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The Strategic Management Frameworks TheThe StrategicStrategic ManagementManagement FrameworksFrameworks Arnoldo Hax TheThe FrameworksFrameworks forfor CompetitiveCompetitive PositioningPositioning •• PorterPorter •• ResourceResource--BasedBased ViewView ofof thethe FirmFirm •• TheThe DeltaDelta ModelModel Porter’s Framework: Explaining the Profitability of a Business Competitive Positioning Industry Structure Achieving sustainable Factors affecting competitive advantage industry profitability Strategy Formulation and Implementation Defining and executing the managerial tasks Figure 5-1. Elements of Industry Structure: Porter’s Five- Forces Barriers to Entry Rivalry among Competitors Economics of scale Product differentiation Concentration and balance among competitors Brand identification Industry growth Switching cost Fixed (or storage) cost Access to distribution channels New Entrants Product differentiation Capital requirements Intermittent capacity increasing Access to latest technology Switching costs Experience and learning effects Corporate strategic stakes Government action Barriers to Exit Threat of Industry protection Threat of Asset specialization New Entrants Industry regulation New Entrants One-time cost of exit Consistency of policies Strategic interrelationships with other businesses Capital movements among countries Industry Competitors Emotional barriers Custom Duties Government and social restrictions Foreign exchange Foreign ownership Assistance provided to competitors Bargaining Power Bargaining Power of Suppliers of Buyers Suppliers Buyers Intensity of Rivalry Power of Suppliers Intensity of Rivalry Power of Buyers Number of important suppliers Number of important buyers Availability of substitutes for the suppliers products Availability of substitutes for the Differentiation or switching cost of suppliers industry products Threat of Threat of Substitutes products Substitutes Buyers’ switching costs Suppliers threat of forward integration Buyers threat of backward integration Industry threat of backward integration Substitutes Industry threat of forward integration Suppliers contribution to quality or service of the Contribution to quality or service of Availability of Substitutes industry products Availability of Substitutes buyers products Total industry cost contributed by suppliers Availability of close substitutes Total buyers cost contributed by the Importance of the industry to suppliers profit User’s switching costs industry Substitute producer’s profitability and aggressiveness Buyers profitability Substitute price-value Figure 5-5. Porter’s Five-Forces Model Applied to the Pharmaceutical Industry in the Early 1990s Barriers to Entry (Very Attractive) • Steep R & D experience curve effects • Large economies-of-scale barriers in R & D and sales force • Critical mass in R & D and marketing require global scale Bargaining Power • Significant R & D and marketing costs of Buyers •High risk inherent in the drug development process (Mildly Unattractive) • Increasing threat of new entrants coming from biotechnology companies • The traditional purchasing process was highly price insensitive: the consumer (the patient) did not Bargaining Power Intensity of buy, and the buyer (the physician) of suppliers Rivalry and did not pay (Very Attractive) Competition • Large Power buyers, particularly plan sponsors and cost containment • Mostly commodities organizations, are influencing the •Individual scientists may have decisions to prescribe less expensive some personal leverage drugs Threat of Substitutes (mildly Unattractive) • Mail-order pharmacies are obtaining large discounts on volume • Generic and “me-to” drugs are weakening branded, proprietary drugs drugs • More than half of the life of the drug patent is spent in the product development and • Large aggregated buyers (e.g., approval process hospital suppliers, large • Technological development is making imitation easier distributors, government • Consumer aversion to chemical substances erodes the appeal for pharmaceutical institutions) are progressively drugs replacing the role of individual customers Intensity of Rivalry (Attractive) • Important influence of the government in the regulation of the • Global competition concentrated among fifteen large companies buying processes • Most companies focus on certain types of disease therapy • Competition among incumbents limited by patent protection • Competition based on price and product differentiation • Government intervention and growth of “Me-too” drugs increase rivalry • Strategic alliances establish collaborative agreements among industry players • Very profitable industry, however with declining margins SUMMARY ASSESSMENT OF THE INDUSTRY ATTRACTIVENESS (Attractive) Make a business in an attractive industry