Chapter 4 Exhibits
from Strategy and the Business Landscape
The Pharmaceutical Payoff Matrix (Millions of Dollars)
CLIENT’S (C’S) PRICE
ENTRANT’S (E’S) PRICE
VERY LOW
LOW
MODERATE
HIGH
NO PRICE CHANGE
358/190
507/168
585/129
624/116
E HAS LARGE PRICE ADVANTAGE
418/163
507/168
E HAS SMALL PRICE ADVANTAGE
454/155
511/138
636/126
C NEUTRALIZES E’S ADVANTAGE
428/50
504/124
585/129
669/128
A Framework for Competitor Analysis What Drives the Competitor
What the Competitor Is Doing and Can Do
Future Goals
Current Strategy How the business is currently competing
At all levels of management and in multiple dimensions
Competitor’s Response Profile Is the competitor satisfied with its current position? What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? What will provoke the greatest and most effective retaliation by the competitor?
Assumptions Held about itself and the industry
Capabilities Both strengths and weaknesses
The Limits to Sustainability 40
30
%I O R
20
10
0 1
2
3
4
5
6
Year
7
8
9
10 10
The Four Threats to Sustainability Imitation
Substitution
Added Value
Appropriated Value
Slack
Holdup
Trends and Success in the Programming of New Television Series
Averages
Trendy Introductions Nontrendy Introductions
Year 1
Year 3
Years
% Surviving
Ratings
Ratings
Broadcast
3 Years
1 5. 3
1 6. 4
1.8
21 %
1 6. 3 16
2 0. 4
2.3
27 %
Source: Robert E. Kennedy, “Strategy Fads and Competit Competitive ive Convergence: An Empirical Test for Herd Behavior in Prime Time Television Programming,”
The Economics of Brokerage Business Models, Early 1996 250
Price 200
Cost
s 150 r a l l o D 100
50
0
Online/Deep
Source: Rajiv Lal, “ E-Trade Securities, Inc.” Stanford University
Disc ount
F ull Servic e
Asset-Specificity in the Automobile Industry U.S./U.S. Measures of Asset-Specificity
Distance between manufacturing plants (miles) Capital that is not readily redeployable redeployable (%) “Man Days” of face-to-face contact divided by sales to automaker (index) Supplier’s sales to automaker divided by supplier’s total sales (%)
Arms-l Arms -len engt gth h (42%)* 589
Partne Part nerr (10%)* 413
Japan/Japan
Divisi Divi sion on (48%)* 2 76
Arms-l Arms -len engt gth h (35%)* 125
Partne Part ner r (38%)* 41
15
18
31
13
31
7.7
9.0
7.9
9.9
10.6
34
34
94
19
60
* Share of part production
Source: Jeffrey H. Dyer, “Does Governance Matter?,”
Market Value versus Cumulated Strategic Investments at General Motors 100
Market Value
50
0
-50
n i $
B
1981
1982
1983
1984
1985
198 6
1987
1988
1 989
1990
1991
1992
1 99 3
-100
oi ll
198 0
-150
Strategic Investments
0%
-200
-250
-300
-350
-400
10%
1994
1 995
1996
1997
Responding to Threats to Sustainability Responses to Imitation Building Barriers
Responses to Substitution
• Economies of scale and scope • Learning/private information • Contracts and relationships • Network externaliti externalities es • Threats of retaliation • Time lags • Strategic complexity • Upgrading
• Not responding • Fighting • Switching • Recombining • Straddling • Harvesting
Added Value
Appropriated Value
Responses to Slack
Responses to Holdup
• Gathering information • Monitoring behavior • Offering performance incentives • Shaping norms • Bonding resources • Changing governance • Mobilizing for change
• Contracting • Integrating • Building bargaining power • Bargaining hard • Reducing asset-specificity • Building relationships • Developing trust
Chapter 4 Text Related Slides
from Strategy and the Business Landscape
Outline I. Appr Approach oaches es to com competi petitor tor anal analysi ysiss II.The purposes of competitor analysis III.
