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PowerPoint Slides © Michael R. Ward, UTA 2014. Kleenex Strategy Recall the Kleenex example from last time What strategic decisions were being made? Bring.

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Presentation on theme: "PowerPoint Slides © Michael R. Ward, UTA 2014. Kleenex Strategy Recall the Kleenex example from last time What strategic decisions were being made? Bring."— Presentation transcript:

1 PowerPoint Slides © Michael R. Ward, UTA 2014

2 Kleenex Strategy Recall the Kleenex example from last time What strategic decisions were being made? Bring out new innovations in the tissue market Determine appropriate prices and production as competitive entry appears Kill off projects at the end of their product lifecycles What was the goal of these decisions? Create additional value to the customer Capture some of this value in higher price-cost margins Sustain these margins as long as possible Econ 5313

3 Kleenex Strategy This was central to a very successful advertisement campaign for many years Not so much any more When to pull the plug? Ex Director of R&D at pharmaceutical firm Econ 5313

4 Strategy Goals Strategy includes all opportunities to increase the size of the profit box Increase customer value Lower costs But also, sustaining your ability to set prices above costs Econ 5313

5 Profit Dissipation Due to falling value Product no longer valued by many Ex Buggy Whips Due to rising costs Costs creep up, eating into margins Ex “Gingerbread” architectural details Due to disappearing competitive advantage Your ability to set prices above costs (capture value) is tied to your competitive advantages relative to others A new innovative product usually has huge competitive advantage The ability of entrants to imitate is what keeps competitive advantage from being sustained over time What are the sources of competitive advantage? Econ 5313

6 Two Views Industrial Organization (IO) Focus on industry, not specific firm assets Characteristics of the particular industry determine the scope for strategies to sustain competitive advantage Characteristics are external to the firm and common for firms in the industry Resource Based View (RBV) Focus on firm assets as opposed to industry setting The particular assets or resources within a firm provide scope for differences in strategy that allow for sustainable competitive advantage Important that the valuable assets cannot be easily copied Neither is wrong; just different ways of looking at the issue Econ 5313

7 IO View What are the important characteristics of the industry that affect the appropriate strategy? Come up with 5 (or 6) main points for greater profits: 1.High barriers to entry 2.Low buyer power 3.Low supplier power 4.Low threat from substitutes 5.Low levels of rivalry between existing firms 6.(Cooperation from complementary products) The first five are the “Five Forces” made popular by Michael Porter The sixth is “the force that Porter forgot” Econ 5313

8 IO View An industry is comprised of a group of firms producing products that are close substitutes to each other to serve a particular market For a multi-product company, industry analysis may need to be done on a product-by-product basis To use the Five Forces model, one must consider “value capture” Value is created in each industry and distributed across suppliers, industry rivals, and buyers. Firms compete to capture as much of the value created as possible. Michael Porter InterviewInterview Econ 5313

9 1. Entry Barriers Keep firms that are outside of the industry from entering when the industry is profitable Maintain competitive advantage Barriers prevent, or slow, their entry Some barriers are: government protection (e.g., patents or licensing requirements) proprietary products Strong brands / reputation high capital requirements for entry lower costs driven by economies of scale Learning-by-doing, network externalities Strategic Implication: Develop barriers to entry if possible Econ 5313

10 2. Buyer Power The extent to which the customers of the product or service can capture value Buyer power will tend to be higher if buyers are concentrated Buyer power will tend to be higher if it is easy for buyers to switch from firm to firm More power means these buyers will find it easier to capture value, taking it away from your firm Strategic Implications: Try to diversify customer base & Try to limit customers ability to switch Econ 5313

11 3. Supplier Power The extent to which the providers of any input to the product or service can capture value Their power tends to be higher when the inputs provided are critical or highly differentiated Concentration among suppliers gives suppliers power since their customers will have fewer bargaining options Even if many suppliers exist, power may still be high if there are significant costs to switching between suppliers Strategic Implication: Try to limit dependence on a few suppliers as much as possible Econ 5313

12 4. Substitutes Other products outside of your industry that can serve the same purpose Ex Aluminum foil and cellophane wrap Ex “Nice” pen and folio as graduation gifts Greater substitutability with another product means your demand is more elastic and price-cost margins are smaller Typically, these are from outside of your main set of rivals Strategic Implication: Often not much you can do. But this information is still relevant for the implementation of other elements of your strategy, e.g., pricing Econ 5313

13 5. Rivalry Refers to the form that competition takes. Is it dog-eat- dog or is it softer? Rivalry is likely to be quite high if there is: A large number of firms compete in an industry A stable technology A technology with high fixed costs or excess capacity Slow or negative industry growth Large, infrequent orders Rivalry higher when products are not well differentiated and buyers find it easy to switch back and forth Strategy Implication: Possibly try to differentiate your product more Econ 5313

14 Pentagonal Analysis A common tool is the so called “Pentagonal Analysis” Each point refers to a force and the distance gauges its importance Industries with similar graphs should have similar strategies Econ 5313

15 Value Net One limitation of the Five Forces is that it often portrays an industry as a zero-sum game The way you get a bigger piece of the pie is to take it from one of the other participants in the industry Although this is one way to view competition, companies can also work with other industry participants to try to build a larger pie With a larger pie, everyone’s slice grows bigger Some economists recommend that as a complement to a Five Forces analysis, which focuses on threats in the industry, that firms also evaluate the Value Net of the industry for cooperative opportunities Econ 5313

