InternationalBusinessStrategyLecture2:TheIndustry-BasedViewsofStrategy

&TheResources-BasedViewofStrategyPrincipleLearningObjectivesDevelopanunderstandingofwhatthetermstrategymeansinpracticalandtheoreticalterms.Developanunderstandingoftheindustry-basedviewofstrategyandthefiveforcesframeworkofindustryanalysis.Developanunderstandingoftheresource-basedviewofstrategyanditsimplicationsforIBstrategyformulation.Developanunderstandingoftheimplicationsoftheaboveforthestrategyformulationandimplementationinmultinationalenterprises.

WhatisStrategy?StrategyishowfirmssustainandrenewtheircompetitiveadvantagesinanexternalcompetitiveenvironmentStrategyisafitbetweenthefirm’sexternalsituationanditsinternalresourcesandcapabilitiesFundamentalquestionsWhydofirmsdiffer?Howdofirmsbehave?Whatdeterminesthescopeofthefirm?Whatdeterminestheinternationalsuccessorfailureoffirms?TheEssenceofStrategyKeyquestionsinthestudyofInternationalBusinessStrategyWhatDeterminestheInternationalSuccessorFailureofFirms?IntheWest-Inthe1960sand1970s:ConglomerationSincethe1980s:DiversificationthatfocusedoncorecompetenciesWhyDoFirmsDiffer?Westernfirms(US/UKvs.German/French)Havedifferent(shorter-versuslonger-term)planninghorizons.Emergingeconomies(China,Korea,Russia)Thechallengeistounderstandtherootsofthesedifferences.WhatDeterminestheInternationalSuccessorFailureofFirms?AcquiringandleveragingcompetitiveadvantageTheKey:Sustainingsuchanadvantageovertimeandacrosscountries(regions)throughreplicationandinnovation.Howdofirmsbehave?HowDoFirmsBehave?IndustryCompetitionandtheIOModelIndustry:Agroupoffirmsproducingproducts(goodsand/orservices)thataresimilartoeachother.Structure-Conduct-Performance(SCP)modelTheprimarycontributionoftheIndustrialOrganization(IO)economicsmodelStructure:StructuralattributesofanindustryConduct:Thefirm’sactionsPerformance:Theresultofthefirm’sconductinresponsetoindustrystructureTheprofitabilityofindustriesvariesgreatlyPharmaceuticals 26.8 Gas&ElectricUtilities 10.5Tobacco 22.0 FoodandDrugStores 10.3Household&PersonalProducts 20.5 MotorVehicles&Parts 9.8FoodConsumerProducts 20.3 HomeEquipment 9.5MedicalProducts&Equipment 18.8 Railroads 9.0Beverages 18.8 Hotels,Casinos,Resorts 8.0Scientific&PhotographicEquipt. 16.5 Insurance:LifeandHealth 7.6CommercialBanks 16.0 BuildingMaterials,Glass 7.0Publishing,Printing 14.3 Metals 6.0PetroleumRefining 14.3 Semiconductors&Apparel 14.3 ElectronicComponents 5.8ComputerSoftware 13.5 Insurance:Property&Casualty5.3Electronics,ElectricalEquipment 13.3 FoodProduction 5.3Furniture 13.3 Telecommunications 3.5Chemicals 12.8 ForestandPaperProducts 3.5Computers,OfficeEquipment 11.8 CommunicationsEquipment(4.0)HealthCare 11.5 Airlines (34.8)Medianreturnonequity(%),1999-2002FiveForcesModelandFirmStrategyTheFiveForcesFramework“Translated”andextendedfromtheSCPmodelin1980byMichaelPorter.Akeyproposition:Thefocalfirmperformancecriticallydependsonthedegreeofcompetitivenessofthefiveforceswithinanindustry.Thestrongerandmorecompetitivetheseforcesare,thelesslikelythefocalfirmisabletoearnabove-averagereturn,andviceversa.AlthoughfirmsbenefitfromafavorableFiveForcesenvironmentintheirindustry,theyarenotsimplypassiverecipientsofthosecompetitiveforces.FirmscanusetheFiveForcesModeltoevaluatewhatnewindustriestoenter.FirmscanalsousetheFiveForcesModeltocompetemoreeffectivelywithintheirindustrySUPPLIERSPOTENTIALENTRANTSSUBSTITUTESBUYERSINDUSTRYCOMPETITORSRivalryamongexistingfirmsBargainingpowerofsuppliersBargainingpowerofbuyersThreatofnewentrantsThreatofsubstitutesFiveForcesFrameworkThreatsoftheFiveForces

Threatsindicativeofstrongcompetitiveforcesthatcan

Fiveforces depressindustryprofitability

Rivalryamong Alargenumberofcompetingfirmscompetitors Rivalsaresimilarinsize,influence,andproductofferings

High-price,low-frequencypurchases

Industryslowgrowthordecline

HighexitcostsThreatof Littlescale-basedlow-costadvantages

potentialentry (economiesofscale)

Insufficientproductdifferentiation

Littlefearofretaliation

NogovernmentpolicybanningordiscouragingentryThreatsoftheFiveForces(cont’d)

