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Managerial Economics I Competitive Strategy ' $ Eco380: Managerial Economics I Competitive Strategy Simon Board Wednesday 2{4, Autumn 2005 & % Eco380, Competitive Strategy 1 ' $ Competitive Strategy: Week 1 Introduction and Industry Analysis Simon Board & % Eco380, Competitive Strategy 2 ' $ Yours Truly ² Education { B.A. Caius College, Cambridge. { M.Phil. Nu±eld College, Oxford. { Ph.D. Graduate School of Business, Stanford. ² Research: Auctions, Bargaining and Pricing. ² UTM O±ce: K112G ² O±ce hours: Wednesday 1.00-2.00 or after lecture. ² Email: [email protected]. I will reply to emails on Monday afternoons. & % Eco380, Competitive Strategy 3 ' $ This Course ² This course will { Identify determinants of competitive advantage. { Develop strategies to take advantage of these opportunities. { Build toolkit of methods to evaluate di®erent strategies. ² At the end of the course, students should be able to { Recognise major strategic problems. { Understand what elements of the environment are crucial. { Suggest how participants may change the game. & % Eco380, Competitive Strategy 4 ' $ Course Evaluation ² Two midterms: 25% each. ² Final: 50 %. ² Three problem sets (not graded). ² Weekly assignments (class discussion). ² Grade given by 25% £ maxfmid1, ¯nalg + 25% £ maxfmid2, ¯nalg + 50% £ ¯nal ² Requests for regrades in writing within one week of exam being returned. ² Exams open book. & % Eco380, Competitive Strategy 5 ' $ Assumed Knowledge ² Economic concepts: { Basics: perfect competition, monopoly pricing. { Industrial organisation: Bertrand competition, Cournot competition, Stackelberg competition (i.e. leader{follower). { Game theory: Nash equilibrium, backwards induction. ² Mathematical concepts: { Optimisation: constrained and unconstrained. { Basic statistics: mean, variance, distribution functions. & % Eco380, Competitive Strategy 6 ' $ Books ² Competitive Solutions by McAfee { Paperback US$25 from Amazon.com. 24 hour availability. ² Co-Opetition by Brandenburger and Nalebu® { Paperback CA$20 from Amazon.ca. 24 hour availability. ² Introduction to Industrial Organisation by Cabral. { Hardback US$45 from Amazon.com. 24 hour availability. & % Eco380, Competitive Strategy 7 ' $ Cooperation vs. Competition ² Value of industry = Buyer value { Supplier cost. ² This pie is shared between the ¯rm, customers, suppliers and other ¯rms. ² Business is cooperation { Cooperate with other parties to make pie as big as possible. ² Business is competition { Compete over share of the pie. ² Business is both cooperation and competition at the same time. & % Eco380, Competitive Strategy 8 ' $ The Value Net ² Components: [see picture] { Our Firm { Customers { Suppliers { Competitors { Complimentors ² Interactions create and divide the pie. ² Notice symmetry: { Increase pie by increasing buyers' values of reducing suppliers' costs. { Tradeo®: The customer is not always right. { Example: Should sta® give up holidays to serve customer? & % Eco380, Competitive Strategy 9 ' $ Industry Analysis ² Identify factors determining industry pro¯tability. ² Foundation for strategic analysis. ² Context for formulation of strategy. ² Analysis depends on market de¯nition. ² Links between products A and B depend on links between value nets. { Products compliments/substitutes { A ¯rm is in both markets { Contracts span markets (e.g. products are bundled). & % Eco380, Competitive Strategy 10 ' $ Porter's \Five" Forces 1. Substitutes 2. Buyer bargaining power 3. Supplier bargaining power 4. Rivalry 5. New entrants 6. Compliments & % Eco380, Competitive Strategy 11 ' $ Substitutes ² Two types of substitutes: 1. Goods outside the market being considered. { Limit the valuations of buyer. { Can be very broad: more leisure time is substitute for a car. { Strategic interactions not directly considered. 2. Goods inside the market being considered. { A®ects how our ¯rm interacts with competitors. { Depends on product di®erentiation. ² Product is often blind{sided by substitute outside immediate market (especially with new technology) { IBM and Microsoft/Intel { Microsoft and Internet. & % Eco380, Competitive Strategy 12 ' $ Buyer/Supplier Bargaining Power ² Consider relationship between ¯rm and supplier. { More on bargaining in week 13. ² How big is pie? { Potential pie = value of relationship. { Ex{post costs of negotiation: lawyers fees, delay, strikes. { Ex{ante costs of negotiation: underinvestment in relationship, cultivation of outside options. ² How is pie split? { Long side vs. short side of market { Power to commit to one