Business 42001- Knez

Competitive Strategy

Lecture 1:
A) Introduction to Competitive Strategy
B) Industry Analysis

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Overview of Course Topics

1. Competitive Strategy Basics

i. Industry Analysis
ii. Strategic Positioning (Low Cost versus Differentiation Strategies)
iii. Competitive Advantage and Sustainable Competitive Advantage

2. Scope of the Firm

i. Horizontal Scope
ii. Vertical Scope

3. Industry Change and Strategy Development

i. Disruptive Innovation
ii. Business Model Innovation

4. Entry and First-Mover Advantage

5. Standards Competition and Network Effects

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Strategy Definitions

 Business Strategy

 Competitive Strategy

 Strategic Management

 Strategic Planning

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Business Strategy =
Core Elements + Strategic Positioning
Business Strategy
Group of customers that have a need and
A formula for creating distinctive
willingness-to-pay for the Value Proposition
value in a well defined set of markets
through a distinctive set of capabilities
(resources and activities).
Business Strategy
Core Elements

Target
Customers Business Strategy
Characteristics Strategic Position
of the good or Value
service that Proposition
generates value
at a particular + How the core elements of the
business strategy are intended to
price Critical create greater value than the
Capabilities competition through higher relative
benefits (differentiation) or lower
costs for a particular scope of
customers.
Set of resources and activities necessary
to create and deliver the value proposition
to the target market.
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 Scope and Market Positioning

Geographic Specialization
Geographies
Europe
Asia  Offer a variety of
U.S products and/or sell to a

Product Varieties
variety of customer
groups within a narrow
Product Specialization geography

 Offer a limited set of

products to an array of
different customer groups
 Do an especially good job
satisfying a subset of the
needs of the customer
groups being served

Customer Groups

Customer Specialization

 Offer a broad set of products to a

limited class of customers.
 Cater to the particular need of the
customer group served
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Strategic Positioning and Competitive Advantage

 Competitive Advantage: ability

of a firm to outperform its
industry. • Strategic Positioning


The firm must create more
economic value than its
competitors. Type of Advantage

Lower Cost Differentiation

Economic Value Created =
Benefit of consumer – Cost of
inputs
= B - C Overall Cost
Broad Leadership Differentiation
= (B - P) + (P - C)
Competitive
The price P determines how Scope
much of the value created is
captured by the sellers and Cost Based Differentiation
how much is captured by the Narrow Focus Based Focus
buyers.

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Example: GameStop - Core Elements
GameStop is the largest video game retailer in the world (over 6200 stores)

Value Proposition Target Market

 First-to-market availability of new video
games (software & hardware)
 Largest selection of new & used video
games (include advance orders)
 Purchase of used games (for store credit)
 Distinctive in-store shopping experience
 Broad geographic coverage
 Best source of video game information
 Primary:
– Hard-core game enthusiast - wants
latest games/technology ASAP
– Value-oriented customer - wants wide
selection of value-priced used games
 Secondary: casual/social gamers (Wii)
whose needs concern overcoming the
complexity of video game technology

Critical Capabilities
 Procurement: Leverage relationships with platform and game developers to procure large
allocations of new hardware and software hitting the market.
 Merchandising: Have the right in-store merchandise on a store-by-store bases in context of
constantly changing SKU requirements (implies a specific set of MIS and Distribution
performance capabilities.)
 Store Operations: Generate unique gaming atmosphere that creates destination of choice
for the video game enthusiast, supported by high levels of customer service provided by
well-trained and motivated store personnel.
 Provision of latest information on video games through stores, website, and Game Informer
magazine.
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Describing the Business Strategy

 Identifying the core elements of the business strategy is the most important step in
analyzing a company’s business strategy.
 For our purposes, it will be sufficient to generate an abbreviated list of the 3-4 most
important elements of the what, who, and how of the business strategy.

Value Proposition: The list of customer benefits identified should contain those elements
that are most likely to be distinctive relative to the competition for the target customer
segments.

Target Market: Description should clearly define the scope of the market segments
served. Also, a brief description of their most important needs should be provided that
provides a linkage to the described value proposition.

Critical Capabilities: There are many levels of detail in describing a company’s

capabilities. For the purposes of describing the core elements of the business
strategy, focus on the performance requirements of the functional activities that are
most important for the elements identified under the value proposition.

 When we engage in a more detailed analysis of a company’s competitive advantage,

we will examine the specific characteristics of the company’s activities and resources
to determine how they are able to create more economic value than the competition.

