Unit 2: Discussion 2 MBA695 Week 2

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Strategic Management

Jeff Dyer

Third Edition

Chapter 2

Analysis of the External Environment:

Opportunities and Threats

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

Determining The Right Landscape

The first strategic decision that most firms must make is to select the industry, and markets, in which it will compete.

A firm’s industry will determine which customers and which competitors will be part of the firm’s landscape. The landscape is typically defined by: (1) the industry in which a firm competes, and (2) the product and geographic markets within that industry that the firm targets.

Firm’s Landscape

Industry In Which The Firm Competes

Product And Geographic Markets Within That Industry That The Firm Targets

Threat of New Entrants

Threat of Substitutes

Rivalry Among Existing Competitors

Bargaining Power of Suppliers

Bargaining Power of Buyers

“Industry Structure” Perspective “Five Forces” Analysis of Competitive Strategy

Alright so what we want to do, we want to break down the industry structure and try to understand what drives profitability in an industry. So at the center of the Porter model is rivalry among the existing competitors. And if you have more rivalry, then you’re going to have more profits. He sort of puts around that threat of new entrance and threat of new substitutes. So typically you’re going to have, these things actually influence rivalry the more you have new entrants that can easily get into an industry, the more rivalry you typically have and the more substitutes you have the more rivalry you’ll have. Although there actually are some independent factors that also influence rivalry in an industry, and we’ll talk about that. But you also have bargaining power over suppliers and bargaining power of buyers. So you’re trying to create a pie and you’re trying to find how much can suppliers grab from me because they’ve got bargaining power. They bring inputs that I have to buy and I can’t be very price sensitive because I need them. Or to what extent do I have power over my buyers, I am selling something and I have power over them, they really want or need what I’m offering.

Five Forces Analysis

Rivalry- Competition among firms within an industry. Typically this involves firms putting pressure on each other and limiting each other’s profit potential by attempting to steal profits and/or market share.

Substitute- A product that is fundamentally different yet serves the same function or purpose as another product.

Threats- Conditions in the competitive environment that endanger the profitability of a firm.

Opportunities -Ways of taking advantage of conditions in the environment to become more profitable.

Five Forces Analysis (continued)

Attractiveness of an Industry- The degree to which an average firm in the industry can earn good profits.

Identify Specific Factors Relevant to Each of The Five Major Forces

Analyze the Strength of Each Force

Estimate the Overall Strength of the Combines Five Forces to Determine The Attractiveness of The Industry

Scale economies (MES is a significant proportion of industry demand)

e.g., aerospace industry

Capital requirements (combined with uncertainty or inefficient capital mkts)

e.g., aerospace industry

Scope economies

e.g., retailing

Switching costs (due to learning, customer investment, loyalty programs, network effects)

e.g., Windows operating system; eBay

Access to scarce resources (e.g. inputs, distribution, locations)

e.g., DeBeers (diamonds), Coke (distribution)

Learning Curve

e.g., Honda motorcycles (motors)

Product Complexity

e.g., supercomputers, microprocessors

Entry deterring regulations

e.g., tariffs;

Industry

Barriers to Entry What Factors Keep Potential Competitors Out?

So let’s walk through each of the five forces. And I want to start with the one that I told you last time that I think is the most important and that is barriers to entry or threat of new entries because if you don’t have barriers to entry, and you have bargaining power over suppliers and buyers, then companies should enter that industry to get at that bargaining power and to make more money. So you tend to see more entries, so there really should be something preventing new entrants from getting in if you want to try and maintain the high profits in an industry. So think of it this way, you’ve got an industry here, you’ve got Firm D who wants to get in and can’t get in. Why can’t it get in? So let’s just sort of walk through different things that serve as barriers of entry to an industry. Let’s start with actually scale economies and capital requirements. So can anybody here define what scale economies means? What’s scale economies?

S: It’s when your company is able to produce at such a high scale that you’re being able to cut down your costs.

P: Okay, so your cost per unit goes down because you’re producing very high volumes. And in fact what you see is that you can spread, you tend to have high fixed costs in a business that you can then spread across lots of units when you produce more. And then there’s this notion of capital requirements so I’m going to talk about the aerospace industry for both of these. In some cases you need a lot of money to enter an industry, in some cases you don’t need a lot of money to enter an industry.

So let’s just talk about the aircraft manufacturing industry for a moment. How many aircraft manufacturers are you aware of? Boeing and Airbus, they’re the two big ones. There are some regional jets and small ones, like Embraer and Canadair, but really it’s Boeing and Airbus that dominate this. About 25 years ago, we actually had McDonald Douglas, we had Lockheed which also made aircraft, Martin Marietta was also a producer of aircrafts or at least large portions of aircrafts and we gradually saw those folks disappear. And here’s partly why. The cost to develop a new aircraft in terms of just figuring out the design of it and then building the manufacturing plant to produce it is about five billion dollars.

Okay, so you need a lot of money. This is why capital requirements can be a barrier of entry. Imagine if I go down and work for Boeing and have an idea for a new jet, I go down to my bank, I say you know I just need five billion dollars to design this new jet, and I won’t have even sold any yet, that’s just to design it, to build the plant, to be ready to produce. You have these huge capital requirements and that creates a barrier to entry. But then in order to make back the five billion dollars, typically you need to sell somewhere around 300 and 400 aircrafts, sort of a rule of thumb, given the amount you tend to make per aircraft. So for a certain sized aircraft, Boeing 737 size, let’s say, there are about 1,200, 1,300 planes that are sold worldwide over the life of a plane. So you’re talking about maybe a 15 year product life cycle. 1,200, 1,300 planes, you need to sell 300 to 400 in order to break even. How many companies are you going to see in that industry? Not too many. It’s hard for there to be four players because for there to be four players, each sell 300 to 400, that means they’d all be breaking even if they all sold 300 to 400. Does that make sense? So what we’ve seen over time is that we’ve had fewer and fewer players in the industry because you need to be able to produce more than 300 to 400 planes if you’re going to make money with any given product. That’s how economies of scale can be a barrier to entry.

