International Business Strategy
Lecture 2: The Industry-Based Views of Strategy
& The Resources-Based View of Strategy
Brendan Boyle 2007
Principle Learning Objectives
Develop an understanding of what the term
strategy means in practical and theoretical terms.
Develop an understanding of the industry-based
view of strategy and the five forces framework of
industry analysis.
Develop an understanding of the resource-based
view of strategy and its implications for IB strategy
formulation.
Develop an understanding of the implications of
the above for the strategy formulation and
implementation in multinational enterprises.
Brendan Boyle 2007
What is Strategy?
•
Strategy is how firms sustain and renew their competitive advantages in an
external competitive environment
•
Strategy is a fit between the firm’s external situation and its internal
resources and capabilities
•
Fundamental questions
- Why do firms differ?
- How do firms behave?
- What determines the scope of the firm?
- What determines the international success or failure of firms?
Brendan Boyle 2007
The Essence of Strategy
Brendan Boyle 2007
Key questions in the study of International Business Strategy
•
What Determines the International Success or Failure of Firms?
– In the West - In the 1960s and 1970s: Conglomeration
– Since the 1980s: Diversification that focused on core competencies
•
Why Do Firms Differ?
– Western firms (US/UK vs. German/French)
– Have different (shorter- versus longer-term) planning horizons.
– Emerging economies (China, Korea, Russia)
The challenge is to understand the roots of these differences.
•
What Determines the International Success or Failure of Firms?
– Acquiring and leveraging competitive advantage
– The Key: Sustaining such an advantage over time and across countries
(regions) through replication and innovation.
•
How do firms behave?
Brendan Boyle 2007
How Do Firms Behave?
Brendan Boyle 2007
Industry Competition and the IO Model
•
Industry:
– A group of firms producing products (goods and/or services) that are
similar to each other.
•
Structure-Conduct-Performance (SCP) model
– The primary contribution of the Industrial Organization (IO) economics
model
Structure: Structural attributes of an industry
Conduct: The firm’s actions
Performance: The result of the firm’s conduct in response to industry
structure
Brendan Boyle 2007
The profitability of industries varies greatly
Pharmaceuticals
Tobacco
Household & Personal Products
Food Consumer Products
Medical Products & Equipment
Beverages
Scientific & Photographic Equipt.
Commercial Banks
Publishing, Printing
Petroleum Refining
Apparel
Computer Software
Electronics, Electrical Equipment
Furniture
Chemicals
Computers, Office Equipment
Health Care
26.8
22.0
20.5
20.3
18.8
18.8
16.5
16.0
14.3
14.3
14. 3
13.5
13.3
13.3
12.8
11.8
11.5
Median return on
equity (%), 1999-2002
Gas & Electric Utilities
10.5
Food and Drug Stores
10.3
Motor Vehicles & Parts
9.8
Home Equipment
9.5
Railroads
9.0
Hotels, Casinos, Resorts
8.0
Insurance: Life and Health
7.6
Building Materials, Glass
7.0
Metals
6.0
Semiconductors &
Electronic Components
5.8
Insurance: Property & Casualty 5.3
Food Production
5.3
Telecommunications
3.5
Forest and Paper Products
3.5
Communications Equipment
(4.0)
Airlines
(34.8)
Brendan Boyle 2007
Five Forces Model and Firm Strategy
•
The Five Forces Framework
– “Translated” and extended from the SCP model in 1980 by Michael
Porter.
– A key proposition:
The focal firm performance critically depends on the degree of
competitiveness of the five forces within an industry.
The stronger and more competitive these forces are, the less likely
the focal firm is able to earn above-average return, and vice versa.
•
Although firms benefit from a favorable Five Forces environment in their
industry, they are not simply passive recipients of those competitive forces.
– Firms can use the Five Forces Model to evaluate what new industries
to enter.
