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Industry Analysis

Generic strategies
Generating competitive advantage

What distinguishes a firm?

What provides a firm with above-normal profits?
*
*

Premium prices charged (than average)

Lower costs (than average)

Competitive advantage

Generic competitive strategies

Is the firm economically profitable?
*
*

If No, then its stuck in the middle

If Yes, Is the product sold at premium prices?

If No, the firm is a cost leader

If Yes, the firm is a differentiator

Cost leadership Characteristics

*
*
*

Target the average customer

Look for higher market share
Lower production costs

Few unique or new features

Cost leadership Calls for

*
*
*

Leveraging scale economies

Marketing: wide product line/ aggressive pricing
Organizational requirements

Efficient organizational systems and structures

Tight cost and overhead controls
Incentives based on quantitative targets
Low cost distribution systems

Cost leadership Risks

*
*
*
*

Technological change can nullify past investment and learning

Low-cost learning by new comers and followers
High attention on cost leads to inability to foresee product-market changes
Inflation of costs can narrow price advantage

Differentiation Characteristics
*

Perceived uniqueness Based on

Quality

Service

Design

Brand

Technology

Features

Differentiation Calls for

*
*
*
*
*

Strong marketing capabilities

Product design skills (creative flair)
Strong cooperation from suppliers and channel partners
Being exclusive
Organizational requirements
Strong coordination skills Incentives based on subjective goals

Attract and retain creative talent

Differentiation Risks
*
Uniqueness that is not valuable
*
Too high a price premium for the differentiating factors
*
Differentiating factors could be easily imitated reducing perceived differentiation
*
Dilution of brand identification through product-line extensions
*
Perception of differentiation may vary between buyers and sellers
Fall in buyers need (value) for differentiating factors as buyers become more sophisticated

Focus Characteristics
*
*
*

Small overall share of the market

Serves chosen (well defined) market segment
Either a cost leader, differentiator within that segment

Focus Calls for

*
*
*
*

Choice of the right buyer group/ product segment/ geographic market

Strong marketing capabilities
Product design skills (creative flair)
Strong image of customization (for that product-market segment)

Focus Works best when the market niche is

*
*
*
*
*
*

Potentially profitable, offers growth potential

Not crucial for the success of industry leaders
Costly or difficult for multi-segment competitors to meet specialized needs of the
niche
Focuser has resources and capabilities to effectively serve that niche
Few other rivals specialize in the same niche
Focuser can defend against challengers via superior ability to serve that niche

Focus Risks
*
*
*
*

Narrowing product differences between the niche products and the market as a
whole
Higher premium charged than the low-cost prices may erode brand loyalty
Erosion of cost advantages (within the narrow segment)
Focused products and services subject to competition from new entrants and
imitators

*
Could become too focused to satisfy buyer needs
Generic Business Strategies
Strategy

Emphasis

Market
coverage

Product
characteris
tics

Market
demand

Pricing

Low cost

Lower
overall
costs

Market wide

No frills

Elastic

Lower than
average

Differentia
tion

Higher
quality

Market wide

Differentiate
d

Relatively
inelastic

Higher than
average

Focused
low cost

Lower
overall
costs

Niche

No frills

Elastic

Lower than
average

Focused
differentia
tion

Special
customer
needs

Niche

Differentiate
d/ exclusive

Inelastic

High

Industry Life Cycle Changes

Strategies Across Life Cycle

Introductio
n

Growth

Maturity

Decline

Generic
strategies

Differentiati
on

Differentiation

Differentiation/
cost leadership

Cost leadership/
focus

Market growth
rate

Low

Very large

Low to moderate

Negative

Number of
segments

Very few

Some

Many

Few

Intensity of
competition

Low

Increasing

Very Intense

Changing

Emphasis on
product design

Very high

High

Low to moderate

Low

The Resource Based View of the Firm

Resources: Inputs into a firms production process, such as capital equipment, skills of individual employees,
patents, finances and talented managers
Capabilities: The capacity for a set of resources to perform a task or an activity in an integrative manner
Competencies: Resources and capabilities that serve as a source of competitive advantage for a firm over
rivals.

