Chapter 4 Exhibits
from Strategy and the Business Landscape
1999 Pankaj Ghemawat
The Pharmaceutical Payoff Matrix
(Millions of Dollars)
CLIENTS (CS) PRICE NO PRICE CHANGE E HAS LARGE PRICE ADVANTAGE E HAS SMALL PRICE ADVANTAGE C NEUTRALIZES ES ADVANTAGE VERY LOW 358/190 418/163
ENTRANTS (ES) PRICE LOW 507/168 507/168 MODERATE 585/129 HIGH 624/116
454/155
511/138
636/126
428/50
504/124
585/129
669/128
1999 Pankaj Ghemawat
A Framework for Competitor Analysis
What Drives the Competitor Future Goals
At all levels of management and in multiple dimensions
What the Competitor Is Doing and Can Do Current Strategy
How the business is currently competing
Competitors 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?
Assumptions
Held about itself and the industry
Capabilities
Both strengths and weaknesses
1999 Pankaj Ghemawat
Source: Michael Porter, Competitive Strategy, (New York: Free Press, 1980), Chapter 3
The Limits to Sustainability
40
30
ROI%
20
10
10
Year
1999 Pankaj Ghemawat
Source: Pankaj Ghemawat, Commitment (New York: The Free Press, 1991)
The Four Threats to Sustainability
Imitation Substitution
Added Value
Appropriated Value
Slack
Holdup
1999 Pankaj Ghemawat
Trends and Success in the Programming of New Television Series
Averages Trendy Introductions Nontrendy Introductions Year 1 Ratings 15.3 16.3 Year 3 Ratings 16.4 20.4 Years Broadcast 1.8 2.3 % Surviving 3 Years 21% 27%
1999 Pankaj Ghemawat
Source: Robert E. Kennedy, Strategy Fads and Competitive Convergence: An Empirical Test for Herd Behavior in Prime Time Television Programming, Unpublished working paper, Harvard Business School (January 1998)
The Economics of Brokerage Business Models, Early 1996
250
200
Price Cost
Dollars
150
100
50
0
1999 Pankaj Ghemawat
Online/Deep Discount
Source: Rajiv Lal, E-Trade Securities, Inc. Stanford University Discount Full Service Graduate School of Business Case No. M-286, 1996
Asset-Specificity in the Automobile Industry
U.S./U.S. Measures of Asset-Specificity Distance between manufacturing plants (miles) Capital that is not readily redeployable (%) Man Days of face-to-face contact divided by sales to automaker (index) Suppliers sales to automaker divided by suppliers total sales (%)
* Share of part production
Japan/Japan Division (48%)* 276 31 7.9 94 Arms-length (35%)* 125 13 9.9 19 Partner (38%)* 41 31 10.6 60
Arms-length (42%)* 589 15 7.7 34
Partner (10%)* 413 18 9.0 34
Source: Jeffrey H. Dyer, Does Governance Matter?, Organization Science, Vol. 7, No. 6, Nov-Dec 1996
1999 Pankaj Ghemawat
Market Value versus Cumulated Strategic Investments at General Motors
100 50 0
Market Value
-50 -100
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
$ Billion
-150
Strategic Investments
0%
-200 -250
-300 -350
10%
-400 1999 Pankaj Ghemawat
Responding to Threats to Sustainability
Responses to Imitation Building Barriers
Economies of scale and scope Learning/private information Contracts and relationships Network externalities Threats of retaliation Time lags Strategic complexity Upgrading
Responses to Substitution
Not responding Fighting Switching Recombining Straddling Harvesting
Added Value
Appropriated Value
Responses to Slack
Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change
1999 Pankaj Ghemawat
Responses to Holdup
Contracting Integrating Building bargaining power Bargaining hard Reducing asset-specificity Building relationships Developing trust
Chapter 4 Text Related Slides
from Strategy and the Business Landscape
1999 Pankaj Ghemawat
Outline
I. Approaches to competitor analysis II.The purposes of competitor analysis III. The process of competitor analysis
1999 Pankaj Ghemawat
I. Approaches to Competitor Analysis
x x x
Structural analysis Behavioral analysis Game-Theoretic analysis
1999 Pankaj Ghemawat
Behavioral Analysis of HSC
x
GOALS
State-ownership Lower Profits Growth Objectives
CAPABILITIES
Tosoh/DSM Technology DSM Size/Deep Pockets Political Access
STRATEGY
Migrating Downstream Legal Skirmishing Likely to Expand into US
ASSUMPTIONS
Different Home Base Chemical Company Parents Thinks NutraSweet Will Accommodate
1999 Pankaj Ghemawat
Behavioral Profiles
Resources and Capabilities Competitor Profile Current Strategy
Apparent Assumptions
Future Goals
1999 Pankaj Ghemawat
Source: Michael Porter, Competitive Strategy, (New York: Free Press, 1980), Chapter 3
Competitors Goals
x x x x x
Market share vs. profitability Growth vs. dividend pay-out Technological leadership vs. cost leadership Long run vs. short run performance Non-economic vs. economic goals
1999 Pankaj Ghemawat
Personality Profiles
x x x x x
Conservative vs. aggressive Risk takers vs. risk adverse Operational focus vs. visionary Analytical vs. emotional Profit-oriented vs. growth
Analyze titles & responsibilities: Chair & CEO Chair, CEO & COO Chair & chief scientist ...
