Chapter

1. Chapter 5 Competing Over Time 5-1

2. Three Stages of Industry Growth • Growth • Entry rate exceeds the exit rate • Shakeout • Exit rate exceeds the entry rate • Maturity • Entry and exit rates are about the same • Industry disruption • Technological substitutes or disruptive technologies offer a stronger buyer surplus to the industry’s customers, drawing them away (e.g., DVDs vs. videotapes) 5-2

3. Industry Evolution • All industries evolve over time as new firms enter and failing firms exit • Industry evolution threatens all sources of competitive advantage • The more a firm resists the forces of industry evolution, the less likely it is to survive • Product life cycle • Not the same as industry evolution but often linked closely to it 5-3

4. The Industry Life Cycles of Four Representative Industries 5-4

5. Entries, Exits and Total Firms in the U.S. Automobile Industry 1880-1974 5-5

6. Total Production of U.S. Automobile Firms (in millions) 5-6

7. Total Automobile and Model T Production, 1909-1927 5-7

8. Dynamic Growth Cycle Innovation in Processes or Products Firm Size Improved Market Position Through Higher Value, Lower Cost or Both Capacity Expansion Increased Profitability Figure 4.1 5-8

9. Key Concepts in Developing and Maintaining Dynamic Capability • Dynamic growth cycle • The cycle of firm growth linking size, innovation, productivity, profitability, and capacity expansion • Dynamic capability • The ability of a firm, as it grows, to build its innovative potential and exploit it effectively • Path dependence • The tendency of a firm over time to invest in innovations that are upwardly compatible with each other, thereby creating a relatively unique path of product and process development 5-9

10. Key Concepts in Developing and Maintaining Dynamic Capability (cont’d) • Absorptive capacity • The ability of the firm to adopt innovations developed by other organizations based on its prior experience with similar or related practices or technologies • Core rigidity • The inability of a firm to adapt to changing market or technological conditions because of its attachment to its core practices and customers 5-10

11. Investment Ahead of the Competition Cash Flows and Balance Sheet Flexibility Market Leadership High Profits Samsung’s Virtuous Cycle in 2003 5-11

12. Customer Segmentation over the Product Life Cycle 5-12

13. Expansion During the Growth Stage • Developing scale-based value drivers • Which drivers are adopted depends on the purchasing criteria of the majority of buyers • For example: brand, service, network externalities, quality • Moving from early adopters to the early majority is crossing the chasm • Developing scale-based cost drivers in specific value chain activities • Economies of scale • Economics of scope • Learning curve 5-13

14. Early Mover Advantage • Defined by a combination of competitive advantage (short term) and dynamic capability (long term) • Opportunity to establish and defend a strong market position • Opportunity to grow over a longer period of time • Higher chances of being exposed to opportunities for growth and innovation 5-14

15. Strategic Pricing • Strategic pricing • Pricing below marginal cost in order to attract additional buyers • Strategic pricing makes sense under two conditions • When increases in volume are sustainable through customer loyalty due to higher switching costs • When increased demand leads to lower costs for the firm through scale-driven cost drivers such as the learning curve and scale economies 5-15

16. Risks of Strategic Pricing • Cost reduction due to learning or scale does not make up for the profits lost by setting a lower price • Poor understanding of technologies or other activities • Inability to protect cost advantages • Higher demand does not materialize • Customers cannot be retained 5-16

17. What Determines a Shakeout? • Shakeout • Due to the emergence of a dominant, sustainable business model (value minus cost) • The strongest competitors use their higher productivity to drive out weaker firms • Shakeouts can occur in the same time frame • As the product life cycle shifts toward maturity • The product life cycle does not explain which firms will survive the shakeout • As a dominant design emerges • A dominant design is the culmination of a series of innovations in a product’s components and architecture and in related value drivers, such as service, network externalities, complements, or breadth of line • For example, the IBM PC, the general purpose tractor, the piano 5-17

18. Rates of Product and Process Innovation over the History of the Industry Source: Adapted from James Utterback, Mastering the Dynamics of Innovation, (Cambridge, MA: Harvard Business School Press, 1994), p. 82. Figure 4.3 5-18

19. What Determines a Shakeout’s Severity? • Expectations about future market demand and the degree of sunk costs • Ease of imitation of the dominant firms’ market position • The existence of defendable niche markets • About six percent of the firms in an industry exit during the shakeout every year 5-19

20. Indicators of Industry Maturity • The long-term leveling-off or decline in the market growth rate • Rising buyer experience with industry products • The high concentration of market share among large, relatively similar firms • The persistence of niche markets 5-20

21. An Increase in Buyer Experience • Firms attempt to counter the growing power of experienced buyers by: • Introducing innovations that increase search and transition costs for buyers: • Improved service • Higher quality • Breadth of line and product customization • Lowering prices 5-21

22. Industry Concentration • Industry concentration depends on • The ratio of market size to the minimum scale required to compete • The lower the scale, the more firms are viable • Sunk cost investments in value drivers that have increasing returns to scale • Higher sunk costs force out smaller rivals and deter entry 5-22

23. Hypercompetition • Hypercompetition is the combination of: • Multipoint competition • Industries in which large firms compete across many products in a product line and across geographical regions • Mutual footholds in the core market of rival firms ensure competitive stability • An arms race • The requirement to develop product and process innovations to keep up with competitors • Returns on innovations become lower innovations are copied by competitors 5-23

24. Niche Markets • Competition in niche markets is affected by: • Size of the niche • Growth rate of the niche • Barriers to entry • Changes in niche buyers’ preferences toward core market products • Minimum level of scale required to compete • Ability to improve non-scale based cost and value drivers • Increase in the buyer switching costs 5-24

