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Hypercompetition
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Is a self inflicted wound not the inevitable outcome of a changing paradigm of competition. Roots of the problem is the failure to distinguish between operational effectiveness and strategy
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Operational Effectiveness
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performing the same tasks better than rivals perform them (efficiency)
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Strategic Effectiveness
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Performing different activities than rivals or performing similar activities in different ways
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When are you improving operational effectiveness?
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When you are improving, the benefits are only realized by the consumer and not the business since there is no incremental change to profits when every one of the competitors is improving OE at the same time. (competitive gains only captured by the consumer).
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Why is operational effectiveness insufficient?
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Competitive convergence is more subtle and insidious. The more benchmarking companies do, the more they look alike. The more that companies outsource activities to third parties, the more they look alike and generic.
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What helps with benefiting operational effectiveness?
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Mergers limits competition and there is no other way to eliminate competition since many companies face diminishing returns.
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Strategy
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when you deliberately choose a different set of activities to deliver a unique mix of value.
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variety based positioning
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Based on the choice of product or service varieties rather than customer segments. It makes economic sense when a company can best produce particular products or services using distinctive sets of activities.
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need-based positioning
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Serving most or all of the needs of a particular group of customers
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access based positioning
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segmenting customers who are accessible in different ways
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Straddlers
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Seeks to match the benefits of a successful position while maintaining its existing position, new features, services, technologies, into activities it already performs.
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trade-offs
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create the need for choice and protect against repositioners and straddlers. They arise due to inconsistencies in image or reputation, the activities themselves and from limits on internal coordination or control.
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False trade-offs
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Between cost and quality occur primarily when there is redundant or wasted effort, poor control or accuracy or weak coordination
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What happens when there is no trade-offs?
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a company will never achieve a sustainable advantage
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positioning choices
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determines how activities relate to one another
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Fit
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important because discrete activities often affect one another. Managers use core competencies, critical resources and key success factors to determine fit. Most valuable fit among activities is strategy specific because it enhances a position's uniqueness and amplifies trade-offs
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First order fit
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Simple consistency between each activity (function) and the overall strategy
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Second order fit
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Occurs when activities are reinforcing to each other
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Third order fit
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Goes beyond activity reinforcement to optimization of effort. Involves coordination and information exchange across activities to eliminate redundancy and minimize wasted effort.
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Sustainability and fit
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The more a company's position rests on activity systems with second and third order fit, the more sustainable it's advantage will be. Fit also means that poor performance in one activity will degrade the performance in others so that weaknesses are exposed and more prone to get attention. When activities complement one another, rivals will get little benefit from imitation unless they can match the whole system
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What is the cause of an undermined strategy?
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Caused by misguided view of competition, organizational failures and desire to grow
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Porter's 5 Forces
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*Rivalry among competitors;
*Threat of new entrants;
*Threat of substitute products;
*Bargaining power of buyers;
*Bargaining power of suppliers;
*Threat of new entrants;
*Threat of substitute products;
*Bargaining power of buyers;
*Bargaining power of suppliers;
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What happens when porters 5 forces are strong?
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no company earns a ROI
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What are the seven major sources of threats of new entry?
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1. Supply side economies of scale.
2. Demand side benefits of scale.
3. Customer switching costs.
4. Capital requirements.
5. Incumbency advantages independent of size.
6. Unequal access to distribution channels.
7. Restrictive government policy.
2. Demand side benefits of scale.
3. Customer switching costs.
4. Capital requirements.
5. Incumbency advantages independent of size.
6. Unequal access to distribution channels.
7. Restrictive government policy.
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Supply side economies of scale
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Firms produce larger volumes to enjoy lower costs per unit because they can spread fixed costs over more units, employ more efficient tech or command better terms from suppliers.
