More tools to use in the Harvard approach

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CHAPTER 4

• More tools to use in the Harvard approach
• to strategic management
• basic industry facts
• Porters five-forces of competition (R4.1)
• competitive intelligence (R4.4)
• evaluation of industry attractiveness
• role of core competencies in creating sustainable
  competitive advantage (R4.2)

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The (multi-layered) External Environment
Figure 2.1
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Basic industry facts

• Main competitive arena for the industry
• local? regional? national? global?
• Stage of industry life cycle ?
• Industry growth rate ?
• Market structure
• fragmented? consolidated?
• Average industry profit margin ?

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Basic industry facts where to get??? -

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Michael Porter (R4.1)How Competitive Forces
Shape Strategy

• The essence of strategy formulation is coping
  with competition.
• Competitive forces go beyond established rivals
  look at five types of competition.
• A strong set of competitive forces reduces profit
  potential.
• Seek a position of power over (or reduced
  vulnerability to) competitive forces.

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Porters five forces analysis

• WHO might be a threat in each of the five
  categories of competition?
• HOW STRONG is each of the five competitive
  forces?
• WHAT CAN THE FIRM DO ABOUT IT? - use defensive
  and/or offensive actions.

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1. New entrants . . .

• can increase competition by adding new capacity
  and aggressively pursuing (stealing) market
  share.
• are discouraged by entry barriers, or obstacles
  to enter the industry.
• existing players want ______entry barriers.

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Common entry barriers

• economies of scale
• proprietary product differences
• brand identity/brand loyalty
• switching costs
• capital requirements
• distribution channels
• government or regulatory policies
• expected retaliation
• low industry profits

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To analyze threat of entry

• you MUST analyze relevant entry barriers.
• also consider possible entry by established
  players from other industries.

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2. Substitutes . . .

• are products offering a different way of
  satisfying a similar need or want.
• often are provided by firms in a different
  industry.
• are NOT THE SAME as rivals
• Burger King vs. McDonalds rivals
• Burger King vs. grocery store substitutes.

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To analyze threat from substitutes

• consider the price-performance tradeoff of
  switching to the substitute.
• consider consumer switching costs.
• consider relevant environmental trends.

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3. Supplier power is high when

• supplies are crucial to product success and hard
  to get.
• very few suppliers exist.
• one supplier is relied upon.
• switching costs for the purchasing firm are high.
• suppliers might integrate forward.

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4. Buyer power increases with . .

• consumer bargaining leverage, from
• - institutional buyers
• - informed buyers
• - many choices
• - low switching costs
• - backward integration
• high levels of price sensitivity
• low levels of brand loyalty

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5. Rivalry

• is usually the strongest of the five competitive
  forces.
• is especially strong when
• - the industry is mature, with slow growth.
• - industry over-capacity exists.
• - consumers lack loyalty.
• - high exit barriers (economic, strategic,
• and/or emotional) are present.

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Advice from Porter

• Navigate the industry structure defined by
  basic industry facts and the five forces of
  competition via
• - selection of competitive position,
• - influencing the competitive forces,
• - exploiting industry change.

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Competitive intelligence

• Learn as much as possible about youre your close
  rivals.
• Understand their current strategy, strengths and
  weaknesses, future goals, assumptions, and
  leadership attributes.
• Anticipate likely competitive responses.
• WHY??? HOW??? WHEN???

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Framework for analyzing direct rivals

• Future goals Current strategies
• ? ?
• Competitors
• Response
• Profile
• ? ?
• Assumptions Capabilities

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Henderson (R4.4)Competitive Maneuvering

• Involves business power games
• Strategy ploy
• Main point
• Behavior of business is not always logical.
• A critical (and often overlooked) factor is
  individual/organizational emotion.

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Useful ideas from Henderson

• Know rivals stakes, character, attitudes,
  motives, and habits.
• Provide little information about your firm.
• Always assess perceptions - you of them, them of
  you.
• Dont arouse rivals emotions.
• Avoid use of overwhelming force.
• Value friendly competition.