– Firms can also use the Five Forces Model to compete more effectively
within their industry
Brendan Boyle 2007
Five Forces Framework
SUPPLIERS
Bargaining power of suppliers
INDUSTRY
COMPETITORS
POTENTIAL Threat of
ENTRANTS
new
entrants
Threat of
Rivalry among
existing firms
SUBSTITUTES
substitutes
Bargaining power of buyers
BUYERS
Brendan Boyle 2007
Threats of the Five Forces
Five forces
Threats indicative of strong competitive forces that can
depress industry profitability
Rivalry among
 A large number of competing firms
competitors
 Rivals are similar in size, influence, and product offerings
 High-price, low-frequency purchases
 Industry slow growth or decline
 High exit costs
Threat of
potential entry
 Little scale-based low-cost advantages
(economies of scale)
 Insufficient product differentiation
 Little fear of retaliation
 No government policy banning or discouraging entry
Brendan Boyle 2007
Threats of the Five Forces (cont’d)
Five forces
Threats indicative of strong competitive forces that can
depress industry profitability
Bargaining power
• A small number of suppliers
of suppliers
• Suppliers provide unique, differentiated products
• Focal firm is not an important customer of suppliers
• Suppliers are willing and able to vertically integrate forward
Bargaining power
• A small number of buyers
of buyers
• Products provide little cost savings or quality of life
enhancement
• Buyers purchase standard, undifferentiated products
from focal firm
• Buyers are having economic difficulties
• Buyers are willing and able to vertically integrate backward
Brendan Boyle 2007
Threats of the Five Forces (cont’d)
Threats indicative of strong competitive forces that can
Five forces
can depress industry profitability
Threat of
of substitutes
• Substitutes superior to existing products in quality and
quality and function
• Switching costs to use substitutes are low
Brendan Boyle 2007
Competitor Analysis
Objectives
What are competitor’s current goals?
Is performance meeting its goals?
How are its goals likely to change?
-
-
Strategy
How is the firm competing?
Assumptions
What assumptions does the competitor
hold about the industry and itself?
Predictions
- What strategy changes will
the competitor initiate?
- How will the competitors
respond to our strategic
initiatives?
Resources and Capabilities
- What are the competitor’s key
strengths and weaknesses?
Brendan Boyle 2007
Lessons from the Five Forces Framework
Not all industries are equal in terms of their potential
profitability.
The task for strategists is to assess the opportunities (O)
and threats (T) underlying each competitive force affecting
an industry, and then estimate the likely profit potential of
the industry.
The key is “to stake out a position that is less vulnerable to
attack from head-to-head opponents, whether established
or new, and less vulnerable to erosion from the direction of
buyer, suppliers, and substitutes.
Brendan Boyle 2007
Three Generic Strategies
Brendan Boyle 2007
Three Generic Strategies
•
Cost leadership: centers on low costs and prices.
» A high-volume, low margin approach.
•
Differentiation: Strategically focusing on how to deliver products that
perceive to be valuable and different.
• A low-volume, high-margin approach
• Research/development and marketing/sales are important
functional areas.
•
Focus strategy: Serving the needs of a particular niche of an industry such
as a geographical market, or product line.
• A specialized differentiator has a smaller, narrower, and sharper
focus than a large differentiator.
• A specialized cost leader deals with a narrower segment compared
with the traditional cost leader.
• Focusing may be successful when a firm possesses intimate
knowledge about a particular segment.
Brendan Boyle 2007
Drivers of Cost Advantages
ECONOMIES OF SCALE
ECONOMIES OF LEARNING
PRODUCTION TECHNIQUES
PRODUCT DESIGN
• Indivisibli\ties Specialization
• Increased dexterity
• Improved organizational routines
• Process innovation
• Reengineering business processes
• Standardizing designs & components
• Design for manufacture
INPUT COSTS
• Location advantages
• Ownership of low-cost inputs
•Bargaining power
CAPACITY UTILIZATION
Speed of capacity adjustment
RESIDUAL EFFICIENCY
• Culture; Managerial efficiency
Brendan Boyle 2007
The Nature of Differentiation
DEFINITION: Providing something unique that is valuable to the
buyer beyond simply offering a low price. (M. Porter)
THE KEY IS CREATING VALUE FOR THE CUSTOMER
TANGIBLE DIFFERENTATION
Observable product characteristics:
• size, color, materials, etc.
