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SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONTECHNOLOGY COMMERCIALIZATION PROGRAMTECHNOLOGY COMMERCIALIZATION PROGRAM

Welcome toBusiness Strategy and Policy

John A. Hengeveld

week 1 part 2


Introduction and Logistics

• Review and Discussion of key readings

• A little review from Grant

• The Innovators Solution

• Ambidextrous Organizations

• B&E: Chapter 1


Review from Grant


Resources and Capabilities


Profit Potential of Resources

From Grant: Contemporary Strategy Analysis, Blackwell, 1998

The ProfitEarning Potential

of a Resourceor Capability

Scarcity

Relevance

Durability

Mobility

Replicability

The Extent of theCompetitiveAdvantageEstablished

Sustainability ofCompetitiveAdvantage

Appropriability

Property Rights

Relative Bargaining Power

Embeddedness


Graphically

Goals andValues

ResourcesCapabilities

Structure & Systems

Grant: Figure 1.2

The Firm

Strategy

Competitors

Customers

Suppliers

Industry Environment


Intra-Industry AnalysisIntra-Industry Analysis

• Game theory

• Competitor Analysis

• Segmentation

• Strategic Groups

OUTLINE


The Contribution of Game Theory to Competitive Analysis

The Contribution of Game Theory to Competitive Analysis

Main value:1. Framing strategic decisions as interactions between competitors2. Predicting outcomes of compeittive situations involving a few

players

Some key concepts:1. Competition and Cooperation—Game theory can show conditions

where cooperation more advantagfeeous than comeptition2. Deterrence—changing the payoffs in the game in order to deter

a comeptitor from certain actions3. Commitment—irrevokable demployments of resoruces that

give criditability to threats4. Signaling—communication to influnece a comeptior’s decision

Problems of game theory:Useful in explaining past competitive behavior—weak in prediucting future competive behaoir.What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions


PREDICTIONS

• What strategy changes will the competitor initiate?

• How will the competitor respond to our strategic initiatives?

OBJECTIVESWhat are competitor’s current goals?Is performance meeting there goals?How are its goals likely to change?

STRATEGYHow is the firm competing?

ASSUMPTIONSWhat assumptions does the competitorhold about the industry and itself?

RESOURCES & CAPABILITIESWhat are the competitors’ key strengths and weaknesses?

A Framework for Competitor Analysis A Framework for Competitor Analysis


Segmentation Analysis: The Principal Stages

Segmentation Analysis: The Principal Stages

• Identify key variables

and categories.

• Construct a segmentation matrix

• Analyze segment attractiveness

• Identify KSFs in each segment

• Analyze benefits of broad vs. narrow scope.

Identify segmentation variablesReduce to 2 or 3 variablesIdentify discrete categories for each variable

Potential for economiesof scope across segmentsSimilarity of KSFsProduct differentiation benefitsof segment focus


The Basis for Segmentation: Customer and Product Characteristics The Basis for Segmentation: Customer and Product Characteristics

Opportunities forDifferentiation

Opportunities forDifferentiation

Characteristics of the Buyers

Characteristics of the Buyers

Characteristics of the Product

Characteristics of the Product

Industrial buyersIndustrial buyers

Household buyersHousehold buyers

Distribution channelDistribution channel

Geographicallocation

Geographicallocation

*Size*Technical sophistication*OEM/replacement

*Size*Technical sophistication*OEM/replacement

*Demographics*Lifestyle*Purchase occasion

*Demographics*Lifestyle*Purchase occasion

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services


Segmenting the European Metal Can IndustrySegmenting the European Metal Can Industry