So in some industries you have to look at the total volume in the industry, and then you’ve got to look at well how many units are we going to have to be likely to produce in order to be able to produce it, what we call a minimum efficient scale. With a minimum efficient scale, you’ll read more about this in the cost section, it’s basically looking at cost per unit, and as you see it come down, you’ll see that it starts to flatten out and then go up, it’s a scale curve. And at that point that it starts to flatten, that’s the minimum efficient scale. And if that number is, if you have to produce 300 planes and there’s like 1,200, there’s only going to be a small number of players in that industry because you can’t get enough scale in order to survive to build plants to produce your product. And so you tend to have few players in that industry. And it becomes a barrier to entry. You don’t want to enter that particular industry because it’s too risky and you have to make too many planes.

And capital requirements, as I already mentioned, can be a barrier to entry. The more money you need to enter an industry then the less likely you’re to have a new entrance because it’s hard to raise that kind of money. We also talked about scope economies. So economies of scale mean that you lower your cost per unit because you do the same thing over and over and over again. Whether it’s making a Boeing 737 over and over again or a particular motor cycle, but you do the same activity over and over again. That’s what we think of as economies of scale. Economies of scope you sort of do related activities that somehow by doing two activities, it lowers the cost for you because you do two activities that are in some way related. Let me give you an example. In the United States, where do we mostly shop for clothing?

S: Malls.

P: Malls, right? We mostly shop at malls. So now the question is, how do retailers get space in a mall? How’s that?

S: Leasing.

P: Leasing. They’ve got to be able to go and lease the space. Now have you noticed are becoming more and more alike over the years with the same stores in the malls? That’s because big companies, some of them will actually own multiple stores in the malls. So like The Limited, the company The Limited, has over the years they’ve bought and sold some of these stores, but over the years they have owned a number of kinds of stores in the mall. For example, they own The Limited, The Limited II, Express, Structure, Bath and Body Works, Victoria Secret, Learner, Blain Brian, those have all been sort of in their portfolio of stores and brands that they offer. How might that create a barrier to entry for a new company wanting to come into selling clothing or even Bath and Body Works in a mall? Let’s think, how does that help them stop another company from coming in?

S: Because they, all of those are stores that sell generally the same thing, but with some variation. So whichever store in entering, they’re going to have to be willing to lower their prices, or even take the loss because those stores pull up ________.

P: Okay, so one option is we can be aggressive in one particular market or area and we could make it up other places. Okay, so that’s one way.

S: So if let’s say 40 percent of the mall is owned by one company, then just the number of, the space that’s left over for other companies _____. You reduce the supply and the price will go up and it’s going to reduce the number of competitors.

P: Right, think about if The Limited is going in or The Gap or others if they have multiple stores, then they’re going to negotiate with the developer for rent. If I can bring you eight stores, do you think that would give them better rent? Absolutely, right? So now not only do I get in early, do I get better rental prices, but I might even get preferred positions in the malls and what that effects is a barrier of entry for someone new trying to get into the industry because they are going to have to pay higher rent because they don’t have the scope of operations, the number of different store formats, and they’re also unlikely to be unable to afford the higher rents.

The other thing is, think of distribution out of the mall. Now we could have central warehousing and we could sell, send a truck and we could have clothing for multiple different of our stores on the same distribution truck. Or we can give, the other we can do, we can give coupons out, if we go out to the outlet mall or other places, sometimes you’ll buy at one place and they’ll give you coupons for other places that you can buy products because they’re often owned by the same company. So now you get this cross-selling opportunities that occur. All of this scope of operations can now produce a barrier of entry for a new entrant. Does that make sense? Any questions about that? Okay, so that’s the way scope economies works.

Switching costs, some products inherently have switching costs. Software is typically one of those. Compatibility issues with switching costs, you’ve learned how to use a certain kind of software, whereas most of us can change our brand of gum without huge switching costs, right? Or a different candy bar or whatever it might be. Products that have these inherent switching costs where there’s learning involved, where there’s investment involved, those products tend to have barriers to entry that other products don’t have. That’s actually one of the reasons that software tends to be a very attractive industry generally because once you get users, there tend to be switching costs which makes it harder for entrants to come in. Access to scarce resources can be a barrier to entry. De Beers company that sells diamonds and actually now has diamond stores, but basically by trying to own the diamond mines, they’ve owned a lot of the scarce resources that you need in order to be in the diamond business and that creates a barrier of entry to somebody else because there are only so many diamonds and diamond mines out there, and if De Beers already owns it, it’s hard to get into the industry.

The learning or experience curve, so we’ve got here, I’ve got automated motor cycles, we’ll do a case a little bit later on Harley Davidson, but Honda by producing of millions of motorcycles it’s able to bring down their cost per unit, and it’s a fairly steep experience curve, which means with every doubling of volume their costs drop fairly significantly, 20 to 25 percent. Well that means for a new entry to come in, if you’re going to produce motorcycles in the same way, or a similar way, you’re going to have a huge cost disadvantage because you just don’t have the volumes to get in. So learning curve or experience curve can be a barrier to entry.

Product complexity can be a barrier to entry like intel we’ll do a case on Intel on Monday, but microchips are a very complex product and so it’s hard, there are fewer people who can figure out how to run a microchip company than there are who can figure out how to run a grocery store company, let’s say. So in fact you’re going to have more supply of people who can run a certain kind of business than others, so really complex business, a lot of times there will be barriers to entry because you’ve got to have people who have the analytical horsepower to figure out how to run that kind of a business. And then finally you could have entry regulations or tariffs that could prevent entry into a particular business, so tariffs are what the US government puts up in some cases to prevent foreign companies from coming into a particular market. They also have had regulations, for example, tobacco, you can’t run an ad on TV for a tobacco product. So in some ways that’s actually been good for the existing tobacco companies because that means new companies can’t come in and really advertise on TV. I know there are reasons the government has for not wanting ads on TV for any kind of tobacco at all, but in some ways it does protect the companies. Is there a question?

S: What’s the difference between scale economies and the learning curve?

P: Let me save that for our discussion on costs. But the short answer is the learning curve is about cost going down with volume because you learn how to do things better. The scale economies are more around cost coming down because I can build a bigger plant with equipment that can handle more volume, and I can spread those fixed costs across more units. So one is more around spreading fixed costs and investment, the other is more around actually learning how to do something better.

