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Industry Analysis

Generic strategiesGenerating competitive advantageWhat distinguishes a firm?What provides a firm with above-normal profits? Premium prices charged (than average) Lower costs (than average)Competitive advantageGeneric competitive strategiesIs the firm economically profitable? If No, then its stuck in the middle If Yes, Is the product sold at premium prices? If No, the firm is a cost leader If Yes, the firm is a differentiator

Cost leadership Characteristics Target the average customer Look for higher market share Lower production costs Few unique or new featuresCost leadership Calls for Leveraging scale economies Marketing: wide product line/ aggressive pricing Organizational requirements Efficient organizational systems and structures Tight cost and overhead controls Incentives based on quantitative targets Low cost distribution systemsCost leadership Risks Technological change can nullify past investment and learning Low-cost learning by new comers and followers High attention on cost leads to inability to foresee product-market changes Inflation of costs can narrow price advantage

Differentiation Characteristics Perceived uniqueness Based on QualityServiceDesignBrandTechnologyFeaturesDifferentiation Calls for Strong marketing capabilities Product design skills (creative flair) Strong cooperation from suppliers and channel partners Being exclusive Organizational requirementsStrong coordination skillsIncentives based on subjective goalsAttract and retain creative talentDifferentiation Risks Uniqueness that is not valuable Too high a price premium for the differentiating factors Differentiating factors could be easily imitated reducing perceived differentiation Dilution of brand identification through product-line extensions Perception of differentiation may vary between buyers and sellersFall in buyers need (value) for differentiating factors as buyers become more sophisticated

Focus Characteristics Small overall share of the market Serves chosen (well defined) market segment Either a cost leader, differentiator within that segmentFocus Calls for Choice of the right buyer group/ product segment/ geographic market Strong marketing capabilities Product design skills (creative flair) Strong image of customization (for that product-market segment)Focus Works best when the market niche is Potentially profitable, offers growth potential Not crucial for the success of industry leaders Costly or difficult for multi-segment competitors to meet specialized needs of the niche Focuser has resources and capabilities to effectively serve that niche Few other rivals specialize in the same niche Focuser can defend against challengers via superior ability to serve that nicheFocus Risks Narrowing product differences between the niche products and the market as a whole Higher premium charged than the low-cost prices may erode brand loyalty Erosion of cost advantages (within the narrow segment) Focused products and services subject to competition from new entrants and imitators Could become too focused to satisfy buyer needsGeneric Business StrategiesStrategyEmphasisMarket coverageProduct characteristicsMarket demandPricing

Low costLower overall costsMarket wideNo frillsElasticLower than average

DifferentiationHigher qualityMarket wideDifferentiatedRelatively inelasticHigher than average

Focused low costLower overall costsNicheNo frillsElasticLower than average

Focused differentiationSpecial customer needsNicheDifferentiated/ exclusiveInelasticHigh

Industry Life Cycle Changes

Strategies Across Life CycleIntroductionGrowthMaturityDecline

Generic strategiesDifferentiationDifferentiationDifferentiation/ cost leadershipCost leadership/ focus

Market growth rateLowVery largeLow to moderateNegative

Number of segmentsVery fewSomeManyFew

Intensity of competitionLowIncreasingVery IntenseChanging

Emphasis on product designVery highHighLow to moderateLow

The Resource Based View of the Firm Resources: Inputs into a firms production process, such as capital equipment, skills of individual employees, patents, finances and talented managersCapabilities: The capacity for a set of resources to perform a task or an activity in an integrative mannerCompetencies: Resources and capabilities that serve as a source of competitive advantage for a firm over rivals.

RBV argues that the heterogeneous market positions of close competitors arise from each firms unique bundle of resources and capabilities

RBV explains sustained competitive advantage in terms of heterogeneity in resources and capabilitiesScarce resources and capabilities that are critical for value creation can be imperfectly mobile and cannot be acquired in the open market

Sustaining Competitive AdvantageCompetitive advantage is sustainable if competitors can not duplicate/ neutralize it. This happens when:1) Firms may differ with respect to resources & capabilities and the differences persist2) Isolating mechanisms (analogous to barriers to entry) may work to protect the competitive advantage of firms

Isolating Mechanisms: 1) Impediments to imitation 2) Market size and scale economies 3) Superior access to inputs 4) Distinctive organizational capabilities 5) Superior access to customers 6) Legal restrictions 7) Network Effects

