2. Chapter 2

3. “Computers in the future may weigh no more than 1.5 tons”

4. 4 “Computers in the future may weigh no more than 1.5 tons” — Popular Science Magazine, forecasting the relentless march of Science - 1949

5. 4 In 1968, a 100 megabyte hard drive weighed 4,500 pounds cost more than $130,000

6. “I think there is a world market for maybe five computers” — Thomas Watson, Chairman of IBM, 1943

7. “But what….is it good for?” — Engineer at IBM, commenting on the microchip, 1968

8. “The idea is interesting and well-formed, but in order to earn better than a “C” the idea must be feasible” — Yale University Professor in response to Fred W. Smith’s paper proposing an overnight delivery service

9. In FY 2004, FedEx delivered over 2 billion packages

10. Reduces inventory/carrying costs Bar-code pioneers/Information Technology Open new markets, Global markets Increased U.S. productivity Leveling the playing field Supply chain revolution Lowers costs to consumer

11. Delivered 206,822,000,000 articles of mail in 2004

12. “We don’t like their music and guitar music is on the way out” — Decca Records Company in rejecting the Beatles, 1962

13. “ Who the hell wants to hear actors talk” H. M. Warner, 1927

14. “There is no reason why anyone would want a computer in their home” Ken Olson, president, chairman, and founder of Digital Equipment Corporation, 1977

15. “This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.” Internal Memo, Western Union, 1876

16. 4 “This ‘telephone” has too many shortcoming to be seriously considered a means of communication. The device is inherently of no value to us.”

17. “Everything that can be invented has been invented” Charles H. Duell, Commissioner of the U.S. Patents Office, 1899

18. “640K of RAM ought to be enough for anybody” Bill Gates, 1981

19. Subway opens a new store every 3 hours Starbucks every 11 hours Quiznos every 16 hours WSJ, Oct 1, 2003

20. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler Chief Dieter Zetsche, January 2002

21. “I see no scenario whatsoever where Toyota will pass us in share” Chrysler Chief Dieter Zetsche, January 2002 September 2003, “The Big Three” became GM, Ford, and Toyota

22. “Nothing important happened today” Journal entry made by King George III, July 4, 1776, the day the United States declared independence from England

23. “Competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industry’s attractiveness” “Analysis is the critical starting point of strategic thinking” “Skate to where the puck is going, not to where it has been”

24. External Analysis It’s not recognizing that change will occur that is the problem, it’s figuring out: what will happen? how it will affect us? what to do about it? Therefore, forecasting is necessary to predict direction and the effect of change

25. BROAD/REMOTE/MACROENVIRONMENT Political and Legal Societal Values and Lifestyles Demographics Technology The Economy at Large COMPANY SuppliersSubstitutes Buyer s New Entrants Rival Firms  IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT

26. Broad/Remote/ Macroenvironment Segments Macroeconomic Demographic Political/Legal Technological Social Firms CAN NOT Directly Control Them ?

28. Porter’s Five Forces Competitive Rivalry Power of Buyers Power of Suppliers Potential Entrants Substitute Products Each of these forces affect costs/prices, therefore, profitability

29. Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Potential New Entrants Suppliers of Key Inputs Buyers

30. Substitute Products (of firms in other industries) Rivalry Among Competing Sellers Potential New Entrants Suppliers of Key Inputs Buyers Complementors

31. Price Costs Profits { Porter’s 5-forces is all about margins - What factors increase/decrease margins, i.e., profitability.

32. Prices can be kept high Costs can be kept low Profits can soar { When industry structural variables are weak…...

33. Prices will be pushed down Costs will rise Profits shrink { When industry structural variables are strong…...

34. 4 If you were unable to find work and had to start making money, what kind of business would you start?

35. 4 Which of these industries would be most difficult to enter? Which would be relatively more easy? 4 Airlines, automobile manufacturing, grocery store, pharmaceutical, beer brewing, restaurant, hair salon

36. Potential Entrants Firms enter when industries are attractive, unless they find themselves at an immediate disadvantage relative to incumbents. Firms can create “barriers to enter” Barriers of entry are desirable for entrenched firms

37. Barriers to Entry Economies of scale Access to technology & know-how Learning, costs, experience curves Product differentiation & loyalty Switching costs Capital & resource requirement Cost disadvantage independent of size Distribution Regulatory policies Threat of retaliation

38. Threat of Substitutes Product/service which fulfills similar need Price cap 3 Questions 1)Are they available? 2)Price-performance relationship? 3)Can we switch?

39. Power of Buyers Who are the Buyers? - who provides our revenues? Can they force: lower prices, higher quality and service – affect the terms and conditions of the exchange? Based on two issues 1 Price sensitivity significant “out of pocket” costs no differentiation exist in a competitive, low profit industry – every penny counts

40. Power of Buyers (cont.) 2 Whether buyers can bargain down prices few buyers buyers are knowledgeable low switching costs backward integration is a valid threat

41. Competitive Force of Suppliers Who are the suppliers? Suppliers are a strong competitive force when: –Only a few suppliers exist –Few substitutes –Buyers not important customers –Suppliers provide a product crucial to production process, and/or significantly affects product quality –It is costly to switch suppliers –Forward integration a credible threat –They can supply a component at a lower cost

42. Rivalry and Profitability Industry profitability is a collective good. Collective good is served by coordination Are there industries were pricing is coordinated? Incentive to violate

43. Usually the most powerful of the five forces How actively and aggressively are rivals employing competitive weapons in jockeying for a stronger market position and increasing sales? –Is price competition vigorous? –Active efforts to improve quality? –Are rivals racing to offer better performance features? better customer service? –Lots of advertising/sales promotions? –Active efforts to build a stronger dealer network? –Active product innovation? –Active use of other weapons of rivalry?

