1. Week 10: Strategy and Competition (11/14)
MANAGEMENT 101
Week 10: Strategy and Competition (11/14)
Management 101 (Fall 2015)

2. Class Agenda Housekeeping: Remaining Weeks
Lecture: Strategy and Competition
Strategy & Porter’s five forces
General Environment and SWOT
Article: Competition and Strategy
Article: Analyzing the External Environment of the Firm
Takeaways
Management 101 (Fall 2015)

4. Inputs
Environment = all external factors with potential to impact organization (including markets-clients or customers, suppliers, governmental and regulatory bodies, labor unions, competitors, financial institutions and special interest groups)
Resources = various assets which the organization has access to, including human resources-employees, technology, capital and information
History = patterns of past behavior, activity and effectiveness that may affect current functioning
Strategy = stream of decisions about how organizational resources will be configured to meet demands, constraints and opportunities within context of organization’s history

5. Part 4: The Unit

6. What is Business Strategy?
Strategy: ancient Greeks “chief magistrate or a military commander-in-chief”
Refined by military analysts like Carl von Clausewitz:
“tactics …[involve] the use of armed forces in the engagement, strategy [is] the use of engagements for the object of the war.” (quoted in Ghemawat, 2000)
Business context: not until early 1900s
Business strategy: How to compete within a given market/industry?
Strategy = stream of decisions about how organizational resources will be configured to meet demands, constraints and opportunities within context of organization’s history

7. Industry or Strategy?

8. Average Return on Invested Capital in U.S. Industries, 1992-2006
Source: Porter (HBR, 2008)
or higher
ROIC
ROIC = EBIT/(Average invested capital – excess cash)

9. Average ROIC,
Source: Porter (HBR, 2008)

10. Coke vs. Pepsi
Sources: Cola Wars Continue: Coke and Pepsi in 2010 (HBS Case ); company filings (10ks; industry reports (IBIS)

11. Coke vs. Pepsi
Question we should always (!) ask before analyzing an industry:
_____________________________?
Sources: Cola Wars Continue: Coke and Pepsi in 2010 (HBS Case ); company filings (10ks; industry reports (IBIS)

12. BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS
Porter’s Five Forces
THREAT OF
NEW ENTRANTS
BARGAINING POWER OF SUPPLIERS
RIVALRY AMONG
EXISTING COMPETITORS
BARGAINING POWER OF BUYERS
THREAT OF
SUBSTITUTES
Adapted from Porter (2008)

13. Threat of New Entrants
Profits of established firms in the industry may be eroded by new competitors
This threat is lower when barriers to entry are higher
Economies of scale
Brand power
Access to distribution
Switching costs
Incumbency Advantage

14. Threat of Substitutes
Substitutes limit the potential returns of an industry by placing a ceiling on prices
Not always obvious what a substitute might be
Threat of substitutes is high when:
They offer an attractive price-performance trade-off to the industry product
Buyer’s switching cost are low

15. Bargaining Power of Suppliers
Suppliers can threaten to raise prices or reduce the quality of purchased goods and services
When do suppliers have this power?
Concentrated groups
Suppliers are differentiated (brand)
Suppliers can forward integrate

16. Bargaining Power of Buyers
Buyers can force down prices or bargain for higher quality or more services by playing competitors against each other.
When do buyers have this power?
If they have negotiating leverage
When they are price sensitive

17. Rivalry
Rivalry diminishes profits as resources are devoted toward price competition, advertising battles, increased customer service, warranties, etc.
Price competition is the most destructive form of rivalry
Rivalry intensifies with:
Number of competitors (or few players equal in size and power)
Slow industry growth
Perishable product

18. BARGAINING POWER OF SUPPLIERS BARGAINING POWER OF BUYERS
Porter’s Five Forces
Economies of scale
Brand power
Access to distribution
Switching costs
Capital Requirements
Incumbency Advantage
Government Policies
Expected Retaliation
THREAT OF
NEW ENTRANTS
If they have negotiating leverage
When they are price sensitive
BARGAINING POWER OF SUPPLIERS
RIVALRY AMONG
EXISTING COMPETITORS
BARGAINING POWER OF BUYERS
Number of competitors (or few players equal in size and power)
Lack of differentiation or switching costs
Slow industry growth
High fixed cost
Perishable product
High exit barriers
Concentrated groups
Suppliers are differentiated
The supplier’s product is an important
Suppliers can forward integrate
THREAT OF
SUBSTITUTES
High if: They offer an attractive price-performance trade-off to the industry product
Buyer’s switching cost are low
Adapted from Porter (2008)

19. Factors shaping and influencing the industry forces
Complementary Industries
General Environment

20. The General Environment
Hard to predict (sometimes sudden events)
Firms have little to no control over general environment
Can shape and alter industry forces
General Environment Segments
Examples
Demographic
Aging population
Sociocultural
Greater concern for fitness
Political/Legal
Deregulation of Airlines industry
Technological
Gene Therapy
Economic
Trends in GDP
Global
Increased risk of terrorism

21. Coke vs Pepsi continued
ROIC (%)
Source: Morningstar

22. Analyzing a firm’s internal and external environment+ -
Strength
Weakness
Opportunity
Threat
Internal
External

23. Coke vs Pepsi continued
Coke and Pepsi bought biggest bottlers (gain control) (2009,2010)
Coke re-franchises bottlers (2013)
Coke plans to sell 9 U.S. production plants to bottlers (2015)
Both, Coke and Pepsi heavily diversified into complementary products

24. Strategy and the (competitive) environment
Strategy = stream of decisions about how organizational resources will be configured to meet demands, constraints and opportunities within context of organization’s history
In other words: how should a firm position itself to
influence and cope with industry forces
make a profit
protect this position from competitors

25. Takeaways
Strategy = stream of decisions about how organizational resources will be configured to meet demands, constraints and opportunities within context of organization’s history.
Industry structure can be the most important driver of profitability.
Porter’s five forces is a useful tool to assess and comprehend the key drivers and inhibitors of an industry’s profitability.
Industry forces may change due to trends in the general environment.
Analysis of a firm’s industry and general environment together with its internal distinct competencies can help managers to better position their firm vis-à-vis competitors.