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Example: GameStop - Strategic Position

 The description of the company’s strategic position should capture (at a high
level) how the company’s core strategy distinguishes it from the competition.

 Traditionally, competitive strategy frames a company’s strategic position in

terms of type of advantage - differentiation versus low cost, and scope - narrow
versus broad. This is fine as a broad characterization, but we need to be a bit
more specific. [Also, it is possible for a company to generate both lower costs
and differentiation (more on this in week 2).]

 GameStop Strategic Position:

GameStop, as a large retailer, has a narrow-differentiation strategic position.

Narrow in the sense that it is focused on the sale of video game hardware and
software, and differentiated in its distinctive ability to meet the complete set of
needs of multiple video game customer segments relative to the competition.

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Core Competitive Strategy Analysis

Business Strategy Strategic Position Resource/Activity

Core Elements Analysis
Value created relative to
Target  Benefit Drivers
competition
Markets  Cost Drivers
What are the specific
 Benefit Position resources/ activities that
Value
Proposition enable the firm to
 Cost Position generate higher benefits
and/or lower costs?
Critical
Capabilities

+
Market/Industry Competitive Sustainable
Environment Advantage Competitive Advantage
Industry 5-Forces In what ways does the
firm create higher What factors prevent
Industry Factors
benefits and, or lower the competition from
costs? That is, what are duplicating or neutralizing
the specific forms of the the firm’s competitive
higher benefits or lower advantage?
Economic costs?
Profitability
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Business 42001-Knez
Competitive Strategy

Lecture 1B: Industry Analysis

Marc Knez

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 Long-Term Economic Value - Strategy View

Industry Attractiveness Competitive Position

High Low
Long-Term
Growth “+” Cost = Economic
Value
Low High
Low High Low High
Profitability Differentiation
(Benefit)

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A Competitive Advantage Allows a Company to Rise Above its Market

Industry Average Economic Profit

Attractive
Industry Attractiveness

A competitive
advantage allows
you to outperform
an attractive market

0
A competitive
advantage allows
you to earn positive
Unattractive

profit in an
unattractive
market

Disadvantage 0 Advantage
Company Profit - Industry Average Profit
Company’s Position in its Market

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Industry Analysis

 From a strategic perspective, the purpose of industry analysis is to:

– Understanding the factors that limit the profitability of companies in the
industry.
– Identify and assess alternative strategic positions
– Identify changes industry conditions that will have an impact profitability and
growth.

 An industry’s 5-forces determine the long-run profit potential of the industry -

how much of the value is retained by companies in the industry, versus:
THREAT OF NEW
– Bargained away by customers or suppliers ENTRANTS

– Limited by substitutes
– Constrained by potential new entrants BARGAINING
POWER OF
RIVALRY
AMONG
BARGAINING
POWER OF
– Competed away through high SUPPLIERS COMPETITORS BUYERS

levels of rivalry
SUBSTITUTES

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Industry Value Chain and Profitability

Industry Value Chain

Potential
Entrants

Supplier Competition Buyer Intermediate End

Suppliers Power Between Power Buyers Buyers
Incumbents
(Rivalry)

Substitute
Products

Value Created by “Piece”Of

Substitute Value Chain
Industry Value Chain
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Barriers to Entry - The Most Important Force

 The key question:

To what extent does the threat or incidence of entry erode the profitability
of a typical firm in the industry?

 Factors that restrict entry into an industry:

– First-mover advantages
• Supply-Side Economies of Sale : High Minimum Efficient Scale - MES =
smallest level output such that long-run average cost are minimized
• Demand-Side Economies of Scale (or network effects)
• Learning curve effects
• Patents and licenses
• Pioneer brand advantages
• Relationships with buyers and suppliers
– Substantial exits costs - investments required for entry are industry specific
– Expectation of aggressive response to entry

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Supplier Power and Buyer Power

Supplier Power Buyer Power

 The key question:
– To what extent do suppliers have
stronger outside options than
buyers, and hence, a stronger
bargaining position?
 Supplier bargaining power increases
if:
– Input is a critical component of
production
– Supplier industry more concentrated
than the industry it sells to.
– Firms in the analyzed industry
purchase relatively small volumes
relative to other customers of the
supplier.
– Suppliers can credibly threaten to
forward integrate.
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 The key question
– To what extent do buyers have
stronger outside options than
buyers, and hence, a stronger
bargaining position?
 The power of buyers increases if:
– input is a not a critical
component of production
– buyers are large and few in
numbers
– input is relatively standardized -
lots of substitutes
– buyers can credibly threaten to
backward integrate
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Substitutes

 The key question:

– To what extent does competition from substitute products outside the defined
boundaries of the industry erode the profitability of a typical firm in the
industry?

