Chapter 4 Slides
Chapter 4 Slides
Chapter 4 Slides
ENTRANTS (ES) PRICE LOW 507/168 507/168 MODERATE 585/129 HIGH 624/116
454/155
511/138
636/126
428/50
504/124
585/129
669/128
Competitors Response Profile Is the competitor satisfied with its current position? What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? What will provoke the greatest and most effective retaliation by the competitor?
Assumptions
Held about itself and the industry
Capabilities
Both strengths and weaknesses
Source: Michael Porter, Competitive Strategy, (New York: Free Press, 1980), Chapter 3
30
ROI%
20
10
10
Year
1999 Pankaj Ghemawat
Source: Pankaj Ghemawat, Commitment (New York: The Free Press, 1991)
Added Value
Appropriated Value
Slack
Holdup
Source: Robert E. Kennedy, Strategy Fads and Competitive Convergence: An Empirical Test for Herd Behavior in Prime Time Television Programming, Unpublished working paper, Harvard Business School (January 1998)
200
Price Cost
Dollars
150
100
50
0
1999 Pankaj Ghemawat
Online/Deep Discount
Source: Rajiv Lal, E-Trade Securities, Inc. Stanford University Discount Full Service Graduate School of Business Case No. M-286, 1996
Japan/Japan Division (48%)* 276 31 7.9 94 Arms-length (35%)* 125 13 9.9 19 Partner (38%)* 41 31 10.6 60
Source: Jeffrey H. Dyer, Does Governance Matter?, Organization Science, Vol. 7, No. 6, Nov-Dec 1996
1999 Pankaj Ghemawat
Market Value
-50 -100
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
$ Billion
-150
Strategic Investments
0%
-200 -250
-300 -350
10%
Responses to Substitution
Not responding Fighting Switching Recombining Straddling Harvesting
Added Value
Appropriated Value
Responses to Slack
Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change
1999 Pankaj Ghemawat
Responses to Holdup
Contracting Integrating Building bargaining power Bargaining hard Reducing asset-specificity Building relationships Developing trust
Outline
I. Approaches to competitor analysis II.The purposes of competitor analysis III. The process of competitor analysis
GOALS
State-ownership Lower Profits Growth Objectives
CAPABILITIES
Tosoh/DSM Technology DSM Size/Deep Pockets Political Access
STRATEGY
Migrating Downstream Legal Skirmishing Likely to Expand into US
ASSUMPTIONS
Different Home Base Chemical Company Parents Thinks NutraSweet Will Accommodate
Behavioral Profiles
Apparent Assumptions
Future Goals
Source: Michael Porter, Competitive Strategy, (New York: Free Press, 1980), Chapter 3
Competitors Goals
x x x x x
Market share vs. profitability Growth vs. dividend pay-out Technological leadership vs. cost leadership Long run vs. short run performance Non-economic vs. economic goals
Personality Profiles
x x x x x
Conservative vs. aggressive Risk takers vs. risk adverse Operational focus vs. visionary Analytical vs. emotional Profit-oriented vs. growth
Analyze titles & responsibilities: Chair & CEO Chair, CEO & COO Chair & chief scientist ...
Profiles of key management Organization structure Advisors Public statements Results of recent past History Parent company strategy Position in the portfolio
Competitor Incentives
x x x x
Look ahead and reason back Recognize linkages across markets Pay attention to uncertainties Narrow uncertainties by projecting profits and implied courses of action
Is the competitor satisfied with its current position? What likely future moves or strategy shifts, will the competitor make and how dangerous are they? Where is the competitor vulnerable? What will provoke the greatest and most damaging retaliation by the competitor?
x x
Ascribing inertia to competitors, while assuming you will act Assuming competitors have no options Underestimating the intensity of retaliation
x x
x x x x
Hard to match; cost them more than it costs you -builds on strategic asymmetries Have commitment value; costly to reverse, so intentions will be believed Help\improve industry structure Lower costs and\or create value for customers Aim at competitors blind spots Anticipate the competition (it is easier to keep them out than kick them out)
x x x
Can be easily copied (when you think its unique) Show a lack of commitment Raise costs without creating value; lower prices without expanding volume Undermine industry structure Ignore a firms capabilities Needlessly provoke or mindlessly hurt competitors
The right competitors can be good Influence the competitors entry and mobility Influence the competitors incentives Avoid creating desperate competitors
Common approach:
Companies with similar strategies and competitive positions
Often forgotten:
Companies able to:
change industry structure or evolution leverage related capabilities to enter the industry offer substitute technologies provide complementary assets or products
Procedural Guidelines
x x x x
A lot of information already in house One time efforts rarely succeed Cost/benefit of data collection Data without analysis = low benefit
More than a planning tool and, a framework for self analysis ...