This makes prospective entrants have to make large capital investments as they have to produce large quantities
This makes prospective entrants have to make large capital investments as they have to produce large quantities
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Demand-side benefits of scale
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(aka network effects) when any buyer's willingness to pay for a product increases when the number of other potential buyers for the product increase. Buyers may trust larger companies more for crucial products and this forces new brands to have lower prices in order to compete
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Customer Switching Costs
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The additional cost a consumer incurs in moving from one vendor's products or services to another vendor's products or services. This makes it harder for new entrants to gain customers.
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Capital Requirement
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The need to invest large amounts of money to gain entrance to an industry.
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Incumbency advantages independent of size
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No matter what their size, incumbents may have cost or quality advantages not available to potential rivals. Advantages include proprietary tech, preferential access to raw materials sources, more favourable geographic locations
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Unequal access to distribution channels
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A firm that has already proven itself worthy of gaining access to the limited number of distribution channels
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Restrictive government policy
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Can hinder or aid new entry directly, as well as amplify the other entry barriers. It can also assist an industry by lowering barriers to entry through policy
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Power of Suppliers
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capture more value by charging higher prices, limiting quality or services or shifting costs to industry participants
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When are suppliers powerful?
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it is more concentrated than the industry it sells to
The supplier group does not depend heavily on the industry for revenues
Industry participants face switching costs in changing suppliers
Suppliers offer products that are differentiated
There is no substitute for what the supplier group provides
The supplier group can credibly threaten to integrate forward into the industry
The supplier group does not depend heavily on the industry for revenues
Industry participants face switching costs in changing suppliers
Suppliers offer products that are differentiated
There is no substitute for what the supplier group provides
The supplier group can credibly threaten to integrate forward into the industry
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Power of Buyers
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can capture more value by forcing down prices, demanding better quality or more service, and by playing industry participants off against one another at the expense of industry profitability.
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Negotiating leverage
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The power of buyers is strong if they have negotiating leverage relative to industry participants, especially if they are price sensitive.
A customer has negotiating leverage if:
*There are few buyers or each one purchases in volumes that are large relative to the size of a single vendor
*The industries products are standardized or undifferentiated
*Buyers face few switching costs in changing vendors
*Buyers can credibly threaten to integrate backward and produce their own products
A customer has negotiating leverage if:
*There are few buyers or each one purchases in volumes that are large relative to the size of a single vendor
*The industries products are standardized or undifferentiated
*Buyers face few switching costs in changing vendors
*Buyers can credibly threaten to integrate backward and produce their own products
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When are buyers sensitive?
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The product it purchases from the industry represents a significant fraction of its cost structure of procurement budget the buyer group earns low profits, is strapped for cash or is under pressure to trim purchasing costs.
The quality of the buyers products or services is little affected by the industry's product.
The industry's product has little effect on the buyers other costs.
The quality of the buyers products or services is little affected by the industry's product.
The industry's product has little effect on the buyers other costs.
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Intermediate Customers
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(customers who buy the product but are not the end user) have the same applications as buyer groups in addition to the fact that they gain significant bargaining power since they can influence the end customers purchasing decisions
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Substitute
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performs the same or similar function as an industry's product by a different means.
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When is there a high threat of substitutes?
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When the threat of substitutes is high, industry profitability suffers by enforcing price ceilings.
The threat of substitutes is high if:
It offers an attractive price- performance trade off to the industry's product
*The better the relative value of the substitute, the tighter the lid on an industry's profit potential
*The buyer's cost of switching to the substitute is low
The threat of substitutes is high if:
It offers an attractive price- performance trade off to the industry's product
*The better the relative value of the substitute, the tighter the lid on an industry's profit potential
*The buyer's cost of switching to the substitute is low
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Rivalry among existing competitors
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Includes price discounting, new product introductions, advertising campaigns, and service improvements.
The degree that rivalry drives down an industry's profit potential depends on the intensity of competition and the basis on which they compete.
The degree that rivalry drives down an industry's profit potential depends on the intensity of competition and the basis on which they compete.
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When is rivalry most intense?
