Competitive Advantage in
Mature Industries
OUTLINE
• Key success factors in mature industries
• Strategic Implementation: Structure, Systems,
Style
• Strategies for declining industries
Competitive Advantage in Retailing: Retailers with
the Highest and Lowest Valuation Ratios
TOP 15
Valuation Sales
Ratio
($,bil.)
Amazon.com (US)
n.a.
3.9
Caremark Rx (US)
18.0
6.8
Expedia
16.6
0.6
Autozone (US)
13.1
5.3
Hennes & Mauritz (Swe.)
10.5
5.9
Next (UK)
10.1
3.6
Bed, Bath & Beyond (US)
8.5
3.7
Woolworth (Australia)
8.0
16.0
Gap (US)
4.1
14.5
TJX (US)
6.9
12.0
Inditex (Spain)
6.8
4.7
Wal-Mart (US)
5.7
244.5
Radio Shack
5.6
4.6
Family Dollar Stores
5.1
4.2
Best Buy (US)
5.0
20.9
BOTTOM 15
Valuation Sales
Ratio ($, bil.)
Toys-R-Us
0.6
11.3
J.C. Penny (US)
0.7
32.3
Federated Dept. Stores (US) 1.1
15.4
J. Sainsbury (UK)
1.1
29.8
Ito-Yokado (Japan)
1.1
28.0
Ahold
1.2
78.3
Safeway plc (UK)
1.3
29.8
Pinault-Printemps
-Redoute (France)
1.4
32.2
Sears Roebuck (US)
1.4
41.4
Dixons Group (UK)
1.4
8.0
Albertson’s (US)
1.5
35.6
May Department Stores (US) 1.7
11.9
Office Depot (US)
1.7
11.4
CVS
1.9
24.2
Kingfisher (UK)
2.0
17.6
Key Success Factors in Mature Industries
•
Opportunities for sustainable
competitive advantage are
limited
-- limited potential for differentiation
-- technology stable and well diffused
-- ease of entry due to well developed
industry infrastructure and powerful
distributors
-- international competition : domestic
cost advantage vulnerable
•
Sources of
cost advantage
-- Economies of scale
-- Low-cost inputs
-- Low overheads
•
Segment and customer
selection
-- As general industry environment
deteriorates, important to locate
attractive segments and woo good
customers.
•
Sources of differentiation
advantage
-- Emphasis on image differentiation and
differentiation through complementary
services.
•
Sources of innovation
-- Limited opportunity for product and
process innovation but considerable
opportunity for strategic innovation
Sources of Strategic Innovation in Mature Industries
• Reconfiguring the value chain:
- Benetton and Zara in clothing
- Southwest & Ryanair in airlines
- Dell in PCs
• Redefining markets and products - Swatch in watches
- Starbucks in coffee shops
- Barnes & Noble in book retailing
• Innovative approaches to
differentiation
- Virgin Atlantic in air travel
- Sephora in cosmetics retailing
Who are the strategic innovators?
• New entrants
• Existing firms on the periphery
• Firms from adjacent industries
- CNN in news broadcasting
- Nucor in the U.S. steel industry
-Sun Records in rock ‘n roll music
- Apple in consumer electronics
Why not leading incumbents?
• They are constrained by “industry recipes,” relationships with existing
customers, investments in resources & capabilities linked to past
strategies.
RATE OF INNOVATION
Product, Process, and Strategic
Innovation over the Life Cycle
Product
innovation
Strategic
innovation
Process
innovation
TIME
Strategy Implementation in Mature
Industries:The Traditional Model
STRATEGY
- Pursuit of cost efficiency through
mass production
STRUCTURE
- Functional departments
- Line and staff distinction
- Job specialization
CONTROLS
- Quantitative, short-term performance targets
- Hierarchical monitoring and control
- Standard, formalized operating procedures,
reporting, and management by exception.
