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gillis
A journey to…
Confidence
Context
Certainty
Courage
Welcome to Course XIV*
1
A Journey To
Self-Actualization
2
Strategy
Michael Porter
“Competitive Strategy”
The Free Press, 1980
3
Strategy
Michael Porter
“Competitive Advantage”
The Free Press, 1985
4
Strategy
Michael Porter
“The Competitive Advantage of Nations ”
The Free Press, 1990
5
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Defining “Strategy”
 “…a consideration of the purposes the
development and explicit statement of a
strategy can se...
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Defining “Strategy”
 “A complete statement of
strategy, then, should convey both what a
company is trying to achie...
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Tests of Consistency
 Internal Consistency
o Are the goals mutually achievable?
o Do the key operating policies ad...
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Tests of Consistency
 Environmental Fit
o Do the goals & policies exploit industry
opportunities?
o Do the goals &...
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Tests of Consistency
 Resource Fit
o Do the goals and policies match the resources
available to the company relati...
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Tests of Consistency
 Communications & Implementation
o Are the goals well understood by the key
implementers?
o I...
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General Analytical Techniques
Every firm competing in an industry has
a competitive strategy, whether explicit or
i...
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General Analytical Techniques
Every firm competing in an industry has
a competitive strategy, whether explicit or
i...
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General Analytical Techniques
Every firm competing in an industry has
a competitive strategy, whether explicit or
i...
ManufacturingLabor
R & D
Purchasing Distribution
Sales
Marketing
Target
Markets
Product
Line
Finance &
Control
Objectives
...
Wheel of
Competitive
Strategy
Personal
Values
Of the Key
Administrators
Industry
Opportunities
And Threats
Company
Strengt...
 “Although this process may be
intuitively clear, answering these
questions involves a great deal of
penetrating analysis...
 What is the business doing now?
o Implicit/explicit current strategy.
 What is happening in the environment?
o Industry...
Forces of Industry Competition
Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppliers
Thr...
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Threat of Entry
 Six barriers to entry (and one)
o Economies of scale
o Product differentiation
o Capital requirem...
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Intensity of Rivalry
 Firms are mutually dependent.
 Numerous competitors?
 Slow industry growth?
 High fixed c...
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Substitute Products
 Products very different in form that can
provide the same function.
 Limits industry profita...
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Bargaining Power of Buyers
 Threat of backward integration.
 Relative importance of product to buyer.
 Cost enou...
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Bargaining Power of Suppliers
 Threat of forward integration.
 Dominated by a few companies?
 Importance of the ...
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Forces of Industry Competition
Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppli...
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Strategic Competitive Options
1. Positioning
o Take the structure of the industry as a given and
match strengths an...
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Three Generic Strategies
Strategic Advantage
Strategic
Target
Industry wide
Particular
Segment
Only
Uniqueness Perc...
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Generic Strategies
Competitive Advantage
Competitive
Scope
Broad
Target
Narrow
Target
Lower Cost Differentiation
Mi...
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Generic Competitive Strategies
 Cost Leadership
 Differentiation
 Focus
 Stuck in the middle
Michael Porter, Co...
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Competitor Analysis
There are four diagnostic components to a
competitor analysis: future goals, current
strategy, ...
Competitor’s Response Profile
Is the competitor satisfied with its
current position?
What likely moves or strategy shifts
...
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Dimensions of Strategy
 Specialization
 Brand identification
 Push vs. pull
 Channel selection
 Product qualit...
Specialization
Vertical Integration
High Vertical Integration Assembler
Full
line
Narrow
Line
Group B
Narrow line
assemble...
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Introduction Growth Maturity Decline
Industry
Sales
Time
Stages of the Life Cycle
34
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Life Cycle
 Legitimate criticisms:
o Duration of stages varies widely from industry to
industry.
o Unclear what st...
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Forecasting Evolution
Evolutionary
processes
Initial
industry structure
Potential
industry structure
36
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Evolutionary Processes
 Long-run changes in
growth.
 Changes in buyer
segments served.
 Buyers’ learning.
 Unce...
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Generic Industry Environments
 Industry concentration
 State of industry maturity
 International competition
38
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Five Generic Environments
1. Fragmented industries.
2. Emerging industries.
3. Transition from rapid growth to matu...
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Strategic Decisions
 Vertical Integration
 Major Capacity Expansion
 Entry
40
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The Value Chain
Value Chain
41
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Outbound
Logistics
Procurement
Technology Development
Human Resource Management
Firm Infrastructure (Finance, Plann...
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Subdividing a Value Chain
FI
HRM
TD
P
IL O OL MS S
Marketing
Mgmt
Advertising Sales
Force
Admin
Sales
Force
Operati...
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The Value System
Supplier
Value Chains
Channel
Value Chains
Firm
Value Chain
Buyer
Value Chains
Channel
Value Chain...
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Supplier
Value Chains
Channel
Value Chains
Business Unit
Value Chain
Buyer
Value Chains
Business Unit
Value Chain
B...
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Value Chain Linkages
FI
HRM
TD
P
IL O OL MS S
FI
HRM
TD
P
IL O OL MS S
Firm Value Chain Buyer Value Chain
Michael P...
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Cost Advantage
Cost is one of the two types of competitive
advantage. Cost is also of vital importance to
different...
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Cost Analysis
 The starting point for cost analysis is to
define a firm’s value chain and to assign
operating cost...
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Cost Analysis
 The starting point for cost analysis is to
define a firm’s value chain and to assign
operating cost...
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Operating Costs
40%
27%
Firm Infrastructure (9%)
Tech Development (9%)
Inbound
Logistics (3%)
HRM
(2%)
Operations (...
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Assets
8%
38%
Firm Infrastructure (16%)
Tech Development (2%)
Inbound
Logistics (3%)
HRM
(1%)
Operations (46%) Outb...
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Cost Behavior
 Managers recognize the importance of cost, and
many strategic plans establish “cost leadership” or
...
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Cost Drivers
1. Economies of scale.
2. Learning and spillovers.
3. The pattern of capacity
utilization.
4. Linkages...
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Cost Drivers
6. Integration.
7. Timing.
8. Discretionary policies not in
other drivers.
9. Location.
10. Institutio...
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Cost Advantage
 A firm must attempt to quantify the
relationship between cost drivers and the cost
of a value acti...
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Cost Advantage
 A firm’s relative cost position is a function of:
o The composition of its value chain versus the
...
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Controlling Cost Drivers
1. Controlling scale:
 Increasing scale by acquisitions, line extensions,
market expansio...
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Controlling Cost Drivers
3. Controlling the effect of capacity utilization:
 Level throughput.
 Reduce the penalt...
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Controlling Cost Drivers
5. Controlling interrelationships:
 Share appropriate activities.
 Transfer know-how in ...
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Controlling Cost Drivers
8. Controlling discretionary policies:
 Modify expensive policies that do not contribute
...
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Three More…
11.Procurement and cost advantage.
12.Reconfiguring the value chain.
 How can the activity be done dif...
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Sustainability & Implementation
 Cost advantage will result in above-average
performance only if the firm can sust...
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Pitfalls - Cost Leadership Strategy
 Exclusive focus on cost of manufacturing
activities.
 Ignoring procurement.
...
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Pitfalls - Cost Leadership Strategy
 Contradictory cost reduction.
 Unwitting cross-subsidy.
 Thinking increment...
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Steps in Strategic Cost Analysis
1. Identify the appropriate value chain and
assign costs and assets to it.
2. Diag...
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Steps in Strategic Cost Analysis
4. Develop a strategy to lower relative cost
position by controlling cost drivers ...
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Differentiation
A firm differentiates itself from its competitors
if it can be unique in something that is
valuable...
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Differentiation
Firms view the potential sources of differentiation
too narrowly. They see differentiation in terms...
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Drivers of Uniqueness
1. Policy choices
o What activities to perform and how to perform
them.
2. Linkages
o Within ...
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Drivers of Uniqueness
4. Location
5. Interrelationships
o Shared sales forces, sister business units, etc.