1999 Pankaj Ghemawat
Diagnosing Competitor Goals and Assumptions
x x x x x x x x
Profiles of key management Organization structure Advisors Public statements Results of recent past History Parent company strategy Position in the portfolio
1999 Pankaj Ghemawat
Competitor Incentives
x x x x
Look ahead and reason back Recognize linkages across markets Pay attention to uncertainties Narrow uncertainties by projecting profits and implied courses of action
1999 Pankaj Ghemawat
Pulling It All Together
x x
Is the competitor satisfied with its current position? What likely future moves or strategy shifts, will the competitor make and how dangerous are they? Where is the competitor vulnerable? What will provoke the greatest and most damaging retaliation by the competitor?
x x
1999 Pankaj Ghemawat
II. The Purposes of Competitor Analysis
Linking Analysis to Action
x x x x x
Offense Defense Influence Cooption Concession
1999 Pankaj Ghemawat
Interaction: Reality & Perceptions
Common Perceptual Biases
x
Ascribing inertia to competitors, while assuming you will act Assuming competitors have no options Underestimating the intensity of retaliation
x x
1999 Pankaj Ghemawat
Classic Good Moves ...
x
x x x x
Hard to match; cost them more than it costs you -builds on strategic asymmetries Have commitment value; costly to reverse, so intentions will be believed Help\improve industry structure Lower costs and\or create value for customers Aim at competitors blind spots Anticipate the competition (it is easier to keep them out than kick them out)
1999 Pankaj Ghemawat
Classic Bad Moves ...
x x x
x x x
Can be easily copied (when you think its unique) Show a lack of commitment Raise costs without creating value; lower prices without expanding volume Undermine industry structure Ignore a firms capabilities Needlessly provoke or mindlessly hurt competitors
1999 Pankaj Ghemawat
A Broader Perspective: Influencing Competitors
x x x x
The right competitors can be good Influence the competitors entry and mobility Influence the competitors incentives Avoid creating desperate competitors
1999 Pankaj Ghemawat
III. The Process of Competitor Identification
Whom do I analyze?
x
Common approach:
Companies with similar strategies and competitive positions
Often forgotten:
Companies able to:
change industry structure or evolution leverage related capabilities to enter the industry offer substitute technologies provide complementary assets or products
1999 Pankaj Ghemawat
Procedural Guidelines
x x x x
A lot of information already in house One time efforts rarely succeed Cost/benefit of data collection Data without analysis = low benefit
More than a planning tool and, a framework for self analysis ...