Industry

Direct substitution with similar or the same functionality

Diesel vs gas engines

DirecTV vs cable

Be Your Own Substitute

Starbucks acquiring Seattle’s best coffee (partnerships with both Barnes & Noble and Borders)

MTV (acquiring other music channels (VH1, Country)

Customers

What Alternatives are Available to Customers (Threat of Substitutes)

Alright, let’s go to the threat of substitutes. So here we have a little bit different situation, we have industry here (big blue circle), the customers are here (rectangle outside), Firm D doesn’t actually try to enter that industry the same way, they actually try and access their customers in another way, through a substitute product. Sometimes you try and do it very directly, so if you think about diesel versus gas engines, or Direct TV versus cable, those are substitutes, but they’re really trying to provide almost the identical kinds of value. And then a lot of times they are viewed as being direct substitutes. Sometimes they are a little bit farther away. When we think about different kinds of companies entering the beverage industry, like when Red Bull came in and started with energy drinks, Coke and Pepsi, they didn’t have energy drinks, but people were starting to buy the energy drinks instead of a Coke or a Pepsi, right? So they were substituting one for another. When we go out for entertainment, we can choose to go to a basketball game or a movie or a concert, and those actually are all substitutes and more indirectly compete with each other.

So one of the things that you want to try and do if you can is you want to be your own substitute. So what we’ve seen is like Starbucks acquired Seattle’s Best Coffee, they developed partnerships with both Barnes and Noble and Borders when Borders was around selling, Starbucks at Barnes and Noble and Seattle’s Best and Borders because it really didn’t matter whether you bought coffee from their perspective at Barnes and Noble or Borders because either way you were getting their coffee, they were their own substitute. You see this with Coke and Pepsi getting into water and energy drinks and any kind of beverage you can think, they want to be their own substitute.

S: So is that also Apple like doing market substitutes you can have very high end products and then you go to cheaper products for the group that substitutes higher

P: Yeah, so it’s sort of like, having this sort of broad line of products. I think that you also though have people that do tablets versus laptops, so let’s say you are, those tend to be substitutes for many people, a laptop versus a tablet. But they’re different products and so Apple is in both, Dell is in laptops, they haven’t been very successful in tablets, but you can imagine they want to be successful in tablets because tablets are substituting a lot for laptops, right? So we tend to think of it more as related product categories but maybe not just a family of products that do sort of the same thing

Industry

Factors

Number of direct competitors & substitutes

High rivalry with more competitors and more substitutes.

Industry growth rates

High rivalry with slow growth and in high growth industries when there are strong first mover advantages (e.g., eBay).

Exit barriers

High rivalry when companies must make significant investments in non-redeployable assets (e.g., steel industry; bowling alleys).

Fixed costs

High rivalry when fixed to variable cost ratio is high (need to keep volumes high to spread fixed costs).

Lack of product differentiation

High rivalry when there are minor or no differences in functionality and performance of products or services.

Switching costs

High rivalry when switching costs among companies are low (e.g., long distance telephone).

Competitive rivalry can focus on many factors, including price, quality, technology, features, service, etc.

Why Industries are More or Less “Competitive” (Nature of Focus on Rivalry)

Let’s talk about rivalry. What influences how much rivalry there is in a particular industry? Now there are some cases where this it seems like competitors just really hate each other and whatever, the leaders, the companies for whatever reason they see this as a war and are out to put their competitor out of business if they can. In some industries there’s just more rivalry than others. There are some things that tend to prompt, that tend to promote rivalry. So here we have an industry and you’ve got competitor rivalry who are focused on a lot of factors: price, quality, technology, features. There are a lot of different ways that we see rivalry play out, it could be very aggressive on lower in price, it could be lots of advertisement and promotions, sort of trying to get new generations to the market much more quickly, there are a variety of ways that can happen.

And here’s some factors that influence whether or not there’s a lot of rivalry in the industry where you compete. One is the number of direct competitors and substitutes. So basic principle, technically speaking, more competitors, more rivalry. It’s harder to keep track of five competitors than it is one or two competitors and what they’re each doing and what their pricing is, how it is they’re advertising, so you tend to get a lot more signaling and more tacit collusion that goes on when there are few companies. So if there are two or three, you tend to have less rivalry than you have five or six. Coke and Pepsi, it looks like there’s lots of rivalry, but they’re both making a lot of money. So they want it to look like there’s a lot of rivalry and they do spend a lot on advertising and they spend a lot of promotion, but there’s not as much rivalry as you might think. Industry growth rates influence rivalry. Yes?

S: So if we’re talking about a measurement of rivalry, how does that work? Because if you have an industry that’s homemade mittens or something like that where there are hundreds and hundreds of competitors, how would you say that is more rivalrous than Pepsi and Coke?

P: So the expectation would be the more companies in the industry, the lower the average profitability in the industry. And that would be, you could test that assumption. That has been tested in a large number of industries and shown that there’s correlation, doesn’t always hold true because there are other factors that might influence the degree of rivalry. But on average, the more companies in an industry, the lower average profitability. That would be one way of measuring. Another way would be industry growth rate. The question is does high growth lead to more rivalry or less rivalry?

S: More.

P: Okay, so more, less, could be either actually. So if you go back to when I started working at Bain in 1984, the standard answer to that answer was low growth leads to higher rivalry, and the standard reasoning for that was if I’ve got low growth in my industry and I want to grow 10 percent, I have to take more market share from my competitors, and that’s going to lead to more rivalry if I want to grow, either that or I just have to accept low growth. So we tend to expect more rivalry when there was low growth. And then all of a sudden, we learned about markets that have what we call network effects, where they’re kind of winner take all markets, like EBay with auctions. It’s like, when I want to go buy something online, people wanted to go to the site where there were the most options. Well because there were the most sellers on EBay, that’s where most buyers went and because the most buyers went there, the most sellers went there, and all of a sudden it becomes a very much winner takes all market. So if you go to Japan, do you know the market leader in auctions in Japan? It’s not EBay. Yahoo. Yahoo beat EBay to Japan just like EBay beat Yahoo in the US to build the customer base and then it sort of dominated the market, but Yahoo beat EBay in Japan and so they are the leader in auctions in the market in Japan.

