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Chapter 4 Exhibits

from Strategy and the Business Landscape

© 1999 Pankaj Ghemawat

The Pharmaceutical Payoff Matrix
(Millions of Dollars)
CLIENT’S (C’S) PRICE NO PRICE CHANGE E HAS LARGE PRICE ADVANTAGE E HAS SMALL PRICE ADVANTAGE C NEUTRALIZES E’S ADVANTAGE VERY LOW 358/190 418/163

ENTRANT’S (E’S) PRICE LOW 507/168 507/168 MODERATE 585/129 HIGH 624/116

454/155

511/138

636/126

428/50

504/124

585/129

669/128

© 1999 Pankaj Ghemawat

A Framework for Competitor Analysis
What Drives the Competitor Future Goals
At all levels of management and in multiple dimensions

What the Competitor Is Doing and Can Do Current Strategy
How the business is currently competing

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

Capabilities
Both strengths and weaknesses

© 1999 Pankaj Ghemawat

Source: Michael Porter, Competitive Strategy, (New York: Free Press, 1980), Chapter 3

1991) . Commitment (New York: The Free Press.The Limits to Sustainability 40 30 ROI% 20 10 0 1 2 3 4 5 6 7 8 9 10 Year © 1999 Pankaj Ghemawat Source: Pankaj Ghemawat.

The Four Threats to Sustainability Imitation Substitution Added Value Appropriated Value Slack Holdup © 1999 Pankaj Ghemawat .

” Unpublished working paper.Trends and Success in the Programming of New Television Series Averages Trendy Introductions Nontrendy Introductions Year 1 Ratings 15.3 % Surviving 3 Years 21% 27% © 1999 Pankaj Ghemawat Source: Robert E.4 Years Broadcast 1.3 Year 3 Ratings 16.8 2.4 20.3 16. Harvard Business School (January 1998) . Kennedy. “Strategy Fads and Competitive Convergence: An Empirical Test for Herd Behavior in Prime Time Television Programming.

The Economics of Brokerage Business Models. 1996 . Inc. Early 1996 250 200 Price Cost Dollars 150 100 50 0 © 1999 Pankaj Ghemawat Online/Deep Discount Source: Rajiv Lal. M-286.” Stanford University Discount Full Service Graduate School of Business Case No. “ E-Trade Securities.

6 60 Arms-length (42%)* 589 15 7./U.S. Nov-Dec 1996 © 1999 Pankaj Ghemawat . “Does Governance Matter?. Measures of Asset-Specificity Distance between manufacturing plants (miles) Capital that is not readily redeployable (%) “Man Days” of face-to-face contact divided by sales to automaker (index) Supplier’s sales to automaker divided by supplier’s total sales (%) * Share of part production Japan/Japan Division (48%)* 276 31 7. Vol. 7.S.9 19 Partner (38%)* 41 31 10.9 94 Arms-length (35%)* 125 13 9.” Organization Science. No.Asset-Specificity in the Automobile Industry U. Dyer. 6.0 34 Source: Jeffrey H.7 34 Partner (10%)* 413 18 9.

Market Value versus Cumulated Strategic Investments at General Motors 100 50 0 Market Value -50 -100 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 $ Billion -150 Strategic Investments 0% -200 -250 -300 -350 10% -400 © 1999 Pankaj Ghemawat .

Responding to Threats to Sustainability Responses to Imitation Building Barriers • Economies of scale and scope • Learning/private information • Contracts and relationships • Network externalities • Threats of retaliation • Time lags • Strategic complexity • Upgrading Responses to Substitution • Not responding • Fighting • Switching • Recombining • Straddling • Harvesting Added Value Appropriated Value Responses to Slack • Gathering information • Monitoring behavior • Offering performance incentives • Shaping norms • Bonding resources • Changing governance • Mobilizing for change © 1999 Pankaj Ghemawat Responses to Holdup • Contracting • Integrating • Building bargaining power • Bargaining hard • Reducing asset-specificity • Building relationships • Developing trust .

Chapter 4 Text Related Slides from Strategy and the Business Landscape © 1999 Pankaj Ghemawat .

Outline I. Approaches to competitor analysis II.The purposes of competitor analysis III. The process of competitor analysis © 1999 Pankaj Ghemawat .

I. Approaches to Competitor Analysis x x x Structural analysis Behavioral analysis Game-Theoretic analysis © 1999 Pankaj Ghemawat .