1999 Pankaj Ghemawat
Sources of Information on Competitors
Public Advertising What competitors say about themselves Promotional materials Press releases Speeches Want ads OTHERS? What others say about them Books HBS cases! Consultants Unions Trade Manuals Technical papers Licenses Patents Courses ... Customers Partners Subcontractors Suppliers Govt SEC Congressional testimony Lawsuits Courts Regulatory agencies ... Lawsuits Agency reports Investors Annual reports Annual meetings 10K, 10Q... Prospectus
... Analysts reports Industry studies Credit agencies
1999 Pankaj Ghemawat
Protecting Ones Own Information
x x x
Decide what needs to be protected Recognize the range of overt sources of information Recognize the possibility of covert action
telephone and fax intercepts trash analysis employee subversion/insertion
Protecting information requires protecting people
1999 Pankaj Ghemawat
Anticipating Competitive and Cooperative Dynamics
x x
The detailed analysis of individual competitors The evolutionary analysis of threats to sustainability
1999 Pankaj Ghemawat
Predicting Profits
39%
3% Bottom Half
1999 Pankaj Ghemawat
Top Half
Sustainability Analysis
20 18 16 14 12 10 8 6 4 2 0 1 97 1
1999 Pankaj Ghemawat
Advantage (% ROI)
1 973
19 75
1 97 7
19 79
Sustainability: Resources and Products
Imitability of the Product/Service Low
High
Imitability of Superior Resources
1999 Pankaj Ghemawat
Threats to Sustained Advantage
Yes
Continued Appropriability
Yes
No
Hold-up Slack
Continued Scarcity
No
Imitation Substitution
Yes
Competitive Advantage
No
1999 Pankaj Ghemawat
Threats to Sustainability
Imitation Slack Substitution Hold-Up
1999 Pankaj Ghemawat
Imitation
x
Imitation increases the supply of what a firm uniquely provides
Profits draw a crowd
Imitation is pervasive and can be deadly
Intel in DRAMs EMI in CAT scanners Apple in user-friendly PCs Netscape in browsers Ben & Jerrys in super-premium ice cream Bridal registries on the Internet
But imitation can be deterred
Continental Lite vs. Southwest Airlines Child World vs. Toys R Us
1999 Pankaj Ghemawat
Imitation: Duration of Intels Monopolies
386 486 Pentium Pentium Pro MMX (4 Years) (3 Years) (2 Years) (1 Year) (3 Months)
1999 Pankaj Ghemawat
Barriers to Imitation
x x x x x x x x
Scale or Scope Economies Experience/Learning (Tacit Knowledge) Relationships Reputation Retaliation Response Lags Upgrading/Investments Fit
1999 Pankaj Ghemawat
Substitution
x
Substitution reduces the demand for what a firm uniquely provides by shifting the demand elsewhere
The better mousetrap Due to changes in technology, customer needs, input prices, etc.
Substitution threats can be subtle and unexpected
Videoconferencing vs. air travel Western Union vs. the telephone Conventional contact lenses vs. disposables
For this reason, substitution is an especially effective way to attack dominant players
1999 Pankaj Ghemawat
Substitution: Book Retailing
Procurement and Logistics Operations Marketing
B&N Offline Amazon Original B&N Online Amazon Response
1999 Pankaj Ghemawat
Substitution: Steel
Steel Quality
Sheet steel
lity ua Q
of
Steel Structural el ste ced du pro illm ini m
& rods Other bars
Rebar
1975
1980
1985
1990
1999 Pankaj Ghemawat
Source: Clayton Christensen and Bret Baird, Continuous Casting Investments at USX Corporation, HBS #5-697-066, April 24, 1997.
Responses to Substitution
x x
Before Scan the landscape broadly for threats Understand underlying customer needs
But be prepared to ignore the needs of current customers
After: Your Options
x
Fight the threat
Incorporate their benefits (e.g., orange juice supplemented with calcium) Incorporate their cost reductions (e.g., private labeled items in supermarkets) Face up to your loss of added value, and reduce price before the substitute gets a foothold
x x
If you cant beat them, join them Take the money and run
1999 Pankaj Ghemawat
Responses to Substitution
x x x x x x
Not responding Fighting Switching Recombining Straddling Harvesting
1999 Pankaj Ghemawat
Hold-up
x
Hold-up diverts value to customers, suppliers, or complementors who have some bargaining leverage
They have bargaining leverage because they have something you need and cant get elsewhere (added value)
x x
Ex: Who makes all the profits from PCs? Hold-up is especially threatening when parties in a relationship have invested in assets that are specific to that relationship (so its hard to walk away)
An electric plant built at the mouth of a coal mine A railroad spur laid to a particular factory Skills that are tailored to a particular employer
1999 Pankaj Ghemawat
Hold-Up: Genex and G.D. Searle
x
Codeveloped a process for making one of the two key amino acids used in NutraSweet Genex entered into a long-term contract to supply Searle and built a new bioprocessing facility Searle began to renegotiate price within months, and initiated internal production within one year Genex went bankrupt
1999 Pankaj Ghemawat
Holdup In The PC Industry
40%
Operating Margin
30%
20%
10%
other components microprocessors
personal computers
software
peripherals services
Share of Industry Revenue
Source: Orit Gadiesh and James L. Gilbert, Profit Pools: A Fresh Look at Strategy, Harvard Business Review, May-June 1998, p.145
1999 Pankaj Ghemawat
Responses to Hold-up
x
Multiple sourcing
But investments in relationship-specific assets are important
x x
Tough negotiation Contractual arrangements
But contractual incompleteness limits this option
Vertical integration
Dont base your competitive advantage on specific assets you cant own (like a particular individual)
1999 Pankaj Ghemawat
Responses to Hold-up
x x x x x x x
Contracting Integrating Building bargaining power Bargaining hard Reducing asset-specificity Building relationships Developing trust
1999 Pankaj Ghemawat
Slack
x x
Slack, or waste within the firm, dissipates value Slack is hard to identify...