So in a market where I can be first and I can grow my install base and then people have a motivation and incentive to stick with me because of this network, I’m part of this network that’s valuable. So Skype is another one that has a network effect. Once I decide to use Skype, I have to tell other people to download it if I want to call you, right? So I pull other people into their network. And of course if it’s free and there’s not a lot of incentive for people to switch unless there’s a better product or an easier to use product out there. So in those cases actually we find, if it’s high growth, we actually find there’s a lot of rivalry early on because you’re trying to get that stall base. You’re trying to get the lead so that the network effect can kick in, in your favor. So normally we would expect low growth lead to higher rivalry, but in higher __ markets where there’s network where there’s ___ first move advantage, move more broadly, they’re _____ advantage by being first, you have some real advantages, then we often see really high rivalry, people are almost giving their product away early on, especially if it’s a digital product. You just want to give it to people to use it so that they’ll be part of your customer base and then that will help you win later on. If you have higher exit barriers, does that make you have higher rivalry or lower rivalry?

S: Higher.

P: Higher rivalry if you have high exit barriers. Now, what creates an exit barrier?

P: Yeah, specialized capital investment. I’ll give you an example, I learned about this, actually I was working at Bain working with a client at Maryland National bank. We were looking at trying to improve the profitability of their loan portfolio to little market customers. And so we went through the loans that they had made for facilities, I noticed that when they loan to a bowling alley operator, they required personal collateral behind the loan. So is this just discrimination against bowling alley operators, or is it something else going on? What do you think? You don’t make someone who’s in an accounting firm, they don’t have to put a personal capital, but if it’s a bowling alley, I want your house if you don’t make the payment on your building.

S: So a bowling alley once it’s built and already made, somebody can just come in and turn it into some other bowling alley, so there’s not really a high exit cost for them, so to advise the bowling alley owner to work hard at his business and not default that…

P: That they want their backup?

S: Collateral.

P: Agree? Disagree? What do you think?

S: In an accounting firm if the accounting firm goes under you can just use the building for just any other type of firm, but a bowling alley can’t really be converted into anything else like not even a grocery store because it’s so specialized, so the bank wants to protect that investment.

P: Okay, so if you are a bank, if someone gives you back a building, would you rather get that accounting building, or would you rather get the bowling alley?

S: Accounting building.

P: Accounting building because it’s probably redeploy-able to another use. The bowling alley, these guys failed because it didn’t work as a bowling alley. Do you want a bowling alley that’s a failed bowling alley? Probably not, it’s specialized use. How can you get another firm to say oh yeah I want a bowling alley, I want to turn my office so I’m going to use this bowling alley? Yeah, those would be some pretty funky offices. If you had someone who wanted to turn a bowling alley into office space. It’s a very specialized use. That means bowling alley operators are going to hang in there as long as they possibly can because the building isn’t worth much if it’s not used as a bowling alley, whereas, if I bought another building or I am leasing a building and things don’t go well, I can exit pretty easily because it’s redeploy-able to another use. If I own the building, maybe it’s more valuable to me to turn around and sell it to somebody else who could use it. So when it is very specialized equipment for a facility then companies want to stay in. This is why steel companies hang in there as long as they can. What else do you use one of those big blast furnaces for if you’re not making steel? They are very expensive, very specialized equipment. So you find companies hang in there and that drags down the profit and creates rivalry for everybody because they’re hanging in there.

When you think about fixed costs, when you tend to have more rivalry, when you’ve got fixed costs because now everybody is trying to spread these fixed costs across the volume, meaning that we are all going for volume, then that is a problem. If we are all going for volume then that is going to increase rivalry because we are all trying to spread the fixed costs of our plant and equipment. We see this in the auto industry all the time. You get an economic downturn and their prices drop. The best time to buy cars is in an economic downturn because they want to keep their factories running and they want to keep their machines running so they have to sell a minimum number of cars.

Finally, lack of product differentiation increases rivalry and lack of switching costs increase rivalry. If it is easy to switch to another product then you are going to see companies trying to steal customers, but if it is hard and there are switching costs or using product differentiation then I’m not sure it’s worth my investment to go and try to steal customers away from me. This gives you a sense for the kinds of things that will actually increase the amount of rivalry in an industry, and again, higher rivalry means less attractive on average.

What can be done to neutralize bargaining power of buyers?

Differentiate your offering so that it uniquely responds to only certain buyer needs.

Buyers have less power when your product offers something that is unique.

Narrow the options of the buyer through market consolidation or exclusive alliances (or aggressive pricing or cross subsidizing to eliminate competitors).

Buyers have less power when there are fewer options.

Create switching costs for your buyers.

Buyers have less power when there are greater costs to switch due learning, specialized investments, loyalty programs, network effects.

Now let’s turn to the bargaining power question. We want to have bargaining power, in attractive industries, over buyers and we want to have bargaining power over suppliers. What can be done to neutralize the bargaining power of buyers? This would be neutralize the buying power of those buying our product. One is you want to try and differentiate your offering so that it uniquely meets that buyer’s needs. We are trying to do that. Buyers have less power when your product offers something that is unique. Sometimes that is difficult to do. Another option is narrow the options of the buyer from market consolidation or exclusive alliances. One thing you can try and do is you can try and buy up competitors so that there are fewer companies, or fewer suppliers, and that is going to give you more bargaining power over your buyers because they now have fewer options where they can go for a product or a service. Third, is trying to create switching costs for your buyers. Sometimes this comes from learning, as we talked about software, but you could have loyalty programs that you create. Like frequent flyer programs, try and build in points, and those kinds of things will try and get people to go back to a particular provider of a product or service because they feel a little bit locked in, and there are more benefits because they have built up all of those points in the loyalty program.

Narrow the sell options of the supplier through market consolidation, merger or alliances.

Develop alternative sources of supply.

Ally with a supplier and encourage the supplier to make non-redeploy-able (transaction-specific) investments to provide inputs to you as the customer at lowest possible cost.

Diversify your product offerings to diminish dependence of your business on any particular supplier

What can be done to neutralize bargaining power of suppliers?

The flip side of it is what can we do to neutralize the bargaining power of suppliers. In the same way, you could narrow the sell options of the suppliers. You could acquire other companies so that there are fewer companies that they could buy from them and now you are likely to have more bargaining power over those suppliers because they don’t have as many buyer options. You could develop alternative sources of supply. You will read in the Intel case that Intel and the other computer manufacturers early on, PC manufacturers, always wanted at least a second source of supply. They wanted multiple sources of supply, so that Intel wasn’t the only one providing the chips, and that helped give them bargaining power. However, Intel was trying to go the opposite way. They were trying to get rid of all alternative sources of chips so that they could be the sole supplier of their type of chip.