The process of competitor analysis
I. Approaches to Competitor Analysis x
Structural analysis
x
Behavioral analysis
x
Game-Theoretic analysis
Behavioral Analysis of HSC x
x
GOALS
x
CAPABILITIES
– State-ownership – Lower Profits
– Tosoh/DSM Technology – DSM Size/Deep Pockets
– Growth Objectives
– Political Access
STRATEGY – Migrating Downstream – Legal Skirmishing – Likely to Expand into US
x
ASSUMPTIONS – Different Home Base – Chemical Company Parents – Thinks NutraSweet Will Accommodate
Behavioral Profiles
Resources and Capabilities
Apparent Assumptions Competitor Profile
Current Strategy
Future Goals
Competitors’ Goals x
Market share vs. profitability
x
Growth vs. dividend pay-out
x
Technological leadership vs. cost leadership
x
Long run vs. short run performance
x
Non-economic vs. economic goals
Personality Profiles x
Conservative vs. aggressive
x
Risk takers vs. risk adverse
x
Operational focus vs. visionary
x
Analytical vs. emotional
x
Profit-oriented vs. growth
Analyze titles & responsibilities: Chair & CEO Chair, CEO & COO Chair & chief scientist ...
Diagnosing Competitor Goals and Assumptions x
Profiles of key management
x
Organization structure
x
Advisors
x
Public statements
x
Results of recent past
x
History
x
Parent company strategy
x
Position in the portfolio
Competitor Incentives x
Look ahead and reason back
x
Recognize linkages across markets
x
Pay attention to uncertainties
x
Narrow uncertainties by projecting profits and implied courses of action
Pulling It All Together x
Is the competitor satisfied with its current position?
x
What likely future moves or strategy shifts, will the competitor make and how dangerous are they?
x
Where is the competitor vulnerable?
x
What will provoke the greatest and most damaging retaliation by the competitor?
II. The Purposes of Competitor Analysis Linking Analysis to Action x
Offense
x
Defense
x
Influence
x
Cooption
x
Concession
Interaction: Reality & Perceptions
Common Perceptual Biases x
Ascribing inertia to competitors, while assuming you will act
x
Assuming competitors have no options
x
Underestimating the intensity of retaliation
Classic Good Moves ... x
Hard to match; cost them more than it costs you -builds on strategic asymmetries
x
Have commitment value; costly to reverse, so intentions will be believed
x
Help\improve industry structure
x
Lower costs and\or create value for customers
x
Aim at competitor’s blind spots
x
Anticipate the competition (it is easier to keep them out than kick them out)
Classic Bad Moves ... x
Can be easily copied (when you think its unique)
x
Show a lack of commitment
x
Raise costs without creating value; lower prices without expanding volume
x
Undermine industry structure
x
Ignore a firm’s capabilities
x
Needlessly provoke or mindlessly hurt competitors
A Broader Perspective: Influencing Competitors x
The right competitors can be good
x
Influence the competitors’ entry and mobility
x
Influence the competitors’ incentives
x
Avoid creating desperate competitors
III. The Process of Competitor Identification Whom do I analyze? x
Common approach: – Companies with similar strategies and competitive positions
x
Often forgotten: – Companies able to: » change industry structure or evolution » leverage related capabilities to enter the industry » offer substitute technologies » provide complementary assets or products
Procedural Guidelines x
A lot of information already in house
x
One time efforts rarely succeed
x
Cost/benefit of data collection
x
Data without analysis = low benefit
… More than a planning tool and, a framework for self analysis ...
Sources of Information on Competitors
What competitors say about themselves
What others say about them
Public Advertising
Trade Manuals
Gov’t SEC
Promotional materials Press relea leases Speeches Want ads
Technical papers Licenses Patents Courses
OTHERS?
...
Congressional testimony timony Laws Lawsuits Courts Regulatory agencies encies ...
Books
Customers
Lawsuits
HBS HBS cases!