If everyone can do it, its difficult to create and capture value from it or alternatively In a perfectly competitive market, no firm realizes economic profits or economic rents Economic Profits(rent) are returns in excess of what an investor expects to earn from investments of similar risk (i.e. in excess of the opportunity cost of capital). Ideally, any existence of long term profits should not be possible in perfectly competitive market. But, we all know of many industries which have been consistently profitable. This means that markets are definitely having some market inefficiencies and some of the industries and firms are definitely able to milk these inefficiencies to pull the economic profits. The core role of strategists is to identify ways in which firms capitalize on these market imperfections.As a strategist, we have to find to identify the industries where the market inefficiencies exist most. Density and Returns are correlated as well. High variance leads to high variability of returns i.e. some firms making huge profits and large number of other firms is facing huge challenges to survive as in Textile industry. 3 perspectives of rents:

First Type of Rent: Monopoly in terms of License or Resource Acquisition; Second Type of Rent: RBV =say Unique or Trademark or Cost Structure; Third Type of Rent: 3 stages 1) Emerging and Growing Stage 2) Mature Stage 3) Counterattack and Decline. First mover and constantly innovating organizations like Apple and Google

Substitutability: Keep a tab on closest competitors on basis of substitutability.Google: Environment: Slapped too many restrictions by many countries lately.RBV: Brands not be too much believed and companies with better algorithms will Should Invest: No. Because market expectations are already covered by huge margins in the stock. Only if earnings and stock are expected to grow in double digits in next 10 years. But their 98% earnings are still coming only from advertisements which is fairly limited in terms of scope.CHAPTER 2 Analyzing Industry Structure(5 Forces Analysis)

Threat of Entry: Most important force as it helps to have less competition and a monopoly. High TE leads to high industry attractivenessEntry is less likely when1) Entry faces high sunk costs(non recoverable investments R&D, Specialized Factories)2) Incumbents have competitive advantage Potential entrants are at a competitive disadvantage compared to existing players as in a Stakelberg model where first mover has a quantity advantage and has already factored the market quantity of the competitor into its market price. Some of competitive advantages are: a. Patents & Licensesb. Pioneering Brandsc. Pre-commitment contractsd. Large economies of scale (relative to demand)e. Steep learning curves 3) Entrant faces retaliation: Further strategy (pricing) behavior of incumbents. Likelihood of Retaliation: a) Excess capacity of Incumbents b) Economies of scale or other cost advantage c) Substantial exit costs c.1. Exit costs are payments that must be made on exit c.2. Exit costs provide incentive to fightd) Aggressive reputation of incumbents: d.1. Must be credible d.2. Suffers from free-riding problemThreat of Substitutes: Low TS leads to High Industry attractiveness. Substitute products are less of a threat when 1) Cross price elasticity is high(Perfectly Elastic Demand: If you increase price of one good, it will make people switch, Not good) 2) Switching costs are high (one-time costs costumers have to incur when switching to a new product or service)

Bargaining Power of Buyers: Industry is more attractive with less of Bargaining Power of Buyers. Buyers have less power when: 1) Buyers are not concentrated (no monopsony [Monopsony can be exemplified by US Defence, only one buyer, where it is the only buyer from many suppliers]) CPE = Cross Price Elasticity. Within Industry, if CPE is low, it means that it is not possible to go away from the industrys products leaving buyers with fewer options and thus go towards favor of industry.

Relative Concentration is used to find the relative Bargaining PowerBargaining Power of Sellers: Mirror image of your Buyers. You dont want BPS high for attractive of Industry.

Intensity of Rivalry: Low IR means High Attractiveness. Try to form a cartel as OPEC. Tacit coordination will help in avoiding Prisoners Dilemma

Best-price clauses: I will meet any of my competitors prices will ensure that competitors understand that their prices will be matchedRole of complements: Complements (software is to hardware). Compliments may work in tandem and may work against the industry. Role of Institutions: Government and institutions making rules of the game.

3.Analyzing Firm CapabilitiesEven though industry matters, but RBV matters more. It is not barriers to entry, but barriers to imitation Capability Analysis Tool to be explored.

VRIN = Valuable Rare Inimitable Non-substitutable (4 Necessary conditions for a capability to provide competitive advantage). First determine whether the capabilities contribute towards value to customers. If the capabilities are there, but not contributing to value to customers, capabilities are not aligned.Alignment: Pressed by Virtuous Cycles. 2 Virtuous Cycle Feedbacks with Nucor Steel:

Sustainability :

How to build capabilities?