You could align with a particular supplier and encourage that supplier to make investments that are specialized to your company. For example, Toyota and Nissan have, with some suppliers like Toyota Bushuko, it’s a seat supplier, they actually have built a conveyor belt that takes the seats from their plant that they have just manufactured from their plant and it takes them directly into the Toyota plant. They built their plant next door, and then they built a conveyor belt to take the product into the Toyota plant. Toyota doesn’t have to put them in trucks and they don’t have to ship them in. It really lowers the costs of transportation and inventory. But think about this, once that suppliers built the plant next door and they’ve built this conveyor belt, what if Toyota decides that they don’t want to do business with them? What do you do with the plant and the conveyor belt? That is a pretty specialized investment. We thing of that as customized specialized investment. If you can get your suppliers to make those investments, that is good because that means that in the future they are going to be more committed to you, and you are going to have more bargaining power because they have made that kind of investment. That is something else that you can do to try and gain bargaining power.

The other thing is, it’s like developing alternative sources of supply, you can diversify your product offering to diminish dependence on any particular supplier. When we look at Intel, they’ve been very powerful in chips for PC’s for computers, but for companies that have diversified and gone…for example Samsung makes a variety of different devices both laptop types of devices, but also phones, but with phones, they actually buy mostly from ARM, so it’s not Intel. This actually diversifies the way their sources of supply and they aren’t as beholden to Intel, and Intel doesn’t have as much bargaining power because they are using different suppliers for different types of products.

Sources of Superior Profitability

Professor: I want to make sure that I have a chance to go through how you know whether an industry attractive or not attractive what kind of things you can analyze and check out. And what we’re really doing is taking this high level view of why some firms make more money than others. And it’s either because you’re in an industry, as I mentioned last time, that is attractive and we’ll define what that means. Or you have a really good position in that industry because you’ve got a good strategy and you’re offering unique value that others aren’t offering.

Superior Profitability

Attractive Industry

Strategy to Offer Unique Value

Example: Historical Profitability of Industries (1976-1991)

So let’s just start with some data on differences and profitability across different industries. So if you’re looking at the return on capital measure for a number of industries, you can see from soft drinks, ethical drugs as opposed to unethical drugs, tobacco, grocery stores, so these are making higher returns. Down here it looks like on average you don’t want to be a steel manufacturer or you don’t want to be an airline. On average, those companies don’t make a lot of money, right? So, all else being equal, you could sort of say, if I had to choose which industry, I want to be in one of the industries on the left. And so the Five Forces Model was designed to help explain why some industries why firms collectively tend to make money in one industry versus another. And as you look as these first couple, these first three actually, so my theory of attractive industries is sell addictive products, right? Because really, soft drinks, drugs, unethical drugs, and tobacco are addictive products. But how does that fit into the Porter’s Five Forces model? Is that captured in that model do you think? Yes, how is it?

Student: I think that because there’s such high demand, you could say there’s buyer power because there’s lots of demand for it. And so you have the advantage as the supplier because you can have high prices.

P: Yeah, and the way we actually say that is we have power over our buyers, so we think of that actually as buyer power, so there’s power over my buyers, or there’s power over my suppliers. In this case, I’ve got power of my buyers, they’re not price sensitive because they are actually hooked to my product, so to speak. So it actually does sort of fit in, this notion of you want to sell products that people got to have, they’re not price sensitive, that means you have buyer power, if they’re not price sensitive, they really need it. And you’ve got bargaining power over those buyers and you’re more likely to make money if you sell products like that.

Soft Drinks Ethical Drugs Tobacco Grocery Stores Publishing Integrated Oil Basic Chemicals Packaging & Container Tire & Rubber Auto & Truck Mfg. Metals & Mining Textiles Air Transport Steel 0.13 0.12 0.11 0.05 0.03 0.01 5.0000000000000001E-3 -5.0000000000000001E-3 -0.04 -0.05 -0.06 -7.0000000000000007E-2 -0.13 -0.15

Additional Mini-Case:

Now we are going to get to a mini case. A few years ago, when I was working with a client while working at Bain, and we were working in this industry. Farmers grow food. Frozen entrée makers purchase the food, then manufacture the frozen entrees, and then sell those to food retailers, and then we go in and we buy the Swanson, Stouffers, Healthy Choice and other different kinds of frozen entrees from grocery store chains. If you look at the Return on Equity (ROE), the majority of farmers are in the 5-10% range for Return on Equity, the majority of frozen entrée makers are in the 20-25% Return on Equity, and the majority of food retailers are in the 8-12% Return on Equity. Using the five forces framework, can someone guess or hypothesize why frozen entrée makers make more than farmers or food retailers. Why is theirs the more attractive industry? Yeah?

S: The input costs are low because it is just ______. You can differentiate their products price and this is more convenient. There is a higher margin of, a big mark up…

P: The first point you made is, this product is hard to differentiate. It is hard to differentiate your corn, your beans, or whatever it might be. Therefore, it is a little more commodity like going to these folks, and yet, what they are making is a little more differentiated with retailers and with consumers. So that is one thing. Yes?

S: There are few frozen entrée makers and there are a lot of farmers and a lot of food retailers, so they have a lot of bargaining power over their suppliers and over their buyers as well.

P: Whenever you see a few players at the end of the chain here, lots of players at the beginning , and lots of players in the middle, in the language of economics, it’s an oligopoly. Taking advantage of a fragmented supply base and a fragmented customer base. They could consolidate, and we have actually seen consolidation with Walmart in particular coming into this part of the business, but basically we would expect them to have bargaining power over both their supplier and their buyers because there are a lot fewer of them. What else do you think might explain higher profits for frozen entrée makers? We have the bargaining power story, yes?

S: There are probably a lot more barriers to entry with producing the food because you have to cook it, package it, and ______.

P: So barriers to entry. I’ve told you before that if you see really high profits, think barriers to entry, so you are thinking somehow it is harder to jump into this business and create those frozen entrees and sell them than to jump into here or to jump into here. Let’s try and push what exactly those barriers to entry might be. So you think it is hard to build a plant that actually brings in the food and crates the entrée.

