3/30/2021

Competitive Strategy
Class 6

Marco Tortoriello
marco.tortoriello@unibocconi.it

Housekeeping: Groups and Final project situation (18)

Group# Topic Group# Topic
• 1 Porsche • 12 Patagonia
• 2 ABBI Group • 13 Ocado
• 3 Delivery Hero • 14 Amazon Physical Retail
• 4 Diageo • 15 Berlucchi
• 5 Sony Playstation • 16
• 6 Manifatture Lombarde • 17 Amazon Fresh
• 7 • 18 Nutribees
• 8 Victoria's Secret • 19 Disney+
• 9 Technogym • 20 Netflix
• 10 La Mer • 21
• 11 Amazon Prime Video • 22

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Housekeeping: Groups and Final project situation (32)

Group# Topic Group# Topic
• 1 Ferrari • 11 RedBull
• 2 • 12 EssilorLuxottica
• 3 AMD • 13 Spotify
• 4 Burgez • 14 Starbucks
• 5 De Longhi • 15
• 6 Revolut • 16 Hermes
• 7 Netflix • 17 Paypal
• 8 Ikea • 18 Energica Motor
• 9 Monster Beverage Co. • 19
• 10 BeyondMeat • 20

Housekeeping: schedule next classes (18)

• Tue April 13th starting at 8.30am (Case due in 24h)
• Wed April 14th starting at 4.50pm
• Tue April 20th starting at 8.30am
• Tue April 27th starting at 8.30am Pressure test
• Tue May 4th starting at 8.30am Final presentation 1
• Wed May 5th starting at 4.50pm Final presentation 2

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Housekeeping: schedule next classes (32)

• Tue April 13th starting at 3.00pm (Case due in 24h)
• Fri April 16th starting at 8.30am
• Tue April 20th starting at 3.00pm
• Tue April 27th starting at 3.00pm Pressure test
• Fri April 30th starting at 8.30am Final presentation 1
• Tue May 4th starting at 3.00pm Final presentation 2

If nothing else, from last class you

should remember that…
• Differentiation implies higher willingness to pay and higher cost
(higher price as well)
• Successful if:
– You can find a niche big enough to allow you to generate profit
– Small enough to prevent entries in short/medium term
• Differentiation probably easier to sustain than cost advantage,
however challenging to grow outside of niche
• Space for many different types of successful differentiated
competitors, whereas there is little space for successful low cost
competitors

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If nothing else, from last class you

should remember that…
Cost
Porter summary slide on the nature of Return on
Differentiation leadership
investment
competitive advantage:
‐ Implies a trade‐off between
differentiation and cost leadership
Stuck in
‐ You either pursue one or the other, hard the middle

(impossible?) to pursue both

‐ Concrete risk to be “stuck in the middle”
which makes you vulnerable on both fronts
Market share

Arrogant Bastard
Learning Objectives:
• Continue to refine 5 forces analysis
• Understanding broad basis of competitive
advantage: Differentiation or Cost based
• Understanding basic concepts related to defense
of competitive advantage: Adaptation and
Protection

https://www.youtube.com/watch?v=l‐Yia9RvsPg

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Successful aspects of Homework

• Identifying negative forces in the industry
– Mostly well done; except for forgetting about niches
• Identifying Arrogant Bastard’s strategy as a differentiation
advantage
• Identifying and explaining basis for differentiation advantage
– Some teams found direct examples that made their answer more
convincing

$ Average Cost

Perceived
Uniqueness

Theoretical
Max WTP
Competitor’s
Price

Competitor’s
Costs

Quality

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Average Cost for

Arrogant Bastard

$ Perceived
Uniqueness for
Theoretical Arrogant Bastard
Max WTP for
Arrogant Bastard

Arrogant Bastard’s
price

Competitor’s
Price
Arrogant Bastard’s
cost
Competitor’s
Costs

Quality

Some numbers… (referring to 2016)