Partners
Age Agency reports
Consultants
Subcontractors
Unions
Suppliers
Investors Annual reports Annual meetings 10K, 10Q.. Q... Prospectus
... Ana Analysts reports Industry ndustry studies Credit agencies encies
Protecting One’s Own Information x
Decide what needs to be protected
x
Recognize the range of overt sources of information
x
Recognize the possibility of covert action – telephone and fax intercepts – trash analysis – employee subversion/insertion
x
Protecting information requires protecting people
Anticipating Competitive and Cooperative Dynamics x
The detailed analysis of individual competitors
x
The evolutionary analysis of threats to sustainability
Predicting Profits 39%
3% Bottom Half
Top Half
Sustainability Analysis 20 18 16 14
Advantage (% ROI)
12 10 8 6 4 2 0 1971
1973
1975
1977
1979
Sustainability: Resources and Products
Imitability of the Product/Service Low
High
Imitability of Superior Resources
Threats to Sustained Advantage Yes
Continued Appropriability Yes
Continued Scarcity
Yes
Competitive Advantage
No
No
• Imitation • Substitution
No
• Hold-up • Slack
Threats to Sustainability
Imitation
Slack
Substitution
Hold-Up
Imitation x
Imitation increases the “supply” of what a firm uniquely provides – Profits draw a crowd
x
Imitation is pervasive and can be deadly – Intel in DRAMs – EMI in CAT scanners – Apple in user-friendly PCs – Netscape in browsers – Ben & Jerry’s in super-premium ice cream – Bridal registries on the Internet
x
But imitation can be deterred – Continental Lite vs. Southwest Airlines – Child World vs. Toys “R” Us
Imitation: Duration of Intel’s Monopolies (4 Years)
386
(3 Years)
486
(2 Years)
Pentium Pentium Pro MMX
(1 Year) (3 Months)
Barriers to Imitation x
Scale or Scope Economies
x
Experience/Learning (Tacit Knowledge)
x
Relationships
x
Reputation
x
Retaliation
x
Response Lags
x
Upgrading/Investments
x
Fit
Substitution x
Substitution reduces the “demand” for what a firm uniquely provides by shifting the demand elsewhere – The better mousetrap – Due to changes in technology, customer needs, input prices, etc.
x
Substitution threats can be subtle and unexpected – Videoconferencing vs. air travel – Western Union vs. the telephone – Conventional contact lenses vs. disposables
x
For this reason, substitution is an especially effective way to attack dominant players
Substitution: Book Retailing Procurement and Logistics
B&N Offline
Amazon Original
B&N Online
Amazon Response
Operations
Marketing
Substitution: Steel
ee l te ee t s t he S h
y
ilt a u Q l e et S
ee l te a l S t ra u r uc t u r u S t r
e e l t t e s c e d u ods ro r o o d r e r ba rs & h h t O p i l l - m m i n n m i f o i t y l a a r ba R e b u Q
1975 975
1980 980
1985 985
1990
Responses to Substitution Before x
Scan the landscape broadly for threats
x
Understand underlying customer needs – But be prepared to ignore the needs of current customers
After: Your Options x
Fight the threat – Incorporate their benefits (e.g., orange juice supplemented with calcium) – Incorporate their cost reductions (e.g., private labeled items in supermarkets) – Face up to your loss of added value, and reduce price before the substitute gets a foothold
x
If you can’t beat them, join them
x
Take the money and run
Responses to Substitution x
Not responding
x
Fighting
x
Switching
x
Recombining
x
Straddling
x
Harvesting
Hold-up x
Hold-up diverts value to customers, suppliers, or complementors who have some bargaining leverage – They have bargaining leverage because they have something you need and can’t get elsewhere (added value)
x
Ex: Who makes all the profits from PCs?
x
Hold-up is especially threatening when parties in a relationship have invested in assets that are specific to that relationship (so it’s hard to walk away) – An electric plant built at the mouth of a coal mine – A railroad spur laid to a particular factory – Skills that are tailored to a particular employer
Hold-Up: Genex and G.D. Searle x
Codeveloped a process for making one of the two key amino acids used in NutraSweet
x
Genex entered into a “long-term” contract to supply Searle and built a new bioprocessing facility
x
Searle began to renegotiate price within months, and initiated internal production within one year
x
Genex went bankrupt
Holdup In The PC Industry 40%
ni gr a
M g in ar
t
30%
20%
e
p O 10%
other components
personal computers
software peripherals services
microprocessors
Share of Industry Revenue Source: Orit Gadiesh and and James L. Gilbert, “Profit Pools: A Fresh Look at Strategy,” Strategy,”
Responses to Hold-up x
Multiple sourcing – But investments in relationship-specific assets are important
x
Tough negotiation
x
Contractual arrangements – But contractual incompleteness limits this option
x
Vertical integration
x
Don’t base your competitive advantage on specific assets you can’t own (like a particular individual)
Responses to Hold-up x
Contracting
x
Integrating
x
Building bargaining power
x
Bargaining hard
x
Reducing asset-specificity
x
Building relationships
x
Developing trust
Slack x
Slack, or waste within the firm, dissipates value
x
Slack is hard to identify... – Plush carpets for their own sake are slack – But plush carpets to win customers and recruit talent might be wise investments
x
…but slack is thought to be large – 10-40% of revenues, typically!?!