Decide what needs to be protected Recognize the range of overt sources of information Recognize the possibility of covert action
telephone and fax intercepts trash analysis employee subversion/insertion
The detailed analysis of individual competitors The evolutionary analysis of threats to sustainability
Predicting Profits
39%
3% Bottom Half
1999 Pankaj Ghemawat
Top Half
Sustainability Analysis
20 18 16 14 12 10 8 6 4 2 0 1 97 1
1999 Pankaj Ghemawat
Advantage (% ROI)
1 973
19 75
1 97 7
19 79
High
Continued Appropriability
Yes
No
Hold-up Slack
Continued Scarcity
No
Imitation Substitution
Yes
Competitive Advantage
No
Threats to Sustainability
Imitation
x
Barriers to Imitation
x x x x x x x x
Scale or Scope Economies Experience/Learning (Tacit Knowledge) Relationships Reputation Retaliation Response Lags Upgrading/Investments Fit
Substitution
x
Substitution reduces the demand for what a firm uniquely provides by shifting the demand elsewhere
The better mousetrap Due to changes in technology, customer needs, input prices, etc.
For this reason, substitution is an especially effective way to attack dominant players
Substitution: Steel
Steel Quality
Sheet steel
lity ua Q
of
Rebar
1975
1980
1985
1990
Source: Clayton Christensen and Bret Baird, Continuous Casting Investments at USX Corporation, HBS #5-697-066, April 24, 1997.
Responses to Substitution
x x
Before Scan the landscape broadly for threats Understand underlying customer needs
But be prepared to ignore the needs of current customers
x x
If you cant beat them, join them Take the money and run
Responses to Substitution
x x x x x x
Hold-up
x
Hold-up diverts value to customers, suppliers, or complementors who have some bargaining leverage
They have bargaining leverage because they have something you need and cant get elsewhere (added value)
x x
Ex: Who makes all the profits from PCs? Hold-up is especially threatening when parties in a relationship have invested in assets that are specific to that relationship (so its hard to walk away)
An electric plant built at the mouth of a coal mine A railroad spur laid to a particular factory Skills that are tailored to a particular employer
Codeveloped a process for making one of the two key amino acids used in NutraSweet Genex entered into a long-term contract to supply Searle and built a new bioprocessing facility Searle began to renegotiate price within months, and initiated internal production within one year Genex went bankrupt
Operating Margin
30%
20%
10%
personal computers
software
peripherals services
Responses to Hold-up
x
Multiple sourcing
But investments in relationship-specific assets are important
x x
Vertical integration
Dont base your competitive advantage on specific assets you cant own (like a particular individual)
Responses to Hold-up
x x x x x x x
Contracting Integrating Building bargaining power Bargaining hard Reducing asset-specificity Building relationships Developing trust
Slack
x x
Slack, or waste within the firm, dissipates value Slack is hard to identify...
Plush carpets for their own sake are slack But plush carpets to win customers and recruit talent might be wise investments
Principal-agent problems between managers and stakeholders Managers have incentives to grow the resources under their control Free cash flow enhances managers ability to
Invest resources in negative-return activities Waste resources
Responses to Slack
x
Monitoring of performance
Benchmarking Time-motion studies Outsiders on Boards
Managerial incentives
On average, top executives get roughly $3.25 for each $1,000 of shareholder value created (Jensen and Murphy)
Responses to Slack
x x x x x x x
Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change
A Fifth Threat
x
Nonmarket Pressures
Government NGOs Media
Conclusions
x x
The best defense is a good offense That is, defend your advantage by continually upgrading it
Seek out ways to increase willingness to pay without incurring commensurate supplier opportunity costs Seek out ways to reduce supplier opportunity costs without sacrificing commensurate willingness to pay
x x
Make yourself a moving target But remember that the landscape can shift under your feet
High fixed costs/Upfront investment Inelastic supply: films, advertising Fixed demand Network effects/Switching costs Diverse competitors Inconsistent goals High strategic stakes Antagonism/emotion Substitutes: BBC/TV/Cable
Assumptions
Low cost Old/proven technology Commercial programming Quick to market Ability to skirt loopholes
Strategy
Emphasis on electronic media Satellites targeted Presence in English speaking markets ITV stake Losing bidder on official franchise
Goals
Murdochs nonpecuniary motivation
2943, -180
-70, 2089
De Beers
Quantity Bought carats South Africa Namibia Botswana Soviet Union Other Total 9,154 963 7,769 6,000 3,320 27,206
CSO List
COGS
Contrib.
$/carat 20 98 10 113 51 44
$/carat 38 102 43 12 9 33
1982 Inventory is $1.7 billion at COGS or $2.42 billion at CSO List. This amounts to 31 m carats inventory (mostly gems) Actual CSO Sales over next 4 years
Near Gem 000 carats 13,500 5,548 7,924 4,664 3,387 10 245 88 1,507 36,873 15,713 135%
Industrial 000 carats 15,000 12,020 4,661 3,180 3,479 41 123 22 1,202 39,728 11,283 252%
Total 000 carats 30,000 18,493 15,537 10,600 9,155 1014 1,226 220 4,285 90,530 37,332 142%
1,500 925 2,952 2,756 2,289 963 858 110 1,576 13,929 10,336 35%
Sensitivity Analysis
Probable Value of Surplus in 1982 ($/carat) 30 40 50 60 Cumulative Additions to Inv. by 1988 ($ mill.) 562 745 928 1,111
Actual Retail Demand Year 1982 1983 1984 1985 1986 1987 1988 (mill. cts.) 7.9 8.5 9 9.9 13.2 13 14.5
Surplus