6. Learn...
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Buyer Value and Differentiation
 A firm creates value for a buyer that justifies
a premium price (or preference at...
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Value Chain and Buyer Value
FI
HRM
TD
P
IL O OL MS S
FI
HRM
TD
P
IL O OL MS S
Firm Value Chain Buyer Value Chain
A ...
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Lowering Buyer Cost
 Anything a firm can do that lowers the
buyer’s total cost of using a product (or other
buyer ...
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Raising Buyer Performance
 Understanding desirable performance from
the buyer’s viewpoint.
 What creates differen...
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Buyer Perception of Value
 Buyers often have a difficult time assessing
value in advance.
 Cannot always gauge th...
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Signals of Value
 Buyers will not pay for value that they do not
perceive, no matter how real it may be.
 Price p...
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Buyer Purchase Criteria
 Use criteria – Purchase criteria that stem
from the way in which a supplier affects
actua...
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Buyer Purchase Criteria Example
Frequency of
Sales Calls
Speed of Order
Processing
Channel Margin
Reliability of Se...
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Buyer Purchase Criteria
Lower
Buyer
Cost
Raise
Buyer
Performance
Readily Measurable Difficult to Measure
Source
of
...
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Differentiation Strategy
 Proliferate the sources of differentiation.
 Make actual product use consistent with
in...
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Routes to Differentiation
 Change the rules to create uniqueness.
o Shift the decision maker.
o Educate the buyer ...
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Pitfalls – Differentiation
 Uniqueness that is not valuable.
 Too much differentiation.
 Too big a price premium...
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Steps in Differentiation
1. Determine who the real buyer is.
2. Identify the buyer’s value chain and the
firm’s imp...
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Steps in Differentiation
6. Choose the configuration of value activities
that creates the most valuable
differentia...
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Technology and Strategy
Technology pervades a firm’s value chain and
extends beyond those technologies associated
d...
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Outbound
Logistics
Procurement
Technology Dev.
Human Resource Mgmt
Firm Infrastructure
Marketing
& Sales
Operations...
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Technology & Generic Strategies
Process for
the segment
value
Process for
the segment
cost
Quality
control, buyer
v...
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Tech Leadership & Advantage
Pioneer the lowest
cost product design.
Be first down the
learning curve.
Low cost valu...
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Industry Segmentation
Segments of industry have a structure just as
industries do, and the strength of the five
com...
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Forces of Industry Competition
Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppli...
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Crucial Strategic Questions
 Where in an industry to compete?
 In what segments will focus strategies be
sustaina...
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Segmentation
 Market Segmentation
o Differences in buyer needs.
o Differences in purchasing behavior.
o Focus on m...
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Bases for Industry Segmentation
 Structural bases for segmentation
o Differences in products or buyers create indu...
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Five Forces Among Segments
Threat of
Buyer
Power
Segment
Rivalry
Supplier
Power
Threat of
Mobility
Product
Varietie...
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Segmentation Variables
1. The discrete product
varieties that are, or could be
produced.
Product Segments
2. The ty...
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New Ways of Segmenting
 Are there other technologies or designs to
perform the required functions in the the
buyer...
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Industry Segmentation
Matrix
INDUSTRY
Product
Varieties
Buyers
Michael Porter, Competitive Advantage
97
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Industry Segmentation
Matrix
INDUSTRY
Product
Segments
Buyer Segments
Michael Porter, Competitive Advantage
98
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Industry Segmentation
Matrix
INDUSTRY
Geographic
Segments
Channel Segments
Michael Porter, Competitive Advantage
99
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Steps - Segmentation Process
1. Identify the discrete product varieties, buyer
types, channels, and geographic area...
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Steps - Segmentation Process
4. Collapse correlated variables together.
5. Plot two-dimensional segmentation matric...
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Alternative Focus Strategies
Buyer Type
Insurance
Companies Banks
Finance
Companies
Company A Company B Company C
P...
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Segmentation and Strategy
WHERE?
Product
Varieties
Buyers
Michael Porter, Competitive Advantage
103
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Segmentation and Strategy
 Where in the industry a firm should compete?
 How strategy should reflect this segment...
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Segmentation and Strategy
 Sustainability of a focus strategy.
o Against broadly-targeted competitors.
o Against i...
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Pitfalls and Opportunities
 Successful focus strategies must involve
compromise costs for competitors.
 Identifyi...
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Pitfalls and Opportunities
 Broadly targeted firms often serve too many
segments.
 The relevant segments and brea...
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Segmentation and Strategy
Where one actually chooses to draw industry
boundaries is not so essential as long as bot...
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Substitution
Use of Personal Computers in Small Businesses
0
20
40
60
80
Sales Dollars
Percentageof
Companies
Small...
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Economics of Substitution
 Current relative value/price (RVP)
o When there are no switching costs and the
product ...
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Economics of Substitution
 Expected relative value/price (RVP)
o When there are costs of switching or the product
...
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Corporate Strategy
Economic, technological, and competitive
developments are increasing the competitive
advantage t...
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Corporate Strategy
This has made horizontal strategy, which cuts
across divisional boundaries, perhaps the most
cri...
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Strategy Levels
 Business Strategy
o Charts the course for a firm’s activities in
individual industries.
o Strateg...
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Horizontal Strategy
 Coordinated set of goals and policies across
distinct but interrelated business units.
 A co...
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Horizontal Strategy
 Diversification philosophy is changing.
 Emphasis is shifting from growth to
performance.
 ...
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Horizontal Strategy
 Achieving interrelationships:
o Long been present.
o Unexploited and untapped.
o Organization...
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Interrelationships
 Tangible interrelationships
o Opportunities to share activities in the value
chain among relat...
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Interrelationships
 Intangible interrelationships
o Transference of management know-how among
separate value chain...
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Interrelationships
 Competitor interrelationships
o Multipoint competitors necessarily link industries
together be...
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Explicit Horizontal Strategy Need
 Business units will value interrelationships
differently and not agree to pursu...
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Explicit Horizontal Strategy Need
 Business units will have a tendency to go
outside to form alliances.
 Business...
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Formulating Horizontal Strategy
1. Identify all tangible interrelationships.
2. Trace tangible interrelationships o...
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Formulating Horizontal Strategy
4. Identify competitor interrelationships.
 Multipoints, patterns of interrelation...
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Formulating Horizontal Strategy
6. Develop a coordinated horizontal strategy.
 Share appropriate value activities....
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Formulating Horizontal Strategy
 Diversify to strengthen important
interrelationships or create new ones.
 Sell b...
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Pitfalls
 Misreading strategic contributions of
business units.
 Misreading position vis-à-vis key diversified
co...
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Achieving Interrelationships
Horizontal organization overlays the business unit
structure and facilitates collabora...
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Achieving Interrelationships
Any firm with significant interrelationships
needs a horizontal corporate organization...
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Interrelationship Impediments
 Asymmetric benefits.
 Loss of autonomy and control.
o Protection of turf.
o Percei...
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Interrelationship Impediments
 Biased incentive systems.
o Lack of credit for contributions.
o Measurement biases....
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Interrelationship Impediments
 Fear of tampering with decentralization.
o Dampening entrepreneurship.
o Desire for...
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Interrelationship Mechanisms
 Horizontal structure.
 Horizontal systems.
 Horizontal human resource practices.
...
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Relationship Devices
 Market focus committees. Cross-business
unit forums.
 Technology and channel committees.
 ...
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Relationship Devices
 Personnel rotation.
 Firmwide role in hiring and training.
 Education on interrelationship...
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A New Organizational Form
 Business unit managers will have to modify
their conception of what managing their own
...
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A New Organizational Form
 Modification of the narrow view of
autonomy.
 Role of group and sector executives.
 L...
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Complementary Products
Complements are the opposite of
substitutes, because the sale of one promotes the
sale of an...
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Complementary Practices
 Control over complementary products.
o Full range.
o “We sell both.”
 Bundling
o Sell to...
