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MGMT 386

Competitive Strategy

©2009 Prentice Hall11-2

Industry Analysis

• An important part of technology strategy is to analyze the attractiveness of an industry

• Some industries are more attractive than others, making the companies in them consistently more profitable than those in other industries

Assessing the Firm’s Current Position

• External Analysis Two common methods are Porter’s Five-Force Model

and Stakeholder Analysis. Porter’s Five-Force Model

1. Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation between firms, demand conditions, exit barriers.

2. Threat of potential entrants. Determined by attractiveness of industry, height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.)

3. Bargaining power of suppliers. Determined by number of suppliers and their degree of differentiation, the portion of a firm’s inputs obtained from a particular supplier, the portion of a supplier’s sales sold to a particular firm, switching costs, and potential for vertical integration.

Assessing the Firm’s Current Position

4. Bargaining power of buyers. Determined by number of buyers, the firm’s degree of differentiation, the portion of a firm’s inputs sold to a particular buyer, the portion of a buyer’s purchases bought from a particular firm, switching costs, and potential for vertical integration.

5. Threat of substitutes. Determined by number of potential substitutes, their closeness in function and relative price.

6. Recently Porter has acknowledged a sixth force: the role of complements. If complements are necessary, industry will be influenced by their availability, quality, and price.

Factors Shaping theChoice of Company Strategy

Company’s Strategic SituationCraftthe

strategy

External Factors

Internal Factors

Social, political,

regulatory and

community factors

Competitive conditions

and industry attractiveness

Company opportunities and threats to

company’s well-being

Resource strengths,

capabilities, and

weaknesses

Influences of key

executives

Shared values and company

culture

Identify and

evaluate alternatives

Determine relevance of internal

and external factors

Strategic Thinking and Analysis Leads to Good Strategic Choices

1. Industry’s dominant economic traits2. Nature of competition & strength of

competitive forces3. Drivers of industry change4. Competitive position of rivals5. Strategic moves of rivals6. Key success factors7. Conclusions about industry attractiveness

Assess Industry & Competitive Conditions

1. Assessment of company’s present strategy2. Resource strengths and weaknesses,

market opportunities, and external threats3. Company’s costs compared to rivals4. Strength of company’s competitive position5. Strategic issues that need to be addressed

Assess Company Situation

IdentifyStrategic Optionsfor the

Company

Select the Best Strategyfor the

Company

©2009 Prentice Hall11-7

Five Forces Model

Assessing the Firm’s Current Position Stakeholder

Analysis1. Who are the

stakeholders.

2. What does each stakeholder want.

3. What resources do they contribute to the organization.

4. What claims are they likely to make on the organization.

©2009 Prentice Hall11-9

The Value Chain

• A description of the activities that are used to produce and deliver a product to customers

• Examining the value chain will help with technology strategy in several ways:1. Helps to determine where most of the value creation lies in an industry 2. Determine whether it makes sense to focus on a different stage of the

value chain if the locus of value creation in an industry changes 3. Offers insight into whether new or established firms will be more

effective at innovation 4. Suggests how companies can create competitive advantage at

different stages of the value chain5. Helps with decisions about ownership of different parts of the value

chain

©2009 Prentice Hall11-10

The Value Chain in Mobile Phones

Assessing the Firm’s Current Position

• Internal Analysis1. Identify the firm’s strengths and

weaknesses. Helpful to consider each element of value chain.

SupportActivities

Primary Activities

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

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Value Chain AnalysisValue Chain AnalysisIdentifying Resources and Capabilities That Can Add Value

SupportActivities

Primary Activities

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

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Inbound Inbound LogisticsLogistics

OperationsOperationsOutboundOutboundLogisticsLogistics

ServiceService

Marketing Marketing & Sales& Sales

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

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MARGIN

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Firms often purchase a portionportion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlymore efficiently

OutsourcingOutsourcingStrategic Choice to Purchase Some Activities From Outside Suppliers

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value

Perform valuable activities that complement the firm’s activities

Buyer Value Chain

Each firm must eventually find a way to become a part of some buyer’s value chain

Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain

This creates VALUE!!

Value chains vary for firms in an industry, reflecting each firm’s unique qualities:

• History• Strategy• Success at Implementation

Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

2. Assess which strengths have potential to be sustainable competitive advantage

• Rare• Valuable• Durable• Inimitable

Resources are difficult (or impossible) to imitate when they are:

– Tacit– Path dependent– Socially complex– Causally ambiguous

Assessing the Firm’s Current Position

Competitive Advantage Sustainable

Competitive Advantage

©2009 Prentice Hall10-16

Controlling Key Resources

• Controlling key resources is most effective when resources are rare and are a rival good (keeps it from being used by two companies simultaneously)

©2009 Prentice Hall10-17

Controlling Key Resources

©2009 Prentice Hall10-18

Establishing a Reputation

• Reputation matters more in industries that serve consumers than industries that serve businesses because businesses are less likely to be swayed by perceptions than by the economics of a transaction