S: You have to understand that there are a lot more capital going into that.

P: So there is a lot of capital. There could be more capital in the Frozen Entree than you would in a grocery store or farmer. What else? Yeah?

S: Specialize production lines and also, if they are frozen entrees, I don’t know how the whole process works, but you might have to transport it frozen, so the transportation costs to have a frozen truck…

P: I think you will have to transport it frozen. Unless you want big liability issues of selling products that are likely to make people sick. You actually have to transport it frozen.

S: If that is something you can do, or outsource that, you would have to make sure the pH levels are all the same in shipping and everything.

P: Think about this. What did you estimate was the cost of a new beverage entrance to have nationwide bottling? How much was it?

S: Was it 10 million dollars __ ____, or 1 million dollars ____.

P: Well that is for a slot. We will get to that in a moment. I am just thinking about what was the cost of building your bottling network.

P: Now that was per plant, but then you needed it for the whole nation. Most of you probably came around 750 million for 5%, or somewhere up to $1.5 billion if you were going to try and get up to that 10% and do it on you r own. Think about how much more it’s going to cost you if you now have to have this refrigerated? The trucking system to get it to the stores. It actually increases the cost by about 50%. It is going to cost you a lot more to have a refrigerated system take it to take it from your production plant to all of these grocery stores around the country. Now think about the costs about getting that slotting. Is it going to be more expensive or less expensive to get it in the freezer versus on the shelf? It is actually going to be a lot more expensive to get it in the freezer because there is a lot less space and it is very expensive for the grocery store. The big barriers to entry are actually partly the specialized equipment and plant, but it is more to build that network.

That is why Green Giant jumped into this because they were already doing frozen vegetables, so they figured they could do frozen entrees because they already had that and they already had the relationship with the retailer where they had space in freezers in grocery stores. The big barriers to entry in this case are distribution and shelf space. It’s just very tough to get in. If someone could get in and they could actually make the entrees. There is an investment. I think it is 50-75 million dollars for a plant. There is one over here in Springville I think for Stouffers, and there are some specialized equipment, but the really big barrier to entry is once I have made it, how do I actually get it to the grocery stores and sell it on the shelves. The other thing is that there is a brand issue too. Are people going to buy Jeff’s Budget Gourmet? I don’t know how I would brand it, but I have to convince people to buy this because this is a product that I want you to buy, but now I have to invest in brand too.

S: If you have a distribution network that is large enough, then it is justified spending a lot on advertising whether it prevents interest from coming in if you have computed the 100 million dollar advertising budget as opposed to a 1 million dollar budget.

P: Absolutely. Yes?

S: ConAgra Foods is one of the reasons that they can do with Banquet and Marie Callenders and not just because they already have the plants and they know what to do, they have their relationships…

P: You are talking about ConAgra Foods and you mentioned which lines?

S: Marie Callenders and Banquet.

P: Those are their lines. Do they have Healthy Choice too? They might do Healthy Choice as well. ConAgra was in the middle 20 years ago. They were not here. What they did is they looked at this and they said that looks a lot better than this. When you think about options for growth and diversification, now this is strategy, you want to grow into areas where you think you can be successful and make money. They are looking at this and saying this looks pretty good. How do we now build a network to get to stores so that we can instead of selling the undifferentiated products that go into frozen entrees, we can actually sell the differentiated products and make a lot more money, and they fully integrated into this business here and they have been more successful making money here than they are in their farming business. That is how it can be useful for strategy. Yes?

S: Maybe farming is similar to the bowling alley buildings since you are having to invest in the equipment and all that stuff that you have even though you aren’t making a huge ________ those machines are expensive __________.

P: I think it is difficult to exit because of your investment equipment and your land, so you want to stay in the business. You can use this framework as a way to figure out why this industry might be more attractive than another industry. You now have a place to start. This is the value of framework. Like the question I asked last time, “Tell me why for soft drinks, the concentrate business is more attractive than the bottling business.” A lot of times it is hard to know where to start, but this gives you a place to start. A more attractive business is likely to have bargaining power of the suppliers and over the buyers. Now compare those two and see whether more bargaining power than the other has. More attractive business have barriers to entry. So are there more barriers to entry to concentrate or into bottling. In fact, concentrate has bigger barriers to entry because not only do you have to get into bottling, but you also have to build a brand and you have to get slot space and storage. Those are very big barriers to entry. It turns out barriers to entry are bigger in concentrate than they are in bottling. You can go through threat of substitutes. Can concentrate makers have bigger threat of substitutes or do bottlers? Some people think that there is no substitute for Coke or no substitute for Pepsi even if the other is there. Some of you may know from your families that there is no substitute for some people. It has to be Coke or it has to be Pepsi, but I could put it in plastic, cans, or bottles. There are a lot of different ways I could bottle a soda, and there are more alternatives. So you use that as a framework as a way to try and diagnose and understand what is going on in a situation. That is how you use the framework.

The General Environment

To determine the landscape that a firm competes in, it isn’t enough to only understand the five forces that directly affect an industry. The general environment also needs to be understood, as it can affect firms in a variety of ways, including affecting the shape of each of the five industry forces. A simple way to think about the general environment is to break it down into eight categories. Strategic managers in the best companies are focused on each of these categories, looking for trends that might lead to new opportunities or threats.

