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Greenwald Strategy Class #1

Greenwald Strategy Class #1

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Published by: John Aldridge Chew on Jan 10, 2012
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LECTURE #1 Greenwald Strategy Class
 
www.csinvesting.wordpress.comStudying/Teaching/Investing Page 1
These notes may be used to supplement your readings in
Competition Demystified. If you look at many strategy and consulting books, your brain will turn to goo. Try to understand the concepts behind the jargon.
 
Strategic Decisions
: The real distinction which will apply in this class is: When you talk aboutstrategy, introducing the new product, going into a new business, it is the nature of thosedecisions that the outcome depends on the reaction of
other agents
to your decisions.
(Think of chess)
. It is the function of the external economic environment.Then you consider the consequences of those decisions, you are going to be looking
outward.
 When you think of tactical decisions like cost reduction, the outcome is in the control of thecompany itself
it is inwardly focused.This is a course in external plans. Formulating or analyzing strategy often gets applied in thecontext of a business plan.Price, entry, competitive response, margin
a lot of assumptions in the outside world are inthose numbers.No one ever sees a
negative NPV
, but as you can see from AOL/Time Warner merger, thereare a lot of negative NPV decisions out there. See a discussion here:http://www.nytimes.com/2010/01/11/business/media/11merger.html?pagewanted=all Before you do these financial numbers in a business plan, look at the world from a broadperspective. How do I avoid investing in the South Bronx
(Declining Business)
of the Investingworld?Five Forces from M. Porter--it is not clear--you want to start with one
(Barriers to Entry).
Whenwe look at external competitive interactions, they are dynamic and complicated. We have toanalyze simply. There is no best solution, no formula. You need to analyze each segment of abusiness and think strategically.Develop a sensible approach. What are the elements of a sensible approach?1. First, given the nature and complexity of these problems, you will get no place unlessyou
simplify.
Start with 1 premise. Go from simple to complicated one step at a time.2. Second, there is no unique in-depth approach. Look at the problem (elephant) from a
variety of different perspectives
of which only some are presented in these cases.3. Third, you want a
broad understanding
first. Know whether other alternatives arestupid.You are going to start with an idea of what is going on, ask yourself first, how do I measure andknow if that is, in fact, true of the particular, real world situation you find yourself, Then you aregoing to look at broader, qualitative implication, and then you are going to compare that to theavailable historical data.The sad thing about life is
all you have is
historical 
data. You have to base your decision onhistorical information. Once you compare your original conjectures, suitably refined, so that they
 
LECTURE #1 Greenwald Strategy Class
 
www.csinvesting.wordpress.comStudying/Teaching/Investing Page 2
lead to measurable prediction, against the actual history, you find out if you are wrong or right
then you can refine your theory of how the world works.One step at a time, multiple impressions, broad understand and an iterate process of doingthings.There are two ways to describe what we are going to do in this class.A. We are going to make a sequence of simplifying assumptions and each of thosesimplifying assumptions is going to lead to an approach, the kind of analysis that we cando.B. The first is an
industry analysis
. It is an army of the ants’ problem
 (http://www.youtube.com/watch?v=DXaaTQztoI0). The industry that you are operating in---there are many competitors who are after broad
profit opportunities and they can’t
be manipulated by you. There is no conscious, direct interaction in that environment.What will determine profitability in that environment?
Always ask, “Is there competitive advantage (“CA”) and barriers
-to-entry (B-t-E)?There is one force of unreasoned competitive drive that most business organizationsseem to have. That is not subject to manipulation.If there are B-t-E and limited competitors, there are opportunities for mutual interaction,conscious interaction, what can you say about that?
The general solutions don’t get you
very far. There are small number of interactions that if you manage them well, you will dowell. They will cover 95% of the situati
ons. They are like a Prisoner’s Dilemma problem
(see http://pespmc1.vub.ac.be/PRISDIL.html)  We are talking about playing in those games and those competitive situations. Finally,you will step back and say that suppose this industry were run by a cooperative council,which organized things efficiently
how would that work?It is possible. Even if it is not possible, you want to think that way, because it will pointyou in the direction of possibilities for collaboration, or possibilities of non-collaboration.Your survival depends on others in that industry not getting together.We will go through and develop alternatives to particular situations.The first questions about
competitive interactions
are the cast of characters limited?Are the characters identifiable or are there an unlimited supply of global competitors? If itis unlimited gl
obal competitors, then don’t worry about interactions. Then where profits
are driven out by competition, you must be the
most efficient producer
or moreefficient than your competitors. If the situation is a level playing field, then you must bethe most efficient producer/operating in that environment.
 
LECTURE #1 Greenwald Strategy Class
 
www.csinvesting.wordpress.comStudying/Teaching/Investing Page 3
If you are the only one there--Wal-Mart
no competitors in its local market. How do youtake advantage of your competitive advantage?When there are CAs and they are shared among a number of competitors (six or less)then you need cooperation amongst firms.You can use classical game theory when more than six firms involved. Cooperativeanalysis. http://www.law.yale.edu/documents/pdf/holler.pdfAndhttp://faculty.lebow.drexel.edu/McCainR/top/personal/ncoopcoop.pdfThis (what we learn in this class) is not the only approach at looking at these strategicsituations.The Brandenberger book,
Co-opetition, will show you that things don 
’t turn out as
expected. They have a different way of looking at situations. Go here: http://mayet.som.yale.edu/coopetition/  
Coke has
customer captivity,
demand advantage (Things go better with Coke: GladysKnight and the Pips) http://www.youtube.com/watch?v=lcAr6gBRG9E&feature=related  Customers buy out of habit. Mercedes-Benz doesn
’t have such customer captivity.
Other companies sell Lexus and Cadillac, so other companies compete on a levelplaying field. Also, the customer is making an infrequent purchase so the opportunity toeven capitalize on customer captivity is less.Note with a complex product or service: it is riskier to go to a different plastic surgeon
acomplex product has higher search costs.
DEMAND competitive advantages
these have to be competitive advantages for yourfirm. Thing you can do that others can
’t do.
Cost structure if you have the technicaladvantage, captive customers that others don
’t have. This is
not product differentiation.B-t-E and CAs are the same. B-t-E are incumbent advantages. So that the entrants areat a disadvantage. Is it the person who comes in with the latest generation of tech thatdoes best? Not necessarily.You can enter against MSFT. You have to support that technology. Entry advantagesintensity competition (TELECOM). A bad industry.Two natural sources of B-t-E and profitability: Proprietary technology and CaptiveCustomers.Competitive Advantage (CA): These others can
’t compete at my stage of 
production; asteadily declining
AVERGE COST CURVE
in the relevant market is ECONOMIES OFSCALE (
“EOS”). This pertains to size in the relative market—
not declining average costsdepending upon the amount of production. If you are a refrigerator manufacturer and this

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