AB‐Inbev
• 95M barrels (~ 45% US mkt)
• Sales ~ 47$ Billion
• One bottle of Budweiser sells
for 3.5$, and costs 2.5$ to sell at
that price
• Due to scale economy fixed
costs (@ one bottle equivalent)
could be estimated at = 1.60$
• Hence marginal costs are = .90$
• ROS = (3.5$ ‐ 2.5$)/3.5 = ~ 29%
• Operating margin given sales of
47$B ~ 13.6$ Billion
Stone Brewery
• 200K barrels (~ 0.1% US mkt)
• Sales ~ 120$ Million
• One bottle of Arrogant Bastard
sells for 5.5$
• If we *assume* no scale
economy, fixed costs = 1.92$
• Marginal costs = 1$
• ROS = (5.5$ ‐ 2.92$)/5.5= ~ 47%
• Operating Margin given sales of
120$M ~ 56.4$ Million

Stone Brewery has margins that are 18% greater compared to AB‐Inbev
AB‐Inbev has profits that are 243,000 times greater compared to Stone Brewery

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How does Arrogant Bastard achieve its competitive advantage?

• Product Design
– Unique and consistent taste
– Packaging
• Marketing & Branding
– Aggressive image, either love it or hate it
– Premium and hip
– Appeals to young sophisticated adult
consumer
– Embedded exclusivity
– Being part of the Craft Beer Trend

How defendable is Arrogant Bastard's competitive advantage?

Types of
Levers How Impact on defendability
defendability

Based primarily on intangibles

Complexity (although some tangible Possible lever
Protection elements also matter)

Formal protection Trademarks ? Possible but negligible

Launch of new products

Regenerate CA exploiting the core brand (i.e. Possible
different types of beers)

Adaptation Difficult to innovate in the same

business (risk of confusing
customers). Brand extension to
Reconfigure CA Possible but negligible
related/unrelated businesses?
(i.e. other beverages, food,
apparel)

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Historically
Mass
Producers
Brewpubs

Microbreweries

Contract
Brewers

Source: Carroll and Swaminathan, AJS 2000

Beer production in the United States from 1860 to 2019 (in million barrels)
Beer production in the U.S. 1860-2019

250

200
Production in million barrels

150

100

50

0
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note(s): United States; 1860 to 2019

Further information regarding this statistic can be found on page 8.
2 Source(s): TTB; ID 183464

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Market share of leading beer suppliers in the United States from 2014 to 2019
Major beer vendor market share in the United States from 2014 to 2019

Molson Coors AB InBev Others

120%

100%

27% 29% 31% 32% 34% 35%

80%
Market share

60%

46% 45% 44% 43% 42% 42%

40%

20%
27% 26% 25% 25% 24% 23%

0%
2014 2015 2016 2017 2018 2019

Note(s): United States; 2014 to 2019

Further information regarding this statistic can be found on page 8.
2 Source(s): Molson Coors; ID 972647

Production volume of craft beer in the United States from 2010 to 2019, by type of brewery (in
1,000 barrels)
Craft beer production in the U.S. 2010-2019, by brewery type

Regional Microbreweries Brewpubs Contract

30,000

25,000
Production volume in thousand barrels

20,000

15,000

10,000

5,000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note(s): United States; 2010 to 2019

Further information regarding this statistic can be found on page 8.
2 Source(s): Brewers Association; ID 732171

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Total number of breweries in the United States from 2012 to 2019

Total number of breweries in the United States 2012-2019

Number of breweries
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

2012 2,670

2013 3,162

2014 4,014

2015 4,847

2016 5,780

2017 6,767

2018 7,686

2019 8,386

Note(s): United States; 2012 to 2019

Further information regarding this statistic can be found on page 8.
2 Source(s): Brewers Association; ID 224157

Production Size Number of Breweries Number of Barrels Produced

6,000,001 Barrels and Over 15 125,788,474.04 Large Breweries = 0.3% of the breweries, producing 80% of the barrels
2,000,000 to 6,000,000 Barrels 6 18,344,022.83 (Largest regional Brewery = 2.6M Barrels Yeungling ‐ PA)

1,000,001 to 1,999,999 Barrels 5 6,058,176.30

500,001 to 1,000,000 Barrels 12 7,585,071.90
100,001 to 500,000 Barrels 42 8,373,874.82 Stone Brewing is about here
60,001 to 100,000 Barrels 33 2,575,065.63
30,001 to 60,000 Barrels 64 2,675,606.37
15,001 to 30,000 Barrels 102 2,166,277.84

