 Opportunities and threats are competitive challenges arising for changes in industry conditions.  Analytic tools such as the five forces model help managers formulate appropriate strategic responses. 3-2

3-3 Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from “How Competitive Forces Shape Strategy” by Michael E.. Porter (March-April 1979), Copyright © 1979 by the President and Fellows of Harvard College: all rights reserved. FIGURE 3.1

Threat of Entry BuyersSuppliers Rivalry Substitutes

 New entrants into an industry threaten incumbent companies.  Barriers to entry:  Brand loyalty  Absolute cost advantages  Economies of scale  Switching costs  Government regulation  Entry barriers reduce the threat of new and additional competition. 3-5

Threat of Entry BuyersSuppliers Rivalry Substitutes Low High capital investment Commoditized market makes it difficult to differentiate Substantial dominance of Wintel platform and low-cost large-scale players (Dell, Gateway, HP, IBM)

Threat of Entry BuyersSuppliers Rivalry Substitutes Low End-users are mostly loyal Cost of switching to PC is high (need new PC and new applications) High PCs have dominance in the marketplace, and huge network externalities Threat of switching to Wintel platform always present

 The intensity of competitive rivalry in an industry arises from:  Industry’s competitive structure.  Demand (growth or decline) conditions in industry.  Height of industry exit barriers. 3-8

Threat of Entry BuyersSuppliers Rivalry Substitutes Very High PCs are commoditized as HW/SW configurations Competition is cost- based

3-10 Continuum of Industry Structures Fragmented Many firms, no dominant firm Few firms, shared dominance (oligopoly) Consolidated One firm or one dominant firm (monopoly)

 Buyers are most powerful when:  There are many small sellers and few large buyers.  Buyers purchase in large quantities.  A single buyer is a large customer to a firm.  Buyers can switch suppliers at low cost.  Buyers purchase from multiple sellers at once.  Buyers can easily vertically integrate to compete with suppliers. 3-11

Threat of Entry BuyersSuppliers Rivalry Substitutes Low End-users are mostly loyal Cost of switching to PC is high (need new PC and new applications) High PCs have dominance in the marketplace, and huge network externalities Threat of switching to Wintel platform always present

 Suppliers have bargaining power when:  Their products have few substitutes and are important to buyers.  The buyer’s industry is not an important customer to the supplier.  Differentiation makes it costly for buyers to switch suppliers.  Suppliers can vertically integrate forward to compete with buyers and buyers can’t integrate backward to supply their own needs. 3-13

Threat of Entry BuyersSuppliers Rivalry Substitutes Low (for Motorola and IBM) Apple is largest purchaser of PowerPC processors, therefore can exercise power on suppliers Low (components suppliers) Most components are commoditized (since they are the same used by PCs) so Apple has wide selection available

 The competitive threat of substitute products increases as they come closer to serving similar customer needs CloseFar

Threat of Entry BuyersSuppliers Rivalry Substitutes High PCs in multiple configurations, performances and price ranges PCs represent about 90% of the market Huge network externalities for PCs Low No Mac clone available No competing product in the Mac market

 Complementors:  Companies whose products are sold in tandem with another company’s products.  Increased supply of a complementary product collaterally increases demand for the primary product.  Example:  Faster CPU chips fuel sales of personal computers. 3-17

3-18 FIGURE 3.2

 The concept of strategic groups  Within an industry, a competitor grouping using similar strategies that differ from other industry groups.  Implications of strategic groups  The closest industry competitors are those in the group.  The various industry groups are differentially and competitively advantaged and positioned.  Mobility barriers inhibit the movement of competitors from one strategic group to another. 3-19

3-20 FIGURE 3.3

 Both models are static and ignore innovation.  Their focus is on industry and group structures rather than individual companies.  Innovation creates change in industry structures, altering the competitive environment.  Industry structure cannot fully explain the performance differences between industry competitors. 3-21

3-22 FIGURE 3.4

 Stages in the industry life cycle: 3-23 FIGURE 3.5

3-24 FIGURE 3.6

 The demand for primary industry products depends on the size of the total market for complementary products.  Network economics result in positive feedback loops that foster rapid demand increases.  Market competitors are protected by switching cost entry barriers. 3-25

3-26 FIGURE 3.7

 Globalization  Globally dispersed production lowers costs and increases quality.  Global markets are replacing national markets.  Trend implications  No isolated national markets  More competitors, more intense competition  More rapid innovation and shorter product life cycles 3-27

 The determinants of competitive advantage: 3-28 Factor endowments

4-30  Competitive advantage is a firm’s ability to outperform its competitors (earn higher profits).  The source of competitive advantage is value creation for customers.  Sustained competitive advantage comes from maintaining higher profits than competitors over long periods of time.

4-31 FIGURE 4.2

4-32 FIGURE 4.3

4-33 FIGURE 4.4

4-34 FIGURE 4.5

4-35 FIGURE 4.6

4-36 FIGURE 4.7  The roots of competitive advantage:

4-37  Tangible  Land  Buildings  Plant  Equipment  Intangible  Brand names  Reputation  Patents  Technological or marketing know- how

 Value  Rareness  Imitability  Substitutability  Appropriability

 How effective is the resource or resources used to create customer value

 How rare are the resources that contribute the most to customer value.

 How easy is it to imitated  Can the resource be copied?  Is it legal protected?  Is it a product of historical circumstances?  Is it difficult to define?  Is it built on previous success?

 Can it be easily substituted?  Or can other resources be developed to compete in different areas i.e. Japanese Cars and Bikes

 Can a competitor take the resource?  i.e. Recruit the resource?

4-44  Skills in effectively coordinating and managing resources for productive use.  Unique resources and capabilities, or  Common resources and unique capabilities.

4-45 FIGURE 4.8  The relationship between strategies and resources and capabilities:

4-46  Barriers to imitation  Speed of imitation by competitors in reducing advantage  Imitation by acquiring similar resources  Imitation of capabilities (more difficult)  Limits on competitors  Prior strategic commitments  Absorptive capacity for change  Industry dynamism  The rapid innovation shortens product life cycles.

4-47  What went wrong?  Inertia  Prior strategic commitments  The Icarus paradox  Avoiding failure and sustaining competitive advantage:  Focus on the building blocks of competitive advantage.  Institute continuous improvement and learning.  Track best industrial practice and use benchmarking.  Overcome inertia.