Plush carpets for their own sake are slack But plush carpets to win customers and recruit talent might be wise investments
but slack is thought to be large
10-40% of revenues, typically!?!
Slack tends to be worst under certain conditions
Forgiving competitive environments Settings in which managers must have wide discretion over productive processes
1999 Pankaj Ghemawat
Slack: The Theory of Free Cash Flow
x
Principal-agent problems between managers and stakeholders Managers have incentives to grow the resources under their control Free cash flow enhances managers ability to
Invest resources in negative-return activities Waste resources
1999 Pankaj Ghemawat
Responses to Slack
x
Monitoring of performance
Benchmarking Time-motion studies Outsiders on Boards
Managerial incentives
On average, top executives get roughly $3.25 for each $1,000 of shareholder value created (Jensen and Murphy)
Commitments to return cash to shareholders
e.g., dividends
Appeals to a higher calling, a sense of mission
1999 Pankaj Ghemawat
Responses to Slack
x x x x x x x
Gathering information Monitoring behavior Offering performance incentives Shaping norms Bonding resources Changing governance Mobilizing for change
1999 Pankaj Ghemawat
A Fifth Threat
x
Nonmarket Pressures
Government NGOs Media
1999 Pankaj Ghemawat
Sustained Cooperative Advantage
With cooperative or competitive interactions, unlikely to gain more than added value Sustained cooperative advantage: significant added value as partner
1999 Pankaj Ghemawat
Building Sustainable Advantages
x x
Understand your own uniqueness Scan the environment for
Technological changes Variations in input supply Demand shifts
Invest in opportunities that fit
1999 Pankaj Ghemawat
Protecting Sustainable Advantages
x x
Sustainability is not forever, nor is it free Investment can reinforce it by
Amplifying advantages Multiplying their bases
1999 Pankaj Ghemawat
Conclusions
x x
The best defense is a good offense That is, defend your advantage by continually upgrading it
Seek out ways to increase willingness to pay without incurring commensurate supplier opportunity costs Seek out ways to reduce supplier opportunity costs without sacrificing commensurate willingness to pay
x x
Make yourself a moving target But remember that the landscape can shift under your feet
1999 Pankaj Ghemawat
Countering Threats to Sustainability
x
Sustained superior performance requires
Scarcity Appropriability
Two routes to sustainability
Making lumpy commitments Building organizational or technical capabilities over time
1999 Pankaj Ghemawat
A Dynamic Theory of Sustainability
x
A dynamic theory of sustainability requires
a link between what you did yesterday and what you can do well today a link between what you do today and what you can do well tomorrow
1999 Pankaj Ghemawat
Sustainability and Investment
x
Implications for investment
The status quo cannot be sustained without investment Because of the moving competitive baseline, investment is required just to earn average returns Above-average returns require investments that retard the movement of the competitive baseline
1999 Pankaj Ghemawat
Chapter 4 Case Related Slides
British Satellite Broadcasting vs. Sky TV
1999 Pankaj Ghemawat
Structural Analysis of BSB vs. Sky
x x x x x x x x x
High fixed costs/Upfront investment Inelastic supply: films, advertising Fixed demand Network effects/Switching costs Diverse competitors Inconsistent goals High strategic stakes Antagonism/emotion Substitutes: BBC/TV/Cable
1999 Pankaj Ghemawat
A Behavioral Profile of News Corporation
x
Resources and Capabilities
Second-largest media conglomerate Cash Twentieth Century Fox library 1/3 of British newspapers Experience with satellite TV
Assumptions
Low cost Old/proven technology Commercial programming Quick to market Ability to skirt loopholes
Strategy
Emphasis on electronic media Satellites targeted Presence in English speaking markets ITV stake Losing bidder on official franchise
Goals
Murdochs nonpecuniary motivation
1999 Pankaj Ghemawat
Game-Theoretic Analysis of BSB vs. Sky
BSB Fight 699, -190 Exit
Fight SKY Exit
2943, -180
-70, 2089
1999 Pankaj Ghemawat
Chapter 4 Case Related Slides
De Beers
1999 Pankaj Ghemawat
De Beers Exhibit A: Value Appropriation
Quantity Bought carats South Africa Namibia Botswana Soviet Union Other Total 9,154 963 7,769 6,000 3,320 27,206
CSO List
COGS
Contrib.