• performance
• packaging
• complementary services
INTANGIBLE
DIFFERENTATION
Unobservable and subjective
characteristics relating to
image, status, exclusivity,
identity
TOTAL CUSTOMER RESPONSIVENESS
Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
Brendan Boyle 2007
Industry-based View: Implications for Strategy
•For strategic practice, the industry competition-based view
provides:
–A systematic foundation for industry analysis and
competitor analysis
–A set of answers to the four fundamental questions in
strategy
–Evidence that industry-specific conditions play an
important role in determining firm performance
Brendan Boyle 2007
Competing on Resource/Capabilities/Competence
•
A firm consists of a bundle of productive resources and capabilities.
Resources - The tangible and intangible assets a firm uses to choose and
implement its strategies.
Capabilities - The skills a firm can use to bring its resources to bear.
Brendan Boyle 2007
Resources and Capabilities
Brendan Boyle 2007
Identifying Organizational capabilities: A Functional Classification
FUNCTION
Corporate
Management
CAPABILITY
Financial management
Strategic control
Coordinating business units
Managing acquisitions
EXEMPLARS
GE
IBM, Samsung
BP, P&G
Citigroup, Cisco
MIS
Speed and responsiveness through
rapid information transfer
Wal-Mart, Dell
R&D
Research capability
Development of innovative new products
Merck, IBM
Sony, 3M
Manufacturing
Efficient volume manufacturing
Continuous Improvement
Flexibility
Harley-D
Zara, Southwest Air
Design
Design Capability
Apple, Nokia
Marketing
Brand Management
Quality reputation
Responsiveness to market trends
P&G, PepsiCo
Johnson & Johnson
MTV, L’Oreal
Sales, Distribution
& Service
Sales Responsiveness
Efficiency and speed of distribution
Customer Service
PepsiCo, Pfizer
Amazon, Dell
Singapore Airlines
Caterpillar
Brendan Boyle 2007
Superior Resources do not necessarily mean Superior Capabilities:
Transfer Fees and Team Performance in European Soccer
TEAMS 19982003
EXPENDITURES ON KEY PLAYERS, 1998-2003
Valencia (Sp)
Pablo Aimar ($20.4m), Ruben Baraja ($12m)
Real Madrid
(Sp)
Zinedine Zidane ($68m), Luis Figo ($55m), Ronaldo ($43m),
Nicolas Anelka ($36m), David Beckham ($26m),
Deportivo La
Coruna (Sp)
Sergio Gonzales ($16m), Alberto Luque ($15m)
Juventus (It)
Gianluigi Buffon ($49m), Pavel Nedved ($38m), Lilian Thuram
($33m), David Trezeguet ($21m), Marco de Viao ($10m)
AC Milan (It)
Rui Costa ($42m), Alessandro Nesta ($30m), Andriy
Shevchenko ($24m), Andrea Pirlo ($16m), Kaka ($9m)
Parma (It)
Hidetoshi Nakata ($30m), Sdrian Mutu ($9m)
Manchester
United (Eng)
Rio Ferdinand ($45m), Juan Veron ($42m), Ruud van
Nistelrooy ($30m), Cristiano Ronaldo ($18m), Fabien Bartez
($12m), Diego Forlan ($10m), Kleberson ($9m), Silvestre ($6m)
Arsenal (Eng)
Sylvain Wiltord ($20m), Thierry Henry ($16m), Dennis
Bergkamp ($12m),Kanu ($7m), Silva ($7m), Vieira ($6m)
Liverpool
(Eng)
Emile Heskey ($16m), El Hadji Diouf ($15m), Dietmar Hamann
($12m), Chris Kerkland ($8m), Harry Kewell ($8m),
HIGHEST EXPENDITURES
ON NEW PLAYERS (Top 3
in Spain, Italy & England)
1.
