SWOT: inform about the elements outside and inside of a business that are likely to have an

impact on strategic choices.

Strength (internal): capabilities or resources Weaknesses (internal): elements that hinder
that enable a business to perform well and
the business from performing well and that
that need to be leveraged, such as
need to be addressed, such as technology,
technology, financial resources, and human
financial resources, and human capital.
capital.
Opportunities (external): trends, ideas, or
Threats (external): trends, ideas, or forces
forces that the business can capitalize on,
that are likely to have a negative impact on
such as changes in consumer preferences,
the business, such as changes in consumer
economic cycle, and regulation.
preferences, economic cycle, and regulation.

Industry Analysis Five Forces: how industry structure influences the

profitability of the average company within that industry.

Barriers to entry: This has to do with the ease with which new firms can enter the industry. If
an industry is profitable, absent entry barriers, new firms are likely to enter and increase
competition, driving down prices. Thus, high barriers to entry are associated with higher
profitability than are low barriers to entry. Barriers to entry are likely to be high if the answer
to the questions below is yes:
Economies of scale: Are fixed costs high? (e.g., mobile operators)
Network externalities: Does the value of the product/service to a consumer increase
as more consumers buy the product? (e.g., MS Word processors)
Switching costs: Is changing from one product provider to another costly? (e.g.,
operating systems)
Capital costs: Does entering the industry require large investments? (e.g., refinery)
Incumbency advantages: Are the best resources available only to the firms that
enter the market first? (e.g., mining)
Unequal access to distribution channels: Are prior relationships (track record) an
advantage in accessing distributors? (e.g., movie industry)
Government policy: Do regulators control entry? (e.g., patents)
High barriers to exit: Is exiting the industry costly e.g., assets have no other use or
there are labor severance costs? (e.g., amusement parks)
Anticipated vigorous incumbent response: Do incumbents have deep pockets, and
are they expected to respond aggressively to new entrants? (e.g., consumer retail)

Bargaining power of suppliers: This has to do with the capacity of suppliers to set prices. If
an industry is profitable and suppliers have a great deal of bargaining power, this may
increase the prices they charge customers in an industry to capture some of the profits
generated by the buyer. Hence, if the bargaining power of suppliers is high, expect lower
profitability than when it is low. The bargaining power of suppliers is likely to be high if the
answer to the questions below is yes:
Suppliers are more concentrated than buyers: Are there are only a few suppliers and
multiple buyers? (e.g., aircraft)
Supplier switching costs: Is it costly for a customer to change suppliers i.e., when
buyers equipment is tailored to fit that of a supplier? (e.g., software providers)
Suppliers offer differentiated products: Do buyers believe suppliers products differ
significantly? (e.g., laser industry)
Few substitutes for suppliers products: Are there few substitutes for the product
provided by a supplier? (e.g., semiconductors)
Credible threat of forward integration: Is it feasible for a supplier to enter its clients
industry?
Suppliers depend heavily on the industry: Is the source of suppliers profits highly
concentrated in an industry?

Industry rivalry: This has to do with the extent to which rivalry between industry players is
high or low. Price competition is the most threatening to profits. If rivalry within an industry is
high, then profitability in an industry is low, and vice versa. Industry rivalry is likely to be high
if the answer to the questions below is yes:
Undifferentiated products: Do firms in an industry compete mostly on price? (e.g.,
cement)
Fixed costs are high and marginal costs low: Are fixed costs high enough that there
are incentives to price below average costs?
Capacity grows in batches: Are there incentives to reduce prices because firms have
excess capacity because increasing capacity can only happen in large batches?
Product is perishable: Are there incentives to reduce prices because products have
an impending expiration date?
Many competitors of roughly equal size: Are there many competitors of roughly equal
size?
Industry growth is slow: Is the industry growth slow enough that companies can only
grow by stealing market share from one another?

Threat of substitutes: Substitutes compete for industry profits, but from outside the focal
industry. You can define firms as being in the same industry when they offer similar
functionality to similar consumers, using a similar production method/technology. Substitutes
are products that are not so closely comparable in terms of the functionality they offer to
consumers; however, if the price of a focal product increases enough, these become feasible
substitutes e.g., air travel vs. teleconferencing, or solar panels vs. electric grid. Industry
profitability is likely to be low when the threat of substitution is high.

Bargaining power of buyers: This has to do with the capacity of customers to set prices in
an industry. Thus, if the bargaining power of buyers is high, expect lower profitability than
when it is low. The bargaining power of buyers is likely to be high if the answer to the
questions below is yes:
Buyers are more concentrated than suppliers: Are there only a few customers and
multiple suppliers?
Low switching costs: Can buyers change suppliers at low cost?
Undifferentiated products: Do buyers believe that suppliers products are
commodities?
Substitutes for suppliers products: Are there many substitutes for the product offered
by a supplier?
Credible threat of backward integration: Is it reasonable for a buyer to enter its client
industry?

Competitive Advantage Value Proposition: Thinking about the determinants of

performance differences between firms that operate in the same industry. List the attributes
that are likely to generate value (willingness-to-pay) for consumers. A company is said to have
a competitive advantage when it consistently outperforms its industry peers. 1. Increase WTP
(differentiation strategy) 2. Decrease Cost (cost strategy).