Food Fruit Juice Pet food Soft drink Beer Oil

Steel 3-piece

Steel 2-piece

Aluminum 2-piece

General cans

Composite cans

Aerosol cans


Segmenting the World Automobile MarketSegmenting the World Automobile Market

REGION US& Canada W.Europe E.Europe Asia Lat America Australia Africa

Luxury Cars

Full-size sedans

Mid-size sedans

Small sedans

Station wagons

Passenger minivans

Sports cars

Sport-utility

Pick-up trucks


0

5

0

10

15

20

25%

100%Share of industry revenue

Auto loans

Leasing

Warranty

Gasoline

Auto insurance

Aftermarket parts

Auto rentalO

per

atin

g m

arg

in

Auto manufacturing

New car dealers

Used car dealers

Service & repair

Vertical Segmentation & Industry Profit Pools—The US Auto Industry

Vertical Segmentation & Industry Profit Pools—The US Auto Industry


SEGMENT

Low price bicycles sold primarily through department and discount stores, mainly under the retailer’sown brand (e.g. Sears’ “Free Spirit”);

KEY SUCCESS FACTORS

* Low-costs through global sourcing of components & low-wage assembly.* Supply contract with major retailer.

Leading competitors: Taiwanese & Chinese assemblers,some U.S manufacturers, e.g. Murray Ohio, Huffy

Medium-priced bicycles sold primarily under manufacturer’s brandname and distributed mainly throughspecialist bicycles stores;

*Cost effieciency through large scale operation and either low wages or automated manufacturing.*Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers.* International marketing & distribution.

Leading competitors: Raleigh, Giant, Peugeot, Fuji

*Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistence).*Reputation (e.g. through success in racing, through effective brand management).*Strong dealer relations.

Similar to low-price bicycle segment.

High-priced bicycles for enthusiasts.

Children’s bicycles (and tricycles) soldprimarily through toy retailers (discount toy stores, department stores, and specialist toy stores).

Segmentation and Key Success Factors in the U.S. Bicycle Industry Segmentation and Key Success Factors in the U.S. Bicycle Industry


Strategic Group AnalysisStrategic Group Analysis

A strategic group is a group of firms in an industry following the same or similar strategy.

Identifying strategic groups:• Identify principal strategic

variables which distinguish firms.

• Position each firm in relation

to these variables.• Identify clusters.


Broad

PRODUCT RANGERANGE

Narrow

National GEOGRAPHICAL SCOPE Global

NATIONALLY- FOCUSED, SMALL, SPECIALIST

PRODUCERS e.g., Bristol (U.K.), Classic Roadsters

(U.S.), Morgan (U.K.)

NATIONALLY FOCUSED, INTERMEDIATE LINE

PRODUCERS

e.g. Tofas, Kia, Proton, Maruti

REGIONALLY-FOCUSED BROAD-LINE PRODUCERS

e.g. Fiat, PSA, Renault,

PERFORMANCE CAR PRODUCERS

e.g., Porsche, Maserati, Lotus

LUXURY CAR MANUFACTURERS

e.g., Jaguar, Rolls Royce, BMW

GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu,

Suzuki, Saab, Hyundai

GLOBAL, BROAD-LINEPRODUCERS

e.g., GM, Ford, Toyota, Nissan, Honda, VW, Daimler

Chrysler

Strategic Groups in the World Automobile Industry Strategic Groups in the World Automobile Industry


Geographical Scope

0 10 20 30 40 50 60 70 80

Ver

tica

l Bal

ance

00.

51.

01.

52.

0

NATIONALPRODUCTION COMPANIES

INTEGRATED INTERNATIONAL

MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Chevron Royal Dutch-Shell Gp.

Exxon-Mobil

Statoil

PDVSA

Kuwait Petroleum

Petronas

Petrobras

RepsolNippon

Tosco

BP-Amoco

TexacoPhillips

Pemex

Indian Oil

ENI

INTEGRATED OIL MAJORSINTERNATIONALUPSTREAM,REGIONALLYFOCUSEDDOWNSTREAM

IranNOC

E.g. Neste

PhillipsENI

Elf-Fina-TotalRepsol INTERNATIONAL

DOWNSTREAM OIL COMPANIES

INTERNATIONALUPSTREAMCOMPANIES

Enterprise

PremierOil

YPF

Strategic Groups Within the World Petroleum Industry Strategic Groups Within the World Petroleum Industry


Generic Strategies


The Emergence of Competitive Advantage

The Emergence of Competitive Advantage

How does competitive advantage emerge?