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More advice from Henderson

• Make sure rivals know benefits of cooperating and
  costs of not cooperating.
• Use diplomacy - the art of being unreasonable
  without arousing resentment.
• Be arbitrary - to a point. The less arbitrary
  you seem, the more arbitrary you can be.
• If youre not willing to accept punishment, and
  your opponents know it, youll almost certainly
  be punished!

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Drawing conclusions about industry
attractiveness, using your overall external
analysis Consider -

• opportunities vs. threats?
• major uncertainties/risks?
• intersecting general environment trends?
• average industry growth rate?
• average industry profit margins?
• power of the five competitive forces?

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Two levels of analysis involved in Harvard
method of strategy formulation

• 1. Industry level - the external environment.
• - look for opportunities and threats tools
  general environment analysis, basic industry
  facts, Porters five-forces of competition,
  competitive intelligence, key success factors
• 2. Company level - the internal environment. -
  look for strengths and weaknesses tools
  resource/capability assessment, financial
  analysis, value chain analysis, distinctive
  (core) competencies . . .

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Use of INTERNAL ANALYSIS

• Identify important resources (tangible and
  intangible - what you have) and capabilities
  (what you can do) - Andrews considers financial,
  managerial, functional, and organizational
  dimensions - Fig. 2, pg. 79
• Understand the organizations specific strengths
  and weaknesses
• Utilize unique strengths to develop strategies
  that provide sustainable competitive advantage
• Improve weak areas that are vulnerabilities

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Distinctive competencies . . .

• are especially instrumental for attaining
  competitive advantage
• consist of resources and capabilities that are
  unique, and set the organization apart from their
  competition
• advice is to base competitive strategy off ones
  distinctive competencies

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Jay Barney (R4.2) Looking Inside for
Competitive Advantage

• Attractive external environment is not the only
  explanation for success.
• Utilizing a firms distinctive competence has a
  huge role in strong performance.
• Use of internal characteristics are more
  influential for strong performance than playing
  the external context.

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4 attributes of core competencies that create
competitive advantage

• Core competencies should be
• 1. valuable - to the marketplace
• 2. rare - not prevalent in the marketplace.
• 3. difficult to imitate - use of intangible
  resources, historical advantages, ambiguous
  and/or complex competency development.
• 4. organizationally accessible - can be used!

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1. Assessing resource/capability value

• Consider extent to which specific resources
  and/or capabilities reduce costs or add to
  perceived value.
• If resources or capabilities increase costs or
  reduce perceived value, they might be
  organizational weaknesses!

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2. Assessing rareness of resource/capability

• Examine prevalence in the marketplace.
• But dont ignore resources/capabilities that are
  not rare they might be necessary regardless
  (maybe complementary resources or capabilities,
  or maybe they are key success factors).

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3. Assessing if resources/capabilities can be
easily imitated

• Work towards utmost use of any advantages from
  proprietary resources, intangible resources,
  image and reputation, unique historical
  conditions, path dependence, causal ambiguity,
  social complexity, tacit knowledge, embedded
  organizational routines, shared values, . . .

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4. Assessing organizational accessibility of
important resources/capabilities

• Is the firm organized in such a way that its
  vital resources and capabilities can be exploited
  in its strategic actions?
• Need appropriate complementary structures,
  processes, and systems to deploy the resources
  and capabilities that exist.

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Are resources/capabilities

• 1. valuable? - if no, a competitive disadvantage
  below normal performance likely.
• 2. valuable but not rare? - average to below
  average performance expected intense competitive
  battles likely.
• 3. valuable, rare, but not difficult to imitate?
  - temporary competitive advantage possible.
• 4. valuable, rare, difficult to imitate, but not
  organizationally accessible? - competitive
  advantage can be sustained over time, but
  difficult to leverage into the future.

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A paradox of distinctive competencies . .

• strategies that are difficult for other firms to
  replicate seem easy to implement due to the
  specific distinctive competencies
• this can lead to an underestimation of the value
  of core competencies, and attempts to do
  something harder or something else, which is
  often unwise

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Financial Assessment

• examines trends in financial performance over
  time (gt 2 years)
• analyzes the entries in the financial statements
  growth rates relevant s
• calculates a rich set of financial ratios
• interprets the numbers
• provides a defensible conclusion about overall
  financial situation