Behavioral Analysis of HSC x GOALS – State-ownership – Lower Profits – Growth Objectives x CAPABILITIES – Tosoh/DSM Technology – DSM Size/Deep Pockets – Political Access x STRATEGY – Migrating Downstream – Legal Skirmishing – Likely to Expand into US x ASSUMPTIONS – Different Home Base – Chemical Company Parents – Thinks NutraSweet Will Accommodate © 1999 Pankaj Ghemawat .

Chapter 3 . Competitive Strategy.Behavioral Profiles Resources and Capabilities Competitor Profile Current Strategy Apparent Assumptions Future Goals © 1999 Pankaj Ghemawat Source: Michael Porter. 1980). (New York: Free Press.

profitability Growth vs. short run performance Non-economic vs. economic goals © 1999 Pankaj Ghemawat . cost leadership Long run vs.Competitors’ Goals x x x x x Market share vs. dividend pay-out Technological leadership vs.

emotional Profit-oriented vs. visionary Analytical vs.Personality Profiles x x x x x Conservative vs. risk adverse Operational focus vs. © 1999 Pankaj Ghemawat .. CEO & COO Chair & chief scientist . growth Analyze titles & responsibilities: Chair & CEO Chair. aggressive Risk takers vs..

Diagnosing Competitor Goals and Assumptions x x x x x x x x Profiles of key management Organization structure Advisors Public statements Results of recent past History Parent company strategy Position in the portfolio © 1999 Pankaj Ghemawat .

Competitor Incentives x x x x Look ahead and reason back Recognize linkages across markets Pay attention to uncertainties Narrow uncertainties by projecting profits and implied courses of action © 1999 Pankaj Ghemawat .

Pulling It All Together x x Is the competitor satisfied with its current position? What likely future moves or strategy shifts. will the competitor make and how dangerous are they? Where is the competitor vulnerable? What will provoke the greatest and most damaging retaliation by the competitor? x x © 1999 Pankaj Ghemawat .

II. The Purposes of Competitor Analysis Linking Analysis to Action x x x x x Offense Defense Influence Cooption Concession © 1999 Pankaj Ghemawat .

while assuming you will act Assuming competitors have no options Underestimating the intensity of retaliation x x © 1999 Pankaj Ghemawat .Interaction: Reality & Perceptions Common Perceptual Biases x Ascribing inertia to competitors.

Classic Good Moves . cost them more than it costs you -builds on strategic asymmetries Have commitment value. 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) © 1999 Pankaj Ghemawat . x x x x x x Hard to match. costly to reverse...

x x x x x x Can be easily copied (when you think its unique) Show a lack of commitment Raise costs without creating value.Classic Bad Moves .. lower prices without expanding volume Undermine industry structure Ignore a firm’s capabilities Needlessly provoke or mindlessly hurt competitors © 1999 Pankaj Ghemawat ..

A Broader Perspective: Influencing Competitors x x x x The right competitors can be good Influence the competitors’ entry and mobility Influence the competitors’ incentives Avoid creating desperate competitors © 1999 Pankaj Ghemawat .

III. The Process of Competitor Identification Whom do I analyze? x Common approach: – Companies with similar strategies and competitive positions x Often forgotten: – Companies able to: » » » » change industry structure or evolution leverage related capabilities to enter the industry offer substitute technologies provide complementary assets or products © 1999 Pankaj Ghemawat .

. a framework for self analysis .. © 1999 Pankaj Ghemawat .Procedural Guidelines x x x x A lot of information already in house One time efforts rarely succeed Cost/benefit of data collection Data without analysis = low benefit … More than a planning tool and.

. Lawsuits Agency reports Investors Annual reports Annual meetings 10K..... 10Q... Prospectus ..Sources of Information on Competitors Public Advertising What competitors say about themselves Promotional materials Press releases Speeches Want ads OTHERS? What others say about them Books HBS cases! Consultants Unions Trade Manuals Technical papers Licenses Patents Courses . Analysts reports Industry studies Credit agencies © 1999 Pankaj Ghemawat . Customers Partners Subcontractors Suppliers Gov’t SEC Congressional testimony Lawsuits Courts Regulatory agencies .

Protecting One’s Own Information x x x Decide what needs to be protected Recognize the range of overt sources of information Recognize the possibility of covert action – telephone and fax intercepts – trash analysis – employee subversion/insertion x Protecting information requires protecting people © 1999 Pankaj Ghemawat .