External sources ofchange e.g.:•Changing customer demand•Changing prices•Technological change

Internal sources of change

Resource heterogeneity among firms means differential impact

Some firms faster and more effective

in exploiting change

Some firmshave greater creative

and innovativecapability


Competitive Advantage from Internally-Generated Change: Strategic InnovationCompetitive Advantage from Internally-Generated Change: Strategic Innovation

Characteristics of innovatory strategies:– Associated with new entrants to an industry (e.g. Nucor in

steel, IKEA in furniture, Enron in energy, Home Depot in DIY, Dell in PCs)

– Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Richardson Sheffield in kitchen knives is low cost, innovative and customer responsive.)

– Reconfiguring the value chain e.g.---• Nike’s system for manufacturing and distributing shoes totally

different from traditional shoe manufacturer• Southwest Airlines simplification of the normal airline value chain• Zara’s system of design, manafacture, and distribution


REQUIREMENT FOR IMITATION

Identification - Obscure superior performance

- Deterrence--signal aggressiveIncentives for imitation intentions to imitators

- Pre-emption--exploit all available investment opportunities

- Rely upon multiple sources of Diagnosis competitive advantage to create

“causal ambiguity”

- Base competitive advantage upon Resource acquisition resources and capabilities that are

immobile and difficult to replicate

ISOLATING MECHANISM

Sustaining Competitive Advantage Against ImitationSustaining Competitive Advantage Against Imitation


Competitive Advantage in Different Market Settings

Competitive Advantage in Different Market Settings

SOURCE OF IMPERFECTIONOF COMPETITION

MARKET TYPE OPPORTUNITY FORCOMPETITIVE ADVANTAGE

TRADING MARKETS

•None (efficient markets)•Imperfect information availability•Transactions costs•Systematic behavioral trends

•Overshooting

NoneInsider tradingCost minimizationSuperior diagnosis(e.g.... chart analysis)Contrarianism

PRODUCTION MARKETS

•Barriers to imitation

•Barriers to innovation

Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them.Difficult to influence or exploit.


TRADING MARKETS

•None (efficient markets)•Imperfect information availability•Transactions costs•Systematic behavioral trends

•Overshooting

NoneInsider tradingCost minimizationSuperior diagnosis(e.g.... chart analysis)Contrarianism

PRODUCTION MARKETS

•Barriers to imitation

•Barriers to innovation

Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them.Difficult to influence or exploit.

MARKET TYPE

SOURCE OF IMPERFECTION

OF COMPETITION

OPPORTUNITY FOR COMPETITIVE

ADVANTAGE

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets


Sources of Competitive AdvantageSources of Competitive Advantage

COST ADVANTAGE

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

COMPETITIVEADVANTAGE

Similar product

at lower cost

Price premium

from unique product


Porter’s Generic StrategiesPorter’s Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COST DIFFERENTIATION

COMPETITIVE LEADERSHIP

SCOPE

Single Segment F O C U S


Features of Cost Leadership and Differentiation Strategies

Features of Cost Leadership and Differentiation Strategies

Generic strategy Key strategy elements Resource & organizational

requirements

COST Scale-efficient plants. Access to capital. Process

LEADERSHIP Design for manufacture. engineering skills. Frequent

Control of overheads & reports. Tight cost control.

R&D. Avoidance of Specialization of jobs and

marginal customer functions. Incentives for

accounts. quantitative targets.

DIFFERENTIATION Emphasis on branding Marketing. Product

and brand advertising, engineering. Creativity.

design, service, and Product R&D

quality. Qualitative measurement and incentives.

Strong cross-functional

coordination.


The Innovators Solution

Time

Perf

orm

ance

Sustaining Innovations

Disruptive Innovations

Pace of Technological Progress

Performance That Customers

Can Utilize and Absorb Range Of SolutionsCustomersCanUtilize


Types of Disruptions

• New Market Disruptions– Compete against non consumption

• Low End Disruptions– Offer lower cost solutions to overserved

customers

• Sustaining Innovations– Continuous improvement of product to existing

customers


Ambidextrous Organizations


Ambidextrous Organizations

• Congruence Model – from the book this was a part of.


