Reflection and Review

What is Strategy?
Strategy is all about “winning”

Strategy is all about competitive advantage…...

Strategy is an overall plan to establish a favorable competitive

position – Robert Grant.

Strategy is the creation of a unique and valuable competitive

position based on a system of distinct activities

Strategy is making trade-offs in competing

 Business Level Strategy:

What determines the competitive advantage and/or

performance of a company in any given business?
 Industry profitability, 1973-2002
ROE ROA
Pharmaceuticals 23.4% 13.8% Industry
Printing and publishing 15.5 7.1 (Environmental)
Factors
Food and kindred products 15.2 6.6
Chemicals and allied products 15.1 7.5
Petroleum and coal products 13.1 6.5
Instruments and related products 12.9 7.2
Performance
Industrial chemicals and synthetics 12.9 6.2
Paper and allied products 12.5 6.0
Aircraft, guided missiles, and parts 12.4 4.1
Fabricated metal products 12.3 5.7
Motor vehicles and equipment 11.6 5.6
Rubber and misc. plastic products 11.6 5.1
Electric and electronic equipment 11.5 5.4
Machinery, except electrical 11.1 5.8
Stone, clay, and glass products 10.4 4.8
Textile mill products 9.3 4.3
Nonferrous metals 8.3 3.9
Iron and steel 3.9 1.5
 Industry
Firm Profitability, 1973-2002 (Environmental)
Factors

ROA% Performance
Johnson & Johnson 21
American Home Products 19
Merck 16 Firm-specific
factors
Bristol Myers Squibb 14
Eli Lilly 14
Pfizer 13
Schering Plough 10
American Cyanamid 7

Oregon Steel Mills 12

Worthington 10
Nucor 9
USX-US Steel 3
Inland Steel 2
ARMCO -1
Bethlehem -2
LTV -3
The Two Main Factors that affect Firm Performance

Industry/Environmental
Factors
• Industry structure
• Industry success drivers
• Macro-environment

Performance

Firm-specific Factors
• Competitive position
• “System” of Activities
• Resources & Capabilities
• Strategy Implementation
 Determinants of Performance:
Industry and Environmental Factors?

What is it about some industries that makes them more profitable, on

average, than others?

This depends on:

•The structure of the industry.
•The nature of competition in the industry
• Macro-environment surrounding the industry

A popular tool to determine industry attractiveness is Porter’s five forces

 Industry Structure: Porter’s Five Forces
Entry Barriers
* Scale Economies
* Brand/Reputation
Potential * Access to Distribution. Channels
Entrants * Capital Requirements
* Retaliation by existing players
* Govt and Legal Barriers
Threat of new entrants

Rivalry
Among firms
Bargaining Bargaining
Suppliers power of power of Buyers
Econ of Scale
suppliers Differentiation buyers
* Similar to Buyer
* Size and Concentration
Power Issues relative to ind. players
* Switching Costs
Threat of substitutes * Ability to integrate
backwards
* Price-Performance * Buyers’ Information
comparison * Cost of product relative
* Buyer propensity to Substitutes to total cost
substitute
 Industry Structure and Profitability

An “Attractive” Industry An “Unattractive” Industry

-ve

Economy wide Economy wide Industry Industry

Industry Industry
Average Average Structure Profitability
Structure Profitability
Industry Structure & Competition

A1 – 10% B1 – 60%
A2 – 10% B2 – 30%
A3 – 10% B3 – 10%
A4 – 10%
A5 – 10%
A6 – 10%
A7 – 10%
A8 – 10%
A9 – 10%
A10 – 10%
 Macro-environment & Industry Structure

Political and Legal Technological

Environment Environment

Potential
Competitors

Supplier Industry Buyer

Power Competitors Power

Substitutes
Macro-Economic
Social/Demographic Environment
environment

The Macro-environment impacts “Industry Structure”:

Thus changes in the Macro-environment can change Industry Structure
 Macro-Environment and Company Actions:
Impact on Industry Structure and Attractiveness

Industry Structure

Changes in * Entry Barriers

Macro Environment
Examples
•Regulatory liberalization
•Change in social trends
•Emergence of new
technology INDUSTRY ATTRACTIVENESS
* Recession
Companies ’ Actions
* Buyer Power
* Supplier Power
* Substitute Threat
* Rivalry
AND PROFITABILITY

COMPETITIVE ADVANTAGE
& PROFITABILITY
 Industry
Firm Profitability, 1973-2002 (Environmental)
Factors

