Incumbency Advantages

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  • Incumbency Advantages

    1. 1. What you will learn in this Section ? <ul><li>Envisioning Strategy </li></ul><ul><ul><li>Definition </li></ul></ul><ul><ul><li>Framework </li></ul></ul><ul><ul><li>Visual Models </li></ul></ul><ul><li>External Analysis </li></ul><ul><ul><li>PEST </li></ul></ul><ul><ul><li>PEST Impact Analysis </li></ul></ul><ul><li>Industry and Competitive Analysis </li></ul><ul><ul><li>Industry Structure </li></ul></ul><ul><ul><li>Evolution of Industries </li></ul></ul><ul><ul><li>Industry Supply Chain </li></ul></ul><ul><ul><li>Potential Industry Earnings </li></ul></ul><ul><ul><li>Porter’s 5 Forces Analysis </li></ul></ul><ul><ul><li>Competitive Intensity </li></ul></ul><ul><ul><li>Strategies for minimizing competitive forces </li></ul></ul><ul><ul><li>Perceptual Map </li></ul></ul><ul><ul><li>Barriers to Entry/Incumbency advantages </li></ul></ul><ul><ul><li>DSIR effect </li></ul></ul><ul><li>Company Resources and Capabilities </li></ul><ul><ul><li>ARC Analysis/HR </li></ul></ul><ul><ul><li>SWOT Analysis </li></ul></ul><ul><ul><li>Value Creating Processes/Core Competencies </li></ul></ul><ul><ul><li>Strategic Gameboard </li></ul></ul><ul><ul><li>Balanced Scorecard </li></ul></ul><ul><ul><li>Change Management </li></ul></ul>© Sunil Mehrotra
    2. 2. Barriers to Entry: Incumbency Advantage The incumbent firms Competitive rivalry <ul><li>Economies of Scale </li></ul><ul><li>Cumulative Investments </li></ul><ul><ul><li>Learning economies </li></ul></ul><ul><ul><li>Innovation advantage </li></ul></ul><ul><ul><li>Promotional advantage </li></ul></ul><ul><li>Customer loyalty advantage </li></ul><ul><li>Switching costs advantage </li></ul><ul><li>Demand Side increasing returns advantage </li></ul>New entrant Suppliers Bargaining power of Suppliers Customers Bargaining power of
    3. 3. Types of Incumbency Advantage <ul><li>Scale Advantage </li></ul><ul><li>Cumulative Investment advantage </li></ul><ul><ul><li>Learning economies </li></ul></ul><ul><ul><li>Innovation advantage </li></ul></ul><ul><ul><li>Promotional Advantage </li></ul></ul><ul><li>Consumer Loyalty advantage </li></ul><ul><li>Switching cost advantage </li></ul><ul><li>Demand Side Increasing return advantage </li></ul>
    4. 4. Economies of scale Incumbent firm's fixed cost/unit New entrant's firm's fixed cost/unit
    5. 5. How economies of scale create a barrier to entry Source; http://www.wikinvest.com/images/d/d5/CYCLEOFFIXEDCOSTS.jpg
    6. 6. Cumulative Investment Advantages <ul><li>Learning economies </li></ul><ul><ul><li>Unit cost to produce decreases with the cumulative quantity produced (cost of goods barrier)‏ </li></ul></ul><ul><li>Innovation advantage </li></ul><ul><ul><li>Probability of innovation increases based on past innovations (new entrants are disadvantaged)‏ </li></ul></ul><ul><li>Promotional Advantage </li></ul><ul><ul><li>When advertising has a cumulative effect on brand loyalty (new entrants have to invest more)‏ </li></ul></ul>
    7. 7. Cumulative Investment Advantages <ul><li>Learning economies </li></ul><ul><ul><li>Unit cost to produce decreases with the cumulative quantity produced (cost of goods barrier)‏‏ </li></ul></ul>Qty. produced Variable cost/unit New entrant's firm's variable cost/unit Incumbent firm's variable cost/unit Cumulative Advantage
    8. 8. Cumulative Investment Advantages: Innovation Advantage <ul><li>Innovation advantage </li></ul><ul><ul><li>Probability of innovation increases based on past innovations (new entrants are disadvantaged)‏ </li></ul></ul><ul><ul><li>Or, Success breeds success! </li></ul></ul>R&D