Threatsindicativeofstrongcompetitiveforcesthatcan

Fiveforces depressindustryprofitabilityBargainingpower ?Asmallnumberofsuppliersofsuppliers ?Suppliersprovideunique,differentiatedproducts ?Focalfirmisnotanimportantcustomerofsuppliers ?SuppliersarewillingandabletoverticallyintegrateforwardBargainingpower ?Asmallnumberofbuyersofbuyers ?Productsprovidelittlecostsavingsorqualityoflife enhancement ?Buyerspurchasestandard,undifferentiatedproducts

fromfocalfirm ?Buyersarehavingeconomicdifficulties ?BuyersarewillingandabletoverticallyintegratebackwardThreatsoftheFiveForces(cont’d)

ThreatsindicativeofstrongcompetitiveforcesthatcanFiveforces candepressindustryprofitabilityThreatof ?Substitutessuperiortoexistingproductsinqualityand

ofsubstitutes qualityandfunction ?SwitchingcoststousesubstitutesarelowCompetitorAnalysis

ObjectivesWhatarecompetitor’scurrentgoals?Isperformancemeetingitsgoals?Howareitsgoalslikelytochange?

StrategyHowisthefirmcompeting?

AssumptionsWhatassumptionsdoesthecompetitorholdabouttheindustryanditself?

ResourcesandCapabilities-Whatarethecompetitor’skeystrengthsandweaknesses?Predictions-Whatstrategychangeswillthecompetitorinitiate?-Howwillthecompetitorsrespondtoourstrategicinitiatives?LessonsfromtheFiveForcesFrameworkNotallindustriesareequalintermsoftheirpotentialprofitability.Thetaskforstrategistsistoassesstheopportunities(O)andthreats(T)underlyingeachcompetitiveforceaffectinganindustry,andthenestimatethelikelyprofitpotentialoftheindustry.Thekeyis“tostakeoutapositionthatislessvulnerabletoattackfromhead-to-headopponents,whetherestablishedornew,andlessvulnerabletoerosionfromthedirectionofbuyer,suppliers,andsubstitutes.ThreeGenericStrategiesThreeGenericStrategiesCostleadership:centersonlowcostsandprices.Ahigh-volume,lowmarginapproach.Differentiation:Strategicallyfocusingonhowtodeliverproductsthatperceivetobevaluableanddifferent.Alow-volume,high-marginapproachResearch/developmentandmarketing/salesareimportantfunctionalareas.Focusstrategy:

Servingtheneedsofaparticularnicheofanindustrysuchasageographicalmarket,orproductline.Aspecializeddifferentiatorhasasmaller,narrower,andsharperfocusthanalargedifferentiator.Aspecializedcostleaderdealswithanarrowersegmentcomparedwiththetraditionalcostleader.Focusingmaybesuccessfulwhenafirmpossessesintimateknowledgeaboutaparticularsegment.PRODUCTIONTECHNIQUESPRODUCTDESIGNINPUTCOSTSCAPACITYUTILIZATIONRESIDUALEFFICIENCYECONOMIESOFLEARNINGECONOMIESOFSCALECulture;ManagerialefficiencySpeedofcapacityadjustmentLocationadvantagesOwnershipoflow-costinputsBargainingpowerStandardizingdesigns&componentsDesignformanufactureProcessinnovationReengineeringbusinessprocessesIncreaseddexterityImprovedorganizationalroutinesIndivisibli\tiesSpecializationDriversofCostAdvantages TOTALCUSTOMERRESPONSIVENESSDifferentiationnotjustabouttheproduct,itembracesthewholerelationshipbetweenthesupplierandthecustomer.INTANGIBLEDIFFERENTATIONUnobservableandsubjectivecharacteristicsrelatingtoimage,status,exclusivity,identityTANGIBLEDIFFERENTATIONObservableproductcharacteristics:size,color,materials,etc.performancepackagingcomplementaryservicesDEFINITION:Providingsomethinguniquethatisvaluabletothebuyerbeyondsimplyofferingalowprice.(M.Porter) THEKEYISCREATINGVALUEFORTHECUSTOMERTheNatureofDifferentiationIndustry-basedView:ImplicationsforStrategyForstrategicpractice,theindustrycompetition-basedviewprovides:AsystematicfoundationforindustryanalysisandcompetitoranalysisAsetofanswerstothefourfundamentalquestionsinstrategyEvidencethatindustry-specificconditionsplayanimportantroleindeterminingfirmperformanceCompetingonResource/Capabilities/Competence