INCENTIVES
- Emphasis on financial incentives linked to
individual performance
TOP
MANAGEMENT
- Primary functions are control and
strategic decision making
- Two main styles: politician and autocrat
The Competitive Environment of
Declining Industries
 Features
of declining
industries
 Smooth adjustment
- Excess capacity
- Lack of technological change
- Consolidation (but some new entry
as old firms exit)
- Old machines and employees
- Predictability of decline
of capacity
depends upon
- Barriers to exit
{
Durable assets
Costs of closure
Management
commitment
- Strategies of surviving firms
Strategy Options in Declining
Industries
LEADERSHIP
Establish dominant market position
-encourage exit of rivals
-buy market share through acquisition
-acquire capacity
-demonstrate commitment
-dispel optimism about the industry’s future
-raise the stakes
NICHE
Identify an attractive segment and dominate it.
HARVEST
Maximize cash flow from existing sources
DIVEST
Get out while there is still a market for industry assets
Strategy Alternatives for a Declining Industry
COMPANY’S COMPETITIVE POSITION
INDUSTRY
STRUCTURE
Favorable
to decline
Unfavorable
to decline
Strengths in
remaining demand
pockets
Lacks strength in
remaining demand
pockets
LEADERSHIP
or
NICHE
HARVEST
or
DIVEST
NICHE
or
HARVEST
DIVEST
QUICKLY
Vertical Integration and
The Scope of the Firm
OUTLINE
• Transactions Costs and the Scope of the Firm
--Why does the firm exist?
--The evolution of firms and markets
• The Costs and Benefits of Vertical Integration
• Designing Vertical Relationships
• Recent Trends
From Business Strategy to Corporate
Strategy: The Scope of the Firm
• Business Strategy is concerned with how a firm
computes within a particular market
• Corporate Strategy is concerned with where a
firm competes, i.e. the scope of its activities
• The dimensions of scope are
– geographical scope
– vertical scope
– product scope
Transactions Costs and the
Scope of the Firm
VerticalProduct
Geographical
Scope
Scope
Scope
[A] Single
Integrated
Firm
V1
V2
V3
[B] Several
V1
Specialized
V2
Firms linked
by Markets V3
P1
P1
P2
P2
P3
P3
C1
C1
C2
C2
C3
C3
In situation [A] the business units are integrated within a single firm.
In situation [B] the business units are independent firms linked by markets.
Are the administrative costs of the integrated firm less than the transaction
costs of markets?
Transactions Costs and The
Existence of the Firm
• Transaction cost theory explains not just the boundaries
of firms, also the existence of firms.
• In 18th century English woollen industry, no firms –
independent spinners and weavers linked by merchants.
• Residential remodeling industry -- mainly independent selfemployed builders, plumbers, electricians, painters.
• Key issue -- transaction costs of the market vs.
administrative costs of firms.
• Where transaction costs high—firm is more efficient means
of organization
Note: transaction costs comprise costs of search and contract
negotiation and enforcement
Aggregate Concentration in
US Manufacturing, 1947-97
45
40
35
30
25
20
15
10
5
0
1947
1954
1962
1970
1978
1987
1997
Top-200 cos. share of value added in US manufacturing
Determinants of Changes in Corporate Scope
1800 – 1980 Expanding scale and scope of industrial corporations due to
declining administrative costs of firms:
• Advances in transportation, information and communication
technologies
• Advances in management—accounting systems, decision sciences,
financial techniques, organizational innovations, scientific management
1980 – 1995 Shrinking size and scope of biggest industrial corporations.
Increasingly
turbulent
external
environment
Increased no. of managerial
decisions. Need for fast
responses to external
change
Admin. costs of
firms rise relative
to transaction
costs of markets
1995 – 2007 Rapid increase in global concentration (steel, aluminium,
oil, beer, banking, cement).
Key drivers: quest for market power and scale economies.