Anticipating Competitive and Cooperative Dynamics x x The detailed analysis of individual competitors The evolutionary analysis of threats to sustainability © 1999 Pankaj Ghemawat .

Predicting Profits 39% 3% Bottom Half © 1999 Pankaj Ghemawat Top Half .

Sustainability Analysis 20 18 16 14 12 10 8 6 4 2 0 1 97 1 © 1999 Pankaj Ghemawat Advantage (% ROI) 1 973 19 75 1 97 7 19 79 .

Sustainability: Resources and Products Imitability of the Product/Service Low High Imitability of Superior Resources © 1999 Pankaj Ghemawat .

Threats to Sustained Advantage Yes Continued Appropriability Yes No • Hold-up • Slack Continued Scarcity No • Imitation • Substitution Yes Competitive Advantage No © 1999 Pankaj Ghemawat .

Threats to Sustainability Imitation Slack Substitution Hold-Up © 1999 Pankaj Ghemawat .

Toys “R” Us © 1999 Pankaj Ghemawat .Imitation x Imitation increases the “supply” of what a firm uniquely provides – Profits draw a crowd x Imitation is pervasive and can be deadly – – – – – – Intel in DRAMs EMI in CAT scanners Apple in user-friendly PCs Netscape in browsers Ben & Jerry’s in super-premium ice cream Bridal registries on the Internet x But imitation can be deterred – Continental Lite vs. Southwest Airlines – Child World vs.

Imitation: Duration of Intel’s Monopolies 386 486 Pentium Pentium Pro MMX (4 Years) (3 Years) (2 Years) (1 Year) (3 Months) © 1999 Pankaj Ghemawat .

Barriers to Imitation x x x x x x x x Scale or Scope Economies Experience/Learning (Tacit Knowledge) Relationships Reputation Retaliation Response Lags Upgrading/Investments Fit © 1999 Pankaj Ghemawat .

x Substitution threats can be subtle and unexpected – Videoconferencing vs. customer needs. etc. disposables x For this reason. substitution is an especially effective way to attack dominant players © 1999 Pankaj Ghemawat .Substitution x Substitution reduces the “demand” for what a firm uniquely provides by shifting the demand elsewhere – The better mousetrap – Due to changes in technology. air travel – Western Union vs. the telephone – Conventional contact lenses vs. input prices.

Substitution: Book Retailing Procurement and Logistics Operations Marketing B&N Offline Amazon Original B&N Online Amazon Response © 1999 Pankaj Ghemawat .

April 24.” HBS #5-697-066.Substitution: Steel Steel Quality Sheet steel lity ua Q of Steel Structural el ste ced du pro illm ini m & rods Other bars Rebar 1975 1980 1985 1990 © 1999 Pankaj Ghemawat Source: Clayton Christensen and Bret Baird. . 1997. “Continuous Casting Investments at USX Corporation.

orange juice supplemented with calcium) – Incorporate their cost reductions (e. private labeled items in supermarkets) – Face up to your loss of added value.. join them Take the money and run © 1999 Pankaj Ghemawat .Responses to Substitution x x Before Scan the landscape broadly for threats Understand underlying customer needs – But be prepared to ignore the needs of current customers After: Your Options x Fight the threat – Incorporate their benefits (e..g.g. and reduce price before the substitute gets a foothold x x If you can’t beat them.

Responses to Substitution x x x x x x Not responding Fighting Switching Recombining Straddling Harvesting © 1999 Pankaj Ghemawat .

suppliers. or complementors who have some bargaining leverage – They have bargaining leverage because they have something you need and can’t get elsewhere (added value) x x Ex: Who makes all the profits from PCs? Hold-up is especially threatening when parties in a relationship have invested in assets that are specific to that relationship (so it’s hard to walk away) – An electric plant built at the mouth of a coal mine – A railroad spur laid to a particular factory – Skills that are tailored to a particular employer © 1999 Pankaj Ghemawat .Hold-up x Hold-up diverts value to customers.

and initiated internal production within one year Genex went bankrupt x x x © 1999 Pankaj Ghemawat .Hold-Up: Genex and G. Searle x Codeveloped a process for making one of the two key amino acids used in NutraSweet Genex entered into a “long-term” contract to supply Searle and built a new bioprocessing facility Searle began to renegotiate price within months.D.