7,501 to 15,000 Barrels 159 1,680,544.75 Small Breweries/Taprooms/Brewpubs = 95% of the breweries
1,001 to 7,500 Barrels 1,183 3,151,130.26 Producing 3.4% of the barrels
1 to 1,000 Barrels 4,577 1,321,901.27 (73.8% of the players produce 0.73% of the barrels!)
Total 6,198 179,720,146.01

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Attrition rate x Brewpubs

Source: https://www.brewersassociation.org/statistics/number‐of‐breweries/
About 1 out of 3 lately

Attrition rate x Microbreweries/Taprooms

Source: https://www.brewersassociation.org/statistics/number‐of‐breweries/
About 1 out of 5 lately

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IMPLICATIONS?

On to industry evolution and what it means for

business survival/success

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Kodak
• Founded in 1888, as late as 1976, Kodak commanded 90% of film
sales and 85% of camera sales in the U.S.
• Revenues of around 16$ Billion in 1996
• Kodak had developed a digital camera in 1975, the first of its kind,
and patented it in 1978. It was dropped for fear it would threaten
Kodak's photographic film business
• Kodak executives could not conceive a world without traditional
film

Kodak
• They did have digital capabilities and by 2005, Kodak ranked
No. 1 in the U.S. in digital camera sales that surged 40% to $5.7
billion
• Despite the high growth, Kodak failed to anticipate how fast
digital cameras became commodities (as an example
traditional films = 70% margins vs. consumer electronics = 5%
margins)
• Its digital cameras soon became undercut by Asian competitors
that could produce their offerings more cheaply

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Kodak
• CEO Antonio Pérez (2005‐2014) shut down film factories and
eliminated 27,000 jobs outsourcing manufacturing. Pérez
invested heavily in digital technologies, spending hundreds of
millions to build up a high‐margin printer ink business to
replace shriveling film sales. Not terribly successful move…
• Kodak entered bankruptcy in Jan 2012

Industry Life Cycle model (ILC)

• Introduction ???
• Growth
• Maturity
• Decline

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• Being the first ones to market is not necessarily a guarantee of

success…
• Be ready to offer a specific product/service is necessary but
not sufficient condition
• Importance of Demand‐side considerations:
– Price sensitivity
– Trends
– Seasonality
– Market saturation

Example: Tablets

• “Calculator Pad”
referred to in the 1951
classic book
“Foundation” by Isaac
Asimov

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Example: Tablets

• “News Pad” referred to

in 1968 movie “2001
Space Odyssey” by
Stanley Kubrick

Example: Tablets

Tablet PCs by Microsoft, November 2001.

“the Tablet PC will represent the next major evolution in PC design and functionality”
Bill Gates

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Example: Nespresso
Eric Favre, an
employee of Nestlé,
invented, patented
and introduced the
Nespresso system, in
1976

Why does that happen? INERTIA

Management don’t see the advantages of some

potentially good ideas and don’t even consider
them (tunnel effect, winner’s course, if it ain’t broke
don’t fix it, threat‐rigidity paradox, etc. etc.)

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Why does that happen? INERTIA

Management “sees” the advantages of some

potentially good ideas, but it takes forever to
approve them (bureaucracy, corporate inertia, etc.
etc.)

• Myopic inertia

• Procedural inertia

• What do you think happened with Kodak?

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Warby Parker Case Assignment

1. Conduct a five forces analysis of the global eyewear industry and answer
the following questions:
a. Which are the most relevant forces in the industry?
b. Is this industry is attractive or not?
c. At what stage of the Industry Life Cycle model is the overall (Global and US)
eyewear industry? Please distinguish between Global and US and motivate your
answer
2. Conduct a Strategic Groups analysis of this industry motivating your choice
of the two main variables. Does this analysis give a different assessment of
industry attractiveness compared to Q1b? Why?
3. What is Warby Parker’s competitive advantage? How could they defend it?
Briefly discuss.

Break (15 min)

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