    9. 9. Cumulative Investment Advantages: Promotional Advantage <ul><li>Promotional Advantage </li></ul><ul><ul><li>When advertising has a cumulative effect on brand loyalty (new entrants have to invest more)‏ </li></ul></ul>http://www.slideshare.net/coolstuff/the-brand-gap?src=related_normal&rel=54574 Branding Differentiation Positioning Brand loyalty Cumulative advertising
    10. 10. Consumer Loyalty advantage <ul><li>Consumer habits are formed, which are difficult for new entrants to change </li></ul><ul><li>Consumer demand forces retailers to carry the brand limiting access to shelf space for new entrants. Creating a barrier to entry. </li></ul><ul><li>New entrants have to spend more on advertising to induce trial to cause consumers to switch and incent retailers to carry their product. </li></ul>
    11. 11. Incumbency advantages accrue at each stage in the value creation process R&D Innovation advantage Manf scale economies Learning economies Distribution scale & learning Retailers Promotional Consumers loyalty Barrier to entry New entrant
    12. 12. What is: “network effect”? “First mover advantage”?
    13. 13. Network Era Is Being Driven by the Interaction of Three 'Laws' more computing power More-valuable networks more communication bandwidth Moore’s Law Metcalfe’s Law Gilder’s Law Source: Prof. N. Venkatraman, Boston University Moore’s Law Metcalfe’s Law Gilder’s Law
    14. 14. Demand Side Increasing Returns Network Effect Network Effects occur when the benefits of a product increase to each user as the number of users increases. An example of network effects is telephone service. The more people who use them the more valuable they are to each user. The Web is an example with even more rapidly increasing DSIR than telephones or fax machines. Industries with Demand Side Increasing Returns have the characteristics of “winner takes all”. Many of the Web based industry exhibit this characteristic, example: eBay and more recently the social networking sites such as Facebook. Source: www.wikipedia.com
    15. 15. Positive Feedback loop creates “winner takes all” Base of users Attracts new users Gets a larger share of new purchases Installed base grows
    16. 18. Competing in markets with DSIR <ul><li>Installed base and tipping point </li></ul><ul><li>Switching costs </li></ul><ul><li>Expectations matter </li></ul><ul><li>Bandwagons may emerge </li></ul><ul><li>Early adopters jump start the process </li></ul><ul><li>Intermediate adopters (fence sitters) are key and difficult to attract </li></ul>Source: Strategic Management; Saloner, Shepard and Podolny; Wiley
    17. 19. Strategies for competing in markets with DSIR http://web2.socialcomputingmagazine.com/ Strategies in the Web 2.0 world
    18. 20. Nappie 14 <ul><li>Types of Incumbency advantage </li></ul><ul><ul><ul><li>Scale Advantage </li></ul></ul></ul><ul><ul><ul><li>Cumulative Investment advantage </li></ul></ul></ul><ul><ul><ul><ul><li>Learning economies </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Innovation advantage </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Promotional Advantage </li></ul></ul></ul></ul><ul><ul><ul><li>Consumer Loyalty advantage </li></ul></ul></ul><ul><ul><ul><li>Switching cost advantage </li></ul></ul></ul><ul><ul><ul><li>Demand Side Increasing return advantage </li></ul></ul></ul>
    19. 21. Mnemonic 6 Incumbency advantages accrue at each stage in the value chain R&D Innovation advantage Manf scale economies Learning economies Distribution scale & learning Retailers Promotional Consumers loyalty Barrier to entry New entrant
    20. 22. Mnemonic 7 Demand Side Increasing Returns: Positive Feedback loop creates “winner takes all” Base of users Attracts new users Gets a larger share of new purchases Installed base grows

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