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.
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. 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. 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. 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. 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. 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. gillis
General Analytical Techniques
Every firm competing in an industry has
a competitive strategy, whether explicit or
implicit…
Michael Porter, Competitive Strategy
12
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. 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. 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. 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. “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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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
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
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. 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. 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
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. 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. 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
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. 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. gillis
Alternative Focus Strategies
Buyer Type
Insurance
Companies Banks
Finance
Companies
Company A Company B Company C
Product
Varieties
Databases
Models
Consulting
102
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. 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. 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. 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. 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. 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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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.
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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.
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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
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Achieving Interrelationships
Any firm with significant interrelationships
needs a horizontal corporate organization to
supplement its vertical organization.
Michael Porter, Competitive Advantage
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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
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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.
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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.
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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.
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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
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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
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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.”
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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
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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.
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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
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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
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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.
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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. 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
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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?
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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?
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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?
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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
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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)
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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
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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
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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
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Consistent Scenarios – Chain Saw
Low Medium High
Casual User Demand
Shape of the
Casual User
Penetration
Curve
Steady
Rise
Peaked
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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
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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 %
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
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“It’s the level underneath, not
the level on the surface, that
affects relationships.”
Marianne Williamson
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Seek to understand the level
underneath and you will grow in:
Confidence
Context
Certainty
Courage
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Course XIV*
Thank you.
Please come again.
First Light LLC
John Gillis (Principal)
jgillis767@aol.com
248-770-0485
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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