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Scenarios
Scenarios can be used as tools to understand
the strategic implications of uncertainty more
fully. A scen...
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Scenarios
 Macroscenarios
o Macroeconomic and macropolitical factors.
o National or global environment.
o Rate of ...
Identify the uncertainties that may affect
industry structure.
Determine the causal factors driving them.
Make a range of ...
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Identifying Industry Uncertainties
 Hard to recognize.
 Hard to detect discontinuous changes.
 Hard to shed conv...
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Identifying Industry Uncertainties
 List all industry trends and possible industry
changes mentioned by industry o...
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Identifying Industry Uncertainties
o Product, marketing, process innovation.
o Structural change in adjacent indust...
Forces of Industry Competition
Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppliers
Thr...
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Chain Saw Industry Variables
 A. Entry Barriers
o Will there be new proprietary product designs?
o How high will s...
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Chain Saw Industry Variables
 B. Buyers
o What will casual user demand be? (1)
o What will professional/farm deman...
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Chain Saw Industry Variables
 C. Competitors
o What will be the shape of the casual user
penetration curve? (2)
o ...
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Chain Saw Industry Variables
 D. Substitutes
o How much will electric saws penetrate vs. gas
saws? (6)
 E. Suppli...
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Chain Saw Industry Variables
 Most important scenario variables
o What will casual user demand be? (1)
o What will...
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Chain Saw Causal Factors
(1) What will casual user
demand be?
External
Social trends /Energy costs
Wood burning sto...
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Chain Saw Causal Factors
(3) What will be the mix of
dealer vs. nondealer sales?
External
Channel product line poli...
Scenario
Variables
Dependent
Elements
of
Structure
Future
Industry
Structure
Predeter-
mined
Structural
Changes
Constant
E...
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Range of Assumptions/Chain Saw
(1) Level of casual
unit demand
Low Medium High
(2) Shape of casual
user penetration...
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Consistent Scenarios – Chain Saw
Low Medium High
Casual User Demand
Shape of the
Casual User
Penetration
Curve
Stea...
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Consistent Scenarios – Chain Saw
Casual User Demand
Channel
Mix
Med/
Steady
Low/
Steady
High/
Steady
High/
Peaked
D...
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Consistent Scenarios – Chain Saw
1 2
3 4 5
876
9
10
Low/
Steady
High/
Peaked
Med/
Steady
High/
Steady
High %
Brande...
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Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substi...
gillis
Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substi...
gillis
Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substi...
gillis
Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substi...
gillis
Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substi...
gillis
Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substi...
gillis
Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substi...
gillis
“You must love the questions
themselves.”
Rainer Maria Rilke
166
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“It’s the level underneath, not
the level on the surface, that
affects relationships.”
Marianne Williamson
167
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Seek to understand the level
underneath and you will grow in:
 Confidence
 Context
 Certainty
 Courage
168
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Course XIV*
 Thank you.
 Please come again.
 First Light LLC
 John Gillis (Principal)
 jgillis767@aol.com
 24...
gillis
Course XIV*
170
* Course XIV is named in honor of the
original Course XIV, which was the
“Department of Social Scie...
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Exerpts of concepts from Michael E. Porter. From the books: Competitive Strategy; Competitive Advantage; and a bit of Competitive Advantage of Nations. From the Course XIV.

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Transcript of "Course_XIV_on_michael_e_porter_jg"

  1. 1. gillis A journey to… Confidence Context Certainty Courage Welcome to Course XIV* 1
  2. 2. A Journey To Self-Actualization 2
  3. 3. Strategy Michael Porter “Competitive Strategy” The Free Press, 1980 3
  4. 4. Strategy Michael Porter “Competitive Advantage” The Free Press, 1985 4
  5. 5. Strategy Michael Porter “The Competitive Advantage of Nations ” The Free Press, 1990 5
  6. 6. gillis Defining “Strategy”  “…a consideration of the purposes the development and explicit statement of a strategy can serve for an organization: 1. To improve the ability of the firm to select basic, long-term objectives for itself, and 2. To develop the means by which these objectives can be achieved.” C. Roland Christensen Harvard University Graduate School of Business Administration 6
  7. 7. gillis Defining “Strategy”  “A complete statement of strategy, then, should convey both what a company is trying to achieve and how it hopes to achieve it.” C. Roland Christensen Harvard University Graduate School of Business Administration 7
  8. 8. gillis Tests of Consistency  Internal Consistency o Are the goals mutually achievable? o Do the key operating policies address the goals? o Do the key operating policies reinforce each other? Michael Porter, Competitive Strategy 8
  9. 9. gillis Tests of Consistency  Environmental Fit o Do the goals & policies exploit industry opportunities? o Do the goals & policies deal with industry threats? o Does the timing reflect the ability of the environment to absorb the actions? o Are the goals and policies responsive to broader societal concerns? Michael Porter, Competitive Strategy 9
  10. 10. gillis Tests of Consistency  Resource Fit o Do the goals and policies match the resources available to the company relative to competitors? o Does the timing of the goals and policies reflect the organization’s ability to change? Michael Porter, Competitive Strategy 10
  11. 11. gillis Tests of Consistency  Communications & Implementation o Are the goals well understood by the key implementers? o Is there enough congruence between the goals and policies and the values of the key implementers to ensure commitment? o Is there sufficient managerial capability to allow for effective implementation? Michael Porter, Competitive Strategy 11
  12. 12. gillis General Analytical Techniques Every firm competing in an industry has a competitive strategy, whether explicit or implicit… Michael Porter, Competitive Strategy 12
  13. 13. gillis General Analytical Techniques Every firm competing in an industry has a competitive strategy, whether explicit or implicit…there are significant benefits to gain through an explicit process of formulating strategy, Michael Porter, Competitive Strategy 13
  14. 14. gillis General Analytical Techniques Every firm competing in an industry has a competitive strategy, whether explicit or implicit…there are significant benefits to gain through an explicit process of formulating strategy, to insure that at least the policies (if not the actions) of functional departments are coordinated and directed at some common set of goals. Michael Porter, Competitive Strategy 14
  15. 15. ManufacturingLabor R & D Purchasing Distribution Sales Marketing Target Markets Product Line Finance & Control Objectives For profitability growth, market share, social goals. Goals How the business is going to compete Manufacturing The Wheel of Competitive Strategy Michael Porter, Competitive Strategy 15
  16. 16. Wheel of Competitive Strategy Personal Values Of the Key Administrators Industry Opportunities And Threats Company Strengths And Weaknesses Broader Societal Expectations Factors Internal to the Company Factors External to the Company Michael Porter, Competitive Strategy 16
  17. 17.  “Although this process may be intuitively clear, answering these questions involves a great deal of penetrating analysis. It is answering these questions that is the purpose of this book.” Michael Porter, Competitive Strategy Process for Strategy Formulation 17
  18. 18.  What is the business doing now? o Implicit/explicit current strategy.  What is happening in the environment? o Industry/competitor/societal/strengths/ weaknesses.  What should the business be doing? o Tests of assumptions and current strategy. o Strategic alternatives. o Strategic choice. Process for Strategy Formulation 18