• By building a reputation, companies can attract customers more easily and keep them from shifting suppliers

• Brand names are more effective at appropriating the returns to investment in innovation in industries that serve consumers, particularly those that are strongly affected by perception

©2009 Prentice Hall10-19

Obtaining Architectural Control

• Architectural control allows firms to limit compatibility of their products to companies that are not a competitive threat, to bias compatibility to their own products, and to control the type and pace of product improvements

©2009 Prentice Hall10-20

The Learning Curve

Experience and Learning Curves

©2009 Prentice Hall10-21

Cost Effects ofNew vs. Old Technology

Old Technology

New Technology

1MillionUnits

2MillionUnits

4MillionUnits

8MillionUnits

Co

st p

er U

nit

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A Resource-Based View

• The creation of sustainable competitive advantage (SCA) depends on resources and capabilities

©2009 Prentice Hall11-24

Resources

• Resources fall into three major categories:1. Tangible: include plant and equipment, raw

materials, and financial reporting systems 2. Intangible: include trade secrets and relationships

with customers 3. Human: include employees’ knowledge, skills and

abilities • Resources are not a complete explanation for

competitive advantage• Different companies transform resources into

products and services in different ways

©2009 Prentice Hall11-25

Capabilities

• The knowledge or skills about how to undertake a particular activity

• Capabilities can be found in all parts of a company, such as in the skills, knowledge, and ability that employees have accumulated over time in the process of doing their job

• Other capabilities reside in an organization’s processes, such as those for product development, production, purchasing, supply chain management, and marketing

• Competitive advantage occurs only when efforts to transform resources into products are valuable, rare, non-substitutable, difficult to imitate, and durable; otherwise, it will not be superior to that of other firms

©2009 Prentice Hall11-26

Core Competencies

• Capabilities are core competencies if they are used to generate value across a wide range of firm activities

• Core competencies are often created through the coordination of different activities or technologies

• Core competencies allow firms to expand successfully into new product markets

Identifying Core Competencies and Capabilities

• Core Competencies: A set of integrated and harmonized abilities that distinguish the firm in the marketplace.

• Competencies typically combine multiple kinds of abilities.• Several core competencies may underlie a business unit.• Several business units may draw from same competency.• Core competencies should:

– Be a significant source of competitive differentiation– Cover a range of businesses– Be hard for competitors to imitate

Identifying Core Competencies and Capabilities

Mobilizing Company Resources to Produce Competitive Advantage

Competitive Advantage

Core Competencies

Distinctive Competencies

Competitive Capabilities

Company Resources

For a capability to be a Core For a capability to be a Core Competency, it must be:Competency, it must be:

Core CompetenciesCore Competencies

Differential knowledge or skill in the organizationDifferential knowledge or skill in the organization

Difficult for others to imitate Difficult for others to imitate

Essential to product characteristics critical to customerEssential to product characteristics critical to customer

Applicable to a variety of end products and marketsApplicable to a variety of end products and markets

Core Competencies must be:

NonsubstitutableNonsubstitutableCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationshipsCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

ValuableValuable

RareRare

Costly to ImitateCostly to ImitateCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexityCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

Capabilities that are possessed by few, if any, current or potential competitorsCapabilities that are possessed by few, if any, current or potential competitors

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environmentCapabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

CORE PRODUCTS AND END PRODUCTS

• COMPETENCE

• CORE PRODUCTS (in business units)

• END PRODUCTS (to markets)

Strategy

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.

Business Business Level Level StrategyStrategy

Business Business Level Level StrategyStrategy

Actions taken to provide value to Actions taken to provide value to customers and gain a competitive customers and gain a competitive advantage by exploiting core advantage by exploiting core competencies in specific, individual competencies in specific, individual product markets.product markets.

Actions taken to provide value to Actions taken to provide value to customers and gain a competitive customers and gain a competitive advantage by exploiting core advantage by exploiting core competencies in specific, individual competencies in specific, individual product markets.product markets.

CoreCompetency

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

©2009 Prentice Hall11-34

Core Rigidities

• The inability to do new things in areas outside of the firm’s core competencies

• Often limit the way in which people can work together or solve problems, and what activities they believe are acceptable and unacceptable

Risk of Core Rigidities• When firms excel at an activity, they can become

over committed to it and rigid. Incentives and culture may reward current

competencies while thwarting development of new competencies.

Dynamic capabilities are competencies that enable the firm to quickly respond to change.

• E.g., firm may develop a set of abilities that enable it to rapidly deploy new product development teams for a new opportunity; firm may develop competency in working with alliance partners to gain needed resources quickly.

Strategic Intent• Strategic Intent: A long-term goal that

is ambitious, builds upon and stretches firm’s core competencies, and draws from all levels of the organization.

• Typically looks 10-20 years ahead, establishes clear milestones

• Firm should identify resources and capabilities needed to close gap between strategic intent and current position.

BCG Growth-Share Matrix

Stars Question Marks

Cash Cows Dogs

22

20

18

16

14

12

10

8

6

4

2

0

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4x 2x1.