stance { Perceptions, perceptions of perceptions, perceptions of perceptions of perceptions,... & % Eco380, Competitive Strategy 13 ' $ Rivalry ² Factors that reduce rivalry: { Concentration { Industry leadership { High and increasing marginal costs { Large minimum e±cient scale { Product di®erentiation and switching costs { Low exit barriers & % Eco380, Competitive Strategy 14 ' $ Rivalry: Industry Structures ² Fragmented (e.g. dry-cleaners) { Little strategy unless market changes (e.g. home depot). ² Dominant ¯rm (e.g. Microsoft) { Biggest danger: entrants with new technology. ² Tight oligopoly (e.g. Coke and Pepsi) { Much scope for cooperation and competition. ² Loose oligopoly (e.g. car ¯rms) { Strategy to maximise value added. ² What determines structure? { Cost structure, transactions costs, regulation. & % Eco380, Competitive Strategy 15 ' $ New Entrants ² More on this in week 6. ² When should you ¯ght entry? ² When preemptively block entry? ² Some barriers to entry: { Government (USPS, Taxis, Patents) { Large MES (Intel, Boeing) { Product uniqueness e.g. loyalty, switching costs (Banking) { Network Externality (Microsoft) { Reputation (Nutrasweet) { No room for entry (Cereals) & % Eco380, Competitive Strategy 16 ' $ Complimentors ² Complimentors make the pie bigger. ² Petrol, cars and roads { Michelin makes maps and tour guides { In 1913 General Motors built \seedling miles" or road { In 1919 General Motors created ¯nancing arm ² Video recorder and movies { Sony Betamax had few rentals ² Mall economics { Toys R Us and McDonalds ² Operating systems, software and hardware & % Eco380, Competitive Strategy 17 ' $ Selling Books: Amazon 1. Substitutes: 2. Buyers: ² Bargaining power: 3. Suppliers: ² Bargaining power: 4. Rivals: ² Rivalry: 5. Entrants: 6. Compliments: & % Eco380, Competitive Strategy 18 ' $ Ice Cream: Haagan Dazs 1. Substitutes: 2. Buyers: ² Bargaining power: 3. Suppliers: ² Bargaining power: 4. Rivals: ² Rivalry: 5. Entrants: 6. Compliments: & % Eco380, Competitive Strategy 19 ' $ Market De¯nition ² How de¯ne market for Vespa? { Scooters? Motorbikes? Cars? Public Transport? ² Case Study: Epson { Epson dominated low{end dot{matrix printers. { HP dominated the Inkjet and high{end laser printer market. { Epson is in the wrong market ! launched competitive laser printer in 1989. { Price War! { Laser printer prices #. Inkjet prices #. And dot{matrix market...? ² Lesson: There always a bigger market. & % Eco380, Competitive Strategy 20 ' $ Coherent Strategies ² Porter (1996). Strategy is: { Creating unique and valuable position. { Making trade-o®s. Choosing what not to do. { Creating ¯t among activities, doing many things well. ² Systems of activities: { Choices compliment each other. { Hard to imitate: can't copy piecemeal. { Increases value added. { Danger: in desire to grow ¯rms can forget what makes them unique. ² Potential Counter Example: Budweiser BE. & % Eco380, Competitive Strategy 21 ' $ Case Study: Toyota ² In 1950s, Toyota was small Japanese car ¯rm. { Little capital, no scale economies. { Couldn't mimic American mass production. ² Just-in-time manufacturing { Inventories act as bu®er, but subject to large economies of scale. { Toyota reduced inventories via close coordination. ² Reliability of process { Without bu®er of inventories, engineers worked on reliability of every step of production line. ² Fewer flaws in product { Problems noticed immediately, rather than sitting in inventories. & % Eco380, Competitive Strategy 22 ' $ Toyota cont. ² Suppliers { Little scale, so can't produce in{house. { Communicate on day{to day basis. { Long term relationships. ² Skilled workers trained to ¯x own machines. { In US, this was specialised job. ² Flexible machines, due to lack of scale. { Leader in use of robots. ² Frequent redesigns possible { Because of flexibility of production line. ² Strategies are complements. & % Eco380, Competitive Strategy 23 ' $ Modern Manufacturing Mass Production Modern Manufacturing Varieties Small Large Machines Specialised Flexible Workers Specialised Multiple tasks Inventories Large Just-in-time Authority Centralised Decentralised Communications Infrequent, top-down Fast, bidirectional & % Eco380, Competitive Strategy 24 ' $ Assignment ² Read: \The Future of Fast Fashion", Economist, 18th June 2005. ² What market is Zara targeting? ² What di®erentiates Zara's products from its competitors? ² What is special about Zara's production process? ² Is Zara's strategy coherent? ² We will discuss this case next week! & % Eco380, Competitive Strategy 25.
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