x
Slack tends to be worst under certain conditions – Forgiving competitive environments – Settings in which managers must have wide discretion over productive processes
Slack: The Theory of Free Cash Flow x
Principal-agent problems between managers and stakeholders
x
Managers have incentives to grow the resources under their control
x
Free cash flow enhances managers’ ability to – Invest resources in negative-return activities – Waste resources
Responses to Slack x
Monitoring of performance – Benchmarking – Time-motion studies – Outsiders on Boards
x
Managerial incentives – On average, top executives get roughly $3.25 for each $1,000 of shareholder value created (Jensen and Murphy)
x
Commitments to return cash to shareholders – e.g., dividends
x
Appeals to a higher calling, a sense of mission
Responses to Slack x
Gathering information
x
Monitoring behavior
x
Offering performance incentives
x
Shaping norms
x
Bonding resources
x
Changing governance
x
Mobilizing for change
A Fifth Threat x
Nonmarket Pressures – Government – NGOs NGOs – Media
Sustained Cooperative Advantage
x
With cooperative or competitive interactions, unlikely to gain more than “added value”
x
Sustained cooperative advantage: significant “added value” as partner
Building Sustainable Advantages x
Understand your own uniqueness
x
Scan the environment for – Technological changes – Variations in input supply – Demand shifts
x
Invest in opportunities that fit
Protecting Sustainable Advantages x
Sustainability is not forever, nor is it free
x
Investment can reinforce it by – Amplifying advantages – Multiplying their bases
Conclusions x
The best defense is a good offense
x
That is, defend your advantage by continually upgrading it – Seek out ways to increase willingness to pay without incurring commensurate supplier opportunity costs – Seek out ways to reduce supplier opportunity costs without sacrificing commensurate willingness to pay
x
Make yourself a moving target
x
But remember that the landscape can shift under your feet
Countering Threats to Sustainability x
Sustained superior performance requires – Scarcity – Appropriability
x
Two routes to sustainability – Making lumpy commitments – Building organizational or technical capabilities over time
A Dynamic Theory of Sustainability x
A dynamic theory of sustainability requires – a link between what you did yesterday and what you can do well today – a link between what you do today and what you can do well tomorrow
Sustainability and Investment x
Implications for investment – The status quo cannot be sustained without investment – Because of the moving competitive baseline, investment is required just to earn average returns – Above-average returns require investments that retard the movement of the competitive baseline
Chapter 4 Case Related Slides
British Satellite Broadcasting vs. Sky TV
Structural Analysis of BSB vs. Sky x
High fixed costs/Upfront investment
x
Inelastic supply: films, advertising
x
Fixed demand
x
Network effects/Switching costs
x
Diverse competitors
x
Inconsistent goals
x
High strategic stakes
x
Antagonism/emotion
x
Substitutes: BBC/TV/Cable
A Behavioral Profile of News Corporation x
Resources and Capabilities
x
– Second-largest media conglomerate – Cash
Assumptions – Low cost – Old/proven technology – Commercial programming – Quick to market
– Twentieth Century Fox library – 1/3 of British newspapers
– Ability to skirt loopholes
– Experience with satellite TV x
Strategy – Emphasis on electronic media – Satellites targeted – Presence in English speaking markets – ITV stake – Losing bidder on official franchise
x
Goals – Murdoch’s nonpecuniary motivation
Game-Theoretic Analysis of BSB vs. Sky BSB
Fight
Exit
Fight
699, -190
2943, -180
Exit
-70, 2089
SKY
Chapter 4 Case Related Slides
De Beers
De Beers Exhibit A: Value Appropriation
Quantity Bought
carats
CSO List
COGS
De Beers’ Total contrib.