  19. 19. Forces of Industry Competition Buyers Suppliers Potential Entrants Suppliers Substitutes Bargaining power of suppliers Threat of substitute products/services Bargaining power of buyers Threat of new entrants Industry Competitors Michael Porter, Competitive Strategy 19
  20. 20. gillis Threat of Entry  Six barriers to entry (and one) o Economies of scale o Product differentiation o Capital requirements o Switching costs o Access to distribution channels o Cost disadvantages independent of scale o Government policy Potential Entrants Michael Porter, Competitive Strategy 20
  21. 21. gillis Intensity of Rivalry  Firms are mutually dependent.  Numerous competitors?  Slow industry growth?  High fixed costs?  Lack of differentiation?  High strategic stakes? Industry Competitors Michael Porter, Competitive Strategy 21
  22. 22. gillis Substitute Products  Products very different in form that can provide the same function.  Limits industry profitability.  Limits bonanza in boom times.  Collective industry actions (quality improvement, marketing efforts.) Threat of substitute products/services Substitutes 22
  23. 23. gillis Bargaining Power of Buyers  Threat of backward integration.  Relative importance of product to buyer.  Cost enough to shop?  Large volume buyers.  Standard/undifferentiated products.  Low-profit buyers. Buyers Bargaining power of buyers 23
  24. 24. gillis Bargaining Power of Suppliers  Threat of forward integration.  Dominated by a few companies?  Importance of the suppliers’ product to the buyer’s business?  Substitute products? Suppliers Bargaining power of suppliers Michael Porter, Competitive Strategy 24
  25. 25. gillis Forces of Industry Competition Buyers Suppliers Potential Entrants Suppliers Substitutes Bargaining power of suppliers Threat of substitute products/services Bargaining power of buyers Threat of new entrants Industry Competitors Michael Porter, Competitive Strategy 25
  26. 26. gillis Strategic Competitive Options 1. Positioning o Take the structure of the industry as a given and match strengths and weaknesses to it. 2. Influencing the balance o Offensive – alter the causes of the forces. 3. Exploiting change o Product life-cycle patterns. 4. Diversification Strategy o “What is the potential of this business?” Michael Porter, Competitive Strategy 26
  27. 27. gillis Three Generic Strategies Strategic Advantage Strategic Target Industry wide Particular Segment Only Uniqueness Perceived By Customer Low Cost Position FocusFocus Overall Cost LeadershipDifferentiation Michael Porter, Competitive Strategy 27
  28. 28. gillis Generic Strategies Competitive Advantage Competitive Scope Broad Target Narrow Target Lower Cost Differentiation Michael Porter, Competitive Advantage of Nations Cost Focus Cost Leadership Focused Differentiation Differentiation 28
  29. 29. gillis Generic Competitive Strategies  Cost Leadership  Differentiation  Focus  Stuck in the middle Michael Porter, Competitive Strategy 29
  30. 30. gillis Competitor Analysis There are four diagnostic components to a competitor analysis: future goals, current strategy, assumptions, and capabilities. Understanding these four components will allow an informed prediction of the competitor’s response profile. Michael Porter, Competitive Strategy 30
  31. 31. Competitor’s Response Profile Is the competitor satisfied with its current position? What likely moves or strategy shifts will the competitor make? Where is the competitor vulnerable? What will provoke the greatest and most effective retaliation by the competitor? Future Goals At all levels of management and in multiple dimensions Current Strategy How the business is currently competing Assumptions Held about itself and the industry Capabilities Both strengths and weaknesses What Drives the Competitor What the Competitor is Doing and Can Do Michael Porter, Competitive Strategy 31
  32. 32. gillis Dimensions of Strategy  Specialization  Brand identification  Push vs. pull  Channel selection  Product quality  Tech leadership  Vertical integration  Cost position  Service  Price policy  Leverage  Relationships Michael Porter, Competitive Strategy 32
  33. 33. Specialization Vertical Integration High Vertical Integration Assembler Full line Narrow Line Group B Narrow line assembler, hi price, hi tech, hi qual Group C Moderate line, assembler, med price, very hi cust svce, low qual, lo price Group D Narrow line, highly automated, low price, low service Group A Full line, vertically integrated low mfg cost, low service, moderate quality Strategic Groups 33
  34. 34. gillis Introduction Growth Maturity Decline Industry Sales Time Stages of the Life Cycle 34
  35. 35. gillis Life Cycle  Legitimate criticisms: o Duration of stages varies widely from industry to industry. o Unclear what stage an industry is in. o Not always S-shaped. o Companies can affect shape through innovation and repositioning. o Competition associated with each stage is different for different industries. o No underlying rationale for “why?” Michael Porter, Competitive Strategy 35
  36. 36. gillis Forecasting Evolution Evolutionary processes Initial industry structure Potential industry structure 36
  37. 37. gillis Evolutionary Processes  Long-run changes in growth.  Changes in buyer segments served.  Buyers’ learning.  Uncertainty reduction.  Diffusion of proprietary knowledge.  Experience increase.  Scale expansion/ contraction  Product, marketing, or process innovation.  Structural change in adjacent industries.  Government policy change.  Entries and exits. Michael Porter, Competitive Strategy 37
  38. 38. gillis Generic Industry Environments  Industry concentration  State of industry maturity  International competition 38
  39. 39. gillis Five Generic Environments 1. Fragmented industries. 2. Emerging industries. 3. Transition from rapid growth to maturity. 4. Decline. 5. Global industries. Michael Porter, Competitive Strategy 39
  40. 40. gillis Strategic Decisions  Vertical Integration  Major Capacity Expansion  Entry 40
  41. 41. gillis The Value Chain Value Chain 41
  42. 42. gillis Outbound Logistics Procurement Technology Development Human Resource Management Firm Infrastructure (Finance, Planning, etc.) Marketing & Sales Operations (Mfg) Inbound Logistics After-Sale Service The Value Chain M A R G I N Michael Porter, Competitive Advantage of Nations 42
  43. 43. gillis Subdividing a Value Chain FI HRM TD P IL O OL MS S Marketing Mgmt Advertising Sales Force Admin Sales Force Operation Technical Literature Promotion Michael Porter, Competitive Advantage 43
  44. 44. gillis The Value System Supplier Value Chains Channel Value Chains Firm Value Chain Buyer Value Chains Channel Value Chains Channel Value Chains Buyer Value Chains Buyer Value Chains Supplier Value Chains Supplier Value Chains Single-Industry Firm Michael Porter, Competitive Advantage 44
  45. 45. gillis Supplier Value Chains Channel Value Chains Business Unit Value Chain Buyer Value Chains Business Unit Value Chain Business Unit Value Chain Firm Value Chain Diversified Firm Supplier Value Chains Channel Value Chains Buyer Value Chains The Value System Michael Porter, Competitive Advantage 45
  46. 46. gillis Value Chain Linkages FI HRM TD P IL O OL MS S FI HRM TD P IL O OL MS S Firm Value Chain Buyer Value Chain Michael Porter, Competitive Advantage 46
  47. 47. gillis Cost Advantage Cost is one of the two types of competitive advantage. Cost is also of vital importance to differentiation because a differentiator must maintain cost proximity to competitors. Michael Porter, Competitive Advantage 47
  48. 48. gillis Cost Analysis  The starting point for cost analysis is to define a firm’s value chain and to assign operating costs and assets to value activities: o Operating costs should be assigned to the activities that employ, control or most influence their use. Michael Porter, Competitive Advantage 48
  49. 49. gillis Cost Analysis  The starting point for cost analysis is to define a firm’s value chain and to assign operating costs and assets to value activities: o Assets must be assigned to value activities in some (consistent) way that will permit an analysis of cost behavior.  Book or replacement value.  Translate to operating cost via capital charges.  Timing should represent performance.  Not the precision of financial reporting. 49
  50. 50. gillis Operating Costs 40% 27% Firm Infrastructure (9%) Tech Development (9%) Inbound Logistics (3%) HRM (2%) Operations (67%) Outbound Logistics (1%) 1% Procure- ment (1%) Mktg & Sls (6%) Margin (5%) Service (1%) 5% Purchased operating inputs 50
  51. 51. gillis Assets 8% 38% Firm Infrastructure (16%) Tech Development (2%) Inbound Logistics (3%) HRM (1%) Operations (46%) Outbound Logistics (1%) 15% Procure- ment (1%) Mktg & Sls (1%) Service (2%) 5% Liquid Assets 6% Fixed Assets 51