Barcelona
2.
Chelsea
3.
Lazio
4.
Manchester United
5.
Inter Milan
6.
Juventus
7.
AC Milan
8.
Arsenal
9.
Real Betis
Note: Spain, Italy &
England only).
Brendan Boyle 2007
The VRIO Framework
•
VRIO
– An matrix analysis of the “sticky” nature of resources and capabilities
of a firm and the difficulty of their replication elsewhere.
•
Two Key Assumptions:
– Resource heterogeneity
Each firm has a unique combination of resources and capabilities
such that no two firms are “twins.”
– Resource immobility
Resources and capabilities unique to one firm cannot easily migrate
to competing firms.
Brendan Boyle 2007
The VRIO Framework:
Features of a Resource or Capability
The VRIO Framework: Value
Only value-adding resources can lead to competitive advantage, whereas non-valueadding capabilities may lead to competitive disadvantage.
–If firms do not shed non-value-adding resources and capabilities, they are likely to
suffer below-average performance or become extinct.
Overall, the search for valuable resources and capabilities is an ever present challenge for
virtually all firms.
Brendan Boyle 2007
The VRIO Framework: Rarity
•
The Question of Rarity
– Valuable common resources and capabilities can lead to competitive
parity but no advantage.
– Valuable rare resources and capabilities can provide, at best,
temporary competitive advantage.
– Resources and abilities that add value in new areas needed to keep up
with the competition (benchmarking).
Once competitors develop equal abilities, then no unique and
distinctive capability remains on which to build a competitive
advantage.
Brendan Boyle 2007
The VRIO Framework: Imitability
•
The Question of Imitability
– Valuable and rare resources and capabilities are a source of competitive
advantage only if competitors have a difficult time imitating them.
Imitation of tangible resources (such as plants, software, or trucking fleet) is
easy.
Imitation of intangible resources (knowledge, managerial talents, and
organizational culture) is much more difficult.
•
Why is imitation so difficult?
Time compression diseconomies
Path dependencies
Causal ambiguity
Brendan Boyle 2007
The VRIO Framework: Organization
• The Question of Organization
– How is a firm organized to develop and leverage the
full potential of its resources and capabilities?
• A More Fundamental Question
– Why do firms exist? In other words, why do people
organize firms?
The resource-based view suggests that firms exist
to develop and leverage resources and
capabilities better than individuals could.
Brendan Boyle 2007
Resource-based View: Implication for Strategy
• The strategic imperative is to focus on identifying the
resources and capabilities that really count and
developing new ones.
• Strategists need to focus on when, where, and how
resources and capabilities are useful.
– A fundamental challenge is how to do this, not just
once or every now and then, but consistently.
• The resource-based view offers a set of answers to the
four fundamental questions in strategy.
Brendan Boyle 2007
Resource-based View: Implication for Strategy
•
Why do firms differ?
– The assumption of resource heterogeneity, that is, every firm is unique in its
bundle of resources and capabilities, directly addresses this question.
•
How do firms behave?
– The answer boils down to how they take advantage of their strengths embodied in
resources and capabilities and overcome their weaknesses.
•
What determines the scope of the firm?
– Value chain analysis suggests that the scope of the firm is determined by how a
firm performs different value-adding activities relative to rivals.
Managers often fail to assess them relative to competitors, resulting in an
unnecessarily broad scope with some mediocre units.
•
What determines the international success and failure of firms?
– The resource-based view identifies firm-specific resources and capabilities as the
determinants.
Brendan Boyle 2007
Principle Learning Objectives – revisited
Have you developed an understanding of what the term
strategy means in practical and theoretical terms?
Have you developed an understanding of the industrybased view of strategy and the five forces framework of
industry analysis?
Have you developed an understanding of the resourcebased view of strategy and its implications for IB
strategy formulation?
Have you developed an understanding of the implications
of the above for the strategy formulation and
implementation in multinational enterprises?
Brendan Boyle 2007