i ii i iii iv v i ii iii iv v vi i ii iii i ii iii iv v vi i ii iii iv Basic definitions Intro lecture 1 2 a b Five Forces Model a b Competitive advantage The strategic advantage one business entity has over its rival entities within its competitive industry Achieving competitive advantage strengthens and positions a business better within the business environment IR AC IS Increase Revenue Avoid Costs Improve Service Sustainable competitive advantage Financial performance that consistently outperforms industry averages Fast follower problem Exists when savvy rivals watch a pioneer s efforts learn from their successes and missteps then enter the market quickly with a comparable or superior product at a lower cost before the first mover can dominate Technology can be matched quickly Rarely a source of competitive advantage Resource based view of competitive advantage The strategic thinking approach suggests that if a firm is to maintain sustainable competitive advantage it must control an exploitable resource or set of resources that have four critical characteristics 1 Valuable Rare Imperfectly imitable Nonsubstitutable Imitation resistant value chain A way of doing business that competitors struggle to replicate and that frequently involves technology in a key enabling role Structure of industry shapes forces Industry structure drives competition and profitability not whether an industry produces a product or service is emerging or mature high tech or low tech regulated or unregulated What are the Five Forces i Threat of New Entrants Entry Barriers Supply side economies of scale Demand side benefits of scale Customer switching costs Capital requirements Incumbency advantages indep of size Unequal access to distribution channels Restrictive Government policy Bargaining Power of Buyers Powerful customers the flip side of powerful suppliers Can capture more value by forcing down prices demanding better quality or more service thereby driving up costs and generally playing industry participants off against one another all at the expense of industry profitability ii 1 Buyers are Powerful If There are few buyers or the buyers buy large volume The industry s products are standardized or undifferentiated music Buyers face few switching costs in changing vendors iTunes vs Rhapsody Buyers can credibly threaten to integrate backward Threat of Substitutes When the threat of substitutes is high industry profitability suffers Substitute products or services limit an industry s profit potential by placing a ceiling on prices If an industry does not distance itself from substitutes through product performance marketing or other means it will suffer in terms of profitability and often growth potential A substitute performs the same or a similar function as an industry s product by a different means Videoconferencing is a substitute for travel Plastic is a substitute for aluminum E mail is a substitute for express mail Substitutes are always present but they are easy to overlook because they may appear to be very different from the industry s product To someone searching for a Father s Day gift neckties and power tools may be substitutes Bargaining Power of Suppliers Powerful suppliers capture more of the value for themselves by charging higher prices limiting quality or services or shifting costs to industry participants Powerful suppliers including suppliers of labor can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices Microsoft for instance has contributed to the erosion of profitability among personal computer makers by raising prices on operating systems Suppliers are Powerful If It is more concentrated than the industry it sells to The supplier group does not depend heavily on the industry for its revenues Industry participants face switching costs in changing suppliers Suppliers offer products that are differentiated patented drugs vs generic There is no substitute for what the supplier group provides airline pilots The supplier group can credibly threaten to integrate forward into the industry Expedia Rivalry Among Existing Competitors High rivalry limits the profitability of an industry The Intensity of Rivalry is Greatest If Competitors are numerous or are roughly equal in size and power Industry growth is slow Slow growth precipitates fights for market share Exit barriers are high Rivals are highly committed to the business and have aspirations for leadership Firms cannot read each other s signals well The degree to which rivalry drives down an industry s profit potential depends on the intensity with which companies compete the basis on which they compete 3 4 Value Chain a b c Info Goods a b What is Value Chain Views an organization as a series of processes each of which adds value to the product or service for each customer First mover advantage Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage Ways to obtain sustainable competitive advantage Being the best product service or image What is an information good A collection of symbols also known as a digital good Utility of Symbols It s utility is a function of the arrangement of the symbols NOT on the material form they take Properties of info goods 7 of them Information goods have High fixed costs Sunk costs Virtually zero marginal costs Information goods are infinitely replicable Information goods are easy to distribute Often Time Dependent Perishable e g Weather Forecasts Stock Quotes News Indestructibility Durable Quality does not deteriorate over time software music CD video Information Goods are Public Goods c Markets for info goods near monopoly usually 1 2 Non rival One person s consumption doesn t diminish the amount available to another Non excludable It is costly to exclude people who do not pay from consuming the good E g Lighthouse National defense TV radio broadcasts Information Goods are experience goods Value is only discovered after the good has been consumed Traditional goods often have many competitors example retail Monopoly or near monopoly suppliers are often a natural outcome in markets for information goods Considering the properties of information goods a monopoly could actually benefit customers Standards compatibility network effects Patents copyrights 5 Content vs Conduit a Author publisher customer relationship content conduit consumer In general a publisher plays two basic roles He
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