  52. 52. gillis Cost Behavior  Managers recognize the importance of cost, and many strategic plans establish “cost leadership” or “cost reduction” as goals. However, the behavior of cost is rarely well understood.  The absence of a systematic framework for cost analysis in most firms underlies this problem.  A firm’s cost position results from the cost behavior of its value activities.  Cost behavior depends on structural factors that influence cost. These are termed cost drivers. Michael Porter, Competitive Advantage 52
  53. 53. gillis Cost Drivers 1. Economies of scale. 2. Learning and spillovers. 3. The pattern of capacity utilization. 4. Linkages. 5. Interrelationships.  Ten major cost drivers determine the cost behavior of value activities: Michael Porter, Competitive Advantage 53
  54. 54. gillis Cost Drivers 6. Integration. 7. Timing. 8. Discretionary policies not in other drivers. 9. Location. 10. Institutional factors.  Ten major cost drivers determine the cost behavior of value activities: Michael Porter, Competitive Advantage 54
  55. 55. gillis Cost Advantage  A firm must attempt to quantify the relationship between cost drivers and the cost of a value activity whenever possible.  Isolating purchased inputs for separate analysis will often yield additional insights.  Segment cost behavior is an additional factor.  A firm has a cost advantage if its cumulative cost of performing all value activities is lower than competitors’ costs. 55
  56. 56. gillis Cost Advantage  A firm’s relative cost position is a function of: o The composition of its value chain versus the value chains of its competitors. (reconfigure the value chain) o Its relative position vis-à-vis the cost drivers of each activity. (control the drivers better than competitors) Michael Porter, Competitive Advantage 56
  57. 57. gillis Controlling Cost Drivers 1. Controlling scale:  Increasing scale by acquisitions, line extensions, market expansions, marketing activity.  Boosting local or regional scale.  Assess the value of scale of different types. 2. Controlling learning:  Manage with the learning curve.  Keep learning proprietary (minimize spillover).  Learn from competitors. 57
  58. 58. gillis Controlling Cost Drivers 3. Controlling the effect of capacity utilization:  Level throughput.  Reduce the penalty of throughput variations.  Tapered integration (peak load suppliers) 4. Controlling linkages:  Exploit cost linkages within the value chain.  Work with suppliers and channels to exploit vertical linkages. 58
  59. 59. gillis Controlling Cost Drivers 5. Controlling interrelationships:  Share appropriate activities.  Transfer know-how in managing similar activities. 6. Controlling integration:  Systematic examination of possibilities for integration and de-integration. 7. Controlling timing:  Exploit first-mover or late-mover advantages.  Time purchase in the business cycle. 59
  60. 60. gillis Controlling Cost Drivers 8. Controlling discretionary policies:  Modify expensive policies that do not contribute to differentiation.  Use technology to skew cost drivers.  Avoid frills. 9. Controlling location:  Optimize location. 10.Controlling institutional factors:  Do not take as a given. Michael Porter, Competitive Advantage 60
  61. 61. gillis Three More… 11.Procurement and cost advantage. 12.Reconfiguring the value chain.  How can the activity be done differently or eliminated?  Regrouping and/or reordering?  Coalitions with other firms? 13.Cost advantage through focus.  Dedication to a well-chosen segment. Michael Porter, Competitive Advantage 61
  62. 62. gillis Sustainability & Implementation  Cost advantage will result in above-average performance only if the firm can sustain it.  The success of cost leadership hinges on a firm’s skills in actually implementing it on a day to day basis.  Costs do not go down automatically or by accident but rather as a result of hard work and constant attention.  Everyone in a firm has the potential to affect cost. Michael Porter, Competitive Advantage 62
  63. 63. gillis Pitfalls - Cost Leadership Strategy  Exclusive focus on cost of manufacturing activities.  Ignoring procurement.  Overlooking indirect or small activities.  False perception of cost drivers.  Failure to exploit linkages. 63
  64. 64. gillis Pitfalls - Cost Leadership Strategy  Contradictory cost reduction.  Unwitting cross-subsidy.  Thinking incrementally.  Undermining differentiation. Michael Porter, Competitive Advantage 64
  65. 65. gillis Steps in Strategic Cost Analysis 1. Identify the appropriate value chain and assign costs and assets to it. 2. Diagnose the cost drivers of each value activity and how they interact. 3. Identify competitor value chains and assess. 65
  66. 66. gillis Steps in Strategic Cost Analysis 4. Develop a strategy to lower relative cost position by controlling cost drivers or reconfiguring the value chain and/or downstream value. 5. Do not erode differentiation, except on purpose. 6. Test for sustainability. Michael Porter, Competitive Advantage 66
  67. 67. gillis Differentiation A firm differentiates itself from its competitors if it can be unique in something that is valuable to buyers. Differentiation is one of the two types of competitive advantage a firm may possess. Michael Porter, Competitive Advantage 67
  68. 68. gillis Differentiation Firms view the potential sources of differentiation too narrowly. They see differentiation in terms of the physical product or marketing practices, rather than potentially arising anywhere in the value chain. Michael Porter, Competitive Advantage 68
  69. 69. gillis Drivers of Uniqueness 1. Policy choices o What activities to perform and how to perform them. 2. Linkages o Within the value chain. o Supplier and channel. 3. Timing o Early – preempt others. o Late – employ more modern technology. 69
  70. 70. gillis Drivers of Uniqueness 4. Location 5. Interrelationships o Shared sales forces, sister business units, etc. 6. Learning o Proprietary vs. spillover to competitors 7. Integration 8. Scale 9. Institutional factors Michael Porter, Competitive Advantage 70
  71. 71. gillis Buyer Value and Differentiation  A firm creates value for a buyer that justifies a premium price (or preference at an equal price) through two mechanisms: o By lowering buyer cost o By raising buyer performance  Differentiation requires that a firm be uniquely able to create competitive advantage for its buyer in ways besides selling to them at lower price. Michael Porter, Competitive Advantage 71
  72. 72. gillis Value Chain and Buyer Value FI HRM TD P IL O OL MS S FI HRM TD P IL O OL MS S Firm Value Chain Buyer Value Chain A firm lowers buyer cost or raises buyer performance through the impact of its value chain on the buyer’s value chain. Michael Porter, Competitive Advantage 72
  73. 73. gillis Lowering Buyer Cost  Anything a firm can do that lowers the buyer’s total cost of using a product (or other buyer costs) represents a potential basis for differentiation. 73
  74. 74. gillis Raising Buyer Performance  Understanding desirable performance from the buyer’s viewpoint.  What creates differentiation for them?  Noneconomic goals (status, image, prestige).  For consumers, better satisfying needs. 74
  75. 75. gillis Buyer Perception of Value  Buyers often have a difficult time assessing value in advance.  Cannot always gauge the performance of a firm and its product even after use.  Buyers frequently do not understand all the ways in which a supplier actually or potentially might lower their costs or improve their performance.  Often inferred or judged (signals of value). Michael Porter, Competitive Advantage 75
  76. 76. gillis Signals of Value  Buyers will not pay for value that they do not perceive, no matter how real it may be.  Price premium hinges on real and perceived value.  Different decision makers value different things about a firm.  Different signals of value will be convincing to different decision makers.  The identity of the real buyer? 76
  77. 77. gillis Buyer Purchase Criteria  Use criteria – Purchase criteria that stem from the way in which a supplier affects actual buyer value through lowering buyer costs or raising buyer performance.  Signaling criteria – Purchase criteria that stem from signals of value, or means used by the buyer to infer or judge actual value. Michael Porter, Competitive Advantage 77
  78. 78. gillis Buyer Purchase Criteria Example Frequency of Sales Calls Speed of Order Processing Channel Margin Reliability of Service Promotional Support Advertising Shelf Positioning In-Store Displays Availability Taste Nutritional Value Texture Appearance Price Availability End user Channels Use Criteria Signaling Criteria 78
  79. 79. gillis Buyer Purchase Criteria Lower Buyer Cost Raise Buyer Performance Readily Measurable Difficult to Measure Source of Value Measurability of Value ? ? ? ? 79
  80. 80. gillis Differentiation Strategy  Proliferate the sources of differentiation.  Make actual product use consistent with intended use.  Employ signals of value to reinforce use criteria.  Employ information bundled with the product.  Exploit all sources of differentiation that are not costly.  Control cost drivers, particularly signaling.  Reduce costs that do not affect buyer value. 80