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*Competitors are numerous or are roughly equal in size and power
*Industries growth is slow
*Exit barriers are high
*Rivals are highly committed to the business and have aspirations for leadership, especially if they have goals that go beyond economics performance in the particular industry
*Firms can not read each other's signals well because of lack of familiarity with one another, diverse approaches to competing or differing goals
*Industries growth is slow
*Exit barriers are high
*Rivals are highly committed to the business and have aspirations for leadership, especially if they have goals that go beyond economics performance in the particular industry
*Firms can not read each other's signals well because of lack of familiarity with one another, diverse approaches to competing or differing goals
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Price Competitors
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Transfer profits directly from an industry to its customers and can make rivalry extremely destructive. When all competitors opt to meet the same needs or compete on the same attributes, it is a zero sum game. Rivarly can increase industry profitability when each competitor establishes a unique target niche.
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When does price competition occur?
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*Products or services of rivals are nearly identical
*Fixed costs are high and marginal costs are low
*Capacity must be expanded in large increments to be efficient
*The product is perishable
*Fixed costs are high and marginal costs are low
*Capacity must be expanded in large increments to be efficient
*The product is perishable
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What determines an industry's profit potential?
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Industry structure determines the industry's long-run profit potential because it determines how the economic value created by the industry is divided, how much is retained by companies in the industry versus bargained away by customers and suppliers, limited by substitutes or constrained by potential new entrants
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What is a common misconception of industry growth rate?
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Looking at industry growth rate as a reason to enter or not to enter the industry. Fast growth means more new entrants and more power to suppliers.
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What are the causes of changes in industry structure?
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*They are caused by changes in technology, in customer needs or other events
*Shifting threat of new entry can be altered by any changes to the seven barriers
*Changing supplier or buyer power over time
*Shifting threat of substitution due to changes in technology which can create new substitutes or shift price-performance comparisons
*New bases of rivalry based on the point in the product/ industry life cycle
*Nature of rivalry is altered by mergers and acquisitions which can eliminate competition or intensify it
*Shifting threat of new entry can be altered by any changes to the seven barriers
*Changing supplier or buyer power over time
*Shifting threat of substitution due to changes in technology which can create new substitutes or shift price-performance comparisons
*New bases of rivalry based on the point in the product/ industry life cycle
*Nature of rivalry is altered by mergers and acquisitions which can eliminate competition or intensify it
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The best strategies do at least 1 of 3 things...?
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1. Positioning the company, by identifying spots with weak competitive forces or reinforcing the current position
2. Exploiting industry change which can bring new opportunities or strategic positions
3. Shaping industry structure by exploiting structure which allows them to recognize and react proactively
2. Exploiting industry change which can bring new opportunities or strategic positions
3. Shaping industry structure by exploiting structure which allows them to recognize and react proactively
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What are some ways to mitigate new entrants?
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*create switching costs
*develop a reputation for retaliation
*invest heavily to exploit economies of scale
*develop a reputation for retaliation
*invest heavily to exploit economies of scale
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What are some ways to mitigate power of suppliers?
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*use standard, instead of proprietary products in production and secure multiple sources
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What are some ways to mitigate power of buyers?
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*build customer loyalty
*target small customers
*differentiate the product
*target small customers
*differentiate the product
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What are some ways to mitigate substitutes?
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*target consumers of substitutes with new products
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What are some ways to mitigate rivalry?
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*differentiate the product
*create switching costs
*target less-competitive market segments
*create switching costs
*target less-competitive market segments
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Who are the players in VCM?
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Value capture model has 3 players in the industry value chain: buyers, firms and suppliers. Firms decide whether to buy from suppliers and at what cost, they also decide what price to sell to buyers. Buyers decide whether to buy from firms, given the price. Suppliers decide whether to sell their inputs to firms, given their supplier costs and the price for their inputs set by the firm.
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What are restraints of VCM
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Every buyer has a WTP for a good which is the max price they will accept and every supplier has a cost of supplies which is the min amount they will accept.
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What is the VCM formula?
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Value= total buyer surplus + total supplier surplus. Buyers WTP must be > suppliers cost of supplies. Buyers WTP - suppliers COS = total value created by the market
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How is value divided among players?
