1. Chapter 5
Competing Over Time
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2. Three Stages of Industry Growth
Entry rate exceeds the exit rate
Shakeout
Exit rate exceeds the entry rate
Maturity
Entry and exit rates are about the same
Industry disruption
Technological substitutes or disruptive technologies offer a stronger buyer surplus to the industry’s customers, drawing them away (e.g., DVDs vs. videotapes)
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3. Industry Evolution
All industries evolve over time as new firms enter and failing firms exit
Industry evolution threatens all sources of competitive advantage
The more a firm resists the forces of industry evolution, the less likely it is to survive
Product life cycle
Not the same as industry evolution but often linked closely to it
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4. The Industry Life Cycles of Four Representative Industries
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5. Entries, Exits and Total Firms in the U. S
Entries, Exits and Total Firms in the U.S. Automobile Industry
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6. Total Production of U.S. Automobile Firms (in millions)
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7. Total Automobile and Model T Production, 1909-1927
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8. Dynamic Growth Cycle Innovation in Processes or Products Firm Size
Improved Market Position Through Higher Value, Lower Cost or Both
Capacity Expansion
Increased Profitability
Figure 4.1
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9. Key Concepts in Developing and Maintaining Dynamic Capability
Dynamic growth cycle
The cycle of firm growth linking size, innovation, productivity, profitability, and capacity expansion
Dynamic capability
The ability of a firm, as it grows, to build its innovative potential and exploit it effectively
Path dependence
The tendency of a firm over time to invest in innovations that are upwardly compatible with each other, thereby creating a relatively unique path of product and process development
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10. Key Concepts in Developing and Maintaining Dynamic Capability (cont’d)
Absorptive capacity
The ability of the firm to adopt innovations developed by other organizations based on its prior experience with similar or related practices or technologies
Core rigidity
The inability of a firm to adapt to changing market or technological conditions because of its attachment to its core practices and customers
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11. Samsung’s Virtuous Cycle in 2003
Investment Ahead
of the Competition
Market Leadership
High Profits
Cash Flows and
Balance Sheet Flexibility
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12. Customer Segmentation over the Product Life Cycle
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13. Expansion During the Growth Stage
Developing scale-based value drivers
Which drivers are adopted depends on the purchasing criteria of the majority of buyers
For example: brand, service, network externalities, quality
Moving from early adopters to the early majority is crossing the chasm
Developing scale-based cost drivers in specific value chain activities
Economies of scale
Economics of scope
Learning curve
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14. Early Mover Advantage
Defined by a combination of competitive advantage (short term) and dynamic capability (long term)
Opportunity to establish and defend a strong market position
Opportunity to grow over a longer period of time
Higher chances of being exposed to opportunities for growth and innovation
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15. Strategic Pricing Strategic pricing
Pricing below marginal cost in order to attract additional buyers
Strategic pricing makes sense under two conditions
When increases in volume are sustainable through customer loyalty due to higher switching costs
When increased demand leads to lower costs for the firm through scale-driven cost drivers such as the learning curve and scale economies
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16. Risks of Strategic Pricing
Cost reduction due to learning or scale does not make up for the profits lost by setting a lower price
Poor understanding of technologies or other activities
Inability to protect cost advantages
Higher demand does not materialize
Customers cannot be retained
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17. What Determines a Shakeout?
Due to the emergence of a dominant, sustainable business model (value minus cost)
The strongest competitors use their higher productivity to drive out weaker firms
Shakeouts can occur in the same time frame
As the product life cycle shifts toward maturity
The product life cycle does not explain which firms will survive the shakeout
As a dominant design emerges
A dominant design is the culmination of a series of innovations in a product’s components and architecture and in related value drivers, such as service, network externalities, complements, or breadth of line
For example, the IBM PC, the general purpose tractor, the piano
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18. Rates of Product and Process Innovation over the History of the Industry
Source: Adapted from James Utterback, Mastering the Dynamics of Innovation, (Cambridge, MA: Harvard Business School Press, 1994), p. 82.
Figure 4.3
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19. What Determines a Shakeout’s Severity?
