PowerPoint Slides © Michael R. Ward, UTA 2014
Econ 5313
Kleenex Strategy
• Recall the Kleenex example from last time
• What strategic decisions were being made?
• Bring out new innovations in the tissue market
• Determine appropriate prices and production as competitive
entry appears
• Kill off projects at the end of their product lifecycles
• What was the goal of these decisions?
• Create additional value to the customer
• Capture some of this value in higher price-cost margins
• Sustain these margins as long as possible
Econ 5313
Kleenex Strategy
• This was central to a very successful advertisement
campaign for many years
• Not so much any more
• When to pull the plug?
• Ex Director of R&D at pharmaceutical firm
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Strategy Goals
• Strategy includes all opportunities to increase the size of
the profit box
• Increase customer value
• Lower costs
• But also, sustaining your ability to set prices above costs
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Profit Dissipation
• Due to falling value
• Product no longer valued by many Ex Buggy Whips
• Due to rising costs
• Costs creep up, eating into margins Ex “Gingerbread”
architectural details
• Due to disappearing competitive advantage
• Your ability to set prices above costs (capture value) is tied to
your competitive advantages relative to others
• A new innovative product usually has huge competitive
advantage
• The ability of entrants to imitate is what keeps competitive
advantage from being sustained over time
• What are the sources of competitive advantage?
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Two Views
• Industrial Organization (IO)
• Focus on industry, not specific firm assets
• Characteristics of the particular industry determine the scope for
strategies to sustain competitive advantage
• Characteristics are external to the firm and common for firms in
the industry
• Resource Based View (RBV)
• Focus on firm assets as opposed to industry setting
• The particular assets or resources within a firm provide scope for
differences in strategy that allow for sustainable competitive
advantage
• Important that the valuable assets cannot be easily copied
• Neither is wrong; just different ways of looking at the issue
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IO View
• What are the important characteristics of the industry that
affect the appropriate strategy?
• Come up with 5 (or 6) main points for greater profits:
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High barriers to entry
Low buyer power
Low supplier power
Low threat from substitutes
Low levels of rivalry between existing firms
(Cooperation from complementary products)
• The first five are the “Five Forces” made popular by
Michael Porter
• The sixth is “the force that Porter forgot”
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IO View
• An industry is comprised of a group of firms producing
products that are close substitutes to each other to serve
a particular market
• For a multi-product company, industry analysis may need
to be done on a product-by-product basis
• To use the Five Forces model, one must consider “value
capture”
• Value is created in each industry and distributed across suppliers,
industry rivals, and buyers.
• Firms compete to capture as much of the value created as
possible.
• Michael Porter Interview
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1. Entry Barriers
• Keep firms that are outside of the industry from entering
when the industry is profitable
• Maintain competitive advantage
• Barriers prevent, or slow, their entry
• Some barriers are:
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government protection (e.g., patents or licensing requirements)
proprietary products
Strong brands / reputation
high capital requirements for entry
lower costs driven by economies of scale
Learning-by-doing, network externalities
• Strategic Implication: Develop barriers to entry if possible
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2. Buyer Power
• The extent to which the customers of the product or
service can capture value
• Buyer power will tend to be higher if buyers are
concentrated
• Buyer power will tend to be higher if it is easy for buyers
to switch from firm to firm
• More power means these buyers will find it easier to
capture value, taking it away from your firm
• Strategic Implications: Try to diversify customer base & Try
to limit customers ability to switch
Econ 5313
3. Supplier Power
• The extent to which the providers of any input to the
product or service can capture value
• Their power tends to be higher when the inputs provided
are critical or highly differentiated
• Concentration among suppliers gives suppliers power
since their customers will have fewer bargaining options
• Even if many suppliers exist, power may still be high if
there are significant costs to switching between suppliers
• Strategic Implication: Try to limit dependence on a few
suppliers as much as possible
Econ 5313
4. Substitutes
• Other products outside of your industry that can serve the
same purpose
• Ex Aluminum foil and cellophane wrap
• Ex “Nice” pen and folio as graduation gifts
• Greater substitutability with another product means your
demand is more elastic and price-cost margins are smaller
• Typically, these are from outside of your main set of rivals
• Strategic Implication: Often not much you can do. But this
information is still relevant for the implementation of
other elements of your strategy, e.g., pricing
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5. Rivalry
• Refers to the form that competition takes. Is it dog-eatdog or is it softer?
• Rivalry is likely to be quite high if there is:
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A large number of firms compete in an industry
A stable technology
A technology with high fixed costs or excess capacity
Slow or negative industry growth
Large, infrequent orders
• Rivalry higher when products are not well differentiated
and buyers find it easy to switch back and forth
• Strategy Implication: Possibly try to differentiate your
product more
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Pentagonal Analysis
• A common tool is the so called “Pentagonal Analysis”
• Each point refers to a force and the distance gauges its
importance
• Industries with similar graphs should have similar
strategies
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Value Net
• One limitation of the Five Forces is that it often portrays
an industry as a zero-sum game
• The way you get a bigger piece of the pie is to take it from one of
the other participants in the industry
• Although this is one way to view competition, companies
can also work with other industry participants to try to
build a larger pie
• With a larger pie, everyone’s slice grows bigger
• Some economists recommend that as a complement to a
Five Forces analysis, which focuses on threats in the
industry, that firms also evaluate the Value Net of the
industry for cooperative opportunities
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6. Cooperation from Complements
• Refers to the bundle of products produced that mutually
support each other
• A product is under one company’s control whereas an
industry platform requires complementary innovations
from others to be useful
• A product is proprietary while a platform is supported by a
whole industry
• Ex Android versus Apple IOS, CDMA standard in mobile phones,
Video game consoles and game publishers
• Strategic Implication: Your business may be better served
if other firms develop compliments. If so, foster these
developments
Econ 5313
Platform Strategy
• If you decide on a platform strategy, there are two
common strategies
• "Coring” - using a set of techniques to create a platform by
making a technology "core" to a particular technological
system and market
• Ex Google Inc. in Internet search and Qualcomm Inc. in mobile
technology.
