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New 9 strategy competitive porter


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New 9 strategy competitive porter

  1. 1. On Strategy and Competition Ziya G. Boyacigiller This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to
  2. 2. 2 Ziya G. Boyacigiller © 2005 Macro Industry View* Ziya G. Boyacıgiller Sabancı University Yonetim Bilimleri Fakultesi * Ref: Based on Competitive Strategy, M. Porter
  3. 3. 3 The Seven Domains of Attractive Opportunities Ziya G. Boyacigiller (c) 2005 EMBA 3MODIFIED by ZGB, from “The New Business Road Test”, by J. Mullins MACROMICRO MARKET DOMAIN INDUSTRY DOMAIN COMPETITIV E ANALYSIS Note: Market is customers, industry is sellers…
  4. 4. 4 Ziya G. Boyacigiller © 2005 Use Strategic Thinking to Question: Can we win? Do not get into an industry where competitive forces are against you and you don’t know what you are getting into...
  5. 5. 5 Ziya G. Boyacigiller © 2005 Art of War, Sun Tzu The main principles are: – If you will wage war, make sure you are prepared to win - war is first about preparation. – To win you need to apply your strength to the weakest points of your enemy – focusing all your might on one spot works best. – Speed in developing your forces and mobility creates decisive advantages. – To win you must: know yourself (your company), know your enemy (competition), and know the terrain (market).
  6. 6. 6 Ziya G. Boyacigiller © 2005 “What is Strategy? Strategic positioning attempts to achieve sustainable advantage by preserving what is distinctive about a company. It means: performing different activities from rivals, or performing similar activities in different ways.
  7. 7. 7 Ziya G. Boyacigiller © 2005 Difference from Rivals?
  8. 8. 8 Ziya G. Boyacigiller © 2005 performing different activities from rivals,
  9. 9. 9 Ziya G. Boyacigiller © 2005 performing similar activities in different ways
  10. 10. 10 Ziya G. Boyacigiller © 2005 3 Key Principles underlie strategic positioning: 1. Strategy is the creation of unique and valuable position, involving a different set of activities. 2. Strategy requires you to make trade- offs in competing – to choose “what-to-do” and “what-not-to-do”. 3. Strategy involves creating fit among a company’s activities.
  11. 11. 11 Ziya G. Boyacigiller © 2005 “Fit” • has to do with the ways a company’s activities interact and reinforce one another. • drives both competitive advantage and sustainability. When activities mutually reinforce each other (fit) , competitors can’t imitate them easily.
  12. 12. 12 Ziya G. Boyacigiller © 2005 Kinepolis Strategy Map resulting from its Value Innovation High Growth in Revenues & Profits
  13. 13. 13 Ziya G. Boyacigiller © 2005 Structural Analysis of Industries Michael Porter Harvard Business School 9-376-054 Rev. June 30, 1983
  14. 14. 14 Remember ! The single most important determinant of entrepreneurial success (that overwhelms all other factors) is the selection of the industry to compete in… Ziya G. Boyacigiller © 2005
  15. 15. 15 Industry vs Market What is the difference? Ziya G. Boyacigiller © 2005
  16. 16. 16 Industry vs Market • Industry: Group of Competitors • Market: Group of Customers Industry sells “substitute products/services” to “customers” in Market Ziya G. Boyacigiller © 2005
  17. 17. 17 Good Market/Bad Industry Market • Movie Customers • Restaurant Customers • Music Listeners • Your Market Industry • Movie Theaters • Restaurants • Music Makers • Your Industry? Ziya G. Boyacigiller © 2005
  18. 18. 18 Ziya G. Boyacigiller © 2005 Starting point… • Economic Theory predicts that risk- adjusted rates of returns in an industry and across industries should be constant. • Several Studies show this is not true. different industries, and different companies within a given industry can have different levels of profitability.