Expectations about future market demand and the degree of sunk costs
Ease of imitation of the dominant firms’ market position
The existence of defendable niche markets
About six percent of the firms in an industry exit during the shakeout every year
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20. Indicators of Industry Maturity
The long-term leveling-off or decline in the market growth rate
Rising buyer experience with industry products
The high concentration of market share among large, relatively similar firms
The persistence of niche markets
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21. An Increase in Buyer Experience
Firms attempt to counter the growing power of experienced buyers by:
Introducing innovations that increase search and transition costs for buyers:
Improved service
Higher quality
Breadth of line and product customization
Lowering prices
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22. Industry Concentration
Industry concentration depends on
The ratio of market size to the minimum scale required to compete
The lower the scale, the more firms are viable
Sunk cost investments in value drivers that have increasing returns to scale
Higher sunk costs force out smaller rivals and deter entry
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23. Hypercompetition Hypercompetition is the combination of:
Multipoint competition
Industries in which large firms compete across many products in a product line and across geographical regions
Mutual footholds in the core market of rival firms ensure competitive stability
An arms race
The requirement to develop product and process innovations to keep up with competitors
Returns on innovations become lower innovations are copied by competitors
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24. Niche Markets Competition in niche markets is affected by:
Size of the niche
Growth rate of the niche
Barriers to entry
Changes in niche buyers’ preferences toward core market products
Minimum level of scale required to compete
Ability to improve non-scale based cost and value drivers
Increase in the buyer switching costs
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25. Types of Industry Disruption
Technological substitution
Introduction of a radically new technology that has a higher rate of return on investment in R&D than the current technology in the industry
Disruptive innovation
Introduction of a new product with lower value but much lower cost than the incumbent product
Typically based on standard components
Exploits emergent customer price sensitivity
Radical institutional change
A radical shift in the regulation of competition that opens the market to firms with innovative capabilities
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26. Adapting to Industry Disruption
When can incumbents adapt to disruption?
When they control assets (e.g., distribution) that are critical for competing in the industry
When isolating mechanisms protecting the innovation are weak
When incumbents do not suffer large short-term opportunity costs in switching to the innovation
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27. Industry Disruption from Technological Substitution
Figure 4.5
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28. Trends in VCR and DVD sales in the United States by quarter, 1998-2003
Figure 4.6
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29. Incumbents Adaptation to Technological Substitutes
Incumbents delay adopting technological substitutes for the following reasons
Emphasis on total (rather than marginal) return on investment in R & D
Potential cannibalization by the new technology of profits from the traditional technology
Poor absorptive capacity to adopt new technology
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30. Disruptive Technology
Characteristics include:
Technology initially introduced by start-ups into niche market too small to attract incumbents’ attention
Product based on technology has relatively lower initial functionality and also a lower cost
Price-value profile of new product does not initially attract customers in industry’s core market
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31. Disruptive Technology (cont’d)
Over time, preferences of incumbents’ customers shift toward value-price profile of new product
Complementary assets (distribution) necessary for market penetration of disruptive technology not controlled by incumbents
Start-ups selling new product develop a dynamic growth cycle which allows them to penetrate core market rapidly through scale-based cost drivers
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32. Disruption by Regulatory Change
Deregulation typically leads to:
Entry
Industry consolidation
Decline in incumbents
Table 4.4
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33. Chapter 6
Strategy Execution
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34. What Is Strategy Execution?
Building the resources and capabilities that lead to competitive advantage through critical value and cost drivers
Not the same as strategic planning
A relatively simple business with a valuable protected resource may not need planning—but it must execute.
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35. Characteristics of Resources
Observable
Tradable
Contribute to the firm’s market position by improving value or lowering cost, or both.
Produce an economic advantage if difficult to imitate or neutralize.
Examples:
Patents
Natural resources
Brand
Distribution network
Proprietary process
Geographic location
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36. Characteristics of a Capability
Cannot be readily observed
Not tradable separately from whole unit
Contributes to higher value, lower cost or both
Developed by people through coordinated action
Less stable than a resource
Developed independently of resources
Can derive its strategic value from its use in support of the firm’s resources
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37. Linking Resources and Capabilities
Capabilities contribute to performance by supporting resources
A firm’s expertise in exploiting a resource strongly influences how much it is worth to the company
Resource Complementarity
Complementarity between the asset being auctioned and the existing resources of the bidding firms determines the least amount each will bid
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38. Makadok’s Model for Relating Resources and Capabilities
How can a firm become more profitable than competitors after bidding for a resource?