De Beers’ Total contrib.
$/carat
$/carat
$ million
%
$ million
9,154
58
5 31
20
183
38
38
348
54 %
963
200
1 93
98
94
1 02
102
98
15 %
Botswana
7,769
53
4 12
10
78
43
13
101
16/6
Soviet Union
6,000
125
750
11 3
675
12
12
72
11 %
Other
3,320
60
1 99
51
169
9
9
30
5%
Total
27,206
77
2 08 4
44
119 9
33
24
649
Namibia
$ million
De Beers’ contrib.
$/carats
South Africa
$/carat
Contrib.
Exhibit A: Value Appropriation (cont’d)
Ratio of CSO Lis istt to inventory COGS = 1.75 Ratio of CSO List to inventory COGS = 1.42 (w/o Debswana)
Average markup in South Africa: 190% Average markup in Namibia: 104% Average markup in Botswana: 430% -- wow!
1982 Inventory is $1.7 billion at COGS or $2.42 billion at CSO List. This amounts to 31 m carats inventory (mostly gems) Actual CSO Sales over next 4 years
Year 1 98 3 1 98 4 1 98 5 1 98 6
CSO Sales $1.6b $1.61b $1.82b $2.56b
Years to clear inventory 1.51 1. 5 1.33 0.95
De Beers Exhibit B: Supply Forecast 1986 Gems
Near Gem
Industrial
Total
000 carats
000 carats
000 carats
000 carats
1,500
13,500
15,000
30,000
92 5
5,548
12,020
18,493
Botswana
2,952
7,924
4,661
15,537
USSR
2,756
4,664
3,180
10,600
South Africa
2,289
3,387
3,479
9,155
Namibia
96 3
10
41
1 014
Angola
85 8
24 5
123
1,226
Tanzania
11 0
88
22
220
1,576
1,507
1,202
4,285
Total 1986
13,929
36,873
39,728
90,530
Total 1982
10,336
15,713
11,283
37,332
35%
135%
252%
1 42%
Yield:
48%,
17.50
---
1982
4961
2750
---
7 7 11
1986
6686
6453
---
13139
% Increase
35%
135%
Australia Zaire
Other
% Increase Polished Supply Available:
7 0%
De Beers Exhibit C: Demand Forecast
Year
Forecast Retail Demand
Forecast Supply Surplus
Sur urp plu luss
Cum umu ula lati tive ve Surplus
Probable Value of Surplus
Additions to Inventory
Cumulative Additions to Inventory
(mill. cts.)
(mill. cts.)
(mill. cts.)
(mill. cts)
($/carat)
($ mill.)
($ mill.)
198 2
7. 9
7.7
198 3
8. 51
9.05
198 4
8. 8
198 5
- 0. 2
20
0.55
0.55
21
12
12
10.4
1.6
2.15
22.1
35
47
9
11.75
2.75
4.9
23.2
64
111
198 6
9. 3
13.1
3.8
8.7
24.3
92
203
198 7
9. 6
13.1
3.5
12.2
25.5
89
293
198 8
9. 9
13.1
3.2
15.4
26.8
86
378
Exhibit C: Demand Forecast (cont’d)
Sensitivity Analysis Prob Pr obab ablle Val Valu ue of Sur urpl plu us in in 198 1982 2
Cum umu ula lati tive ve Add ddit itio ions ns to Inv nv.. by by 198 1988 8
($/carat)
($ mill.) 30
562
40
745
50
928
60
1,111
Exhibit C: Demand Forecast (cont’d)
Actual Retail Demand
Actual Supply
Surplus
Year
(mill. cts.)
(mill. cts.)
(mill. cts.)
1982
7.9
7.7
-0.2
1983
8.5
9
1984
9
1985
Cumulative Surplus
(mill. cts.)
Average Value of Surplus
($/carat)
Additions to Inventory
($ mill.)
Cumulative Additions to Inventory
($ mill.)
0.5
0. 5
1 45
14 5
10
1
1. 5
90
23 5
9.9
11.5
1.6
3. 1
-4 0
19 5
1986
13.2
13.1
-0.1
3
-5 1
14 4
1987
13
13.1
0.1
3. 1
45 6
60 0
1988
14.5
13.1
-1.4
1. 7
-300
30 0