Complementary Products Or Services

Technological Change

General Economic Conditions

Population Demographics

Ecological/Natural Environment

Global Competitive Forces

Political, Legal, And Regulatory Forces

Social/Cultural Forces

How The General Environment Shapes Firm and Industry Profitability

SUPPLIER POWER

HIGH

strong labor unions

concentrated aircraft makers

THREAT OF ENTRY

HIGH

entrants have cost advantages

moderate capital requirements

little product differentiation

deregulation of governmental barriers

INDUSTRY RIVALRY

HIGH

many companies

little differentiation

excess capacity

high fixed/variable costs

cyclical demand

THREAT OF SUBSTITUTES

MEDIUM

Autos/train for short distances

BUYER POWER

MEDIUM/HIGH

Buyers extremely price sensitive

Good access to information

Low switching costs

Example: Airlines

You can do this in different industries. Two examples are an overall low profit industry and an overall high profit industry. If we think about airlines. Why are airlines not an attractive industry? The interesting thing is that even though people have not been profitable, there is still a fairly high threat of entry, and the reason is that new entrants sometimes have a cost advantage over incumbents, established players. Why? Because they enter with cheaper labor and labor is a huge cost in the airline industry. So if you enter with a younger workforce, you have lower labor costs. The other thing is that if you enter with planes because there is a ____ of planes and you can get them cheap because they are leased, or new planes that have better technology for better gas mileage, you actually can have a cost advantage as a new entrant going into this market because you don’t get the same sort of benefits economies of scale, however there are some, and we will talk about this when we get to the Southwest case. Supplier power. There has typically been strong labor unions. Customers tend to be pretty price sensitive because it is one flight versus another. There are some differences, but it’s expensive enough that we are willing to go for the cheaper flight. Also, there are some threats of substitutes. If the price gets too expensive, people just won’t fly, they won’t go, or they will take a train, a bus, or drive. There are other ways to do it. All of those add up to an industry that over the last 50 years has not been particularly attractive or profitable for the average company. Let’s compare that with pharmaceuticals, so this would be ethical drugs industry. Yes?

S: In the airline industry, when did it become deregulated? In the 80’s?

P: It was in the late 70’s, I think.

S: How would you analyze that? Because that changed the industry significantly, so how would that have affected the…

P: So it made it less profitable for the average airline company, and because they now had to compete. Before that, they were regulated and that means that the price was regulated between two cities, it was the same price, and the way they set the price was the government took their costs and then they added a little bit of profit, and the government said ok, you can make a little bit of profit. So on average, before there was the competition, the way we have it today, it was higher profit, so it was a better business to be in before deregulation.

S: So that would have made it more difficult to enter…

Dr. David Benson: You couldn’t enter in those days unless you got approval from the CAB which was the forerunner of the FAA, so you had to get approval from them. You would have a lock on the Detroit to Chicago…

P: It was whatever the routes were.

D: Salt Lake to L.A. market, and the other thing was if you had two airlines that could fly the Salt Lake to L.A. market, you had to both charge the same price. That is why in those days, you couldn’t compete on price and that is why they would compete on who had better meals, who had better leg room, and things like that because you had to charge the same price. When deregulation happened, all that went away.

P: This is Dr. David Benson, strategy professor. He is the resident airline expert.

SUPPLIER POWER

LOW

Suppliers provide mostly commodity inputs

THREAT OF ENTRY

LOW

economies of scale

capital requirements for R&D and clinical trials (more than $300 million per drug).

product differentiation

control of distribution channels

patent protection

INDUSTRY RIVALRY

LOW-MED

high concentration

product differentiation

patent protection

steady demand growth

no cyclical fluctuations of demand

THREAT OF SUBSTITUTES

LOW

No substitutes.

(Changing as managed care

encourages generics.)

BUYER POWER

LOW

Physician as buyer:

Not price sensitive

No bargaining power.

(Changing with managed care.)

Example: Pharmaceuticals

So let’s talk about pharmaceuticals. It is a little bit different. If we think about firepower in particular, how much power do you have to influence the price of your medications? It is kind of laughable. They almost charge whatever they want because most of the time they are granted a monopoly, a patent, on their product for a certain period of time. The reason they do that is because the want an incentive for those companies to make R&D investments to come up with new things. It is a good news, bad news thing. The good news is they come up with breakthroughs, and the bad news is they can charge anything they want for a period of time and there is nothing you can do about it. If you need the product to deal with an ailment, you have to buy it, and you can’t be very price sensitive, so buyer power is low and supplier power is actually pretty low too because usually the pills come from commodities. They are just different chemical combinations that come together, so there isn’t a lot of supplier power.

If we think about threat of entry, the cost of developing the drugs is now so high, getting them through the FDA, so you need to understand the drug approval process which is very expensive, and then you have to have the sales and distribution network to get your drug around the globe as quickly as possible because you have to sell it worldwide pretty quickly because you want to make back the money that it cost you to develop that drug as quickly as possible because you are patented. The clock is ticking, so you want to get it out there and start making money on it as quickly as you can, so you want to get worldwide distribution. That’s all very, very expensive, which creates barriers to entry. In some cases there is no substitute. Now at some point, what we see is, when the generic drug comes on, the revenues of the branded drug usually drops by 50% the year after. That is how much you tend to lose because now you have competition, but during that time that you have the patent, you are making a lot more money. You can take each industry and you can go through each of the forces and rank them low to high, in terms of the strength, and we actually have a little tool to do that in Chapter 2 on Industry Analysis to just get a sense if an industry is likely to be highly attractive, moderately attractive, or not very attractive.

Industry	Incumbent ROA	Number of Entrants	Rate of Entry	Entrants’ ROA	Profitable Entrants’ ROA
1. Software	21%	675	90%	-4%	14%
2. Research Services	20%	16	67%	12%	14%
3. Semiconductors	18%	141	74%	6%	11%
4. Athletic Footwear	18%	3	43%	-5%	5%
5. Apparel	17%	9	47%	16%	26%
6. Beverages	17%	6	67%	-1%	9%
7. Testing Laboratories	17%	6	60%	7%	11%
8. Credit Rating Agencies	16%	10	71%	19%	23%
9. Grain Mill Products	15%	15	68%	5%	5%
10. Sugar & Confectionary Products	15%	8	42%	-3%	10%
Average of Top Ten Industries	17.9%	89	85%	1.6%	11%
Average of All Other Industries	3.9%	19	70%	2.3%	3%

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Example: Entry and Profitability Top 10 Industries from 1990-2000

No – The Top 10 most profitable markets have almost five times as many entrants as less profitable markets

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Do Barriers To Entry Thwart Firms From Attempting Entry On Profitable Markets?

Dr. Bryce and I did this study looking at attractive industries over a time period and this shows the most attractive industries in terms of incumbent Return on Assets, the number of new entrants, the rate of entry, the entrance ROA, and the profitable entrants ROA. Now we were interested in answering a couple of questions. 1.) Do barriers to entry thwart firms from attempting entry into profitable markets? The answer was no. Everybody wants the profitable markets. You don’t want to go for airlines or steel. You want to go for pharmaceuticals. The top 10 most profitable markets have 5 times as many new entrants as the average industry. New entrants see an opportunity in attractive markets, that’s what attracts them, and they try to enter.

