2.
Theories in Strategy,
Competitive Advantage,
levers
Ref: Text by Frank T Rothaermel
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Learning objectives
• Explore and understand strategic groups, its significance in industry
analysis
• Discuss how industries evolve over time
• Show how trends can shape the nature of competition in an industry
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“To assure victory, always carefully survey
the field before battle”
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What is “industry”?
• A group of companies offering products or services that are close
substitutes for each other
• These satisfy the same customer needs
• Example: Soft drink industry
• Hector beverages, Pepsico, Coca Cola
• Example: Steel Industry
• Companies: Tata Steel, Vizag Steel, JSW Steel
• Products: steel rods, pipes – each with their own specifications
• Example: Cement Industry
• Companies: Ultratech cement, Gujarat Ambuja, ACC, India Cements
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Starting point of external analysis
• Identify the industry in which a company competes
• How can managers do this?
• Take a customer oriented view of their business
• Demand side: customers | Supply Side: Companies
• Basic customer needs that are served by a market define an industry’s
boundary
• Coca Cola defined its business as soda industry
• RESULT? Hence, what is our understanding?
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Starting point of external analysis
In the 1990s the market changed
Coca Cola introduced bottled water,
‘Dasani’, introduced ‘Minute Maid’ (from
acquired company)
Coca Cola acquired Energy Brands Inc.
Glaceau – the owner of the Vitamin water
brand
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Industry & Sector
• Sector – a group of closely related industries
• Examples
• Computer hardware industry, software industry
• Automotive component industry
• Food packaging industry
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Example: PC industry & its adjacent industries
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Can industry boundaries change
• Makers of fruit drinks / colas
• Makers of telecommunications equipment
• Observe complete transition towards digital technologies
• As a result, forced to compete with computer manufacturers
• Examples?
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Porter’s five forces model
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A 6th force: complementors
• Relevant to some industries such as the computer industry
• Software: Windows, Linux, Mac OS, etc.
• Hardware: PCs made by HP, Dell, Acer, etc.
• Higher the value of software, higher is the value of PCs to customers
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Strategic Groups
• Sectors (OR) industries within industries
• Example: Group 1 – Merck, Pfizer and Eli Lilly [Proprietary]
• Group 2 – Forest Labs, Mylan Labs, Watson [Generic]
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Strategic Groups: Pharmaceuticals
Strategic
Barrier
Lack of R&D
Skills to develop
new proprietary
drugs
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Commercial aviation
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Stages in Industry Life Cycle
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Industry Shakeout (consolidation)
Industry Shakeout:
Rivalry Intensifies
with growth in
excess capacity
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Limitations of 5-Forces Analysis
Life Cycle Issues
• The industry life cycle model is a generalization – “one size does not fit all”
• Some industries skip stages
• Media consumption skipped personal computers, but hopped onto handheld devices (phones,
tablets)
• In some cases, industries fail to get past embryonic stage
• E.g. space travel?, autonomous vehicles?
• In some cases, industry growth can be revitalized after consistent declines (or) slow
growth
• E.g. bicycle industry: as a result of health-focused society
• Despite mature stage, sudden growth due to consumption of specific services
• E.g. wireless data revenue in US surged from $19 B to $68 B during 2007 to 2012
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Limitations of 5-Forces Analysis
Innovation and change
• Punctuated Equilibrium- industry’s long term stable structure punctuated with periods
of rapid change/innovation
• Hypercompetitive industries- permanent, ongoing innovation & competitive change
• Disruptive nature of innovation
• Steel industry in the US during 1960s: large firms such as US Steel, LTV and
Bethlehem Steel (Typical oligopoly)
• New firms such as Nucor and Chapparal steel – they used a new process: electric arc
furnace
• Soon, it led to fragmentation and price-competitive nature of this industry
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Punctuated Equilibrium
Periods of
long term
stability Periods of
long term
stability
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Internal Analysis
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Learning Objectives
• Differentiate among a firm’s core competencies, resources,
capabilities, and activities
• Understand the Resource Based View
• Apply the VRIO framework to assess the competitive
implications of a firm’s resources
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Dr. Dre’s Core Competency: Coolness factor?
