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STR 421


... Superior access to inputs or customers Inputs: De Beers until 1990 Alcoa s backward integration into bauxite in early 20th century Customers: ... – PowerPoint PPT presentation

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Title: STR 421

STR 421
  • Economics of
  • Competitive Strategy
  • Michael Raith
  • Spring 2007

Todays class
  • 2. Value creation and competitive advantage
  • 2.1 Value creation and positioning
  • 2.2 Sustainability of a competitive advantage

Sustainability of competitive advantage
  • Efficient markets principle if you have a
    competitive advantage, others will try to imitate
    what youre doing
  • What will prevent them?

Sources of sustainability
  • a.k.a. Isolating mechanisms, Sources of market
  • All of these are also barriers to entry
  • Impediments to imitation
  • Reasons why others cannot imitate you
  • Loosely speaking, returns from unique resources
    and skills
  • First (or early)-mover advantages
  • Reasons why it would be uneconomical for others
    to imitate you
  • Loosely speaking, returns from market power
  • Distinction not clear-cut how much does it cost
    to replicate an incumbents advantage?

1. Impediments to imitation (a)-(f)
  • Regulatory restrictions
  • Broadcasting rights, taxis, import tariffs and
  • Not just given situation companies spend to
    influence regulation
  • Patents legally protected monopoly rights,
    exist to encourage innovation
  • Example Patent protection important in
    pharmaceuticals, weaker in medical devices.
    Depends on
  • Ability to innovate around existing patents
  • Speed of innovation new devices quickly become
  • Secrecy about production process
  • Often chosen when obtaining patent protection is
    difficult and product is difficult to

(d) Superior access to inputs or customers
  • Inputs
  • De Beers until 1990
  • Alcoas backward integration into bauxite in
    early 20th century
  • Customers e.g. through exclusive-dealing
  • What about talented employees (inputs)?
  • Can be hired away if worth as much or more
  • Cannot if they stand to lose human capital
    specific to the firm (or to a set of other
    employees, cospecialized assets)
  • Unique resources must be scarce and immobile

(e) Unique capabilities
  • Examples
  • Honda in engines
  • 3M in adhesives and thin-film coating
  • Bombardier in trains
  • Canon integration of microelectronics, fine
    optics and precision engineering
  • Capabilities that
  • are result of organizational learning over time,
    corporate culture, organizational structure
  • do not depend on individuals

(f) Strategic fit
  • Examples Southwest Airlines, Ikea, Dell well
    see others
  • Good internal fit can be
  • Source of competitive advantage
  • Reason for its sustainability
  • Hard for others to get all components of the
    system right at the same time.
  • But successful imitation may only be question of
  • E.g. pressure on airlines like Southwest, JetBlue

2. First-mover advantages basic logic
  • Suppose A has discovered a market opportunity and
    is making a profit
  • B considers imitating A. Assume B can do so
    without any technological disadvantage (no
    impediments to imitation)
  • What would happen? Upon entry, B might find
  • Sharing a limited market with A
  • Engaged in a price war with A
  • Without customers because for some reason
    customers stick with A
  • As long as A is committed to staying, A can make
    profit if alone, but B as second mover cannot,
    and hence should stay out
  • A then has a first-mover advantage

(a) Scale economies relative to size of market
  • Basic logic
  • A and B can share market if market gt 2 MES
  • But if market smaller, competition will lead to
  • If A is more likely to stay because of sunk
    costs, B should not enter in the first place
  • Examples
  • Wal-Mart in small towns
  • Coors in West in 70s, A/B Miller in East in 80s
  • Closely related Geographic or positional
    preemption in markets with differentiated goods
  • CCS in its niche of the market

(b) Reputation
  • Established reputation for quality raises buyers
  • What matters is perceived quality
  • Competitors w/o reputation can only sell at lower
  • Reputation must often be maintained through
    advertising or RD
  • Endogenous sunk-cost markets
  • E.g. Coke, Intel, Apple

Special case brand image
  • Perceived quality often more matter of brand
    image than based on tangible things
  • Companies spend to advertise brands
  • Importance of advertising depends on who
    makes/influences purchase decision
  • Beer consumers
  • Cans companies
  • PCs resellers, Consumer Reports,
    corporate/educational etc.

(c) Network effects
  • Direct network effects value to buyers increases
    with of users
  • Fax machines, Word, eBay
  • Indirect network effects link through a
    complementary product
  • The more people use PCs Windows,
  • the more software for PCs is developed
  • the greater the value of PCs to buyers
  • Another example DVDs/players and Blockbuster
  • If a firm owns technology that customers are
    locked into, it has market power because rivals
    products will be less valuable to customers.
  • PC industry is competitive, but Microsoft is
  • Ask how strong are network effects?

(d) Switching costs
  • A firm has market power if its customers incur
    some cost if they switch to a different product
  • Synergies with other products in same family,
    e.g. Microsoft Office
  • Familiarity with existing product, e.g.
  • eBay, NetFlix
  • Yahoo vs. Google lock in users through
    personalized searches?
  • Creating switching costs is powerful way to build
    customer loyalty and market power
  • But rational customers must be willing to be
    locked in!
  • Ask How difficult is it really for customers to
  • E.g. cell phones regulation that allows
    customers to transfer home phone number to cell

(e) Learning effects (experience curve)
  • lower AC as a result of higher cumulative output
  • First-mover advantage through experience
  • E.g. aircraft
  • Strategic consequences
  • Being first important if you know there will be
    learning effects
  • BCG in 70s invest in early stages of product
    life cycle to secure learning economies.
  • Existence of learning effects often known only
  • You may be investing in losing products
  • Internal fit matters union contracts at Lockheed
    diminished learning effects in producing the
    L-1011 TriStar (BDSS Ch. 2)

Sustaining a competitive advantage is hard
  • Dont assume any of these barriers exist for a
    particular firm ask to what extent they may
  • Having certain resources and capabilities does
    not mean theyre unique
  • Imputed unique capabilities often used as
    shortcut to explain a firms success without
    careful analysis
  • Firms often fool themselves by claiming to have
    certain unique capabilities
  • Moving first does not by itself confer a
    first-mover advantage
  • Sustainability is not yes-no matter, often only
    matter of time