16 6. Cooperation from Complements Refers to the bundle of products produced that mutually support each other A product is under one company’s control whereas an industry platform requires complementary innovations from others to be useful A product is proprietary while a platform is supported by a whole industry Ex Android versus Apple IOS, CDMA standard in mobile phones, Video game consoles and game publishers Strategic Implication: Your business may be better served if other firms develop compliments. If so, foster these developments Econ 5313

17 Platform Strategy If you decide on a platform strategy, there are two common strategies "Coring” - using a set of techniques to create a platform by making a technology "core" to a particular technological system and market Ex Google Inc. in Internet search and Qualcomm Inc. in mobile technology. "Tipping” - the set of activities that helps a company "tip" a market toward its platform rather than some other potential one Ex Linux's growth in the market for Web server operating systems and Ebay’s dominance in online auctions Econ 5313

18 Support for IO View Econ 5313

19 MBA Thought Experiment Econ 5313 Apply the Five (Six) Forces to UT Arlington’s MBA program Market Definition? 1.Barriers to entry New For-Profit Universities? New Non-Profit Universities? New MBA program from existing university? 2.Buyer power Who are buyers? Individual students? Local businesses? Diverse groups? Switching Costs? 3.Supplier power Who are suppliers? Faculty? Administrators? Publishers? Are they critical or highly differentiated?

20 MBA Thought Experiment 4.Threat from substitutes What are substitutes? Job experience? Certificate programs? 5.Rivalry between existing firms Who are UT Arlington’s rivals? UNT, UTD, TCU, SMU, UT Austin, Wharton? How do they compete? 6.Cooperation from complementary products Campus life? (sports, activities) Campustown? Network of local firm recruiters? Network of influential alumni? Econ 5313

21 In-class exercise With a group of 2-4 neighbors Choose an industry – probably one that one of you work in – and gauge how high each of the five (six) forces are What sort of profitability would this suggest? Is the prediction accurate? What sort of strategy would this suggest? Is it actually being implemented? What changes have occurred in these forces? What changes in strategy do they suggest? Econ 5313

22 Resource-Based View (RBV) Individual firms may exhibit sustained performance advantages due to the superiority of their resources Even when other firms in the same industry do not Resources are “the tangible and intangible assets firms use to conceive of and implement their strategies” If the IO view was the whole story, all firms in an industry would have the same level of profitability With the RBV view, some out perform others because they have developed better resources Econ 5313

23 RBV Assumptions Two primary assumptions underlie the RBV: resource heterogeneity (firms possess different bundles of resources) resource immobility (since resources can be immobile, these resource differences may persist) Ex Farmland is both heterogeneous and immobile Ex Worker human capital is heterogeneous but often mobile Ex Raw material inputs are neither heterogeneous nor immobile Econ 5313

24 RBV View If a resource is both valuable and rare, it can lead to at least a temporary competitive advantage over rivals A valuable resource must allow a business to conceive of and implement strategies that improve its efficiency or effectiveness These resources let a firm operate at lower costs than its rivals or charge higher prices to its customers For a resource to be rare, it must not be broadly available to competitors Econ 5313

25 Temporary versus Sustainable Resources that may generate temporary competitive advantage do not necessarily lead to a sustainable competitive advantage Sustainable competitive advantage requires that resources must be difficult to imitate or substitute Some conditions that make a resource hard to imitate are: Resources that flow from a firm’s unique historical conditions will be difficult for competitors to match Resources where the link to advantage is ambiguous are more difficult for competitors to re-create the advantage Resource that are socially complex (e.g., organizational culture) are difficult for rivals to duplicate Econ 5313

26 RBV Assets So from the resource based view perspective, resources and capabilities that are valuable, relatively rare, and difficult to successfully imitate/substitute are at the core of sustained, excellent firm performance These resources and capabilities may include: technology physical capital intellectual assets human capital financial resources organizational form Econ 5313

27 Frank Perdue How did Frank Perdue create sustainable competitive advantage in the poultry business? Produce a chicken that tastes better, looks better, and cooks better – increase customer value Requires monitoring throughout the supply chain – increases costs Cover increased costs with price premium How to sustain the advantage though? Focus on quality control Branding Econ 5313

28 Waffle House How does Waffle House create sustainable competitive advantage in the breakfast restaurant business? Produce a low cost breakfast without amenities – increase customer value for those who prefer value over amenities Requires monitoring costs and prices throughout the franchise chain How to sustain the advantage though? Franchise monitoring Branding Econ 5313

29 Management Advice Be wary of advice that claims to identify critical resources or capabilities that successful companies have to develop in order to gain a competitive advantage Explanations such as these often mistakenly conclude a causal relationship when only a correlation exists Publicly available knowledge is not going to help you create a competitive advantage Ex You read that having a CMEO (Chief Managerial Economics Officer) in your company leads to a competitive advantage. You decide to hire a CMEO but no competitive advantage follows. What happened? Your competitor also heard about the CMEO "secret" and hired one too. Competitive Advantage cannot flow from something that is easily duplicated. Econ 5313

30 From the Blog Chapter 10 Banning ride sharing to protect taxis Using consumer activism to erect entry barriers Patents and Prices Uber versus Taxis Video Game Platforms 59 Minute Photo And the Band Played On Econ 5313

31 Main Points Strategy lies in increasing the profit box by: increasing value, lowering costs, and/or sustaining advantage The IO view focuses on industry structure The Five Forces (six) is a useful tool to analyze IO view The RBV view focuses on distinct assets of the firm Sustained competitive advantage comes from superior resources that are difficult to imitate Be wary of advice from consultants because this implies that the resource is easily imitable Strategy usually comes down to affecting: cost reduction, product differentiation and competitive intensity Econ 5313

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