Sold Beats Electronics to
Dr. Dre Andre Young Apple for $3 Bn
Dr. Dre created custom beats
for Justin Bieber, Lady Gaga
and Nicki Minaj
What does Apple hope to gain
from this acquisition?
Ref: p.105, 132 of text - Rothaermel
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Key Takeaway
• Firm’s ability to create SCA is partly driven by its core competency
• In the case of Dr. Dre, the fashion statement that communicates
‘coolness’
• He has a keen intuition for what’s hep and happening in the music industry
• Ties up the product with savvy marketing activities
• Beats vision: “bring emotion, energy, excitement of playback in the
recording studio to ….possibilities of premium sound entertainment”
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Looking inwards
• Change our frame of reference to
internal analysis
• Look at firm’s core competencies,
resources and capabilities
• Study why differences in firm
performance exists within the same
industry
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How can we conduct an internal analysis?
• Firm’s internal strengths have to change in alignment with the
changing market
• i.e. dynamic approach
• Hence, we need to understand what makes a company tick..
• Is it a single competency? / Resource? / Capability?
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I Core Competencies
• Unique strengths embedded deep within a firm
• From industry observation:
• Honda, by experimentation developed expertise in engines
• Carried forward this expertise into several different machines (automobiles,
lawnmowers, generators, etc.)
• Hence, Honda’s Core Competence : Engine design
• Nurtured over several decades
• Its engines have become popular in formula one car racing and several
other such racing circuits
• Products & Services of Honda - visible side
• However, underneath, there are invisible core competencies lying deep within the
firm 26
II Resources
• Any assets such as cash, buildings, intellectual property that a firm
possesses
• Can be used by the firm to craft and execute a strategy
• Examples
• IBM’s deep pockets to fund new ventures in consulting, services, etc.
• Walt Disney’s entertainment parks
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III Capabilities
• Organizational and managerial skills that are needed to orchestrate
resources, deploy them
• By nature these are intangible
• They find their expression in a company’s structure, routine and
culture.
OYO Rooms’ ability to
International Management
convert and utilize
Group, which runs the IPL
property for commercial
(Cricket)
use
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IV Activities
• Distinct fine-grained business processes within a firm
• Examples
• Order taking
• Delivery
• Customer Service
• On the whole, adding value to the firm
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An integrated view
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The VRIO framework
• Is the resource, capability or Is the firm organized
to capture value?
competency…
• Xerox’ Palo Alto Research Centre
(PARC)
• Developed GUI, the first personal
computer in 1972
• But, commercialize?
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‘I’ – Easy to imitate
• Maker of iconic plastic clogs
• Launched in 2002 as a spa shoe in Fort Lauderdale,
Florida boat show
• Reached $650 million in 2008
• Worn by celebrities such as Sergey Brin, Matt Damon,
Adam Sandler
• Competitors copied despite patents, celebrity
endorsements
• Soon, Crocs share price plunged from a high of about
$75 to $1 in less than 13 months
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Value Chain
• Primary & Secondary activities
• Geared towards delivering value to the company
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Value Chain: Application
Burberry, London
• Rose Marie Bravo, President of Saks Fifth Avenue took over as CEO
of Burberry
• Turned it around- Worked on the marketing angle
• Brought in Kate Moss to work on the modelling angle; used the
services of a top class photographer as well.
• Christopher Bailey, one of the best fashion designers was roped in to
lead the design team
• Burberry achieved what was commented upon as an “achingly hip”
high fashion brand, by the end of Bravo’s tenure
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Building Blocks of Competitive Advantage
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Looking back to VRIO model,
• Capabilities, competencies are intangible
• Can they remain static? NO
• Hence calls for the concept of Dynamic Capabilities
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Dynamic Capabilities
• Call for constant upgradation of capabilities.
• May call for training, introduction of new technologies and enhanced know-
how
• Can happen with acquisitions as well
• E.g. Mahindra learnt about passenger cars from the joint venture with Renault
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… Resource Flows: Firm’s level of
Resource Stocks: Firms’
investments to maintain or
current level of intangibles
build a resource
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