De Beers contrib. $/carat 38 102 13 12 9 24
De Beers Total contrib. $ million 348 98 101 72 30 649
De Beers Total contrib. % 54% 15% 16/6 11% 5%
$/carats 58 200 53 125 60 77
$ million 531 193 412 750 199 2084
$/carat 20 98 10 113 51 44
$ million 183 94 78 675 169 1199
$/carat 38 102 43 12 9 33
1999 Pankaj Ghemawat
Exhibit A: Value Appropriation (contd)
Ratio of CSO List to inventory COGS = 1.75 Ratio of CSO List to inventory COGS = 1.42 (w/o Debswana) Average markup in South Africa: 190% Average markup in Namibia: 104% Average markup in Botswana: 430% -- wow!
1982 Inventory is $1.7 billion at COGS or $2.42 billion at CSO List. This amounts to 31 m carats inventory (mostly gems) Actual CSO Sales over next 4 years
Year 1983 1984 1985 1986
CSO Sales $1.6b $1.61b $1.82b $2.56b
Years to clear inventory 1.51 1.5 1.33 0.95
1999 Pankaj Ghemawat
De Beers Exhibit B: Supply Forecast 1986
Gems 000 carats Australia Zaire Botswana USSR South Africa Namibia Angola Tanzania Other Total 1986 Total 1982 % Increase Polished Supply Available: Yield: 1982 1986 % Increase
1999 Pankaj Ghemawat
Near Gem 000 carats 13,500 5,548 7,924 4,664 3,387 10 245 88 1,507 36,873 15,713 135%
Industrial 000 carats 15,000 12,020 4,661 3,180 3,479 41 123 22 1,202 39,728 11,283 252%
Total 000 carats 30,000 18,493 15,537 10,600 9,155 1014 1,226 220 4,285 90,530 37,332 142%
1,500 925 2,952 2,756 2,289 963 858 110 1,576 13,929 10,336 35%
48%, 4961 6686 35%
17.50 2750 6453 135%
------7711 13139 70%
De Beers Exhibit C: Demand Forecast
Forecast Retail Demand Year 1982 1983 1984 1985 1986 1987 1988 (mill. cts.) 7.9 8.51 8.8 9 9.3 9.6 9.9 Forecast Supply Surplus (mill. cts.) 7.7 9.05 10.4 11.75 13.1 13.1 13.1 Surplus Cumulative Surplus (mill. cts) 0.55 2.15 4.9 8.7 12.2 15.4 Probable Value of Surplus ($/carat) 20 21 22.1 23.2 24.3 25.5 26.8 Additions to Inventory ($ mill.) 12 35 64 92 89 86 Cumulative Additions to Inventory ($ mill.) 12 47 111 203 293 378
(mill. cts.) -0.2 0.55 1.6 2.75 3.8 3.5 3.2
1999 Pankaj Ghemawat
Exhibit C: Demand Forecast (contd)
Sensitivity Analysis
Probable Value of Surplus in 1982 ($/carat) 30 40 50 60 Cumulative Additions to Inv. by 1988 ($ mill.) 562 745 928 1,111
1999 Pankaj Ghemawat
Exhibit C: Demand Forecast (contd)
Actual Retail Demand Year 1982 1983 1984 1985 1986 1987 1988 (mill. cts.) 7.9 8.5 9 9.9 13.2 13 14.5
Actual Supply (mill. cts.) 7.7 9 10 11.5 13.1 13.1 13.1
Surplus
Cumulative Surplus (mill. cts.)
Average Value of Surplus ($/carat)
Additions to Inventory ($ mill.)
Cumulative Additions to Inventory ($ mill.)
(mill. cts.) -0.2 0.5 1 1.6 -0.1 0.1 -1.4
0.5 1.5 3.1 3 3.1 1.7
145 90 -40 -51 456 -300
145 235 195 144 600 300
1999 Pankaj Ghemawat