25. Types of Industry Disruption • Technological substitution • Introduction of a radically new technology that has a higher rate of return on investment in R&D than the current technology in the industry • Disruptive innovation • Introduction of a new product with lower value but much lower cost than the incumbent product • Typically based on standard components • Exploits emergent customer price sensitivity • Radical institutional change • A radical shift in the regulation of competition that opens the market to firms with innovative capabilities 5-25

26. Adapting to Industry Disruption • When can incumbents adapt to disruption? • When they control assets (e.g., distribution) that are critical for competing in the industry • When isolating mechanisms protecting the innovation are weak • When incumbents do not suffer large short-term opportunity costs in switching to the innovation 5-26

27. Industry Disruption from Technological Substitution Figure 4.5 5-27

28. Trends in VCR and DVD sales in the United States by quarter, 1998-2003 Figure 4.6 5-28

29. Incumbents Adaptation to Technological Substitutes • Incumbents delay adopting technological substitutes for the following reasons • Emphasis on total (rather than marginal) return on investment in R & D • Potential cannibalization by the new technology of profits from the traditional technology • Poor absorptive capacity to adopt new technology 5-29

30. Disruptive Technology • Characteristics include: • Technology initially introduced by start-ups into niche market too small to attract incumbents’ attention • Product based on technology has relatively lower initial functionality and also a lower cost • Price-value profile of new product does not initially attract customers in industry’s core market 5-30

31. Disruptive Technology (cont’d) • Over time, preferences of incumbents’ customers shift toward value-price profile of new product • Complementary assets (distribution) necessary for market penetration of disruptive technology not controlled by incumbents • Start-ups selling new product develop a dynamic growth cycle which allows them to penetrate core market rapidly through scale-based cost drivers 5-31

32. Disruption by Regulatory Change • Deregulation typically leads to: • Entry • Industry consolidation • Decline in incumbents Table 4.4 5-32

33. Chapter 6 Strategy Execution 6-33

34. What Is Strategy Execution? • Strategy execution • Building the resources and capabilities that lead to competitive advantage through critical value and cost drivers • Not the same as strategic planning • A relatively simple business with a valuable protected resource may not need planning—but it must execute. 6-34

35. Characteristics of Resources • Resources: • Observable • Tradable • Contribute to the firm’s market position by improving value or lowering cost, or both. • Produce an economic advantage if difficult to imitate or neutralize. • Examples: • Patents • Natural resources • Brand • Distribution network • Proprietary process • Geographic location 6-35

36. Characteristics of a Capability • Cannot be readily observed • Not tradable separately from whole unit • Contributes to higher value, lower cost or both • Developed by people through coordinated action • Less stable than a resource • Developed independently of resources • Can derive its strategic value from its use in support of the firm’s resources 6-36

37. Linking Resources and Capabilities • Capabilities contribute to performance by supporting resources • A firm’s expertise in exploiting a resource strongly influences how much it is worth to the company • Resource Complementarity • Complementarity between the asset being auctioned and the existing resources of the bidding firms determines the least amount each will bid 6-37

38. Makadok’s Model for Relating Resources and Capabilities • How can a firm become more profitable than competitors after bidding for a resource? • Have stronger complementarities between the resources of the firm and the resource being auctioned • Higher complementarity allows the firm to raise its bid • Develop a better forecast of economic returns to the resource after it is acquired (resource picking) • Bid depends on forecast • Have stronger capabilities that increase the returns to the target’s resource • Raises the firm’s bid 6-38

39. Building Capabilities • Capabilities are produced by specific activities and policies • Two frameworks for mapping activities and policies are: • Value chain framework • Activity system framework 6-39

40. Porter’s Value Chain Figure 5.1 6-40

41. Activity Systems • Interconnected components of a firm that contribute to its market position • Policies • Programs • Value chain activities • Product characteristics • Key resources • Firm’s structure and culture 6-41

42. Vanguard’s Activity System at the Beginning of 1997 Figure 5.2 6-42

43. Vanguard Activity System • Core elements: • The fund family’s mutual structure (not stock) • Direct distribution (no brokers) • Focus on conservatively managed funds (low risk) • Low transaction and account maintenance cost • Candid communication (strong culture) • Focus on long-term performance • High-quality service (higher retention rates) • Supporting elements 6-43

44. The Elements of Strategy Execution Figure 5.3 6-44

45. Organizational Dimensions of Strategy Execution • Complementarity and consistency among the firm’s resources, tasks and policies in support of a firm’s market position • Control and coordination systems for the design and execution of tasks • Compensation and incentive systems • Culture and learning behavior 6-45

46. Complementarity and Consistency • Complementary resources or capabilities • Produce a more effective outcome together than independently • Example: Stores and catalogue operations for internet retailing • Consistency (fit) • Resources or capabilities are jointly aligned with the requirements of the firm’s market position • Example: The alignment of Vanguard’s activity system with its low cost position 6-46

47. Control and Coordination Systems • Coordination mechanisms • Standardized procedures • Joint planning • Liaison personnel • Task forces with members from multiple activities • Teams that institutionalize the task forces • Hierarchical referral up the chain of command 6-47

48. Types of Hierarchical Structure Figure 5.4 6-48

49. Benefits of a Functional Structure • Lower costs • Reduced overhead • Standardized procedures within functions • Continuous process innovation within functions • Power over suppliers through increased scale in purchasing • Increased expertise within functions that may result in value to the customer • Specific technology development • Skills in sales and marketing research • Quality improvements in operations, logistics and service 6-49

50. Benefits of a Geography-based Structure • Increased focus on the characteristics of geographical regions • Unique local competitors • Unique local suppliers • Unique local customer preferences 6-50