“Profit Pools: A Fresh Look at Strategy. Gilbert.” Harvard Business Review. May-June 1998.Holdup In The PC Industry 40% Operating Margin 30% 20% 10% other components microprocessors personal computers software peripherals services Share of Industry Revenue Source: Orit Gadiesh and James L. p.145 © 1999 Pankaj Ghemawat .

Responses to Hold-up x Multiple sourcing – But investments in relationship-specific assets are important x x Tough negotiation Contractual arrangements – But contractual incompleteness limits this option x Vertical integration x Don’t base your competitive advantage on specific assets you can’t own (like a particular individual) © 1999 Pankaj Ghemawat .

Responses to Hold-up x x x x x x x Contracting Integrating Building bargaining power Bargaining hard Reducing asset-specificity Building relationships Developing trust © 1999 Pankaj Ghemawat .

Slack
x x

Slack, or waste within the firm, dissipates value Slack is hard to identify...
– Plush carpets for their own sake are slack – But plush carpets to win customers and recruit talent might be wise investments

x

…but slack is thought to be large
– 10-40% of revenues, typically!?!

x

Slack tends to be worst under certain conditions
– Forgiving competitive environments – Settings in which managers must have wide discretion over productive processes

© 1999 Pankaj Ghemawat

Slack: The Theory of Free Cash Flow
x

Principal-agent problems between managers and stakeholders Managers have incentives to grow the resources under their control Free cash flow enhances managers’ ability to
– Invest resources in negative-return activities – Waste resources

x

x

© 1999 Pankaj Ghemawat

Responses to Slack
x

Monitoring of performance
– Benchmarking – Time-motion studies – Outsiders on Boards

x

Managerial incentives
– On average, top executives get roughly $3.25 for each $1,000 of shareholder value created (Jensen and Murphy)

x

Commitments to return cash to shareholders
– e.g., dividends

x

Appeals to a higher calling, a sense of mission

© 1999 Pankaj Ghemawat

Responses to Slack x x x x x x x Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change © 1999 Pankaj Ghemawat .

A Fifth Threat x Nonmarket Pressures – Government – NGOs – Media © 1999 Pankaj Ghemawat .

Sustained Cooperative Advantage With cooperative or competitive interactions. unlikely to gain more than “added value” Sustained cooperative advantage: significant “added value” as partner x x © 1999 Pankaj Ghemawat .

Building Sustainable Advantages x x Understand your own uniqueness Scan the environment for – Technological changes – Variations in input supply – Demand shifts x Invest in opportunities that fit © 1999 Pankaj Ghemawat .

Protecting Sustainable Advantages x x Sustainability is not forever. nor is it free Investment can reinforce it by – Amplifying advantages – Multiplying their bases © 1999 Pankaj Ghemawat .

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 x x Make yourself a moving target But remember that the landscape can shift under your feet © 1999 Pankaj Ghemawat .Conclusions x x The best defense is a good offense That is.

Countering Threats to Sustainability x Sustained superior performance requires – Scarcity – Appropriability x Two routes to sustainability – Making lumpy commitments – Building organizational or technical capabilities over time © 1999 Pankaj Ghemawat .

A Dynamic Theory of Sustainability x A dynamic theory of sustainability requires – a link between what you did yesterday and what you can do well today – a link between what you do today and what you can do well tomorrow © 1999 Pankaj Ghemawat .

Sustainability and Investment x Implications for investment – The status quo cannot be sustained without investment – Because of the moving competitive baseline. investment is required just to earn average returns – Above-average returns require investments that retard the movement of the competitive baseline © 1999 Pankaj Ghemawat .

Chapter 4 Case Related Slides British Satellite Broadcasting vs. Sky TV © 1999 Pankaj Ghemawat .

advertising Fixed demand Network effects/Switching costs Diverse competitors Inconsistent goals High strategic stakes Antagonism/emotion Substitutes: BBC/TV/Cable © 1999 Pankaj Ghemawat .Structural Analysis of BSB vs. Sky x x x x x x x x x High fixed costs/Upfront investment Inelastic supply: films.

A Behavioral Profile of News Corporation x Resources and Capabilities – Second-largest media conglomerate – Cash – Twentieth Century Fox library – 1/3 of British newspapers – Experience with satellite TV x Assumptions – – – – – Low cost Old/proven technology Commercial programming Quick to market Ability to skirt loopholes x Strategy – Emphasis on electronic media – Satellites targeted – Presence in English speaking markets – ITV stake – Losing bidder on official franchise x Goals – Murdoch’s nonpecuniary motivation © 1999 Pankaj Ghemawat .