Also, large corporations better at reconciling size with agility
The Costs and Benefits of Vertical
Integration: BENEFITS
• Technical economies from integrating processes e.g. iron
and steel production
—but doesn’t necessarily require common ownership
• Superior coordination
• Avoids transactions costs of market contracts in situations
where there are:
-- small numbers of firms
-- transaction-specific investments
-- opportunism and strategic misrepresentation
-- taxes and regulations on market transactions
Williamson (1975)
• Complete vs incomplete contracts
– Bounded rationality
– Measurement problems
– Information asymmetry
Ensure all contracts are incomplete
• Asset specificity creates quasi-rents
– the difference in value of an asset in its best and next best
use (fundamental transformation to small N bargaining or
bilateral monopoly)
• Site specificity – assets located side by side to save costs
• Physical asset specificity – customized to a particular transaction
• Human asset specificity – workers have specialized skills
Holdup
• The existence of quasi-rents creates the incentive for
opportunism in the form of hold-up
– E.g. If I make you the exclusive supplier of a critical part then I
expose myself to your demands
• Firms integrate to avoid the threat of hold-up or the costs
of avoiding it (e.g. litigation, distrust)
• Integration is efficient if the transaction costs of hold-up
exceed governance costs
• In theory, hold-up should be very rare because potential
victims will integrate before being held up.
The Costs and Benefits of Vertical
Integration: COSTS
• Differences in optimal scale of operation between different
stages prevents balanced VI
• Strategic differences between different vertical stages creates
management difficulties (dominant logic)
• Inhibits development of and exploitation of core
competencies
• Limits flexibility -- in responding to demand cycles
-- in responding to changes in technology,
customer preferences, etc.
(But, VI may be conducive to system-wide flexibility)
• Compounding of risk
• Also lack of market prices increases inefficiency (may result
in tapered integration –part internal, part market)
When is Vertical Integration More Attractive
than Outsourcing?
How many firms are available
to undertake the activities?
The fewer the companies
the more attractive is VI
Is transaction-specific investment
needed?
If yes, VI more attractive
Does limited information permit
cheating?
VI can limit opportunism
Are taxes or regulation imposed
on transactions?
VI can avoid them
Do the different stages have similar
optimal scales of operation?
Greater the similarity, the
more attractive is VI
Are the two stages strategically
similar?
Greater the strategic
similarity ---the more
attractive is VI
How great the need for entrepreneurship
& continual upgrading of capabilities
Greater the need, the greater
the disadvantages of VI
How uncertain is market demand?
Greater the unpredictability
----the more costly is VI
Are risks compounded by
linkages between vertical stages
VI increases risk.
The value chain for steel cans
Iron ore
mining
Steel
production
Steel strip
production
Can
making
VERTICAL
INTEGRATION,
AND MARKET
CONTRACTS
VERTICAL
INTEGRATION
MARKET
CONTRACTS
Canning of
food, drink,
oil, etc.
MARKET
CONTRACTS
What factors explain why some stages are vertically integrated,
while others are linked by market transactions?
More brainteasers
• Why do car manufacturers not own
dealerships anymore?
• Why don’t Hollywood studios produce or
exhibit films anymore? Why were they
completely integrated before WWII?
Designing Vertical Relationships: Long-Term
Contracts and Quasi-Vertical Integration
• Intermediate between spot transactions and vertical
integration are several types of vertical relationships
---such relationships may combine benefits of both market
transactions and internalization
• Key issues in designing vertical relationships
-- How is risk allocated between the parties?
-- Are the incentives appropriate?
Recent Trends in Vertical Relationships
• From competitive contracting to supplier partnerships, e.g.
in autos
• From vertical integration to outsourcing (not just
components, also IT, distribution, and administrative
services).
• Diffusion of franchising
• Technology partnerships (e.g. IBM- Apple; Canon- HP)
• Inter-firm networks
General conclusion:- boundaries between firms and
markets becoming increasingly blurred.
High
Different Types of Vertical Relationship
Low
Long-term
contracts
Joint
ventures
Agency
agreements
Spot sales/
purchases
Informal
supplier/
customer
relationships
Low
Formalization
Franchises
Low
Supplier/
customer
partnerships
Degree of Commitment
Vertical
integration
High
Birdseye Case
• Why did Birds Eye develop as a vertically
integrated producer the way it did?
• Did a vertically integrated producer have a
competitive advantage over more vertically
specialized suppliers of frozen foods during
the early 1980s?
• What should Birds Eye have done in 1979?