Ep.

1 - Strategy is making choices

● Michael A Roberto, DBA - Bryant University
● Historical changes:
○ Blockbuster --> Netflix
○ Tower Records --> Spotify
○ Hotel --> Airbnb
○ Cab/Taxi --> Uber
● Strategy Choices:
○ What will your company do
○ What will you not do
○ How will you create advantage over competition
● Resources are scarce, you can’t do everything
● Business strategy - based on “art of war” strategy
● Fundamental question of course - “how do some firms perform better than others?
○ Industry attractiveness
○ Competitive advantage
■ How to create
■ How to sustain <-- even more important
● Strategic Planning
○ Budgeting is not strategic planning
○ How to compete and where to compete
● Rita Mcgrath - comp adv is not sustainable - must adapt constantly - experiment, iterate,
learn
● Roger Martin - have to begin with a clear set of choices, what direction you're headed in
● Strategy not always written down - simply transmitted via series of decisions made
○ Sometimes conscious and deliberate, other times emergent
● Questions for plotting strategy:
○ What’s your winning aspiration?
○ Where will you play?
○ How are you going to win?
○ What capabilities must be in place?
○ What management systems are reqd to implement strategy?
● 4 Key facts about competition:
○ Industries vary widely in profitability
■ Warren Buffett - when an industry with a rep for tough economics meets a
manager with rep for excellent performance, it’s usually the industry that
keeps its rep intact
■ The industry you’re in matters a great deal - profitability driven largely by
greater forces beyond your firm at the industry level
■ Competitive adv may be fleeting - hard to stay on top
● Industry structure tends to be more stable - profitable industries do
not change much over time
■ Industry structure changes widely around the world
 ● Consumer tastes, culture, government regulations, forms of
govnmt
● Pfizer (12.7%) vs Alaska air (8.7%)
○ Airlines low profit
○ Pharma very profitable
● Comp adv is fleeting but more fleeting in some industries than others
○ turbulent environment vs stable environment
● Supermarket tough business but some companies do well - whole foods, kroger,
supervalu

HOMEWORK: consider two industries: airlines vs pharmaceuticals - why airlines not profitable
whereas pharma very profitable?

Ep. 2 - How Apple raises competitive barriers

● Airline industry as a whole has lost money over time
● Many airlines have gone bankrupt except Southwest - profitable every year for 4
decades
● Industry return (low to high, 1990-2005) - computer terminals (-), eating/drinking (-),
radio broadcasting, hotels/motels, life insurance, aircraft, department stores,
pharmaceuticals, beverages
● Michael Porter - Five forces - Harvard Business Review
○ Barriers to Entry - higher = more profitable (e.g moat around castle) - desire
HIGH
○ Threat of substitutes - similar products that serve SIMILAR purpose - desire LOW
○ Bargaining power of suppliers - do they have leverage over you? - desire LOW
○ Bargaining power of customers - do they have leverage over you? - desire LOW
○ Rivalry among existing firms - price wars vs friendly competition - desire LOW
● Airlines:
○ Barriers - LOW - can lease planes, military trains pilots, can go to regional
airports
○ Buyer Power - HIGH - not much differentiation btwn firms; price transparency
○ Supplier Power - HIGH - Airbus & Boeing, powerful unions, OPEC cartel drives
oil price
○ Substitutes - HIGH - cars, trains, vide conferencing
○ Price competition - HIGH - price wars, high fixed costs, low marginal/variable
costs, seats are perishable - can never sell seat again
● Contributions margin - income that goes to covering fixed costs
● Airlines - 5 star terrible industry!!
● 5 forces is simplified version of reality - not always right, but usually useful which is what
matters
● Use to help with decision making
○ entry/exit decisions
○ Impact on future profitability
 ○ How to position firm for success
○ How you might shape a favorable industry structure
● Perfect competition:
○ Free entry and exit
○ Many buyers/sellers - relatively small or equal in size
○ Complete info about goods and services
○ Homogenous goods - undifferentiated; nothing to set firms apart
○ Each firm is trying to maximize profit - not friendly competition
○ RESULT - max social wellfare; economic profits = zero
● Accounting profits do not account for opportunity costs, whereas economic profits do
● Government looks for severe imperfect competition - antitrust concerns
● Firms want imperfect competition, but not so much that govnmt sues you
● Perfect competition vs monopolies is actual spectrum - fragmented markets, oligopolies
● Oligopolies - 3-4 dominant firms
● 5 Forces Analysis Steps:
○ Define industry to analyze - unit of analysis, everyone talking about same thing
○ Define players - buyers (distributor, retailer, end-user, everyone along supply
chain), suppliers, rivals, substitutes
○ Asses strength of each force - qualitatively and quantitatively - do your
conclusions match actual performance/results
○ Understand trends within the industry - where forces will be in years ahead
● Pharmaceuticals
○ Barriers - HIGH - huge economies of scale, IP rights / patents, govnmt
regulations
○ Substitutes - LOW - surgery, death, homeopathy <--not very attractive
alternatives
○ Buyer Power - LOW - doctors make decisions for us, we only pay copay, not full
price
○ Supplier Price - LOW - only provide commodities, not very expensive or rare
○ Rivalry - LOW - don’t compete on price, IP restrictions, insurance covers much of
cost
● Personal Computers (Wintel world)
○ Barriers - LOW - many start in garage / dorm room, modular components
○ Buyer power - HIGH - homogenous products
○ Supplier Power - HIGH - Microsoft, Intel, not many others
○ Subs - HIGH - Phones, tablets, etc.
○ Rivalry - HIGH - price wars, products become obsolete rapidly, short shelf life
● Help to shape strategy - think of negative forces and mitigate those forces
● Apple - built own OS, differentiation, easier for users, not dependant on suppliers, built
own stores (not reliant on retailers), Apple produces its own subs (phones, tablets, etc.)
● MIstakes - trying to analyze company instead of industry, looking backward instead of
forward, ignoring full range of subs, can’t pay equal attention to all forces (any one can
harm industry), presume industries are similar all over world
● Wine business - Australia - Oligopoly; France - Fragmented
 ● Limitations
○ Boundaries - Industries converge - Google, Facebook, conglomerate
○ Dangerous to apply on global basis
○ Does not give magnitudes, rather just whether forces are important, not how
much
○ Rivalry - price (bad for profits) vs non-price competition (good, lifts all boats)
○ Complements - product/service adds value when added on - PB & Jelly
■ Co-opetition - Competitors also cooperating - Samsung & Google
■ Razors & Blades - get razor in consumers hands, make money on blades
■ Apple - Blades & Razors - how to sell $400 iPhones? - sell really
expensive peanut butter by giving out really cheap Jelly - 0.99 songs
itunes, free apps, etc.
● Lessons learned:
○ Sexy industries not necessarily high-profits
○ High growth not necessarily high-profit
○ Stable, low growth industries can be very profitable
○ With appropriate competitive positioning, can mitigate (-) forces & be profitable