  81. 81. gillis Routes to Differentiation  Change the rules to create uniqueness. o Shift the decision maker. o Educate the buyer about new bases for the decision. o Discover unrecognized purchase criteria. o Preemptively respond to changing buyer or channel circumstances. o Reconfigure the value chain to be unique in entirely new ways. o Sustain differentiation by continued focus on perceived value to buyers and growth of imitators. 81
  82. 82. gillis Pitfalls – Differentiation  Uniqueness that is not valuable.  Too much differentiation.  Too big a price premium.  Ignoring the need to signal value.  Not knowing the cost of differentiation.  Focus on the product vs. the whole value chain.  Failure to recognize buyer segments. Michael Porter, Competitive Advantage 82
  83. 83. gillis Steps in Differentiation 1. Determine who the real buyer is. 2. Identify the buyer’s value chain and the firm’s impact on it. 3. Determine ranked buyer purchasing criteria. 4. Assess the existing and potential sources of uniqueness in a firm’s value chain. 5. Identify the cost of existing and potential sources of differentiation. 83
  84. 84. gillis Steps in Differentiation 6. Choose the configuration of value activities that creates the most valuable differentiation for the buyer relative to cost of differentiating. 7. Test the chosen differentiation strategy for sustainability. 8. Reduce cost in activities that do not affect the chosen forms of differentiation. Michael Porter, Competitive Advantage 84
  85. 85. gillis Technology and Strategy Technology pervades a firm’s value chain and extends beyond those technologies associated directly with the product. There is, in fact, no such thing as a low technology industry if one takes this broader view. Michael Porter, Competitive Advantage 85
  86. 86. gillis Outbound Logistics Procurement Technology Dev. Human Resource Mgmt Firm Infrastructure Marketing & Sales Operations (Mfg) Inbound Logistics After-Sale Service The Value Chain Technologies M A R G I N Transportation Mtl Handling Storage & Preservation Commo Sys Testing Info Sys Media Audio &Video Commo Sys Info Sys Process Machine Tool Mtl Handling Packaging Maintenance Building Design & Ops Transportation Mtl Handling Storage & Preservation Packaging Commo Sys Info Sys Diagnostic & Testing Commo Sys Info Sys Info Sys Technology Commo Sys Technology Transportation Sys Technology Product Tech Software Info Sys Computer-aided design Pilot Plant Training Motivation Research Info Systems Finance Planning Budget Office Michael Porter, Competitive Advantage 86
  87. 87. gillis Technology & Generic Strategies Process for the segment value Process for the segment cost Quality control, buyer value Learning curve, scale economies Process Tech change Meet the needs of the segment Performance for the segment cost Enhance product quality Reduce product cost Product Tech change Differentiation Focus Cost Focus DifferentiationCost Leadership Michael Porter, Competitive Advantage 87
  88. 88. gillis Tech Leadership & Advantage Pioneer the lowest cost product design. Be first down the learning curve. Low cost value activities. Lower cost of product or value activities by learning from the leader’s experience. Avoid R&D costs through imitation. Pioneer a unique product. Innovate in activities to increase buyer value. Adapt more closely to buyer needs by learning from the leader’s experience. Tech Leadership Tech Followership Cost Advantage Differentiation 88
  89. 89. gillis Industry Segmentation Segments of industry have a structure just as industries do, and the strength of the five competitive forces often differs from one part of an industry to another. Michael Porter, Competitive Advantage 89
  90. 90. gillis Forces of Industry Competition Buyers Suppliers Potential Entrants Suppliers Substitutes Bargaining power of suppliers Threat of substitute products/services Bargaining power of buyers Threat of new entrants Industry Competitors Michael Porter, Competitive Strategy 90
  91. 91. gillis Crucial Strategic Questions  Where in an industry to compete?  In what segments will focus strategies be sustainable because barriers can be built between segments? Michael Porter, Competitive Advantage 91
  92. 92. gillis Segmentation  Market Segmentation o Differences in buyer needs. o Differences in purchasing behavior. o Focus on marketing activities.  Industry Segmentation o Division of an industry into subunits for purposes of developing competitive strategy. o Differing value chains and buyer value chains. o Competitive scope within an industry. Michael Porter, Competitive Advantage 92
  93. 93. gillis Bases for Industry Segmentation  Structural bases for segmentation o Differences in products or buyers create industry segments if they alter one or more of the five competitive forces. o Structural analysis applies to industry segments.  Value chain differences and segmentation o Differences in products and buyers also create segments if they affect the requirements for competitive advantage. o Affect drivers of cost or uniqueness? Michael Porter, Competitive Advantage 93
  94. 94. gillis Five Forces Among Segments Threat of Buyer Power Segment Rivalry Supplier Power Threat of Mobility Product Varieties Buyers Substitution Michael Porter, Competitive Advantage 94
  95. 95. gillis Segmentation Variables 1. The discrete product varieties that are, or could be produced. Product Segments 2. The types of end buyers that purchase the industry’s products. Buyer Segments 3. Alternative distribution channels employed (Immediate Buyer). Channel Segments 4. Locality, region, country, group of countries. Geographic Segments 95
  96. 96. gillis New Ways of Segmenting  Are there other technologies or designs to perform the required functions in the the buyer’s value chain?  Could additional functions be performed by an enhanced product?  By reducing the number of functions (and price?) could the needs of some buyers be better served?  Are there different bundles (narrower or broader) that could be sold as a package? 96
  97. 97. gillis Industry Segmentation Matrix INDUSTRY Product Varieties Buyers Michael Porter, Competitive Advantage 97
  98. 98. gillis Industry Segmentation Matrix INDUSTRY Product Segments Buyer Segments Michael Porter, Competitive Advantage 98
  99. 99. gillis Industry Segmentation Matrix INDUSTRY Geographic Segments Channel Segments Michael Porter, Competitive Advantage 99
  100. 100. gillis Steps - Segmentation Process 1. Identify the discrete product varieties, buyer types, channels, and geographic areas in the industry that have implications for structure or competitive advantage. 2. Reduce the number of segmentation variables by applying the significance test. 3. Identify the most meaningful discrete categories for each variable. Michael Porter, Competitive Advantage 100
  101. 101. gillis Steps - Segmentation Process 4. Collapse correlated variables together. 5. Plot two-dimensional segmentation matrices for pairs of variables, and eliminate correlated variables and null segments. 6. Combine these segmentation matrices into one or two overall industry segmentation matrices. 7. Test the matrices by locating competitors on them. Michael Porter, Competitive Advantage 101
  102. 102. gillis Alternative Focus Strategies Buyer Type Insurance Companies Banks Finance Companies Company A Company B Company C Product Varieties Databases Models Consulting 102
  103. 103. gillis Segmentation and Strategy WHERE? Product Varieties Buyers Michael Porter, Competitive Advantage 103
  104. 104. gillis Segmentation and Strategy  Where in the industry a firm should compete?  How strategy should reflect this segmentation?  The attractiveness of a segment? o Structural attractiveness. o Segment size and growth. o Firm position vis-a-vis a segment. o Segment interrelationships. o Segment spillover. o Sustainability. Michael Porter, Competitive Advantage 104
  105. 105. gillis Segmentation and Strategy  Sustainability of a focus strategy. o Against broadly-targeted competitors. o Against imitators. o Against segment substitution. Michael Porter, Competitive Advantage 105
  106. 106. gillis Pitfalls and Opportunities  Successful focus strategies must involve compromise costs for competitors.  Identifying a new way of segmenting an industry can be a major opportunity.  Broad targeting does not necessarily lead to competitive advantage. Michael Porter, Competitive Advantage 106
  107. 107. gillis Pitfalls and Opportunities  Broadly targeted firms often serve too many segments.  The relevant segments and breadth of target must be continually examined.  New technology is changing old assumptions about segmentation. Michael Porter, Competitive Advantage 107
  108. 108. gillis Segmentation and Strategy Where one actually chooses to draw industry boundaries is not so essential as long as both segmentation and strategic interrelationships are examined as part of structural analysis. Michael Porter, Competitive Advantage 108