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The value created is divided among players based on the price that firms sell to buyers and the price at which firms buy from suppliers (i.e., the firms' cost). These prices determine how much value firms will capture from the total value created in the market. We assume unrestricted bargaining which means that players can continue to haggle until no value is left unclaimed. No player can capture more than their added value to the market.
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What is added value in VCM?
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Added value represents the value that would be lost to the market if the firm disappeared. Added value for playeri= total value created by all transactions -total value created by all transactions without playeri. If any player tries to capture more than they add, that value will get bargained away by the other players. In other words, other players will either be better off not exchanging at all or will exchange with other players in a way that makes them better off.
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Why does added value create an upper bound on the amount of value a player can appropriate?
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By definition, the value added for a player is the difference between the total value with and without the player. If a player claims more than that difference, then the remaining players can create more total value without the "over-claiming" player and split it among themselves.
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VCM EX 1.
Suppose there are 2 identical firms (A and B), 1 buyer, and 1 supplier. Both firms produce a good with WTP "X" and SC "Y". What is the max value that each firm can capture? Total value created if both firms buy from the supplier and sell to the buyer is X-Y
Suppose there are 2 identical firms (A and B), 1 buyer, and 1 supplier. Both firms produce a good with WTP "X" and SC "Y". What is the max value that each firm can capture? Total value created if both firms buy from the supplier and sell to the buyer is X-Y
answer
What is Firm A's added value? If you remove firm A, firm B can supply the same good. So, the total value created, excluding firm A, is still X-Y. So, A's added value is 0. The same goes for B. So, if Firm A or B, tried to capture any amount of value larger than 0, the buyer and seller would simply negotiate with the other firm. Since there is only one buyer and supplier, the other firm would offer a lower price to gain them. This process of bargaining would continue until the firms' value captured was zero.
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VCM EX 2
Suppose there are 2 identical suppliers, 1 buyer, and 2 firms (one producing a deluxe version of the good "d" and one producing a standard version "s"). Suppose the WTP (d) is $150, WTP (s) is $100, and the SC is $10. What is the max value that Firm D and Firm S can capture?
Suppose there are 2 identical suppliers, 1 buyer, and 2 firms (one producing a deluxe version of the good "d" and one producing a standard version "s"). Suppose the WTP (d) is $150, WTP (s) is $100, and the SC is $10. What is the max value that Firm D and Firm S can capture?
answer
When there are differentiated WTPs or SCs we calculate the value created based on the flows of resources that generate the highest value. This means that the total value created is based on all the most valuable transactions occurring. Although this may not always happen in reality, we assume that given enough time, players will be able to figure out how to maximize the total value that can be created. In this case, the buyer gains the most value from "d" ($140) rather than from "s" ($90). So, in this case, total value created is $140.
How much value is each supplier adding? Added Value (supplier i) = 140 -(150-10) = 0
How much value is the buyer adding? Added Value(buyer) = 140 -(0) = $140
How much value is firm s adding? Added Value(firm S) = 140 -(150-10) = 0
How much value is firm d adding? Added Value(firm D) = 140 -(100 -10) = $50
Given the above, the maximum cost that suppliers can charge to the firms is $10. So, for both firms, SC=Cost=$10. Because the added value of firm S is $0, that firm will also only be able to charge a price of $10 for its product. Finally, because the added value of firm D is $50, it will be able to capture a max of $50 worth of value, meaning that the max price it can sell at will be $60.
How much value is each supplier adding? Added Value (supplier i) = 140 -(150-10) = 0
How much value is the buyer adding? Added Value(buyer) = 140 -(0) = $140
How much value is firm s adding? Added Value(firm S) = 140 -(150-10) = 0
How much value is firm d adding? Added Value(firm D) = 140 -(100 -10) = $50
Given the above, the maximum cost that suppliers can charge to the firms is $10. So, for both firms, SC=Cost=$10. Because the added value of firm S is $0, that firm will also only be able to charge a price of $10 for its product. Finally, because the added value of firm D is $50, it will be able to capture a max of $50 worth of value, meaning that the max price it can sell at will be $60.