where you can excel; then excel by achieving a low cost of differentiation through unique activities The Value Chain Firm Infrastructure Margin Support Activities Human Resource Management Technology Development Procurement Inbound Operations Outbound Marketing Service Logistics Logistics And Sales Margin Primary Activities Source: This setup for the value chain was suggested by Michael E. Porter (1985). Merck’s Value Chain Firm Infrastructure • Very strong corporate culture • Very lean structure • One of America’s best managed companies • Highly concerned about ethics, • Superb financial management and managerial control capabilities ecology, and safety Human Resources Management • Friendly and cooperative labor relations • Excellent training and development • Strong recruiting programs in top universities • Excellent rewards and health-care programs Margin Technology Development • Technology leader; developer of break-path drugs (e.g., Mevacor, Vasotec, Sinement • Intensive R & D spending •Strengthening technological & marketing capabilities through strategic alliances (DuPont, Astra, and Johnson & Johnson) • Fastest time-to-market in drug discovery and drug approval processes Procurement • Vertical integration in chemical products Outbound Marketing Inbound Manufacturing Service Logistics And Sales Logistics • Increasing manufacturing • Medco’s service • •Acquisition of Medco • Marketing flexibility and cost excellence has flexibility and cost provides unique leadership reductions attracted major reductions distribution • Large direct sales • Stressing quality and corporations and • Stressing quality and capabilities and staff productivity improve- health-care productivity improve- information • Global marketing ments organization as ments technology support coverage • Global facilities network clients. • Global facilities network • Medco is the number • Leverage through one mail-order firm Medco, including powerful marketing groups Margin • Medco IT infra- structure & database, covering patients, physicians, & drug uses • Strategic alliances ThereThere areare twotwo waysways toto compete:compete: LowLow CostCost oror DifferentiationDifferentiation The efficiency of the low cost provider’s cost structure allows pricing below the average competitor, which in the long run may put average competitors out of business. This is why the alternative to low cost needs to be differentiation, offering unique product attributes that the customer values and will pay a premium for. Best Product Margin Margin $/Unit Margin Cost Cost Cost Average Low Cost Differentiation Player Player Player However, the Total Customer Solutions positioning offers a possible preferred alternative by introducing significant cost savings (and/or revenue increases) to the customer Best Product Total Customer Solutions Margin Margin Margin $/Unit Margin Cost Cost Cost Cost Average Low Cost Differentiation Player Player Player CriticalCritical ElementsElements inin Porter’sPorter’s FrameworksFrameworks Porter Focus of Strategic Attention Industry/ Business Types of Competitive Advantage Low Cost or Differentiation Basic Unit of Competitive Advantage Activities Porter’sPorter’s WinningWinning FormulaFormula PickPick aa businessbusiness inin anan attractiveattractive industryindustry inin whichwhich youyou cancan excel.excel. NoticeNotice thatthat Porter’sPorter’s FrameworkFramework stressedstressed rivalryrivalry andand competition.competition. Therefore,Therefore, anan attractiveattractive industryindustry isis oneone inin whichwhich wewe cancan achieveachieve asas closeclose toto aa monopolisticmonopolistic positionposition asas possible.possible. InIn turn,turn, thethe messagemessage ofof thethe valuevalue chainchain isis toto achieveachieve sustainablesustainable advantageadvantage byby beatingbeating youryour competitors,competitors, ifif notnot inin all,all, atat leastleast inin thosethose activitiesactivities thatthat araree mostmost crucialcrucial toto competition.competition. StrategyStrategy isis War!War! TheThe ResourceResource--BasedBased ViewView ofof thethe FirmFirm FrameworkFramework ResourcesResources cancan bebe classifiedclassified intointo threethree broadbroad categoriescategories • Tangible assets are the easiest to value, and often are the only resources that appear on a firm’s balance sheet. They include real estate, production facilities, and raw materials, among others. Although tangible resources may be essential to a firm’s strategy, due to their standard nature, they rarely are a source of competitive advantage. There are, of course, notable exceptions. ResourcesResources cancan bebe classifiedclassified intointo threethree broadbroad categoriescategories (continued)(continued) • Intangible assets include such things as company reputations,
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