  109. 109. gillis Substitution Use of Personal Computers in Small Businesses 0 20 40 60 80 Sales Dollars Percentageof Companies Small Business Computer Manual Methods Service Bureau Michael Porter, Competitive Advantage 109
  110. 110. gillis Economics of Substitution  Current relative value/price (RVP) o When there are no switching costs and the product is consumed quickly, the relevant “relative value/price” is solely a function of current conditions. Michael Porter, Competitive Advantage 110
  111. 111. gillis Economics of Substitution  Expected relative value/price (RVP) o When there are costs of switching or the product is durable, the attractiveness of a substitute is the expected RVP over the planning horizon. o Same as in differentiation, a substitute is valuable if it lowers buyer cost or improves buyer performance relative to the product. Michael Porter, Competitive Advantage 111
  112. 112. gillis Corporate Strategy Economic, technological, and competitive developments are increasing the competitive advantage to be gained by identifying and exploiting interrelationships among distinct but related businesses. Michael Porter, Competitive Advantage 112
  113. 113. gillis Corporate Strategy This has made horizontal strategy, which cuts across divisional boundaries, perhaps the most critical item on the strategic agenda facing a diversified firm. Michael Porter, Competitive Advantage 113
  114. 114. gillis Strategy Levels  Business Strategy o Charts the course for a firm’s activities in individual industries. o Strategic business units (SBUs).  Corporate Strategy o Addresses the composition of a firm’s portfolio of business units. o The concept of synergy.  Horizontal Strategy Michael Porter, Competitive Advantage 114
  115. 115. gillis Horizontal Strategy  Coordinated set of goals and policies across distinct but interrelated business units.  A concept of group, sector and corporate strategy based on competitive advantage, not on financial considerations or stock market performance. Michael Porter, Competitive Advantage 115
  116. 116. gillis Horizontal Strategy  Diversification philosophy is changing.  Emphasis is shifting from growth to performance.  Technological change is proliferating interrelationships and making them more achievable.  Multipoint competition is increasing. Michael Porter, Competitive Advantage 116
  117. 117. gillis Horizontal Strategy  Achieving interrelationships: o Long been present. o Unexploited and untapped. o Organizational barriers to achieving interrelationships in practice.  Synergy is vague o Not one idea but three – tangible, intangible and competitor. o Intangible is the most ephemeral. 117
  118. 118. gillis Interrelationships  Tangible interrelationships o Opportunities to share activities in the value chain among related business units. o There is a competitive advantage if sharing lowers cost or enhances differentiation enough to exceed the cost of sharing. Michael Porter, Competitive Advantage 118
  119. 119. gillis Interrelationships  Intangible interrelationships o Transference of management know-how among separate value chains. o Competitive advantage through transference of generic skills from one business unit to another. Michael Porter, Competitive Advantage 119
  120. 120. gillis Interrelationships  Competitor interrelationships o Multipoint competitors necessarily link industries together because actions toward them in one industry may have implications in another. o A firm may have to match an interrelationship or face a competitive disadvantage. Michael Porter, Competitive Advantage 120
  121. 121. gillis Explicit Horizontal Strategy Need  Business units will value interrelationships differently and not agree to pursue them.  Business unit strategies will evolve in ways that weaken interrelationships.  Pricing and investment decisions taken independently may erode firm position. 121
  122. 122. gillis Explicit Horizontal Strategy Need  Business units will have a tendency to go outside to form alliances.  Business units may ignore key potential competitors.  Transfer of know-how among generically similar business units will not occur. Michael Porter, Competitive Advantage 122
  123. 123. gillis Formulating Horizontal Strategy 1. Identify all tangible interrelationships. 2. Trace tangible interrelationships outside the firm. 3. Identify possible intangible interrelationships  Isolate value activities.  Identify new industries.  Generic strategies, buyer types, value chain configuration. 123
  124. 124. gillis Formulating Horizontal Strategy 4. Identify competitor interrelationships.  Multipoints, patterns of interrelationships. 5. Assess the importance of interrelationships to competitive advantage.  Advantages and costs of sharing.  Difficulties in matching the interrelationship. 124
  125. 125. gillis Formulating Horizontal Strategy 6. Develop a coordinated horizontal strategy.  Share appropriate value activities.  Coordinate strategic postures of related units.  Distinguish the horizontal goals of business units.  Coordinate offensive and defensive strategies.  Exploit important intangible interrelationships through formal programs for exchanging know-how. Michael Porter, Competitive Advantage 125
  126. 126. gillis Formulating Horizontal Strategy  Diversify to strengthen important interrelationships or create new ones.  Sell business units that do not have significant interrelationships with others (or that make the achievement of important interrelationships difficult). 7. Create horizontal organizational mechanisms to assure implementation. 126
  127. 127. gillis Pitfalls  Misreading strategic contributions of business units.  Misreading position vis-à-vis key diversified competitors.  Portfolio management.  Negative leverage from sharing or transferring know-how.  Making too much of an interrelationship.  Illusory interrelatedness. 127
  128. 128. gillis Achieving Interrelationships Horizontal organization overlays the business unit structure and facilitates collaboration. Mechanisms include the grouping of business units, standing committees, management systems, human resources policies, etc. Michael Porter, Competitive Advantage 128
  129. 129. gillis Achieving Interrelationships Any firm with significant interrelationships needs a horizontal corporate organization to supplement its vertical organization. Michael Porter, Competitive Advantage 129
  130. 130. gillis Interrelationship Impediments  Asymmetric benefits.  Loss of autonomy and control. o Protection of turf. o Perceived dilution of buyer relationships. o Inability to “fire” a sister division. o Conflicts over priorities in shared activities. o Unfair blame for poor performance. Michael Porter, Competitive Advantage 130
  131. 131. gillis Interrelationship Impediments  Biased incentive systems. o Lack of credit for contributions. o Measurement biases.  Capitalized assets vs. expenses.  Split revenues.  Differing business unit circumstances. o Strong business unit identities. o Differing cultures. o Management, procedural, and geographic differences. 131
  132. 132. gillis Interrelationship Impediments  Fear of tampering with decentralization. o Dampening entrepreneurship. o Desire for a consistent organization. o Difficulty of measuring importance. o Fear of providing “excuses.”  Interrelationships and equity. o Fairness. o “Carrying” other units. 132
  133. 133. gillis Interrelationship Mechanisms  Horizontal structure.  Horizontal systems.  Horizontal human resource practices.  Horizontal conflict resolution processes. 133
  134. 134. gillis Relationship Devices  Market focus committees. Cross-business unit forums.  Technology and channel committees.  Temporary task forces.  Interrelationship champions.  Horizontal strategic planning, procedures & incentives. 134
  135. 135. gillis Relationship Devices  Personnel rotation.  Firmwide role in hiring and training.  Education on interrelationship concepts. 135
  136. 136. gillis A New Organizational Form  Business unit managers will have to modify their conception of what managing their own business means.  Recognition of the value of decentralization, and also:  Recognition of both vertical and horizontal dimensions. 136
  137. 137. gillis A New Organizational Form  Modification of the narrow view of autonomy.  Role of group and sector executives.  Less simplicity, greater ambiguity, more subjectivity, and potentially more conflict.  More competitive advantage. Michael Porter, Competitive Advantage 137
  138. 138. gillis Complementary Products Complements are the opposite of substitutes, because the sale of one promotes the sale of another. They represent a form of interrelatedness that involve a firm’s competitive scope and how it should compete. Michael Porter, Competitive Advantage 138
  139. 139. gillis Complementary Practices  Control over complementary products. o Full range. o “We sell both.”  Bundling o Sell together only as a bundle, at a single price. o “We only sell both together.”  Cross-subsidization o Sell one product at terms that promote the sale of another product. o “We sell one to sell another.” 139