44. Rivalry – What drives it? Numerous, equally balanced competitors Perceptions of high payoff from competitive actions Slow growth, excess capacity High fixed, storage, obsolescence costs High exit barriers Diversity of competitors Low switching costs Lack of differentiation

45. Porter’s..in conclusion Determines the attractiveness of industry Can we influence any of these structural attributes? Static model & Hypercompetition –If the pace of transformation is rapid, if entry rapidly undermines the market power of dominant firms, if innovation speedily transforms industry structure by changing process technology, creating new substitutes, and by shifting the basis on which firms compete, then there is little merit in using industry structure as a basis for analyzing competition and profit.

46. Porter’s Five Forces - Two Examples Campus Bookstore Rivals? - Entry Barriers? - Substitutes - Supplier Power - Buyer Power - Profitable? PCs Rivals - Entry Barriers - Substitutes - Supplier Power - Buyer Power - Profitable ?

47. Industries and Segments What is a segment? Different segments….. posses different combinations of 5-forces therefore: reward different strategies possess different levels of profitability Therefore, not all firms can effectively compete across multiple segments

48. What Forces Are at Work to Change Industry Conditions? Industries change because forces are driving industry participants to alter their actions Driving forces are the major underlying causes of changing industry and competitive conditions

49. Common Types of Driving Forces Changes in long-term industry growth rate Changes in who buys the product and how they use it Product innovation Technological change/process innovation Marketing innovation Entry or exit of major firms Diffusion of technical knowledge

50. Common Types of Driving Forces Increasing globalization of industry Changes in cost and efficiency Market shift from standardized to differentiated products (or vice versa) New regulatory policies and/or government legislation Changing societal concerns, attitudes, and lifestyles Changes in degree of uncertainty and risk

51. Which Companies are in Strongest / Weakest Positions? Strategic group mapping A strategic group consists of those rivals with similar competitive approaches in an industry

52. Price Quality National Jewelry Retailers

53. Price Quality National Jewelry Retailers Cartier

54. Price Quality National Jewelry Retailers Cartier Tiffany

55. Price Quality National Jewelry Retailers Cartier Tiffany Jerrods

56. Price Quality National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan

57. Price Quality National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales

58. Price Quality National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay

59. Price Quality National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay WalMart

60. Price Quality National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay WalMart K-Mart

61. Price Quality National Jewelry Retailers Cartier Tiffany Jerrods Marks & Morgan Zales Kay WalMart K-Mart

62. Price Breadth of Product Line National Jewelry Retailers Cartier Tiffany Nordstroms Sachs WalMart Kmart Target Sears JCP Burdines Dillards Zales Kay Pawn Shop Chain-by-the-Foot Carts Jerrods Marks & Morgan

63. Price Breadth of Product Line National Jewelry Retailers Cartier Tiffany Nordstroms Sachs WalMart Kmart Target Sears JCP Burdines Dillards Zales Kay Pawn Shop Chain-by-the-Foot Carts Jerrods Marks & Morgan

64. Price Breadth of Product Line National Jewelry Retailers Cartier Tiffany Nordstroms Sachs WalMart Kmart Target Sears JCP Burdines Dillards Zales Kay Pawn Shop Chain-by-the-Foot Carts Jerrods Marks & Morgan Strategic Groups identify Closest Rivals

65. Price Breadth of Product Line National Jewelry Retailers Cartier Tiffany Nordstroms Sachs WalMart Kmart Target Sears JCP Burdines Dillards Zales Kay Pawn Shop Chain-by-the-Foot Carts Jerrods Marks & Morgan Strategic Groups identify Mobility Barriers

66. Price Breadth of Product Line National Jewelry Retailers Cartier Tiffany Nordstroms Sachs WalMart Kmart Sears JCP Burdines Dillards Zales Kay Pawn Shop Chain-by-the-Foot Carts Jerrods Marks & Morgan Strategic Groups identify Untapped Niches

67. Price Breadth of Product Line National Jewelry Retailers Cartier Tiffany Nordstroms Sachs WalMart Kmart Target Sears JCP Burdines Dillards Zales Kay Pawn Shop Chain-by-the-Foot Carts Jerrods Marks & Morgan Strategic Groups identify Untapped Niches

68. What strategic moves are rivals likely to make? - Competitive Analysis Important in concentrated industries Benefits –forecast future actions, predict reactions –can we influence rivals’ behavior?

69. Four Steps of CA Identify their strategy Identify the objectives Identify their assumptions Identity their capabilities Strategy Objectives Assumptions Capabilities Strategic Action

70. What are the Key Success Factors? KSFs are product attributes, competencies, competitive capabilities, and market achievements with the greatest direct bearing on profitability opportunities for competitive advantage

71. Example: KSFs for Beer Industry Utilization of brewing capacity -- to keep manufacturing costs low Strong network of wholesale distributors -- to gain access to retail outlets Clever advertising -- to induce beer drinkers to buy a particular brand

72. Identifying Key Success Factors (KSFs) - vary by segment Automotive Industry