HOMEWORK: Compare fitness industry vs chewing gum industry

Ep. 3 - The danger of straddling

● Dell - Low cost player
● Mercedes - Luxury - Differentiated product
● JC Penney - Stuck in the middle - not low cost & not differentiated
● Need to create more economic value than rivals
● Economic Value = Perceived value - Total Cost = difference btwn what customer is
willing to pay and total cost <--split btwn customer and firm
● Two questions for comp positioning: (1) what type of advantage do I seek; (2) what is
the comp scope of your firm
● Types of comp adv
○ Low cost
○ Differentiated
○ Dual advantage = low cost + premium price
● Types of comp scope:
○ Niche competitor - focused, particular category, product line, geography, narrow
customer segment, narrow target market
○ Broad competitor - broad product categories, expansive geo, wider target market
● Start with : who is average competitor and what econ value are they achieving
● Trying to generate larger wedge btwn willingness to pay and cost from competitors
● Mercedes - tries to vastly increase willingness to pay, but not incr cost nearly as much
● Low cost player - drive cost much lower, but reduce willingness to pay less
● Dual advantage is very difficult, if not impossible to achieve - trying to increase brand
image requires more cost, and reducing cost makes it difficult to maintain brand image,
and competitor will be able to attack you more easily
● WalMart & Target financials
○ Walmart - much lower gross margins, lower OH costs, lower admin expenses,
higher asset turnover (turns), rock bottom prices
○ Target higher margins, lower turnover, slightly higher quality goods - fancy
clothes designers
○ Nordstroms vs TJX - same story
Competiti
ve scope

