RSM392 Final Exam Notes

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Rotman Commerce
Professor Chris Liu

RSM392 Lecture Notes & Readings Strategic Positioning = doing different things than your rivals Lecture 2 Industry Problem  Craft effective strategy, must take account of external environment o To decide whether to put your firm in an environment (entry) o To decide whether to extricate your firm from an environment (exit) o To positions your firm to succeed in a given industry o To assess the effect of a major change o To shape the environment Strategy = A plan that specifies tradeoffs, A vision for how the firm can create a defensible advantage against the forces that determine industry profitability Two Complementary Solutions  Demand/Supply & Porter 5 Forces  D&S works well to describe certain situations, focuses on predicting price & quality  5 Forces more flexible: works where assumptions of D&S don‟t hold, focuses on long run structure & profitability  Two work hand in hand o Supplier power affects marginal costs o Substitutes affect slope, shape of demand curve o Entry barrier affect steepness supply curve is Key Quotes from Porter  “The state of competition in an industry depends on five basic forces, which are diagrammed in the Exhibit on page 6. The collective strength of these forces determines the ultimate profit potential of an industry.”  “In economists‟ „perfectly competitive‟ industry, jockeying for position is unbridled and entry to the industry very easy. This kind of industry structure, of course, offers the worst prospect for long-run profitability. The weaker the forces collectively, however, the greater the opportunity for superior performance.” Definitions:  Industry: define the industry based on similar products that have common suppliers and buyers  Suppliers: organizations that firms in the industry PAY  Buyers: organizations that PAY firms in the industry  Rivals: firms in same industry  Substitutes: stuff that could be alternative to industry‟s products  Potential Entrants : firms (current/potential) that could enter industry  Switching costs describes the “costs” that customers must bear when they try to switch from one product to another. Porter 5 Forces  Industry structure determines long-term average profitability!  firm profitability depends to a great extent on structural (economic) forces often outside of managerial control Common Pitfalls of – 5 Forces  Using the firm as the level of analysis  Failing to define the industry clearly  Taking the perspective than an “attractive” industry means new entrants want to enter  Focusing on the symptom (“customers are price sensitive”) rather than the problem (“it‟s not a critical input for their products”)  Ignoring changes  Ignoring the full range of substitutes  Giving equal weight to all forces Steps to a 5 Force Analysis 1 | P a g e RSM392 Lecture Notes & Readings 1. Define the industry 2. Identify the players 3. Assess the strength of each force 4. “Sniff test” ◦ Is the analysis in line with actual profitability? ◦ Are more profitable players positioned vis-à-vis competitive forces? 5. Assess recent & future changes in each force Buyer Seller  Are very price sensitive & have high bargaining  Are very price sensitive & have high bargaining power  they can squeeze profit out of industry power  they can squeeze profit out of industry Ideal (low situation) Low supplier power = low costs  Low buyer power = higher prices (more value  (more value created) created)  Many suppliers  Many buyers  Small suppliers  Small buyers  Suppliers can‟t forward integrate  Buyers can‟t backward integrate  Many good alternatives  Not many alternatives  Supplier isn‟t important to the industry  Industry very important to the buyer  Industry very important to supplier  Buyer isn‟t important to the industry  Standardized products  Differentiated products  Low switching costs (for industry)  High switching costs (for buyers) Factors to Consider: Factors to Consider: • Buyer concentration • Differentiation of inputs • Buyer volume • Switching costs • Buyer switching costs • Presence of substitute inputs • Buyer information • Supplier concentration • Ability to integrate backward • Importance of volume to supplier • Substitute products • Cost relative to total purchases • Price / total purchases • Impact of inputs on cost or differentiation • Product differences • Threat of forward integration • Brand identity • Impact of quality / performance • Buyer profits Threat of Substitutes Threat of New Entrants Close substitutes can reduce the value created High barriers to entry make the threat of new entrants LOW: • Lower the price that buyers will pay • Economies of scale • Put a floor on the prices that suppliers will require • High capital requirements • Level of threat = f(functional equivalence) • Cost disadvantages for new entrants • If substitutes @ lower cost, the product industry will • Low access to distribution channels have to lower cost or increase value • Favorable government policies for incumbent firms • Brand identity of incumbents • Relative price performance of substitutes • High threat of retaliation • Switching costs • desirability of entry is NOT SAME AS • Buyer propensity to substitute ability to enter • key question is whether there are BARRIERS to entry Factors Affecting Entry  Economy of scale o If exist high BTE  Capital requirements o If high  high BTE  Cost disadvantage for new entrants o If exist  high BTE  Accessible to distribution channels o If difficult  high BTE  Government policy o If favorable to industry  high BTE Overall if BTE high = Threat is Low (profit stays in the industry) Factors to consider: • Economies of scale 2 | P a g e RSM392 Lecture Notes & Readings • Proprietary product differences • Brand