  19. 19. 19 Ziya G. Boyacigiller © 2005 Outside Forces… … are significant primarily in a relative sense, since forces outside the industry (economy, nature, etc.) usually affect all firms in the industry – the key is whether firms have different abilities to deal with them or not. (Remember, when the tide comes in, all boats rise…)
  20. 20. 20 Ziya G. Boyacigiller © 2005 Industry Structure… … has a strong influence in defining the competitive rules of the game, as well as the strategies potentially available to the firm.
  21. 21. 21 “When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact.” Warren Buffet Ziya G. Boyacigiller © 2005
  22. 22. 22 Who Has the Leverage? Ziya G. Boyacigiller © 2005
  23. 23. 23 Forces Determine Profitability Ziya G. Boyacigiller © 2005
  24. 24. 24 Ziya G. Boyacigiller © 2005 Porter’s “Five Forces” that influence competitiveness
  25. 25. 25 BY JOHN W. MULLINS Let’s take a look at Johnny’s “Lemonade Stand” Business From a Competitiveness Viewpoint Ziya G. Boyacigiller © 2005
  26. 26. 26 Ziya G. Boyacigiller © 2005 Johnny’s Lemonade Business
  27. 27. 27 Ziya G. Boyacigiller © 2005 Johnny… Big Brother…
  28. 28. 28 Ziya G. Boyacigiller © 2005 Johnny… Big Brother… Good use of strategy helps you to create your legal “big brother” – also known as “unfair competitive advantage”
  29. 29. 29 Determinants of Profitability 1- Competitive Forces 2- Positioning Ziya G. Boyacigiller © 2005
  30. 30. 30 Perform “Profitability Analysis” on your target industry Ziya G. Boyacigiller © 2005
  31. 31. 31 Ziya G. Boyacigiller © 2005 Force #1: RIVALRY • Economic theory predicts that profits are driven to zero (marginal cost) over time. • This rarely becomes true since competition (industry) and markets are not perfect. • Intensity of rivalry varies in industries.
  32. 32. 32 Ziya G. Boyacigiller © 2005 How to Quantify Rivalry? • Economists measure rivalry by indicators of  industry concentration. • The Concentration Ratio (CR) is one such measure. • The Bureau of Census periodically reports the CR for major Standard Industrial Classifications (SIC's). • The CR indicates the percent of market share held by the four largest firms (CR  8%, 25%, 50%, etc.)
  33. 33. 33 Ziya G. Boyacigiller © 2005 Competitive Markets • With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). • A low concentration ratio (CR) indicates that the industry is characterized by many rivals (fragmented), none of which has a significant market share. • These fragmented markets are said to be competitive.
  34. 34. 34 Ziya G. Boyacigiller © 2005 Disciplined Industries • If rivalry among firms in an industry is low, the industry is considered to be disciplined. • Discipline may result from – the industry's history of competition, – the role of a leading firm, or – informal compliance with a generally understood code of conduct. (Explicit collusion generally is illegal and not an option) • In low-rivalry industries competitive moves must be constrained informally. However, a maverick firm seeking a competitive advantage can displace the otherwise disciplined market. • Almost all new markets start not disciplined.
  35. 35. 35 Roger L. Martin
  36. 36. 36 Ziya G. Boyacigiller © 2005 Intense Rivalry • When a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies. • Points of Pressure: – Changing prices – Improving product differentiation – Creatively using channels of distribution (EX: using a distribution channel that is novel to the industry (Timex)). – Exploiting relationships with suppliers (EX: Sears 1950- 70)
  37. 37. 37 Ziya G. Boyacigiller © 2005 Intensity is Affected by threats… • Large number of competitors (opportunity web-sites) • Slow market growth (industrial, agricultural) • High fixed costs, sunken costs (steel) • High storage costs/highly perishable products (produce) • Low switching costs (cell phone numbers) • Low levels of product differentiation (keyboards) • Strategic stakes are high (IBM) • High exit barriers (shipbuilding) • A diversity of rivals (hospitals) • Industry shakeout (networking)
  38. 38. 38 Ziya G. Boyacigiller © 2005 Rule of Three and Four • BCG founder Bruce Henderson generalized this observation: A stable market will not have more than 3 significant competitors, and the largest competitor will have less than 4 times the market share of the smallest. • If this rule is true, it implies that: – If there is a larger number of competitors, a shakeout is inevitable – Surviving rivals will have to grow faster than the market – Eventual losers will have a negative cash flow if they attempt to grow – All except the two largest rivals will be losers – The definition of the "market" is strategically important.