Bro WalMar Starbuc

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Focus RyanA Duca
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Low Differentiat
CostType of ion
advantage
● Don’t wanna be stuck in the middle like JCPenney
● How do you get stuck in middle? “Straddling”
○ Try to be all things to all people - not focused - JCP,
○ trying to move boxes - if not achieve shift may be strained and stuck in btwn
(Starbucks early 2000’s - diluted brand)
○ Trying to react to emergence of new competitor
● Look at Airlines again: Legacy Players - Delta, United, Continental, British Airway
● New Low cost rivals - Southwest, RyanAir, EasyJet (Europe)
● Legacy players created low-cost subsidiaries - Song, Ted, Continental Light, Go
○ Not really competitive - not as good as low cost comps, elements of both - not as
effective as either model, straddled in middle
○ All failed - none were successful
○ Similar to IBM’s response to Dell - IBM sold standardized products thru retailers,
mass warehouses & achieved economies of scale, but Dell sold customized
product online and over phone
● Comp Adv - not about doing one thing well (core competence) - about whole system of
capabilities - integrated self reinforcing system of activities to enable comp adv
○ Have to be different - perform activities differently or perform different activities
● Interconnectedness of choices, capabilities, etc. - all affected by one another
● WalMart:
○ Everyday low price, little natl advertising, focused in rural areas, satellite stores to
connect to corp offices, dense network of stores around distribution centers,
frugal travel policies, no regional offices - each of these choices fit together
○ KMart couldn’t mimic low prices, etc. - copied one piece instead of whole system
● Tailoring strategies difficult when trying to grow though
● Why has costco outperformed Sams club in wholesale club business?
 ○ Wholesale - richer customers - annual fee, spend more each time, larger house
to store goods, larger cars to haul goods
○ Costco - Volvo / BMW vs WalMart - Chevy
● Another problem - you’ve tailored your business and then the world changes!
● Incumbent players not adaptive often times
● Judo Strategy - New entrants use incumbents strengths against them
○ IBM vs Dell - Retailers vs online - factories not set up for customization, etc.
● External Threats
○ Imitation - Can some imitate you and do it better
○ Substitution - tablet vs computer
○ Holdup - when buyers and suppliers gain leverage over you and extract profits
from you
● Incumbent players sometimes don’t see threats early enough, don’t react properly, etc.
● Herd Behavior is chronic - antithesis of great competitive strategy
● Strengths can become liabilities - difficulty lies not in new ideas but in escaping old ones

HOMEWORK: Look at annual reports of whole food and Kroger, look at financial statements,
how do key ratios compare such as ROA, net income margin, gross margin, inventory turnover

Ep. 4 - What Trader Joe’s doesn’t do

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Ep. 5 - First movers vs fast followers

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Ep. 6 - When Netflix met Blockbuster

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Ep. 7 - Anticipating your rival’s response
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Ep. 8 - Why did Disney buy Pixar?

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Ep. 9 - The diversification discount

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Ep. 10 - Forward and backward integration

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Ep. 11 - Mergers & Acquisitions - The winner’s curse

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Ep. 12 - Launching a lean start-up

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Ep. 13 - The power of superior operations
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Ep. 14 - Leaner, meaner production

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Ep. 15 - Refining service operations

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Ep. 16 - Matching supply and demand

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Ep. 17 - Rightsizing inventory

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Ep. 18 - Managing supply and suppliers

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Ep. 19 - The long reach of logistics

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Ep. 20 - Rethinking your business processes

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Ep. 21 - Measuring operational performance

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Ep. 22 - Keeping an eye on your margins

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Ep. 23 - Leveraging your supply chain

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Ep. 24 - Reducing risk, building resilience
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Ep. 25 - Accounting and finance -- decision making

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Ep. 26 - How to interpret a balance sheet

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Ep. 27 - Why an income statement matters

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Ep. 28 - How to analyze a cash flow statement

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Ep. 29 - Common size, trend, and ratio analysis

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Ep. 30 - Cost-Volume-Profit analysis

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Ep. 31 - Understanding the time value of money

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Ep. 32 - The trade-off between risk and return

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Ep. 33 - How investors use Net Present Value

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Ep. 34 - Alternatives to Net Present Value

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Ep. 35 - Weighing the costs of debt & equity
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Ep. 36 - How to value a company’s stock

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Ep. 37 - Achieving results in your organization

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Ep. 38 - The value of great leadership

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Ep. 39 - Emotional intelligence in the workplace

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Ep. 40 - The art of effective communications

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Ep. 41 - The motivation-performance connection
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Ep. 42 - Winning with teamwork

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Ep. 43 - Coaching -- from gridiron to boardroom

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Ep. 44 - Understanding power relationships

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Ep. 45 - Handling workplace conflict

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Ep. 46 - Ethics and the Bathsheba syndrome

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Ep. 47 - Leading real organizational change
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Ep. 48 - Lifelong learning for career success

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Ep. 49 - What is marketing?

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Ep. 50 - How to segment a market

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Ep. 51 - Targeting a market segment

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Ep. 52 - Positioning your offering

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Ep. 53 - Identifying sources of sales growth

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Ep. 54 - Deriving value from your customers

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Ep. 55 - Creating great customer experiences

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Ep. 56 - The tactics of successful branding

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Ep. 57 - Customer-focused pricing

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Ep. 58 - Marketing communications that work
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Ep. 59 - The promise and perils of social media

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Ep. 60 - Innovative marketing research Techniques

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