RBV argues that the heterogeneous market positions of close competitors arise from each
firms unique bundle of resources and capabilities
RBV explains sustained competitive advantage in terms of heterogeneity in resources and
capabilities
Scarce resources and capabilities that are critical for value creation can be imperfectly
mobile and cannot be acquired in the open market
Sustaining Competitive Advantage
Competitive advantage is sustainable if competitors can not duplicate/ neutralize it. This
happens when:
1) Firms may differ with respect to resources & capabilities and the differences persist
2) Isolating mechanisms (analogous to barriers to entry) may work to protect

the competitive advantage of firms

Isolating Mechanisms: 1) Impediments to imitation 2) Market size and scale economies 3) Superior access
to inputs 4) Distinctive organizational capabilities 5) Superior access to customers 6) Legal restrictions 7)
Network Effects

If everyone can do it, its difficult to create and capture value from it or alternatively In a perfectly
competitive market, no firm realizes economic profits or economic rents Economic Profits(rent) are
returns in excess of what an investor expects to earn from investments of similar risk (i.e. in excess of
the opportunity cost of capital).
Ideally, any existence of long term profits should not be possible in perfectly competitive market. But,
we all know of many industries which have been consistently profitable. This means that markets are
definitely having some market inefficiencies and some of the industries and firms are definitely able to
milk these inefficiencies to pull the economic profits. The core role of strategists is to identify ways in
which firms capitalize on these market imperfections.
As a strategist, we have to find to identify the industries where the market inefficiencies exist most.
Density and Returns are correlated as well.

High variance leads to high variability of returns i.e. some firms making huge profits and large number
of other firms is facing huge challenges to survive as in Textile industry.
3 perspectives of rents:

First Type of Rent: Monopoly in terms of License or Resource Acquisition;

Second Type of Rent: RBV =say Unique or Trademark or Cost Structure;
Third Type of Rent: 3 stages 1) Emerging and Growing Stage 2) Mature Stage 3) Counterattack and
Decline. First mover and constantly innovating organizations like Apple and Google

Substitutability: Keep a tab on closest competitors on basis of substitutability.

Google:
Environment: Slapped too many restrictions by many countries lately.
RBV: Brands not be too much believed and companies with better algorithms will
Should Invest: No. Because market expectations are already covered by huge margins in the stock. Only
if earnings and stock are expected to grow in double digits in next 10 years. But their 98% earnings are
still coming only from advertisements which is fairly limited in terms of scope.

CHAPTER 2 Analyzing Industry Structure(5 Forces Analysis)

Threat of Entry: Most important force as it helps to have less competition and a monopoly. High
TE leads to high industry attractiveness
Entry is less likely when
1)

Entry faces high sunk costs(non recoverable investments R&D, Specialized

Factories)
2)
Incumbents have competitive advantage Potential entrants are at a competitive
disadvantage compared to existing players as in a Stakelberg model where first mover has a
quantity advantage and has already factored the market quantity of the competitor into its
market price. Some of competitive advantages are:
a. Patents & Licenses
b. Pioneering Brands
c. Pre-commitment
contracts
d. Large economies of scale (relative to demand)
e. Steep learning curves
3)
Entrant faces retaliation: Further strategy (pricing) behavior of incumbents. Likelihood
of Retaliation:

a)

Excess capacity of Incumbents

b) Economies of scale or other cost
advantage
c) Substantial exit costs c.1. Exit costs are payments that must be made on exit c.2.
Exit costs provide incentive to fight d) Aggressive reputation of incumbents: d.1. Must
be credible d.2. Suffers from free-riding problem

Threat of Substitutes: Low TS leads to High Industry attractiveness. Substitute products are
less of a threat when 1) Cross price elasticity is high(Perfectly Elastic Demand: If you increase
price of one good, it will make people switch, Not good) 2) Switching costs are high (one-time
costs costumers have to incur when switching to a new product or service)

Bargaining Power of Buyers: Industry is more attractive with less of Bargaining Power of Buyers.
Buyers have less power when: 1) Buyers are not concentrated (no monopsony [Monopsony can
be exemplified by US Defence, only one buyer, where it is the only buyer from many suppliers])
CPE = Cross Price Elasticity. Within Industry, if CPE is low, it means that it is not possible to
go away from the industrys products leaving buyers with fewer options and thus go towards
favor of industry.

Relative Concentration is used to find the relative Bargaining Power

Bargaining Power of Sellers: Mirror image of your Buyers. You dont want BPS high for attractive
of Industry.

Intensity of Rivalry: Low IR means High Attractiveness. Try to form a cartel as OPEC. Tacit
coordination will help in avoiding Prisoners Dilemma

Best-price clauses: I will meet any of my competitors prices will ensure that competitors
understand that their prices will be matched
Role of complements: Complements (software is to hardware). Compliments may work in
tandem and may work against the industry.
Role of Institutions: Government and institutions making rules of the game.

3. Analyzing Firm Capabilities

Even though industry matters, but RBV matters more. It is not barriers to entry, but barriers to
imitation

Capability Analysis Tool to be explored.

VRIN = Valuable Rare Inimitable Non-substitutable (4 Necessary conditions for a capability to

provide competitive advantage). First determine whether the capabilities contribute towards
value to customers. If the capabilities are there, but not contributing to value to customers,
capabilities are not aligned.
Alignment: Pressed by Virtuous Cycles. 2 Virtuous Cycle Feedbacks with Nucor Steel:

Sustainability :

How to build capabilities?