Sky BSB Fight 699. -180 -70. 2089 © 1999 Pankaj Ghemawat . -190 Exit Fight SKY Exit 2943.Game-Theoretic Analysis of BSB vs.

Chapter 4 Case Related Slides De Beers © 1999 Pankaj Ghemawat .

De Beers Exhibit A: Value Appropriation Quantity Bought carats South Africa Namibia Botswana Soviet Union Other Total 9. % 54% 15% 16/6 11% 5% $/carats 58 200 53 125 60 77 $ million 531 193 412 750 199 2084 $/carat 20 98 10 113 51 44 $ million 183 94 78 675 169 1199 $/carat 38 102 43 12 9 33 © 1999 Pankaj Ghemawat . $/carat 38 102 13 12 9 24 De Beers’ Total contrib.154 963 7.000 3. $ million 348 98 101 72 30 649 De Beers’ Total contrib.769 6. De Beers’ contrib.320 27.206 CSO List COGS Contrib.

33 0.wow! 1982 Inventory is $1.56b Years to clear inventory 1.42 (w/o Debswana) Average markup in South Africa: 190% Average markup in Namibia: 104% Average markup in Botswana: 430% -.82b $2.61b $1.5 1.Exhibit A: Value Appropriation (cont’d) Ratio of CSO List to inventory COGS = 1.7 billion at COGS or $2.42 billion at CSO List. This amounts to 31 m carats inventory (mostly gems) Actual CSO Sales over next 4 years Year 1983 1984 1985 1986 CSO Sales $1.51 1.95 © 1999 Pankaj Ghemawat .75 Ratio of CSO List to inventory COGS = 1.6b $1.

548 7.387 10 245 88 1.929 10.952 2.713 135% Industrial 000 carats 15.180 3.283 252% Total 000 carats 30.020 4.289 963 858 110 1.202 39.756 2.50 2750 6453 135% ------7711 13139 70% .537 10.530 37.507 36.De Beers Exhibit B: Supply Forecast 1986 Gems 000 carats Australia Zaire Botswana USSR South Africa Namibia Angola Tanzania Other Total 1986 Total 1982 % Increase Polished Supply Available: Yield: 1982 1986 % Increase © 1999 Pankaj Ghemawat Near Gem 000 carats 13.155 1014 1.226 220 4. 4961 6686 35% 17.332 142% 1.664 3.479 41 123 22 1.873 15.600 9.000 12.500 925 2.000 18.500 5.728 11.493 15.285 90.924 4.661 3.336 35% 48%.576 13.

2 0.05 10.6 9.1 13.6 2.4 Probable Value of Surplus ($/carat) 20 21 22.1 Surplus Cumulative Surplus (mill.) 12 47 111 203 293 378 (mill.7 12.2 © 1999 Pankaj Ghemawat .3 25.De Beers Exhibit C: Demand Forecast Forecast Retail Demand Year 1982 1983 1984 1985 1986 1987 1988 (mill.) 12 35 64 92 89 86 Cumulative Additions to Inventory ($ mill. cts.3 9.9 8.55 2.5 26.55 1.75 13.5 3.8 3.) -0.) 7.15 4.1 13.51 8.1 23.9 Forecast Supply Surplus (mill.2 24.9 8.4 11. cts) 0.8 9 9.75 3. cts. cts.2 15.) 7.8 Additions to Inventory ($ mill.7 9.

by 1988 ($ mill.) 562 745 928 1.111 © 1999 Pankaj Ghemawat .Exhibit C: Demand Forecast (cont’d) Sensitivity Analysis Probable Value of Surplus in 1982 ($/carat) 30 40 50 60 Cumulative Additions to Inv.

7 9 10 11.5 Actual Supply (mill. cts.) -0. cts.) Cumulative Additions to Inventory ($ mill.5 13.2 13 14.) 7.) 7.) (mill. cts.1 13.Exhibit C: Demand Forecast (cont’d) Actual Retail Demand Year 1982 1983 1984 1985 1986 1987 1988 (mill.4 0.1 13.) Average Value of Surplus ($/carat) Additions to Inventory ($ mill. cts.1 1.1 Surplus Cumulative Surplus (mill.9 8.5 1 1.5 1.6 -0.1 0.5 9 9.2 0.1 3 3.7 145 90 -40 -51 456 -300 145 235 195 144 600 300 © 1999 Pankaj Ghemawat .9 13.1 -1.5 3.