5x 1x

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Relative Competitive Position

Bus

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(P

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Source: B. Hedley, “Strategy and the Business Portfolio,” Long Range Planning (February 1997), p. 12. Reprinted with permission.

General Electric’s Business Screen Matrix

AWinners Winners

B

C

Question Marks

D

F

Average Businesses

EWinners

Losers

GLosers H

LosersProfit

Producers

Strong Average Weak

Low

Medium

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Business Strength/Competitive Position

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Source: Adapted from Strategic Management in GE, Corporate Planning and Development, General Electric Corporation. Used by permission of General Electric Company.

Strategic Groups in the Pharmaceutical Industry

Multi-technology, Multi-attribute Matrix

Attribute

RankDevice

1Device

2Device

3Device

4Device

5Attribute

1

Attribute

2

Attribute

3

Attribute

4

TOTAL

SWOT MATRIX

STRENGTHS WEAKNESSES

OPPORTUNITIES SO STRATEGIES

WO STRATEGIES

THREATS ST STRATEGIES

WT STRATEGIES

SWOT Analysis -- What to Consider

Potential Resource Strengths

Potential Resource Weaknesses

Potential Company Opportunities

Potential External Threats

• Powerful strategy

• Strong financial condition

• Strong brand name image/reputation

• Widely recognized market leader

• Proprietary technology

• Cost advantages

• Strong advertising

• Product innovation skills

• Good customer service

• Better product quality

•Alliances or JVs

• No clear strategic direction

• Obsolete facilities

• Weak balance sheet; excess debt

• Higher overall costs than rivals

• Missing some key skills/competencies

• Subpar profits . . .

• Internal operating problems . . .

• Falling behind in R&D

• Too narrow product line

• Weak marketing skills

• Serving additional customer groups

• Expanding to new geographic areas

• Expanding product line

• Transferring skills to new products

• Vertical integration

• Openings to take MS from rivals

• Acquisition of rivals

• Alliances or JVs to expand coverage

• Openings to exploit new technologies

• Openings to extend brand name/image

• Entry of potent new competitors

• Loss of sales to substitutes

• Slowing market growth

• Adverse shifts in exchange rates & trade policies

• Costly new regulations

• Vulnerability to business cycle

• Growing leverage of customers or suppliers

• Shift in buyer needs for product

• Demographic changes

PORTER- BUSINESS STRATEGY AND TECHNOLOGY STRATEGY• Identify all distinct technologies and sub-technologies

in value chain• Identify potentially relevant technologies in other

industries or under development• Determine likely path of change in key technologies• Determine which technologies and potential changes

are most significant to competitive advantage and industry structure

• Assess a firm’s relative capabilities in important technologies and cost of making improvements

• Select a technology strategy, encompassing all-important technologies that reinforce company strategy

• Reinforce business-unit technology strategies at the corporate level

Strategy and Competitive Advantage

• The relationship between strategies and resources and capabilities:

©2009 Prentice Hall11-45

Strategic Dissonance

• Strategic dissonance occurs when what managers want to accomplish and what companies are doing are misaligned

• It indicates the need to change strategy• Companies are most successful in responding to

strategic dissonance by: Evaluating Information on the Misalignment Gathering Information from Frontline Employees Devoting Organizational Resources to the New

Direction

Alignment of Technology and Business Strategy

Actual and Perceived Utility

©2009 Prentice Hall3-48

Distribution of Adopters

• Normal distribution is the most common pattern of adoption of new products and services

©2009 Prentice Hall2-49

©2009 Prentice Hall3-50

The Normal Distribution of Adopters

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Groups of Adopters

Innovators: adopt new technology immediately

Early adopters: follow the innovators

Early majority: adopt new technology just before the average for the market

Late majority: adopt after other customers have adopted the technology successfully

Laggards: prefer to avoid adoption as long as possible

©2009 Prentice Hall3-52

S-Curves of Adoption

• The S-shaped pattern indicates that there is an acceleration point at which a market “takes off” by: Pointing out that different groups of customers adopt

new products at different points in time for different reasons

Providing information about the right promotional strategy

Indicating appropriate pricing strategy Providing estimated demand growth over time Providing information about the financial

attractiveness of a market at different points in time

©2009 Prentice Hall3-53

The Adoption S-Curve

©2009 Prentice Hall3-54

Crossing the Chasm

• The need to sell to the mass market to achieve an adequate return on investment

• For companies to segment the early majority of the market and focus on the portion of the majority that is underserved by existing products

©2009 Prentice Hall3-55

Crossing the Chasm

©2009 Prentice Hall3-56

Identifying the Take-off Stage

• If there is an accelerated rate change in demand

• When the customer base begins to shift away from the innovators and early adopters

©2009 Prentice Hall3-57

How to Cross the Chasm

• Need to show how it provides value to customers

• Need to develop a complete solution to customers’ problems

• Need to pursue a vertical marketing strategy rather than a horizontal marketing strategy