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How does VCM add value?
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By lowering cost through lowering SOC and not affecting WTP, differentiating by boosting WTP and leaving SOC, and offering dual competitive advantage which increases WTP And lowers SOC.
question
Consider a game between two suppliers, two firms, and one buyer. Each supplier can transact with at most one firm, and vice versa. The buyer can transact with at most one firm. Each supplier has an opportunity cost of $10 of providing resources to a firm. The buyer has a WTP of $100 for the first firm's product and a WTP of $150 for the second firm's product.
answer
There is no question as to what number to use for opportunity cost-a figure of $10 is obviously appropriate. But there is a question as to which number to use for WTP-$100 or $150? (It would clearly be incorrect to use both numbers, since the buyer is interested in transacting with one firm only.) The natural answer is that the $150
figure should be chosen, since the arrangement in which the buyer transacts with the second firm (and the second firm transacts with either supplier) leads to the largest "pie." The value created by the players in the game is then $150 - $10 = $140.
figure should be chosen, since the arrangement in which the buyer transacts with the second firm (and the second firm transacts with either supplier) leads to the largest "pie." The value created by the players in the game is then $150 - $10 = $140.
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Consider a game between four suppliers, three firms, and two buyers. Each supplier can transact with at most one firm, and vice versa. Similarly, each buyer can transact with at most one firm, and vice versa. Each supplier has an opportunity cost of $10 of providing resources to a firm. Each buyer has a WTP of $100 for a firm's product.
answer
The value created by the players in this game is $(100 - 10) x 2 = $180. The added value of each supplier is $0, as is that of each firm. It follows that none of these players captures any value. Each buyer has an added value of $90. Since the sum of the players' added values equals the overall value created, each buyer must in fact capture $90 of value. All this is very intuitive. The firms are on the long side of the market with buyers, and each therefore has zero added value. This is despite the fact that the firms are on the short side of the market with suppliers. The upshot is that having sufficiently many competitors to be on the long side of just one market (not both) is enough for a firm to have zero added value.
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Consider a game between four suppliers, three firms, and two buyers. Each supplier can transact with at most one firm, and vice versa. Similarly, each buyer can transact with at most one firm, and vice versa. Each supplier has an opportunity cost of $10 of providing resources to a firm. Each buyer has a willingness-to-pay of $100 for the product of the first or second firm, and a WTP of $150 for the product of the third
firm.
firm.
answer
The value created by the players in this game is $(150 - 10) + $(100 - 10) = $230. The added value of each supplier is $0, as is that of the first and second firms. Accordingly, none of these players captures any value. The third firm has an added value of $50, while each buyer has an added value of $90. Since the sum of the players' added values equals the overall value created, the third firm and each of the buyers will capture their respective added values of $50 and $90. Notice, in particular, that the third firm is able to capture value by virtue of the asymmetry between it and its competitors.
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What is a red and blue ocean market?
answer
Red ocean market: lots of rivalry among competitors who offer similar goods or services
Blue ocean market: create a new market space that is only occupied by your firm
Blue ocean market: create a new market space that is only occupied by your firm
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What is value innovation?
answer
The process of creating a new market space by modifying key elements so as to increase WTP and reduce SOC. Entails developing products that meet new customer needs while eliminating elements that are less valuable to consumers. look at familiar data from a new perspective
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What are 3 constraining beliefs firms have?
answer
1.Industry categories
2.Product categories
3.Buyer categories
2.Product categories
3.Buyer categories
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How can industry categories be challenged?
answer
1. Integrate features from products that are substitutes
2. Integrate features from products that are complements
3. Crossing price/performance categories
4. Crossing emotional/ functional categories
5. Crossing professional/ amateur categories
2. Integrate features from products that are complements
3. Crossing price/performance categories
4. Crossing emotional/ functional categories
5. Crossing professional/ amateur categories
question
ERRC Grid
answer
Eliminate; raise; reduce; and create
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