• "Tipping” - the set of activities that helps a company "tip"
a market toward its platform rather than some other
potential one
• Ex Linux's growth in the market for Web server operating systems
and Ebay’s dominance in online auctions
Econ 5313
Support for IO View
Econ 5313
MBA Thought Experiment
Apply the Five (Six) Forces to UT Arlington’s MBA program
Market Definition?
1. Barriers to entry
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New For-Profit Universities?
New Non-Profit Universities?
New MBA program from existing university?
2. Buyer power
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Who are buyers? Individual students? Local businesses?
Diverse groups? Switching Costs?
3. Supplier power
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Who are suppliers? Faculty? Administrators? Publishers?
Are they critical or highly differentiated?
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MBA Thought Experiment
4. Threat from substitutes
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What are substitutes? Job experience? Certificate programs?
5. Rivalry between existing firms
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Who are UT Arlington’s rivals?
UNT, UTD, TCU, SMU, UT Austin, Wharton?
How do they compete?
6. Cooperation from complementary products
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Campus life? (sports, activities)
Campustown?
Network of local firm recruiters?
Network of influential alumni?
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In-class exercise
• With a group of 2-4 neighbors
• Choose an industry – probably one that one of you work
in – and gauge how high each of the five (six) forces are
• What sort of profitability would this suggest?
• Is the prediction accurate?
• What sort of strategy would this suggest?
• Is it actually being implemented?
• What changes have occurred in these forces?
• What changes in strategy do they suggest?
Econ 5313
Resource-Based View (RBV)
• Individual firms may exhibit sustained performance
advantages due to the superiority of their resources
• Even when other firms in the same industry do not
• Resources are “the tangible and intangible assets firms
use to conceive of and implement their strategies”
• If the IO view was the whole story, all firms in an industry
would have the same level of profitability
• With the RBV view, some out perform others because they
have developed better resources
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RBV Assumptions
• Two primary assumptions underlie the RBV:
• resource heterogeneity (firms possess different bundles of
resources)
• resource immobility (since resources can be immobile, these
resource differences may persist)
• Ex Farmland is both heterogeneous and immobile
• Ex Worker human capital is heterogeneous but often
mobile
• Ex Raw material inputs are neither heterogeneous nor
immobile
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RBV View
• If a resource is both valuable and rare, it can lead to at
least a temporary competitive advantage over rivals
• A valuable resource must allow a business to conceive of
and implement strategies that improve its efficiency or
effectiveness
• These resources let a firm operate at lower costs than its
rivals or charge higher prices to its customers
• For a resource to be rare, it must not be broadly available
to competitors
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Temporary versus Sustainable
• Resources that may generate temporary competitive
advantage do not necessarily lead to a sustainable
competitive advantage
• Sustainable competitive advantage requires that resources
must be difficult to imitate or substitute
• Some conditions that make a resource hard to imitate are:
• Resources that flow from a firm’s unique historical conditions will
be difficult for competitors to match
• Resources where the link to advantage is ambiguous are more
difficult for competitors to re-create the advantage
• Resource that are socially complex (e.g., organizational culture)
are difficult for rivals to duplicate
Econ 5313
RBV Assets
• So from the resource based view perspective, resources
and capabilities that are valuable, relatively rare, and
difficult to successfully imitate/substitute are at the core
of sustained, excellent firm performance
• These resources and capabilities may include:
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technology
physical capital
intellectual assets
human capital
financial resources
organizational form
Econ 5313
Frank Perdue
• How did Frank Perdue create sustainable competitive
advantage in the poultry business?
• Produce a chicken that tastes better, looks better, and
cooks better – increase customer value
• Requires monitoring throughout the supply chain –
increases costs
• Cover increased costs with price premium
• How to sustain the advantage though?
• Focus on quality control
• Branding
Econ 5313
Waffle House
• How does Waffle House create sustainable competitive
advantage in the breakfast restaurant business?
• Produce a low cost breakfast without amenities – increase
customer value for those who prefer value over amenities
• Requires monitoring costs and prices throughout the
franchise chain
• How to sustain the advantage though?
• Franchise monitoring
• Branding
Econ 5313
Management Advice
• Be wary of advice that claims to identify critical resources
or capabilities that successful companies have to develop
in order to gain a competitive advantage
• Explanations such as these often mistakenly conclude a
causal relationship when only a correlation exists
• Publicly available knowledge is not going to help you
create a competitive advantage
• Ex You read that having a CMEO (Chief Managerial Economics
Officer) in your company leads to a competitive advantage. You
decide to hire a CMEO but no competitive advantage follows.
What happened?
• Your competitor also heard about the CMEO "secret" and hired
one too. Competitive Advantage cannot flow from something
that is easily duplicated.
Econ 5313
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From the Blog
Chapter 10
Banning ride sharing to protect taxis
Using consumer activism to erect entry barriers
Patents and Prices
Uber versus Taxis
Video Game Platforms
59 Minute Photo
And the Band Played On
Econ 5313
Main Points
• Strategy lies in increasing the profit box by: increasing
value, lowering costs, and/or sustaining advantage
• The IO view focuses on industry structure
• The Five Forces (six) is a useful tool to analyze IO view
• The RBV view focuses on distinct assets of the firm
• Sustained competitive advantage comes from superior resources
that are difficult to imitate
• Be wary of advice from consultants because this implies
that the resource is easily imitable
• Strategy usually comes down to affecting: cost reduction,
product differentiation and competitive intensity