Area Man Achieves Your Dream NOVEMBER 7, 2006 | ISSUE 4245 The Onion ISSUE 4245ISSUE 4245 CHARLOTTE, NC—After almost two decades of dreaming on your part, 34-year-old Stephen Hochenko achieved your goal of opening up a small bookstore and café last Thursday, coincidentally in the exact location you had planned to open yours. "This proves that no matter what your dreams are, someone out there can achieve them if they just do a little homework, save their money, and believe in themselves," said a satisfied Hochenko as he arranged tables and chairs for a Monday night wine tasting and reading featuring acclaimed author Neil Gaiman. "I'm happier than you can even imagine or will probably ever experience yourself." Hochenko joins a long list of people who have achieved your dreams, including the creators of YouTube, Grand Prix motorcycle-racer Valentino Rossi, and the people who married your longtime crush and potential soul mate in April 1998, June 2001, and last Saturday.

Agenda for Today Feasibility plan: competitive advantage Feasibility plan: competitive advantage Lucent case Lucent case IBM case IBM case Corporate entrepreneurship: overcoming barriers Corporate entrepreneurship: overcoming barriers

Feasibility Plan: Competitive Analysis February 26, 2006

Competitive Advantage What is it?

Competitive Advantage Factors Internal to The Firm Factors External to The Firm Resources Capabilities Rivalry Barriers to Entry Power: suppliers and buyers Competitive Advantage

Competitive Advantage: External Factors Porter’s five forces model Porter’s five forces model Barriers to entry Supplier power Threat of substitutes Buyer power Degree of rivalry

Rivalry Degree of aggressiveness in attempting to gain advantage Degree of aggressiveness in attempting to gain advantage Varies across industries Varies across industries Industry concentration ratiosIndustry concentration ratios Percentage of market share held by the four largest firms Percentage of market share held by the four largest firms

Threat of substitutes Substitute products Substitute products Products in other industriesProducts in other industries Threat exists when demand is affected by the price change of substitutesThreat exists when demand is affected by the price change of substitutes Constrain the ability to raise pricesConstrain the ability to raise prices E.g. dial-up vs. cable or DSL E.g. dial-up vs. cable or DSL

Buyer Power The impact of customers on the industry The impact of customers on the industry Occurs in a monopsony Occurs in a monopsony One buyer, many suppliersOne buyer, many suppliers The buyer sets the priceThe buyer sets the price When are buyers powerful?

Buyer Power Buyers are powerful if: Buyers are powerful if: A few buyers with significant market share (e.g. DOD)A few buyers with significant market share (e.g. DOD) Buyers purchase a significant proportion of output (e.g. Sears and appliance manufacturers)Buyers purchase a significant proportion of output (e.g. Sears and appliance manufacturers) Buyers threat of backward integration (e.g. auto manufacturer purchasing tires)Buyers threat of backward integration (e.g. auto manufacturer purchasing tires) Examples From: QuickMBA.com

Supplier Power Suppliers are powerful if: Suppliers are powerful if: Forward integration threat (e.g., acquisition of distributors)Forward integration threat (e.g., acquisition of distributors) Suppliers are concentrated (e.g., drug industry and hospitals)Suppliers are concentrated (e.g., drug industry and hospitals) Buyers are fragmented: e.g. consumer markets Buyers are fragmented: e.g. consumer markets Significant costs to switch suppliers (e.g. non-standardized products)Significant costs to switch suppliers (e.g. non-standardized products) Examples From: QuickMBA.com

Barriers to entry Barriers to entry Barriers to entry Anything which places potential entrants at a disadvantage as compared with established firms (Bain, 1956)Anything which places potential entrants at a disadvantage as compared with established firms (Bain, 1956) A characteristics that protect the high profit levels of firms and inhibit additional rivals from enteringA characteristics that protect the high profit levels of firms and inhibit additional rivals from entering

Barriers to entry Types of barriers to entry Types of barriers to entry Government – induced barriersGovernment – induced barriers Creation of monopolies such as utilities Creation of monopolies such as utilities Patents and intellectual propertyPatents and intellectual property Asset specificityAsset specificity Economies of scaleEconomies of scale Minimum efficiency scales vary by industry (e.g. 10% market share in long-distance communications) Minimum efficiency scales vary by industry (e.g. 10% market share in long-distance communications) Capital requirementsCapital requirements Price deterring strategiesPrice deterring strategies

What Barriers Can You Establish? Intellectual property: patents, trade secrets, copyrights, trademarks, etc Intellectual property: patents, trade secrets, copyrights, trademarks, etc Switching costs to your target market Switching costs to your target market Customer loyalty/brand Customer loyalty/brand Agreements with customers, suppliers, strategic partners Agreements with customers, suppliers, strategic partners Control of the distribution channel Control of the distribution channel

Competitive Advantage: Internal Factors Resources Distinctive Competencies Capabilities Value Creation Cost Advantage or Differentiation Advantage

Sustainable Competitive Advantages Resources and capabilities Resources and capabilities Valuable Valuable Rare Rare Inimitable Inimitable Non substitutable Non substitutable Example: technology Example: technology

Identify Your Resources Financial: access to capital (equity & debt), cash reserves, government grants, etc. Financial: access to capital (equity & debt), cash reserves, government grants, etc. Physical assets: plant & equipment, raw materials, location, working capital, etc. Physical assets: plant & equipment, raw materials, location, working capital, etc. Human: social, employee knowledge, experience, accumulated wisdom, labor cost and skills, etc. Human: social, employee knowledge, experience, accumulated wisdom, labor cost and skills, etc. Intangible: patents, trade secrets, know-how, copyrights, databases, etc. Intangible: patents, trade secrets, know-how, copyrights, databases, etc. Organizational: culture, contacts, policies, Boards of Directors & Advisors, suppliers, service providers, etc. Organizational: culture, contacts, policies, Boards of Directors & Advisors, suppliers, service providers, etc. Network - well developed, high-quality, accessible contacts that take years to build Network - well developed, high-quality, accessible contacts that take years to build Relationships - regulators, politicians, investorsRelationships - regulators, politicians, investors

Identify Your Capabilities Marketing - differentiation, branding, positioning Marketing - differentiation, branding, positioning Product/service - design features & benefits Product/service - design features & benefits Sales & distribution Sales & distribution Total operational approach - Wal-Mart Total operational approach - Wal-Mart Supply chain management Supply chain management

Competitive Advantage Challenges Intellectual property Intellectual property Agreements with customers or suppliers Agreements with customers or suppliers Long term contracts Long term contracts Control of costs Control of costs Control of prices Control of prices Control of channel Control of channel Location Location Differentiation Differentiation First to market First to market World class management World class management Expertise Expertise Development lead time Development lead time Brand Brand Quality Quality Service Service Execution Execution Relationships Relationships

Sustainable Competitive Advantage Understand the market Understand the market Understand the competition Understand the competition Differentiation Differentiation Resources & capabilities Resources & capabilities Really understand the market & competition Really understand the market & competition Why is this so hard?

Feasibility Plan: Competition Describe key competitors Describe key competitors Direct, indirect, future Direct, indirect, future Prepare a competitive matrix Prepare a competitive matrix Product/ServicesProduct/Services MarketingMarketing ManagementManagement FinancialFinancial Image – website, brochures, literature, advertisements Image – website, brochures, literature, advertisements