ROA% Performance
Johnson & Johnson 21
American Home Products 19
Merck 16 Firm-specific
factors
Bristol Myers Squibb 14
Eli Lilly 14
Pfizer 13
Schering Plough 10
American Cyanamid 7

Oregon Steel Mills 12

Worthington 10
Nucor 9
USX-US Steel 3
Inland Steel 2
ARMCO -1
Bethlehem -2
LTV -3
Determinants of Performance

Industry/Environmental
Factors
• Industry structure
• Industry success drivers
• Macro-environment

Performance

Firm-specific Factors
• Competitive position
• Nature of Business System
• Resources & Capabilities
• Strategy Implementation
 Determinants of Performance:
Firm-Specific Factors

• A Firm’s Competitive Position and/or Generic Strategy

• A Firm’s Business System or Value Chain

• A Firm’s Resources and Capabilities

• Strategy Implementation by the Firm

– People, Organization Structure, Systems
Competitive Position

Source of Competitive Advantage

Based on Cost Based on Distinctiveness

Industry wide Low-Cost

(Broad) Differentiation
Leadership
Target (E.g. Apple)
(E.g.: Southwest)
Market
Focused Differentiation
Specific Niche Cost-Based
or Segment Focus (Ferrari)
(Narrow)
 Customer’s Willingness to Pay
and a Firm’s Total Costs

Customer’s “Willingness to Pay”

(The Price)

Greater
Value or
Profit for
The Firm Value or
Profit for Greater
The Firm Value or
Profit for
Level of Level of The Firm
Firm’s Cost Firm’s Total
to provide Costs to
Product or provide Lowest
service Product or Total Cost
service

“Differentiation” An “Average” “Cost Leadership”

Position Firm Position
 Cost leadership & Differentiation

Differentiation Cost leadership

Return on
investment Stuck in the
(Profitability) middle

Market share
 Competitive Position:
Making Trade-offs and Choices

Do things differently to “push”

the frontier on both dimensions

Relative
Differentiation

Relative Cost Position

 The Business System and Competitive Advantage

Purchase/Inputs Logistics Operations Sales/Marketing

- One type of -Short flights -Everyday Low
plane (737) - Point-to-point -No food Pricing
- Screened direct service -No assigned seats - No Travel
employees - Small airports - No bag transfer Agents

Distinctive/Innovative Activities across the Business System

Low-Cost Leadership

Competitive Advantage
 Resources and Capabilities

Resources and Capabilities enable the firm to perform the

activities that allow it to offer customer value

Resources or Assets

Tangible Intangible Capabilities

Physical Financial
 Apple’s Resources and Capabilities:
Source of Competitive Advantage
VALUABLE!!

Ease of Use for

Tangible Proprietary Op. System Customers!
Resource
Customer Loyalty
Brand/Reputation High Switching Costs

Intangible
Resource Innovative products
Leadership & Culture

Superior Products
Product Development First-to-Market
Capabilities

Customer Loyalty
Marketing Creation of New Mkts
 Attributes of Resources & Capabilities
that give Competitive Advantage

• Valuable
– They help the company provide value to the customer
(lower prices, high quality, faster delivery)

• Rare/Unique
– Other companies do not possess them

• Difficult to imitate
- uniqueness (e.g. unique location)
- path-dependent (built over long time)
- systemic (part of a larger complex system)
 Resource/Capability Test
for Sustainable Competitive Advantage

Valuable? Rare/Unique? Difficult to Imitate? Competitive

Consequence

No No No Competitive
Disadvantage

Competitive
Yes No No Parity

Competitive
Yes Yes No Advantage
(Temporary)

Competitive
Yes Yes Yes Advantage
(Sustainable)
 Strategy: The Drivers of Firm Performance
Tools to assess
Industry Factors
-Porter’s Five Forces
- Competitive Dynamics
Tools to assess
Firm Specific Factors
-Competitive Position Matrix
-Business System Analysis
-Framework for Resources
and Capabilities (VRI)
Industry/Environmental
Factors
• Industry structure Cola Wars
• Industry success drivers Apple 2002
• Nature of Competition
•Macro-environment
Performance
Firm-specific Factors
• Competitive position
Southwest
• Nature of Business System Apple 2002
• Resources & Capabilities
• Strategy Implementation
 Business Strategy and Firm Performance:
An Integrative 6-C Framework

Competitive Connected Actions Critical Value Customer Value

Forces in Industry “System” of activities Drivers in Industry
Across the business •Low Cost
System or value chain •Differentiation

Capabilities & Resources

“Skills and assets”
Required to perform the
Necessary activities

Change
Apple