  140. 140. gillis Scenarios Scenarios can be used as tools to understand the strategic implications of uncertainty more fully. A scenario is an internally consistent view of what the future might turn out to be. Michael Porter, Competitive Advantage 140
  141. 141. gillis Scenarios  Macroscenarios o Macroeconomic and macropolitical factors. o National or global environment. o Rate of economic growth, inflation, protectionism, regulation, energy prices, interest rates.  Industry Scenarios o Move away from dangerous single-point forecasts. o Make implicit assumptions explicit. o Think beyond the confines of conventional wisdom. o Translate uncertainty into its strategic implications. 141
  142. 142. Identify the uncertainties that may affect industry structure. Determine the causal factors driving them. Make a range of plausible assumptions about each important causal factor. Combine assumptions about individual factors into internally consistent scenarios. Analyze the industry structure that would prevail under each scenario. Determine the sources of competitive advantage under each scenario. Predict competitor behavior under each scenario. The Process of Constructing Industry Scenarios 142
  143. 143. gillis Identifying Industry Uncertainties  Hard to recognize.  Hard to detect discontinuous changes.  Hard to shed conventional wisdom.  Each element of industry structure must be examined and placed into one of three categories: 1. Constant 2. Predetermined 3. Uncertain Michael Porter, Competitive Advantage 143
  144. 144. gillis Identifying Industry Uncertainties  List all industry trends and possible industry changes mentioned by industry observers or discussed internally: o Long-run changes in growth - changes in buyer segments served - buyer learning - reduction of uncertainty. o Diffusion of proprietary knowledge - accumulation of experience. o Product, marketing, process innovation. o Structural change in adjacent industries - entries and exits. 144
  145. 145. gillis Identifying Industry Uncertainties o Product, marketing, process innovation. o Structural change in adjacent industries - entries and exits.  Independent uncertainties. o Inside or outside the industry.  Dependent uncertainties. o Determined by the independent uncertainties. (e.g. advertising levels may be a function of casual user demand). 145
  146. 146. Forces of Industry Competition Buyers Suppliers Potential Entrants Suppliers Substitutes Bargaining power of suppliers Threat of substitute products/services Bargaining power of buyers Threat of new entrants Industry Competitors Michael Porter, Competitive Strategy 146
  147. 147. gillis Chain Saw Industry Variables  A. Entry Barriers o Will there be new proprietary product designs? o How high will scale economies in manufacturing be? o In Marketing (media mix and spending rates)? o How difficult will gaining access to each channel be? o What safety regulations will be enacted? 147
  148. 148. gillis Chain Saw Industry Variables  B. Buyers o What will casual user demand be? (1) o What will professional/farm demand be? (5) o What will be the mix of dealer vs. nondealer sales? (3) o How significant will private labeling be? (4) o Will distribution be direct or through distributors? o How price sensitive will buyers be? 148
  149. 149. gillis Chain Saw Industry Variables  C. Competitors o What will be the shape of the casual user penetration curve? (2) o How will traditional competitors behave? o How will newly acquired competitors behave? o Will additional foreign firms be attracted? o How high will fixed costs be? o How committed is each competitor to chain saws? 149
  150. 150. gillis Chain Saw Industry Variables  D. Substitutes o How much will electric saws penetrate vs. gas saws? (6)  E. Suppliers o Relatively constant. Michael Porter, Competitive Advantage 150
  151. 151. gillis Chain Saw Industry Variables  Most important scenario variables o What will casual user demand be? (1) o What will be the shape of the casual user penetration curve? (2) o What will be the mix of dealer vs. non-dlr sales? (3) o How significant will private labeling be? (4)  Less important scenario variables o What will professional/farm demand be? (5) o How much will electric saws penetrate vs. gas saws? (6) 151
  152. 152. gillis Chain Saw Causal Factors (1) What will casual user demand be? External Social trends /Energy costs Wood burning stove and fireplace installations Number of households formed Channels selling casual saws Internal Marketing activity and product changes by competitors (2) What will be the shape of the casual user penetration curve? External Economic conditions Pattern of energy price changes Pattern of social trends Replacement rate for saws Channel strategies/chain saws Internal Marketing activity by competitors Scenario Variables Causal Factors 152
  153. 153. gillis Chain Saw Causal Factors (3) What will be the mix of dealer vs. nondealer sales? External Channel product line policies Consumer shopping habits Ability of channels to provide service Usage patterns of casual saws (spare parts usage, service, etc) Internal Channel policies of competitors (4) How significant will private labeling be? External Channel branding policies Channel product policies Internal Channel policies of competitors Branding policies of competitors Scenario Variables Causal Factors 153
  154. 154. Scenario Variables Dependent Elements of Structure Future Industry Structure Predeter- mined Structural Changes Constant Elements of Structure Causal Factors Michael Porter, Competitive Advantage 154
  155. 155. gillis Range of Assumptions/Chain Saw (1) Level of casual unit demand Low Medium High (2) Shape of casual user penetration curve Steady increase Peaked (3) Mix of dealer vs. non-dealer sales Dealers dominate High non- dealer share Short-term shift to non- dealers, return to dealers in long term (4) Extent of private label vs. branded sales through nondealers High percent branded High percent private label Scenario Variables Assumptions 155
  156. 156. gillis Consistent Scenarios – Chain Saw Low Medium High Casual User Demand Shape of the Casual User Penetration Curve Steady Rise Peaked 156
  157. 157. gillis Consistent Scenarios – Chain Saw Casual User Demand Channel Mix Med/ Steady Low/ Steady High/ Steady High/ Peaked Dealers Dominate High % Through Non-dealers Short-term Shift to Non-dealers 157
  158. 158. gillis Consistent Scenarios – Chain Saw 1 2 3 4 5 876 9 10 Low/ Steady High/ Peaked Med/ Steady High/ Steady High % Branded High % Branded High % Private Label High % Private Label Casual User Demand Channel Mix Dealers Dominate High % Through Non-dealers Short-term Shift to Non-dealers Michael Porter, Competitive Advantage 158
  159. 159. gillis Porter Summary – Key Terms Differentiation Linkages Focus Strategy Structural Analysis Industry Segmentation Substitution Integration Sustainability Interrelationships Value Chains 159
  160. 160. gillis Porter Summary – Key Terms Differentiation Linkages Focus Strategy Structural Analysis Industry Segmentation Substitution Integration Sustainability Interrelationships Value Chains 160
  161. 161. gillis Porter Summary – Key Terms Differentiation Linkages Focus Strategy Structural Analysis Industry Segmentation Substitution Integration Sustainability Interrelationships Value Chains 161
  162. 162. gillis Porter Summary – Key Terms Differentiation Linkages Focus Strategy Structural Analysis Industry Segmentation Substitution Integration Sustainability Interrelationships Value Chains 162
  163. 163. gillis Porter Summary – Key Terms Differentiation Linkages Focus Strategy Structural Analysis Industry Segmentation Substitution Integration Sustainability Interrelationships Value Chains 163
  164. 164. gillis Porter Summary – Key Terms Differentiation Linkages Focus Strategy Structural Analysis Industry Segmentation Substitution Integration Sustainability Interrelationships Value Chains 164
  165. 165. gillis Porter Summary – Key Terms Differentiation Linkages Focus Strategy Structural Analysis Industry Segmentation Substitution Integration Sustainability Interrelationships Value Chains 165
  166. 166. gillis “You must love the questions themselves.” Rainer Maria Rilke 166
  167. 167. gillis “It’s the level underneath, not the level on the surface, that affects relationships.” Marianne Williamson 167
  168. 168. gillis Seek to understand the level underneath and you will grow in:  Confidence  Context  Certainty  Courage 168
  169. 169. gillis Course XIV*  Thank you.  Please come again.  First Light LLC  John Gillis (Principal)  jgillis767@aol.com  248-770-0485 169
  170. 170. gillis Course XIV* 170 * Course XIV is named in honor of the original Course XIV, which was the “Department of Social Science and Economics” at the Massachusetts Institute of Technology (MIT) VERITAS
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