11-1 MGMT 386 Competitive Strategy

©2009 Prentice Hall 11-2 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 the Choice of Company Strategy Company’s Strategic Situation Craft the 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 traits 2. Nature of competition & strength of competitive forces 3. Drivers of industry change 4. Competitive position of rivals 5. Strategic moves of rivals 6. Key success factors 7. Conclusions about industry attractiveness Assess Industry & Competitive Conditions 1. Assessment of company’s present strategy 2. Resource strengths and weaknesses, market opportunities, and external threats 3. Company’s costs compared to rivals 4. Strength of company’s competitive position 5. Strategic issues that need to be addressed Assess Company Situation Identify Strategic Options for the Company Select the Best Strategy for the Company

©2009 Prentice Hall 11-7 Five Forces Model

Assessing the Firm’s Current Position  Stakeholder Analysis 1.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 Hall 11-9 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 chain 5.Helps with decisions about ownership of different parts of the value chain

©2009 Prentice Hall The Value Chain in Mobile Phones

Assessing the Firm’s Current Position Internal Analysis 1.Identify the firm’s strengths and weaknesses. Helpful to consider each element of value chain.

Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN MARGIN Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN InboundLogistics Operations OutboundLogistics Service Marketing Technological Development Human Resource Management Procurement MARGIN portion more efficiently Firms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlyOutsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers

Supplier Value ChainFirm Value ChainChannel 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 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 Hall 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 Hall Controlling Key Resources

©2009 Prentice Hall 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 Hall 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 Hall The Learning Curve

Experience and Learning Curves ©2009 Prentice Hall 10-21

Cost Effects of New vs. Old Technology Old Technology New Technology 1 Million Units 2 Million Units 4 Million Units 8 Million Units Cost per Unit

©2009 Prentice Hall A Resource-Based View The creation of sustainable competitive advantage (SCA) depends on resources and capabilities

©2009 Prentice Hall 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 Hall 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 Hall 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 Competency, it must be: Core Competencies Differential knowledge or skill in the organization Differential knowledge or skill in the organization Difficult for others to imitate Essential to product characteristics critical to customer Applicable to a variety of end products and markets Applicable to a variety of end products and markets

Core Competencies must be: Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships Valuable Rare Costly to Imitate Capabilities 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 competitors Capabilities 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 Level Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

©2009 Prentice Hall 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 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 StarsQuestion Marks Cash CowsDogs x 4x2x 1.5x 1x 0.5x0.4x0.3x0.2x0.1x Relative Competitive Position Business Growth Rate (Percent) Source: B. Hedley, “Strategy and the Business Portfolio,” Long Range Planning (February 1997), p. 12. Reprinted with permission.

General Electric’s Business Screen Matrix A Winners B C Question Marks D F Average Businesses E Winners Losers G H Profit Producers StrongAverageWeak Low Medium High Business Strength/Competitive Position Industry Attractiveness 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 Rank Device 1 Device 2 Device 3 Device 4 Device 5 Attribute 1 Attribute 2 Attribute 3 Attribute 4 TOTAL

SWOT MATRIX STRENGTHSWEAKNESSES OPPORTUNITIES SO STRATEGIES WO STRATEGIES THREATSST 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 Hall 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 Hall 3-48 Distribution of Adopters Normal distribution is the most common pattern of adoption of new products and services

©2009 Prentice Hall 2-49

©2009 Prentice Hall 3-50 The Normal Distribution of Adopters

©2009 Prentice Hall 3-51 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 Hall 3-52 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 Hall 3-53 The Adoption S-Curve

©2009 Prentice Hall 3-54 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 Hall 3-55 Crossing the Chasm

©2009 Prentice Hall 3-56 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 Hall 3-57 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