Resource and Capabilities VRIN

Rare:
Valuable:
Resource helps
implement
strategy and be
more efficient,
innovative

Resource is
specific to a firm
if others have
access then this
cannot lead to
competitive
advantage

This resource
is (or is not)
valuable
because

Resourc
e

Imperfectly
imitable:

Nonsubstitutable:

Difficult to imitate
because (a) it
takes time to build,
(b) not sure how
this works, (c)
socially embedded

There must not be

a resource that is
equivalent, which is
not rare or imitable

This resource is
(or is not) rare
because

This resource is
(or is not)
imperfectly
imitable
because

This resource is
(or is not) nonsubstitutable
because

Business Model: For a business model to drive a competitive advantage, the choices that
this embodies (Who, What, How) have to be internally consistent: choices reinforce each
other, fit well together, and leverage the resources owned by the company. Similarly, these
choices have to be externally consistent: reflective of the forces present in the firms industry,
observant of the actions of competitors, and mindful of more general economic conditions.

Who are the customers?

What is the
product/service?

How does the firm

deliver?

Identify significant ways

Identify the most relevant

Identify the main

to segment potential
customers, such as
demographics (e.g.,
income), lifestyle (e.g.,
professionals), purchase
occasion (e.g., repeat
customers), or
geographic location.

characteristics of the
product/service: price
level, features,
performance
characteristics.

activities carried out to

produce the
product/service:
procurement of inputs,
human resources,
operations/processes,
marketing, sales, and
distribution.

Outsourcing:

In-house

Outsource

Cost
- Spreading resources across
multiple activities, instead of
concentrating on the core
- Limited to internal resources
- Isolated from market incentive,
thus done less competitively

Forgo
synergies
activities (if any)

between

- Forget how to do an activity

- Once locked into a contract,
supplier
may
become
opportunistic
- Costly to adjust contract

Benefits
- Exploit synergies
activities (if any)

between

- Full control to adjust activities as

needed
- Protect valuable resources from
undesired
spillovers
(supplier
steals technology)
- Low transaction costs (enforcing
contract)

- Cost reductions because activity

can be performed more effectively
by supplier
- Refocus
activities

resources

on

core

- Access to a variety of resources

not owned by the firm

Internationalization: firms decide (a) whether it is convenient to establish subsidiaries

internationally (whether to go global or not), and (b) if so, which international markets to enter
(which countries offer the most promising opportunities). For internationalization to drive a
competitive advantage, entering a new geography (region or country) needs to offer the firm
with opportunities to (a) adapt existing products/services to the idiosyncrasies of some
regional market, (b) offer similar products/services across multiple markets, and/or (c) access

relevant resources that are not available in the firms home market (e.g., technology, low-cost
labor).

Components of
Value

Guidelines

Does
internationalization
help add volume or
growth?

Has Haier run out of room to grow in China? Is it cost

effective to acquire additional volume by going
international? i.e., ponder whether there is any value left
after accounting for the costs of internationalization, such
as adapting products to foreign markets.

Does
internationalization
help decrease costs?

Does expanding internationally help Haier reduce its

overall costs by achieving economies of scale and scope?
i.e., do increased production/sales help the firm spread
fixed costs? Does accessing resources not available in
China help it reduce costs? Are these cost reductions (if
any) large enough to justify the other costs of going
global?

Does
internationalization
help differentiation
or willingness-topay?

Is there room in the appliance industry for product

differentiation? Are the variety of products produced by
Haier in China likely to help the firm differentiate in other
markets?

Does
internationalization
help improve
industry
attractiveness or
bargaining power?

How does Haiers entry into international markets change

the nature of competition in those markets and in China?
Think about rivals response to Haiers internationalization.
Are the dynamics of the appliance industry any different in
China than in other countries?

Does
internationalization
help diversify risk?

What are the implications of success/failure internationally

for Haiers Chinese operations? For example, are there any
risks that failure internationally may affect Haiers
reputation in China? In general, think about whether and
how internationalization helped Haier reduce risks, or
whether and how its risks increased.

Diversification: Deciding in which markets (industries) a firm will compete is one of the key
decisions for a corporation i.e., what businesses should the firm be in? A firm can be
focused on a single market (e.g., McDonalds) or highly diversified (e.g., Samsung). There are
a number of reasons why firms expand their horizontal scope. First, entering a new industry
may be part of the firms growth strategy once opportunities in its existing businesses have
been exhausted. Second, entering new markets may serve as a means for the firm to spread
risk, namely when cash flows and cycles are negatively correlated. In general, entering a new

business contributes to generating a competitive advantage when this enhances the overall
value of the firm i.e., when the value created by the firm is greater than the sum of the value
of each of the businesses if these were operating independently. This is likely to happen when
(1) the industry that the firm is entering is attractive and offers potential for the firm to exploit a
differentiated position, and (2) there are clear economies of scope and scale between the new
business and the resources/capabilities that are specific to the firm. In the absence of such
elements, diversification is not likely to be a source of competitive advantage and may even
lead to the destruction of value.

Industry
attractiveness.
Consider industry size,
profitability, and, in
general, use elements
from the Five Forces
framework (dont go
into too much detail,
though).

Potential for competitive advantage. Consider the

extent to which Disneys resources generate an
advantage in each market. Can the same resource be
deployed across multiple businesses at a low cost and
offer effective differentiation (economies of scale)?
Does Disney have to invest in that market to monetize
its resource, or can it use other means to be present
(e.g., licensing)?
Yes
No
Yes

Build

Hold

No

Hold

Harvest