaining
competitive advantage
• Where in the course do we see the importance of interactive
incentives?
-
•
Interactive incentives tool kit
-
21
0
HSC vs. Nutrasweet
Barnesandnoble vs. Amazon.com
War of Attrition
Intel vs. OEMs
Game theory
Competitor analysis
Industry Analysis
A solution concept: the Nash Equilibrium
•
Fundamental tool for examining non-cooperative games
-
•
Definition
-
•
Idea: Every player does the best that he/she can, given that the other
players are also doing the best that they can
a Nash equilibrium is a set of strategies for each player in which no
player can improve his/her situation by choosing a different strategy,
given the choices of the other players
Testing for a Nash equilibrium
-
Does any player have a profitable deviation? I.e., could any player
improve his / her payoffs by choosing a different strategy?
•
21
1
Industry Analysis
If there is a profitable deviation from a set of strategies, then this is not a
Nash equilibrium
A famous example: The Prisoner’s Dilemma
Prisoner B
Don’t Confess
Don’t Confess
Prisoner A
1 year
1 year
Confess
Industry Analysis
No prison
10 year
10 years
No prison
21
2
Confess
9 years
9 years
An example of Game Theoretic Analysis:
Anticipating NutraSweet’s response in Europe
•
In the A case, we asked the question, how will NutraSweet respond
in Europe
-
Two scenarios:
•
•
Accommodate (Price = $50); HSC sells 500 tons, NS sells 800 tons
Fight / Price war (Price = $25); HSC sells 0, NS sells 1300 (estimated Europe
/ Canada demand in 1989)
Fight
NS
Enter*
Accommodate
($27 M, $56 M)
HSC
Don’t
Enter
21
3
(0, $20 M)
(0, $149 M)
But the real game was broader – it involved multiple players and
markets
Industry Analysis
*Assumes Entry with 500 Tons of Capacity
Questions?
21
4
Industry Analysis