Congruence ModelTushman and O’Reilly

Formal OutputsBalanced

ScoreCard:FinancialGrowth

Profitability

CUSTOMERInternal

Learning and Growth

EnvironmentResourcesHistory

Formal Organizat

ion

Financial Systems

Organizational

Structure

Policies

Etc

Informal Organizatio

n-

Characterize the

Way things Really get

done

People

Management TrainingTechnical

SkillsFunctional

SkillsLong term development needs

Strategy

Critical Tasks

-The few key tasks whose success is

essential to implementation of strategy


Key to Congruence Analysis

• Assess the degree of alignment of each “link”

• Organizations where these 7 items are “congruent” (represent the same shape and size, although projected into different axis) have a far superior chance of successful implementation to strategy

• The agenda for change is fixing the links.


Technology CyclesR

ate

of I

nnov

atio

n

Time

Product innovation Process Innovation

Substitution EventDD DD


Examples of Technology Cycles

• VCR

• Audio Recording and Distribution

• Computers?

• Telecommunication?


Types of Innovation andInnovation Streams

T&O, Winning Through Innovation, figure 7.3

InexpensiveMechanical Watch

Smaller, ThinnerMechanicalWatches

Swatch

ContinuousAim gunfire

First Watch

Quartz Watch

New

Existing

Mar

kets

IncrementalSmall Extensionsof ExistingTechnology

ArchitecturalReconfiguresExistingTechnology

DiscontinuousNew operating principles inCore Subsystems&/or DiscontinuousProcess innovation


Organizational CyclesThe success syndrome

FIT SUCCESS

Size and AgeInertia:StructuralCultural

Successin StableMarkets

Failurein MarketShifts


Ambidextrous Organizationsfrom WTI, figure 7.6

Executive Team•Provide Clear, Simple Vision•Balance Multiple Architectures•Makes Bets on Shifting Innovation•Manage Ambidextrously

•Today/Tomorrow•Large/Small – Incremental/Discontinuous

Inc•Culture Promoting

Continuous Improvement•Incremental Change•Eliminate Variability

•Reward Volume & Cost

Arch•Culture Promoting

Linkage Across Units•Adding and Linking

Subsystems•Reward Integration

Disc•Culture Promoting

Breakthroughs•Many Small Failures

•Learn by Doing•Reward Experimentation

and Innovation


B&EFive Forces

Assumptions Stable

Industry

Goal Defensible position

Performance

Driver

Industry

structure

Strategy Pick Industry

Pick position

Shape firm

Success Profits


B&ECore

Competence

Assumptions Firm as bundle of competences

Goal Sustainable

advantage

Performance

Driver

Unique

competencies

Strategy Craft vision

Build competencies to

match

Success Long Term

Dominance


B&EGame

Theory

Assumptions Dynamic

Oligopoly

Goal Temporary

advantage

Performance

Driver

Right

Moves

Strategy Make the right

Competitive &

Collaborative moves

Success Short Term

Wins


B&ECompeting

On the Edge

Assumptions Industry inRapid change

Goal Continuous

Flow of adv.

Performance

Driver

Ability

To change

Strategy Gain the edge:

Time pace, shape

semicoherent,

Strat. direction

Success Continual

Reinvention


B&EFive Forces Core

CompetenceGame

Theory

Competing

On the Edge

Assumptions Stable

Industry

Firm as bundle of competences

Dynamic

Oligopoly

Industry inRapid change

Goal Defensible position

Sustainable

advantage

Temporary

advantage

Continuous

Flow of adv.

Performance

Driver

Industry

structure

Unique

competencies

Right

Moves

Ability

To change

Strategy Pick Industry

Pick position

Shape firm

Craft vision

Build competencies to

match

Make the right

Competitive &

Collaborative moves

Gain the edge:

Time pace, shape

semicoherent,

Strat. direction

Success Profits Long Term

Dominance

Short Term

Wins

Continual

Reinvention



B&E Chapter 1

Playing the Improvisational Edge

Capturing Cross-BusinessSynergies

-Coadaptation

Gaining Advantagesfrom the Past-Regeneration

Winning TomorrowToday

-options-learning

Setting the Pace-time pacing

Time Pacing

Edge of Time

Edge of Chaos


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