  39. 39. 39 Ziya G. Boyacigiller © 2005 Summary Checklist: 1 - DEGREE OF RIVALRY -Ease of entry -Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity -Product differences -Switching costs -Brand identity -Diversity of rivals -Corporate stakes
  40. 40. 40 Ziya G. Boyacigiller © 2005 Force #2 : Threat Of Substitutes • Threat of substitutes exists when a product's demand is affected by the price change of an existing substitute product. • A product's price elasticity is affected by substitute products - as more substitutes become available, the demand becomes more elastic since customers have more to choose from. • A close substitute product constrains the ability of firms in an industry to raise prices. (diapers, cans, tires)
  41. 41. 41 Ziya G. Boyacigiller © 2005 Summary Checklist: 2 - THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to  substitute -Price-performance  trade-off of substitutes (value)
  42. 42. 42 Ziya G. Boyacigiller © 2005 Force #3 : Buyer Power • When buyer power is strong, the relationship to the producing industry is near to, what an economist terms, a monopsony - a market in which there are many suppliers and one buyer where buyer sets the price – (government vs. contractors)
  43. 43. 43 Ziya G. Boyacigiller © 2005 Buyers are Powerful if … – Buyers are concentrated - there are a few buyers with significant market share (military / contractors) – Buyers purchase a significant proportion of output / distribution of purchases or if the product is standardized (Wall Mart / retail good producers) – Buyers possess a credible backward integration threat - can threaten to buy producing firm or rival (beverage firm/ bottlers)
  44. 44. 44 Ziya G. Boyacigiller © 2005 Buyers are Weak if… – producers threaten forward integration - producer can take over own distribution/retailing (Sony / theaters) – significant buyer switching costs exist - products not standardized and buyer cannot easily switch to another product (Microsoft Office) – buyers are fragmented (many, different) - no buyer has any particular influence on product or price (consumer products) – producers supply critical portions of buyers' input - distribution of purchases (Dell’s relationship with PC manufacturers)
  45. 45. 45 Ziya G. Boyacigiller © 2005 Summary Checklist: 3 - BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs. industry Substitutes available Buyers' incentives
  46. 46. 46 Ziya G. Boyacigiller © 2005 Force #4 : Supplier Power • A producing industry requires raw resources - labor, components, and other supplies. • Suppliers, if powerful, can exert an influence on the producing industry
  47. 47. 47 Ziya G. Boyacigiller © 2005 Suppliers are Powerful if: • credible forward integration threat by suppliers exits (Baxter/AHSupply) • suppliers concentrated (drugs/hospitals) • significant cost to switch suppliers (Intel)
  48. 48. 48 Ziya G. Boyacigiller © 2005 Suppliers are Weak if: • many competitive suppliers - product is standardized (automotive Tier 2s) • purchase commodity products (store labels) • credible backward integration threat by purchasers (timber / paper) • concentrated purchasers (department stores / garments)
  49. 49. 49 Ziya G. Boyacigiller © 2005 Summary Checklist: 4 - SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry
  50. 50. 50 Ziya G. Boyacigiller © 2005 Force #5 : Threat of Entry • possibility that new firms may enter the industry also affects competition • if free entry and exit exists, then profits always should be nominal • high profits attract new entrants • however, industries possess characteristics that protect the high profit levels of firms in the market and inhibit additional rivals from entering the market
  51. 51. 51 Ziya G. Boyacigiller © 2005 Entry Barriers keep competitors out