 Substitutes limit the profits of an industry by placing a ceiling on industry prices. The more
attractive the price-performance tradeoff offered by substitutes, the more important the
substitute product.

 Identifying substitutes depends on how “finely” you draw the boundaries of the analyzed
market (or market segments)
– Any product/service that provides an alternative means of generating a desired
outcome for the customer is a substitute.
– Direct competitors are those players that provide the same primary elements of your
value proposition:
• Amtrak (rail) versus Airlines
• Netflix versus Blockbuster (brick and mortar)
• On-line media versus print media
 Significant (long-term) threats to an industry are usually driven by substitute products
generated through new technology/business models.

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Rivalry Among Competitors

 Two basic questions:

– How do firms compete?
• price competition
• product competition
• technological innovations
• marketing

– To what extent does price competition or non-price competition (e.g.,

advertising) erode the profitability of a typical firm in the industry?

 Intense rivalry erodes profitability by

– reducing price-cost margins (price competition)
– increasing programmed costs (e.g., advertising) (non-price competition)

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Price Competition

 The most significant threat to industry profitability is increased price competition

 Factors which increase price competition

– Decline in market demand
– Large number of competitors
– Large buyers who negotiate price
– Poor information about competitors’ prices
– Long reaction times
– Lack of segmentation
– Differences among competitors
• Costs, market shares, brand name, quality

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How the Five Forces Affect Economic Profitability

Substitutes

-
Supplier Power

+
-
Economic Profit = (Price - Average Cost) X Sales Volume - Cost of Capital x Capital Invested

- - +
Buyer Power
- Threat of Entry

-
Rivalry

Actual Entry

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Industry Factors Vs. Industry Forces*

 An industry’s 5-forces determine the long-run profit potential of the industry - how much
of the value is retained by companies in the industry, versus:

– Bargained away by customers or suppliers

– Limited by substitutes
– Constrained by potential new entrants
– Competed away through high levels of rivalry

 Industry (or Environmental) Factors are external forces or industry attributes that also
impact the profitability of the industry, but in ways that may be positive or negative
depending on the broader industry context (most importantly, the five forces). Common
industry factors include:

– Macro and Industry Growth Rate

– Technological change
– Government – Political and Regulatory conditions
– Importance of complementary products and services

*See – The Five Competitive Forces that Shape Strategy, by Michael Porter, HBR Jan. 2008.
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Dell Case Questions

Case Write-up Questions - Only answer the questions below if you choose to do a case
write-up. Your answers should be based on the information in the case Marching
Dell, not Matching Dell (B).

1. Provide a description of the core elements of Dell’s business strategy (at the time of
the case). (30%)

2. Describe how Dell generates a competitive advantage through lower costs (at the
time of the case). Note that your answer should be in terms of costs relative to their
competition on important value chain activities and the cost drivers associated with
these activities. Where possible, provide a back-of-the-envelop calculation of the cost
advantage. Given the 600 word limit, you should identify and discuss at least three
advantages that you believe are the most significant. (50%)

3. In what ways does Dell differentiation itself from the competition (higher Benefits)
(20%)

 Note: The percentages indicate (roughly) the percentage of your write-up that should be
devoted to each question.

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Write-Up Format

 Use the cover sheet provided on the Chalk site in the Course Documents folder.

 Do your best to stick to the 600 word limit. It’s okay to go over by ten or twenty
words. You should only include facts from the case in your write-up that are
directly relevant to your answers.

 While you should avoid short bulleted answers, you should provide a clear
separation between your answers to the different questions. Long paragraphs,
where the critical elements of your answer are nor clearly broken out, should be
avoided.

 Your write-up needs to be submitted at the beginning of class. Bring an extra

copy if you want to refer to it during the in-class discussion.

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Case Discussion Preparation Questions

In addition to the questions above, consider the following questions in

preparation for the class discussion. (Note: these are not questions for
the write-up. )

1. Conduct a quick five-forces analysis of the personal computer industry in 1998.

How and why did the personal computer industry come to have such low
profitability?

2. Why was Dell so successful (during the time of the case) despite the low
average profitability in the PC industry?

3. Why has it been difficult for the competition to overcome Dell’s competitive
advantage (through the time period covered in Matching Dell (B)?

4. For those more familiar with the PC industry, why has Dell’s performance
declined since the time of the case?

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