identity • Switching costs • Capital requirements • Access to distribution • Absolute cost advantages • Government policy • Expected retaliation Rivalry Among Existing Competitors Summary Intense rivalry can drive prices down (or force costs/quality up)Buyer power + Supplier Power + Threat of Substitutes  • Speaks to the competitive intensity within an industry determine how much value is created in an industry Things that make rivalry low: • High differentiation Together, R and ToE determine the extent to which a firm in • Capacity the industry can capture the value created. • Few rivals (<6 as a gut check) • Different sizes of firms • Growing industry • Low exit barriers • High switching costs Factor to Consider: • Switching costs • Concentration and balance • Informational complexity • Diversity of competitors • Corporate stakes • Exit barriers • Industry growth • Fixed costs / value added • Overcapacity • Product differences • Brand identity Lecture 3: Coke Vs. Pepsi  Coke & Pepsi have a history of excellent profits in the soft drink concentrate industry in part because the industry structure has been managed carefully. Business  Secret ingredients.  Locked-in Buyers  Lots of substitutes but advertising spend decreases their impact.  Competition is restrained.  High BTE  Bottlers are essential as a buffer against stronger buyer (i.e., Costco).  However, bottlers have been squeezed too much. Take Away  their investments in brand image help create barriers to entry & increase power over buyers  they also manage their bottlers well and keep their power low  help choose positions within industries o like Dr. Pepper does (avoiding direct competition with Coke & Pepsi)  If firms are not careful…they can wreck their industry structure! o If Coke & Pepsi decided to compete on price rather than advertising, things could look different. Lecture 4: Airbone  Illustrates the power of activity analysis and of analyzing relative costs  Demonstrates the sources of the company‟s narrow low-cost advantage, particularly the exploitation of FedEx and UPS‟s inflexibilities. 3 | P a g e RSM392 Lecture Notes & Readings  Questions arise about the sustainability of the company‟s advantage the shipping industry moves towards internet/online shopping. Business  Industry with very high fixed costs.  Low buyer loyalty.  Moderate supplier power, which the companies try to offset.  Intense Rivalry between FedEx and UPS, but this is relaxing over time.  This is driving out all small players. Take Away  The successful design and implementation of a focused strategy (narrow, cost-leadership) based on numerous, interrelated activities and careful choices about what should and should NOT do.  Illustrates two different, but internally consistent firm strategies.  Illustrates that strategies are often rooted in the historical circumstances of the firm‟s founding  It demonstrates how competition among the largest firms in an industry can affect changes in the structure of the industry  FedEx & UPS‟s rivalry drove up fixed costs, leading to increasing economies of scale  Thus, rivalry improved industry structure in the long-term, although the aggressive rivalry and imitation (i.e., price wars) hurt in the short-term.  The key to attacking a “giant” is to focus on their inflexibilities.  Airborne managed to bypass unfavorable economies of scale.  By substituting marginal costs for fixed costs. Lecture 5: Ducati  Ducati has an aggressive growth strategy to streamline & consolidate production while increasing customer willingness-to-pay.  The logic for aggressive growth is to leverage not only the engineering, but also the history of the company to appeal to a larger consumer base.  Ducati sells an experience as much as it sells a motorcycle.  Questions arise about the (fixed) costs of this differentiation strategy, saturation of Ducati‟s core market, and how it drives an imperative to grow. Business Drivers of WTP Drivers of Cost Physical/Tangible: R&D  performance, handling  Level of spending  speed  Scope(number of segments; car division, racing  skill level division)  design  Engineering vs. design  service Manufacturing  availability of parts  Scale (volume) Intangible:  Scope  image  Outsourcing/supplier relations  community  Location  lifestyle Marketing  heritage/history  Advertising choices  Number of segments/scope  Community  Related products & events Distribution  Owned v. franchise  Quantity v. quality  Internet  Goals = Harley‟s P (~20%) & significant growth!  Minoli found three advantages at Ducati o Good product (though less efficient & reliable than Japanese) o Top-Notch Engineers (in R&D and Racing) o Strong brand potential (high loyalty!)  Minoli‟s Plan (Ex 7) 4 | P a g e RSM392 Lecture Notes & Readings o Motorcycle products: hyper-sport, super-sport, naked o Emphasize advantages  especially product design & brand o Sell Ducati as a Motorcycle Experience o lower costs related to physical product without lowering willingness-to-pay o to do this, he needed to increase expenditures on non-physical (emotional) product attributes o By keeping prices relatively stable, he delivered value to buyers o Wsth higher fixed costs, pressures to grow – should it enter a new segment (cruisers?)  Minoli’s 1 Step: fix factory roof ? -build a museum !!!  Minoli’s next steps: o Production  rationalize supplier network (fewer suppliers)  outsource production more aggressively (more stuff outsource)  in-house = only R&D, design, quality control, & 2 components o Marketing, Sales, & Distribution  expand sales/marketing  replace multi-franchise dealers with wholly-owned Ducati stores o Product Dev + R&D:  increase R&D, especially racing!  internal design; reduce time-to-market o World of Ducati
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