  52. 52. 52 Ziya G. Boyacigiller © 2005 What Creates Barriers? • Government (regulation, quotas) • Patents and proprietary knowledge • Complexity of business/technology • Asset specificity (ship building) • Organizational (Internal) Economies of Scale (Minimum Efficient Scale – SOM to sustain firm) (UPS) • Market Leadership (Facebook, Google)
  53. 53. 53 Ziya G. Boyacigiller © 2005 Easy to Enter • If there is: – Common technology – Little brand franchise – Access to distribution channels – Low scale threshold
  54. 54. 54 Ziya G. Boyacigiller © 2005 Difficult to Enter • If there is: – Patented or proprietary know-how – Difficulty in brand switching – Restricted distribution channels – High scale-threshold
  55. 55. 55 Ziya G. Boyacigiller © 2005 Easy to Exit • If there are: – Saleable assets – Low exit costs – Independent businesses
  56. 56. 56 Ziya G. Boyacigiller © 2005 Difficult to Exit • If there are: – Specialized assets – High exit costs – Interrelated businesses
  57. 57. 57 Ziya G. Boyacigiller © 2005 Exit Barriers can keep you trapped…
  58. 58. 58 Ziya G. Boyacigiller © 2005 Entry & Exit Barriers determine quality of returns (profit) LOW HIGH L O W low returns worst case returns H I G H best returns high returns but risky ENTRYBARRIERS EXIT BARRIERS
  59. 59. 59 Ziya G. Boyacigiller © 2005 Value Migration • Over time, leading firms are replaced by others as value propositions degrade, and new value propositions are created. • Lesson Learned: Be Agile – “We will create faster than they can copy…” Walt Disney
  60. 60. 60 Ziya G. Boyacigiller © 2005 Summary Checklist: 5 – THREAT OF ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products
  61. 61. 61 Determinants of Profitability 1- Competitive Forces 2- Positioning Ziya G. Boyacigiller © 2005
  62. 62. 62 Ziya G. Boyacigiller © 2005 Position within an Industry is a second determinant of profitability Q: Where does a 300 kg. Gorilla sit?
  63. 63. 63 Ziya G. Boyacigiller © 2005 A well positioned company in an unattractive industry, can still generate desirable returns EX: Southwest Airlines
  64. 64. 64 Ziya G. Boyacigiller © 2005 Firms position themselves using their strengths • Strengths are one of: – Cost, or – Differentiation • Strengths can be applied with: – Narrow Focus (Niche), or – Broad Focus (Industry Wide)
  65. 65. 65 Ziya G. Boyacigiller © 2005 Porter’s Generic Strategies
  66. 66. 66 Ziya G. Boyacigiller © 2005 Which Strategy Should I Use?
  67. 67. 67 Ziya G. Boyacigiller © 2005 Each Strategy has its Risks • Cost Leader can lose: if competition reduces costs even further (US vs Japan in memory), invents disruptive technologies (CD vs vinyl), or focuses on niches. • Differentiator can lose: if competition imitates (chips, PCs), customer requirements (tastes) change, or to differentiators focused on niches. • Focus can lose: if broad focus competitors imitate (Microsoft), to others even more focused (sensors), or when market requirements change (low gas mileage cars).
  68. 68. 68 Ziya G. Boyacigiller © 2005 The Goal of Strategic Analysis… …is to find a position in the industry where the company can best defend itself against these forces or can influence them.
  69. 69. 69 Ziya G. Boyacigiller © 2005 Cost Leadership Strategy • Low cost enables: – Higher profits when product sold at market prices, or – Higher market share when product sold below market price • Cost leader can win price wars, and price attrition by time – others lose. • This strategy usually targets a broad market • Enablers are: access to low cost capital, skill in efficient production/design, efficient distribution channels, access to low cost materials…
  70. 70. 70 Ziya G. Boyacigiller © 2005 How to Achieve Cost Leadership • Process efficiencies • Access to low cost material / suppliers • Avoiding costs by innovative process or design changes • Good management • Quality • etc. etc.