Module 1: Introduction & Industry AnalysisCola Wars ContinueAnalytical framework for understanding the attractiveness of industries using the five forces frameworkDifferences within industry segments (CPs and Bottlers)Matching DellTransition to generic strategiesOvercoming industry forces (how a company can perform well despite an unattractive industry environment-combating the five forces)Tradeoffs with regard to competitive positioning

Module 2:Competitive positioningSouthwest Airlines: An industry under SiegeCost leadership as the generic strategy/competitive positioningRole of organizational alignment (structure, systems, and culture) in realizing strategySuperior turnarounds to overcome industry adversity and create a new segment

Module 2:Competitive positioningSkil CorporationThe various generic strategies brought togetherTradeoffs and their implications on strategyStuck in the middle!Changes in strategic positioning/mobility barriersFocused cost leadership strategy

Samsung ElectronicsDistilling dual advantageFirm strategies for leveraging dual advantages Virtuous circle enabling cost leadership (scale economies) and differentiation (ability to be at the frontier)

Module 3:Resource Based View of the FirmWal-Mart Stores, Inc.Transition to RBVImitability (copying) challenges on account economic deterrence being erodedSustainability challenges across multiple retailing formats

ZaraQuick response as a strategy to ward off inimitability owing to path dependency, physical uniqueness, causal ambiguity and economic deterrence.Substitution challenges owing to demographics, localization of fashion, and MFA

Module 3:Resource Based View of the FirmCapital oneIBS as the strategy to cater to inimitability issuesOrganizational structure geared towards harnessing IBS. Role of organizational alignment (structure, systems, and culture) in realizing IBS.Transferring IBS to other sectors/industries. Critical success factors for the transfer (i.e., interaction frequency, economic impact of interaction, access to unfiltered data, regulatory barriers)

Module 3:Resource Based View of the FirmInnovation, technology, and competitive strategy: Bajaj Auto and the motor cycle market (A)Identification of firm resourcesPartner capabilities in creating resource advantagesTests of imitability and substitutability on DTSiStrategies for warding off imitability threats using legal impediments

Module 4: Two sided markets & Strategic FailureGoogle Inc.Platform staging: Creating of two sided platforms to build inimitability and non-substitutability. Platform control: Winner take all markets (Inimitability)Platform envelopment issues (Yahoo, Microsoft, EBay: Substitutability)The Rise and Fall of IridiumStrategic failureThe role of organizational issues in compounding failure (technology, financing, marketing) Implementation issues

Module 4: Decision making complexities and Competitive DynamicsThe Cuban Missile CrisisDecision making under extreme complexity and information uncertainty.Limitations of the rational actor model. Need for organizational and bureaucratic political process viewsImplementation challenges Bitter Competition: Holland Sweetener Vs. NutraSweet (A-G)Competitive DynamicsGames and tactics in competitionPredicting and responding to competitors strategies

GeneralEnvironmentAnalyzing Competitive AdvantageIndustryEnvironmentFirm211PD Jose, IM BangaloreBarriers to EntryHigh Economies of ScaleHigh Product Differentiation/ Brand EquityHigh Capital RequirementsHigh Switching CostsHigh cost of accessing Dist ChannelsAbsolute Advantages(Experience, Technology, IPR,)High Expected RetaliationHigh Level of Government ProtectionBTE is High When .712Suppliers exert power bySuppliers are likely to be powerful if:Few Firms Dominate Supplier IndustryFew Substitutes for Supplier Products (SP)Buyer Not an Imp Customer for SupplierSP important (price/quality) to BuyerSP is Highly DifferentiatedSP is able to induce high Switching CostsHigh Threat of Forward Integration by SupplierLow Threat of Backward Integration by Buyer815Buyers exercise power byBuyer groups are likely to be powerful if:Buyer concentration is highPurchase accounts for a significant fraction of suppliers salesProducts are undifferentiatedBuyers face few switching costsBuyers industry earns low profitsBuyer presents a credible threat of backward integration918Substitutes limit the prices firms can chargeThreat of Substitute Products Close Substitutes Available Low Switching Cost High Price Value Performance of Substitutes High Profitability of Producers of substitutesHigh When 1021Cutthroat competition is more likely when:Rivalry Among Existing Competitors

Large number of competitors (Low Concentration Ratios)Many equally balanced competitors Slow growth industryHigh fixed costs & High Storage CostsChanging conditions of demand and supplyLack of product differentiationCapacity added in large incrementsLow switching costs between rivals productsHigh strategic stakesHigh exit barriers

1126Highly Specialized assetsHigh Fixed Cost of exit (e.g., labor agreements)High Government and social restrictionsHigh Strategic interrelationshipsHigh Emotional barriersRivalry Among Existing CompetitorsExit barriers are High When 1227Entry BarriersExit BarriersHighLowHighLowEffects of Entry Barriers and Exit Barriers on Industry Profits

Low returnsHighest returnsLowest returnsHigh returns1328Industry Analysis: Putting it all togetherRivalrySubstitutesEntrantsBuyersSuppliersINDUSTRY ACTORSINDUSTRY PROFITABILITYWeak RivalryPoorSubstitutesDifficult to EnterWeak BuyersWeak SuppliersStrong RivalryCloseSubstitutesEasy To EnterPowerfulBuyersPowerful SuppliersLow Levels of Industry ProfitabilityHigh Levels of Industry Profitability15PD Jose, IM Bangalore