Have stronger complementarities between the resources of the firm and the resource being auctioned
Higher complementarity allows the firm to raise its bid
Develop a better forecast of economic returns to the resource after it is acquired (resource picking)
Bid depends on forecast
Have stronger capabilities that increase the returns to the target’s resource
Raises the firm’s bid
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39. Building Capabilities
Capabilities are produced by specific activities and policies
Two frameworks for mapping activities and policies are:
Value chain framework
Activity system framework
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40. Porter’s Value Chain
Figure 5.1
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41. Activity Systems
Interconnected components of a firm that contribute to its market position
Policies
Programs
Value chain activities
Product characteristics
Key resources
Firm’s structure and culture
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42. Vanguard’s Activity System at the Beginning of 1997
Figure 5.2
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43. Vanguard Activity System
Core elements:
The fund family’s mutual structure (not stock)
Direct distribution (no brokers)
Focus on conservatively managed funds (low risk)
Low transaction and account maintenance cost
Candid communication (strong culture)
Focus on long-term performance
High-quality service (higher retention rates)
Supporting elements
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44. The Elements of Strategy Execution
Figure 5.3
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45. Organizational Dimensions of Strategy Execution
Complementarity and consistency among the firm’s resources, tasks and policies in support of a firm’s market position
Control and coordination systems for the design and execution of tasks
Compensation and incentive systems
Culture and learning behavior
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46. Complementarity and Consistency
Complementary resources or capabilities
Produce a more effective outcome together than independently
Example: Stores and catalogue operations for internet retailing
Consistency (fit)
Resources or capabilities are jointly aligned with the requirements of the firm’s market position
Example: The alignment of Vanguard’s activity system with its low cost position
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47. Control and Coordination Systems
Coordination mechanisms
Standardized procedures
Joint planning
Liaison personnel
Task forces with members from multiple activities
Teams that institutionalize the task forces
Hierarchical referral up the chain of command
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48. Types of Hierarchical Structure
Figure 5.4
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49. Benefits of a Functional Structure
Lower costs
Reduced overhead
Standardized procedures within functions
Continuous process innovation within functions
Power over suppliers through increased scale in purchasing
Increased expertise within functions that may result in value to the customer
Specific technology development
Skills in sales and marketing research
Quality improvements in operations, logistics and service
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50. Benefits of a Geography-based Structure
Increased focus on the characteristics of geographical regions
Unique local competitors
Unique local suppliers
Unique local customer preferences
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51. Benefits of a Customer-Based Organization
Increases focus on unique characteristics of customer segments
Unique marketing requirements
Example: Knowledge of customer industry
Unique customer preferences
Example: Products tied to unique practices in each segment
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52. Matrix Organization Organized on two or more dimensions:
Function and geography, function and customer
Managers report to both functional and geographical executives who report to president
Avoids problems of putting one dimension over another in the hierarchy:
Dimensions are roughly equal in importance
Can be hard to manage because of conflicting demands of different dimensions
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53. Incentive Systems
Incentive compensation systems contribute to strategy execution
Goals
Measure outcomes for tasks that affect the firm’s market position
Goal setting and rewards
Set appropriate targets for each outcome
Reward managers for achieving targets
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54. Problems Inherent in Incentive Systems
Controllability
Occurs when managers are unable to identify how much of the firm’s performance is due to skill, effort or luck
Alignment
Occurs when crucial tasks that contribute to performance are not measurable, leading to overweighting of tasks that can be measured
Interdependency
Occurs when performance depends on the effort of a team and it is hard to identify individual contributions
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55. Dilemmas of Noise and Distortion
Noise = measurement error
Controllability and interdependency increase noise that lowers the ability of management to measure its current progress in achieving important results
Distortion = misalignment of measurement
Distortion is increased through the improper weighting of tasks
There is an inevitable tradeoff between these dilemmas
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56. Piece-Rate Piece-rate pay
Pay related to the quantity of output of a person over a period of time
Piece-rate systems are appropriate when there is:
Employees control the pace of production
Performance standards are perceived as fair
Group members preferences are similar
Cooperation and innovation are rewarded
Lower bound on quality is explicit
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57. Culture and Learning Culture Learning
Can be seen as the development and maintenance of focal points for decision making
Learning
Single loop learning occurs within the constraints of a problem
Double loop learning raises questions about the task parameters
Effective strategy execution requires know-how and involvement in both types of problem solving
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58. Capability Planning and Learning
Target market position
Desired value drivers
Desired cost drivers
Revise target
Capability planning
Product
Process
Single loop learning:
Problem solve
Double loop learning:
Discover new processes, practices and policies
Revise planning
Desired operational capabilities
Identify
Knowledge gaps
Cooperation problems
Coordination problems
Design of activities and tasks
Design organizational dimensions of execution
Control and coordination
Compensation and incentives
Complementarity and consistency
Culture
Actual execution
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