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Yes - New entrants to Top 10 most profitable markets earn returns 30% lower than entrants elsewhere

However, considering only profitable entrants to Top 10 markets, they earn, on average

7 times the returns of all entrants into top markets

4 times the returns of profitable entrants elsewhere

Do entrants to the most attractive markets encounter entry barriers?

Now the question is “do entrants to the most attractive markets, do they encounter entry barriers?” The answer is yes they do. On average, you make less money when you try to enter an attractive industry than when you try to enter an average industry. So there are 5 times more entrants. It looks like it is more profitable, but on average you do worse. However, if we look at only the profitable entrants into those attractive new markets compared to profitable entrants into any other markets. The companies that crack the code to get around those barriers to entry into an attractive market, those companies actually do much better than average. If you are Red Bull and you can actually figure out how to get into the beverage business, you will do better, but you have to figure out how to get around the barriers to entry. That is one of the real challenges that you want to look at. If you are thinking about market entry and you are looking about growing into an attractive industry, so we think about ConAgra, going into frozen entrees, it’s how do we get around the barriers to entry? How does Red Bull get around the barriers to entry? How did Red Bull do it?

S: They found a niche.

P: They found a niche. Did they actually try to get into grocery stores?

S: No. Not at first.

P: No. Initially they didn’t. It was all night clubs, bars, and especially university towns where there were 20 something year olds that wanted to go to night clubs and dance the night away, and this was going to help them dance the night away and to stay awake for their tests. Also, they created thin cans, and they had these things that the bars and the night clubs could hang on the inside of their refrigerators so it wouldn’t take up any more space, so they could go in and they could hang them in. This way it gave them some additional supply that they could sell, but it didn’t take up additional space in the refrigerator. So they went to night clubs, and had a completely different distribution route. They targeted on a niche market, and it turned out that the niche market really liked that. So they grew in the niche market, and then they became popular enough in the niche market, that then they had some leverage to go into grocery stores and convenience stores to go in and say, “We are already selling this many. We already have this many customers. Also, they tried to get customers to go in and ask for Red Bull in the grocery stores and convenience stores, and this helped crack open the door. You try and get around those barriers to entry. We think about Virgin Cola trying to get into the U.S. market. They had a brand, so you could argue that they could overcome the brand barrier entry, but they didn’t overcome the distribution barrier entry. What could they have done? It’s not an easy problem. Yes?

S: I’m not sure how Virgin functions, but they could have done some bundling thing with their phones. It may have been weird, but they had some types of supply and distribution already.

P: They could have done something that would have been very funky trying to bundle it with phones or some other product. Who else has distribution to stores? They could have maybe teamed up with a beer company that has distribution to stores or convenience stores. We talked about Walmart entering because they have their own shelf space, maybe they should have teamed up with Target, the Super Targets and they could have actually done something like a cool promotional thing with Target and use their shelf space. So you have to think about how we get around each of the barriers to entry. If you want to have a successful entry into an attractive market where there are barriers. First you identify the barriers and then you have to figure out how you get around each one of those to have a strategy that is likely to work. Yes?

S: So you said that barriers to entry are not preventing people from trying to enter but barriers to entry are what is preventing them from being profitable.

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Through Indirect Assault

Successful entrants use strategies that allow them to stay under the radar screen of powerful incumbents and avoid incumbent retaliation

In general, the more indirect the assault, the more successful it is

How do Profitable Firms successfully enter attractive markets?

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

To create successful Indirect Assaults, Profitable entrants to top markets combine at least two out of three approaches…

1. Leverage existing assets

Companies leverage excess capacity in existing assets, often supplementing their resources with a partner’s, to overcome costly entry barriers at minimal cost

2. Reconfigure the value chain

Entrants change the activities or the sequence of activities they perform to deliver value to customers.

3. Exploit a niche

Entrants develop offerings that appeal only to some customers, particularly those that are over- or under-served by existing incumbent offerings.

How to Launch an Indirect Assault

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Process for Successful Entry

Identify Specific Barriers to Entry in the Industry

E.g., Beverage Industry’s three major barriers to entry:

Develop a Strategy to Eliminate/Overcome Each Barrier

Bottling (Wal-Mart: Used Cotts, largest private label bottler)

Avoid Direct Assault on Incumbent’s Customers

Bottling

Shelf space

Brand awareness

Shelf space (leveraged Wal-Mart stores)

Brand awareness (leveraged “Sam’s Choice” and “Wal-Mart”)

Wal-Mart focused on a niche: price sensitive customers

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Looking for Entry Opportunities

Can We Reconfigure the Value Chain?

Can we use new technologies or perform activities in this industry in ways that weren’t possible until recently?

Can we apply a business model from another industry to this one? (e.g., Netflix applying the Amazon-like model to DVD rentals).

Can we modularize the existing value chain, either by recombining steps or by substituting ones from different value chains? (e.g., Usana Health using multilevel distribution to the nutritional supplements industry).

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Looking for Entry Opportunities (continued)

In this market, to customers care about a large number of features?

Do customers vary significantly in their preferences?

Are there distinctive groups of customers who are not well served by current offerings?

Are there rebel customers who, in an attempt to maintain a nonconformist identity, avoid mainstream products?

Can We Find a Niche?

An entrant will be better able to create a niche if it can answer yes to the following questions:

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Can We Leverage our Assets and Resources?

Do we, or potential partners, have excess capacity in existing tangible, or intangible, resources that are related in some way to the target industry’s:

Looking for Entry Opportunities (continued 3)

Customers

Distribution Channels

Inputs

Processes

Technologies

Source: David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-Guarded Markets,” Harvard Business Review, May 2007

Use Indirect Assault

When companies combine two or more of the basic entry strategies—leverage, niche, reconfigure—it increases the chances that incumbents will find it difficult to respond or will choose to ignore the entry.

Close the Door Behind You

Create barriers to entry by securing scarce inputs or locations, investing preemptively in capacity, generating network effects, or developing cost advantages by racing down the experience curve (e.g., Jet Blue acquiring LiveTV; purchasing all of Embraer capacity).

Takeaways

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