  71. 71. 71 Ziya G. Boyacigiller © 2005 Low Cost Strategy ENTRY Ability to cut price in retaliation deters potential entrants BUYERS Ability to offer lower price to powerful buyers SUPPLIER Better insulated from powerful suppliers SUBSTITUTES Can use low price to defend against substitutes RIVALRY Better able to compete on price
  72. 72. 72 Ziya G. Boyacigiller © 2005 Porter’s “Five Forces”: Low Cost Strategy cut prices to keep new entrants out offer lower prices to powerful buyers better insulated from powerful suppliers defend with lower prices better structured to compete on cost
  73. 73. 73 Ziya G. Boyacigiller © 2005 Differentiation Strategy • Perception of Valuable Differentiation by customers enables: – Charging premium prices than competition – If costs increase (buyer power) company can pass the cost to customers • Customers pay higher prices to have early access to products that will make them more competitive (thus make more profits) • Enablers are: access to leading research, highly skilled or creative team, strong sales team to communicate the value, brand reputation for quality and innovation.
  74. 74. 74 Ziya G. Boyacigiller © 2005 Differentiation Strategy ENTRY Customer loyalty can discourage potential entrants BUYERS Large buyers have less power to negotiate because of few close alternatives. SUPPLIER Better able to pass on supplier price increases to customers SUBSTITUTE S Customer's become attached to differentiating attributes, reducing threat of substitutes. RIVALRY Brand loyalty to keep customers from rivals
  75. 75. 75 Ziya G. Boyacigiller © 2005 Porter’s “Five Forces”: Differentiation Strategy customer loyalty to keep new entrants out  no close alternatives for powerful buyers better able to pass supplier price increases to buyers defend with strong differentiators brand loyalty and defendable differentiation
  76. 76. 76 Ziya G. Boyacigiller © 2005 Focus Strategy • Targets a small enough (niche) market segment, whose needs are not met by broad market supplier • Provides either low cost or differentiation for this niche market. • Focus enables: – Strong customer loyalty (better service  relationship) – Discourages competitors from entry. – Pass supply cost increases to customer (buyer power) • Enablers are: expert understanding of customer problems, and whole product/custom solution
  77. 77. 77 Ziya G. Boyacigiller © 2005 Focus Strategy ENTRY Focusing develops core competencies that can act as an entry barrier. BUYERS Large buyers have less power to negotiate because of few alternatives SUPPLIER Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases SUBSTITUTE S Specialized products & core competency protect against substitutes RIVALRY Rivals cannot meet differentiation-focused customer needs
  78. 78. 78 Ziya G. Boyacigiller © 2005 Porter’s “Five Forces”: Focus Strategy focus develops core competencies to keep new entrants out  no close alternatives for powerful buyers better able to pass supplier price increases to buyers defend with specialized products and core competencies rivals can’t meet differentiation focused needs
  79. 79. 79 Ziya G. Boyacigiller © 2005 Stuck in the Middle? • Generic strategies are not compatible with each other. • Pick one and stick to it – otherwise brand image becomes confusing for customers (EX: high quality & low cost)
  80. 80. 80 Ziya G. Boyacigiller © 2005 McDonalds Denny’s SushiHot Dog Stands
  81. 81. 81 Ziya G. Boyacigiller © 2005 SWOT Analysis Using the Five-Forces 1. Make a list of your company’s strengths thinking about the Five Forces. 2. Repeat for you competitor(s) ! 3. Repeat both steps for your weaknesses. 4. Analyze and make a list of opportunities you see (what will make you “win”) – remember Sun Tzu 5. Analyze and make a list of the risk (threats) you see (what will “kill” you) 6. See if you can turn threats into opportunities using your creativity.
  82. 82. 82 Caution ! Many people, with a shallow understanding of the concept, try to make use of SWOT without a competitor defined... SWOT analysis is a competitive analysis tool. “Competitive” implies you need to compare your business to at least one competitor. You cannot (should not) try to use SWOT without defining a competitor - SWOT becomes a powerful tool only when used properly. Ziya G. Boyacigiller © 2005
  83. 83. 83 Again: Remember ! The single most important determinant of entrepreneurial success (that overwhelms all other factors) is the selection of the industry to compete in… Ziya G. Boyacigiller © 2005