Afirmconsistsofabundleofproductiveresourcesandcapabilities.Resources-Thetangibleandintangibleassetsafirmusestochooseandimplementitsstrategies.Capabilities-Theskillsafirmcanusetobringitsresourcestobear.ResourcesandCapabilitiesFUNCTION CAPABILITY EXEMPLARSCorporate Financialmanagement GEManagement Strategiccontrol IBM,Samsung Coordinatingbusinessunits BP,P&G Managingacquisitions Citigroup,CiscoMIS Speedandresponsivenessthrough Wal-Mart,Dell rapidinformationtransfer R&D Researchcapability Merck,IBM Developmentofinnovativenewproducts Sony,3MManufacturing Efficientvolumemanufacturing ContinuousImprovement Harley-D Flexibility Zara,SouthwestAirDesign DesignCapability Apple,NokiaMarketing BrandManagement P&G,PepsiCo Qualityreputation Johnson&Johnson Responsivenesstomarkettrends MTV,L’OrealSales,Distribution SalesResponsiveness PepsiCo,Pfizer&Service Efficiencyandspeedofdistribution Amazon,Dell CustomerService SingaporeAirlines CaterpillarIdentifyingOrganizationalcapabilities:AFunctionalClassificationTEAMS1998-2003EXPENDITURESONKEYPLAYERS,1998-2003Valencia(Sp)PabloAimar($20.4m),RubenBaraja($12m)RealMadrid(Sp)ZinedineZidane($68m),LuisFigo($55m),Ronaldo($43m),NicolasAnelka($36m),DavidBeckham($26m),DeportivoLaCoruna(Sp)SergioGonzales($16m),AlbertoLuque($15m)Juventus(It)GianluigiBuffon($49m),PavelNedved($38m),LilianThuram($33m),DavidTrezeguet($21m),MarcodeViao($10m)ACMilan(It)RuiCosta($42m),AlessandroNesta($30m),AndriyShevchenko($24m),AndreaPirlo($16m),Kaka($9m)Parma(It)HidetoshiNakata($30m),SdrianMutu($9m)ManchesterUnited(Eng)RioFerdinand($45m),JuanVeron($42m),RuudvanNistelrooy($30m),CristianoRonaldo($18m),FabienBartez($12m),DiegoForlan($10m),Kleberson($9m),Silvestre($6m)Arsenal(Eng)SylvainWiltord($20m),ThierryHenry($16m),DennisBergkamp($12m),Kanu($7m),Silva($7m),Vieira($6m)Liverpool(Eng)EmileHeskey($16m),ElHadjiDiouf($15m),DietmarHamann($12m),ChrisKerkland($8m),HarryKewell($8m),HIGHESTEXPENDITURESONNEWPLAYERS(Top3inSpain,Italy&England)BarcelonaChelseaLazioManchesterUnitedInterMilanJuventusACMilanArsenalRealBetisNote:Spain,Italy&Englandonly).SuperiorResourcesdonotnecessarilymeanSuperiorCapabilities:TransferFeesandTeamPerformanceinEuropeanSoccerTheVRIOFrameworkVRIOAnmatrixanalysisofthe“sticky”natureofresourcesandcapabilitiesofafirmandthedifficultyoftheirreplicationelsewhere.TwoKeyAssumptions:ResourceheterogeneityEachfirmhasauniquecombinationofresourcesandcapabilitiessuchthatnotwofirmsare“twins.”ResourceimmobilityResourcesandcapabilitiesuniquetoonefirmcannoteasilymigratetocompetingfirms.TheVRIOFramework:

FeaturesofaResourceorCapabilityTheVRIOFramework:Value

Onlyvalue-addingresourcescanleadtocompetitiveadvantage,whereasnon-value-addingcapabilitiesmayleadtocompetitivedisadvantage.Iffirmsdonotshednon-value-addingresourcesandcapabilities,theyarelikelytosufferbelow-averageperformanceorbecomeextinct.Overall,thesearchforvaluableresourcesandcapabilitiesisaneverpresentchallengeforvirtuallyallfirms.TheVRIOFramework:RarityTheQuestionofRarityValuablecommonresourcesandcapabilitiescanleadtocompetitiveparitybutnoadvantage.Valuablerareresourcesandcapabilitiescanprovide,atbest,temporarycompetitiveadvantage.Resourcesandabilitiesthataddvalueinnewareasneededtokeepupwiththecompetition(benchmarking).Oncecompetitorsdevelopequalabilities,thennouniqueanddistinctivecapabilityremainsonwhichtobuildacompetitiveadvantage.TheVRIOFramework:ImitabilityTheQuestionofImitabilityValuableandrareresourcesandcapabilitiesareasourceofcompetitiveadvantageonlyifcompetitorshaveadifficulttimeimitatingthem.Imitationoftangibleresources(suchasplants,software,ortruckingfleet)iseasy.Imitationofintangibleresources(knowledge,managerialtalents,andorganizationalculture)ismuchmoredifficult.Whyisimitationsodifficult?TimecompressiondiseconomiesPathdependenciesCausalambiguityTheVRIOFramework:OrganizationTheQuestionofOrganizationHowisafirmorganizedtodevelopandleveragethefullpotentialofitsresourcesandcapabilities?AMoreFundamentalQuestionWhydofirmsexist?Inotherwords,whydopeopleorganizefirms?Theresource-basedviewsuggeststhatfirmsexisttodevelopandleverageresourcesandcapabilitiesbetterthanindividualscould.Resource-basedView:ImplicationforStrategyThestrategicimperativeistofocusonidentifyingtheresourcesandcapabilitiesthatreallycountanddevelopingnewones.Strategistsneedtofocusonwhen,where,andhowresourcesandcapabilitiesareuseful.Afundamenta