Unit 2: Discussion 2 MBA695 Week 2

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Strategic Management

Jeff Dyer

Third Edition

Chapter 11

Competitive Strategy and Sustainability

Professor’s Goals for this Lecture

There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:

- the homework assignment involving calculating an experience curve in semiconductors

- Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)

- the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry

Knowing the Competition

Understand the competitive landscape

Evaluate the competition

Beat the competition

Understand the market structure and competitive environment

Competition is a reality for business firms. Whether a company faces competitors that are actively striving to erode its market share or potential new entrants to its market, nearly all managers must grapple with how to compete. In some markets, competition is light because firms are highly differentiated or because they face few rivals. In other markets, competition can be very intense. In such markets, a company must acknowledge the reality that competitors are watching and are likely to react to its strategic actions.

Understanding the Competitive Landscape

In order to compete effectively, a firm must understand the structure of the competitive environment in which it operates.

Understand structure of competitive environment

Direct and indirect competitive groups within an industry should not be ignored

First must understand the structure of the competitive environment in which it operates

Companies may compete directly or indirectly

Depends on the segment they focus on

Rivals in other groups cannot be ignored

Strategic Group Analysis

Identify main differences in the ways firms in the industry compete (low-cost vs. full-fare airlines with a Strategic Group Map

Determine most relevant factors for horizontal and vertical axes

Score industry players on chosen factors and plot on chart

Clusters represent strategic groups

Strategic Group Map—Plot Industry Players

Strategic Group Map—Identify Industry Clusters

Barriers to Mobility

Switching strategic groups is difficult because it is hard and slow to reconfigure activities or activity systems

This inability to jump between groups is known as a barrier to mobility

Strategic Group Analysis

A strategic group map can reveal important potential changes in an industry e.g. are companies in one group beginning to appeal to the primary markets of another?

Are there empty spaces on the strategic group map that might invite successful entry?

Strategy Canvas

Assess relative strengths and weaknesses against specific customer purchase criteria

Uncover how companies attempt to offer unique value to customers relative to competitors

Identify new ways to compete with rivals

Knowing the Competition

Understand the competitive landscape

Evaluate the competition

Beat the competition

Understand the market structure and competitive environment

Evaluating the Competition

Examine motives and likely behavior of individual competitors

Use analysis to identify your own competitive moves which bring most advantageous effect

Evaluate competition by developing a competitor response profile which identifies characteristics of a competitor to assess likely responses to rival actions

Competitor Response Profile

“What drives the competitor?”

Objectives and undergirding assumptions which point to potential rival moves

“What is the competitor doing or capable of doing?”

Competitor’s strategy, resources, and capabilities

“How will the competitor respond to specific moves?”

Do we want to mention game theory here under #3?

Delta Competitor Response Profile

Passengers want to fly the same airline domestically and internationally

Scale savings exist by having a global footprint which permits competitive pricing on international routes

To leverage the benefits of international scale for overall cost savings

To capture a greater share of market b providing home city to destination travel for international passengers

Position as an international travel choice to as many customers as possible by building an extensive travel network

Locations in major cities

Airline partners that provide global reach

Fleet of large aircraft

Reliable and service-oriented travel

Delta is likely to largely ignore entry into its international city-pair markets by Southwest as long as these entries remain few

Delta

Knowing the Competition

Understand the competitive landscape

Evaluate the competition

Beat the competition

Understand the market structure and competitive environment

How to Beat the Competition

Four Principles for Identifying Potential Competitive Moves:

Know your strengths and weaknesses

Bring strength against weakness

Protect and neutralize vulnerabilities

Develop strategies that cannot be easily imitated or copied (go where the competitor is not)

Do we want to mention game theory here under #3?

Know your strengths and weaknesses

Strengths:

Resources and capabilities that deliver unique value

Weaknesses:

Resources and capabilities subject to rapid obsolescence, easy imitation, or high costs not recouped by value

A careful assessment of strengths and weaknesses form the foundation of competitive strategy

Know Your Strengths and Weaknesses

Target strengths against competitors' weaknesses for greatest competitive effect

Example: Google leveraging software engineering strength to develop the Android operating system, helping it grab smartphone market share from Microsoft

Protect and Neutralize Vulnerabilities

Strengthen or neutralize weaknesses

Starbucks protected its atmosphere by surrounding it with a large variety of great tasting coffee blends, food items, store convenience, and brand positioning

Develop Strategies that Cannot be Easily Copied

“To be certain to take what you attack is to attack a place the enemy does not protect.” –Sun Tzu

Avoid missing new opportunities by only copying moves by competitors

companies often fail to see how they could do something altogether different.

Competitors may occupy distinctive positions in their market so that they can profitably coexist

Knowing the Competition

Understand the competitive landscape

Evaluate the competition

Beat the competition

Understand the market structure and competitive environment

Understanding Market Structure and the Competitive Environment

A firm’s circumstances define which competitive actions are available and likely to be effective

Understanding the market context creates the scope for competitive action

Two Types of Market Environments

Stable

Set of competitors faced by a firm, the supporting technologies, and the environmental factors are changing slowly

Dynamic

Rapid product releases, new entrants, or market consolidations which affect the shape of the industry

Strategic Responses in Stable Environments

Monopoly

Oligopoly

Perfect Competition

Description

Important Considerations

Strategic Moves

A market of a few firms (2-5) which monitor and react to specific rival behavior

A market of one firm or one highly dominant firm

A market with many firms

Reinforce the monopoly

Make moves carefully because rivals will detect their moves and respond accordingly (tit-for-tat)

Firms are price takers rather than price setters

Homogeneous goods

Raise barriers to entry

Limit competitive access to scarce resources

Innovate and Patent

Introduce new products frequently

Monitor and mimic rival behavior

Employ tit-for-tat strategies (Take most beneficial action, while expecting competition to do the same. If a competitor defects, respond aggressively)

Merge or consolidate markets (to increase bargaining power)

Pursue a low cost strategy

Pursue a differentiation strategy

Create switching costs

Strategic Responses in a Dynamic Environment

“Reconfigure processes and capabilities to emphasize innovation and speed”

Summary and Takeaways

Understanding the competitive landscape can help a firm identify strategic groups and potential areas for opportunities

Developing a competitive response profile allows a company to examine areas for opportunities and assess possible responses to rival actions

A company can beat the competition by identifying its strengths and weaknesses, bringing strengths against competitors’ weaknesses, neutralizing its own vulnerabilities, and developing strategies that cannot be easily imitated or copied

Understanding the market structure may influence the strategies a firm might employ

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