RSM392 Lecture Notes & Readings
Strategic Positioning = doing different things than your rivals
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
o Entry barrier affect steepness supply curve
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.”
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
Ignoring the full range of substitutes
Giving equal weight to all forces
Steps to a 5 Force Analysis
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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
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
Factors Affecting Entry
Economy of scale
o If exist high BTE
o If high high BTE
Cost disadvantage for new entrants
o If exist high BTE
Accessible to distribution channels
o If difficult high BTE
o If favorable to industry high BTE
Overall if BTE high = Threat is Low (profit stays in the
Factors to consider:
• Economies of scale
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• 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
• 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
Lots of substitutes but advertising spend decreases their impact.
Competition is restrained.
Bottlers are essential as a buffer against stronger buyer (i.e., Costco).
However, bottlers have been squeezed too much.
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
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Questions arise about the sustainability of the company‟s advantage the shipping industry moves towards
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.
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
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
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.
Drivers of WTP Drivers of Cost
performance, handling Level of spending
speed Scope(number of segments; car division, racing
skill level division)
design Engineering vs. design
availability of parts Scale (volume)
image Outsourcing/supplier relations
heritage/history Advertising choices
Number of segments/scope
Related products & events
Owned v. franchise
Quantity v. quality
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)
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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
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
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:
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
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