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2. Mapping the business landscape

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COMPETITIVE STRATEGY (2017-2018)
MAPPING THE BUSINESS LANDSCAPE
BUSINESS LANDSCAPE METAPHORE
Most businesses operate in a highdimension space of choices.
Thinking of a three-dimensional business
landscape each location S would represent a
different strategy (a different set of choices).
S
A Business Landscape maps each
stategy’s elevation according to its
economic profitability.
The goal of a strategy is to guide a business
to a relatively high point on such a
landscape.
BUSINESS LANDSCAPE
Managers would need to understand the business landscape in which their firms
operate in order to:
•
decide where and how their firms will compete;
•
assess the implications of major changes in the business landscape;
•
adapt to the business landscape;
shape the business landscape.
•
We will describe various structures corresponding to various different ways of thinking of
the business landscape:
➢ The SUPPLY- DEMAND ANALYSIS
➢ BENCHMARKING
➢ The SWOT ANALYSIS
➢ The ‘FIVE FORCES’ FRAMEWORK
➢ The VALUE NET
SUPPLY-DEMAND ANALYSIS
The supply-demand analysis has long been known (Middle Ages) in western culture.
Formalisation by Alfred Marshall (1842-1924)
in the SD diagram:
the equilibrium price of a given good is
determined at the point where the aggregated
demand curve for that good intersects the
correspondent aggregated supply curve.
The S-D analysis is deeply rooted in sometimes highly unrealistic assumptions:
- Large numbers of suppliers
- Product homogeneity
Other frameworks: Monopoly and Duopoly (Cournot, 1838), Monopolistic
competition (Chamberlin and Robinson, 1933), Oligopolistic competition - i.e.
‘competition among few’ – (Hotelling, 1929)
BENCHMARKING
The idea that comparing your own business to a rival is essential when competing
dates back to the 1800s and became a valuable and widely used tool of management
in the late 1980s, formally introduced by Xerox.
Main purposes of benchmarking are:
•
Improve company’s performance by means of the identification of best practices in
other companies that is possible to apply to own processes.
•
Reveal successful business processes by observing and scrutinizing rival
companies’ processes, skills or competences.
•
Facilitate knowledge sharing when knowledge acquired from rivals can be
transferred to own company.
• Gain competitive advantage applying best practices from other
industries to own industry.
BENCHMARKING
There are different types and approaches to benchmarking.
Three major types:
•
Strategic benchmarking
Identifies winning strategies that successful
companies use and compare strategic goals to
spot new strategic choices.
•
Performance benchmarking
Determines how strong own products and
services are compared to those of competitors
by looking at some features like price, reliability,
design and customer satisfaction.
•
Process benchmarking
It is usually derived from performance
benchmarking and it looks at companies
engaging in similar activities to identify best
practices that can be applied to own processes.
BENCHMARKING
Each type of benchmarking may be carried out following one of the different
approaches:
•
Internal benchmarking
Usually employed by organisations operating in different geographic
locations/different product markets that have not yet developed a
knowledge sharing system between divisions.
•
External/Competitive benchmarking
External is often opposed to Competitive to refer to comparison with
competitors outside own industry.
•
Functional benchmarking
The comparison here takes place at the level of functional departments
only (marketing, finance, human resources, etc.). The advantage is that
companies may look at a wider range of organisations, even unrelated
ones, in their search for best practices.
•
Generic benchmarking
Takes place when the comparison is between own company and some
generally accepted best standards.
SWOT ANALYSIS
Developed in the 1960’s, the SWOT analysis is useful in identifying and understanding
key issues affecting a specified business objective (can be carried out for a product, a
project, a business, even an entire industry).
The idea is that the company determines its strategic fit given its internal capabilities
and external environment in a two-by-two grid.
Limitations:
EXTERNAL FACTORS
I
N
T
E
R
N
A
L
F
A
C
T
O
R
S
-
It does not provide any guidance
on how to identify the four
elements;
-
It offers a preliminary stage in
strategic planning and does not
provide solutions immediately;
-
It may generate too many
ideas/information
without
prioritising among them.
‘FIVE FORCES’ FRAMEWORK
Michael E. Porter (born 1947, professor at HBS)
Published Competitive Strategy in 1980, where he
presented a framework for industry analysis with the
purpose of relating the average profitability of
participants in a given industry to five competitive
forces.
‘FIVE FORCES’ FRAMEWORK
1. THE DEGREE OF RIVARLY: it is the most obvious competitive force determining
the attractiveness of an industry. Its major determinants are:
 Number and relative size of competitors
The more concentrated the industry, the less rivalry; the presence of a
dominant player may lessen rivalry by setting industry prices and
disciplining defectors.
 Industry basic conditions
High fixed costs, excess capacity, slow growth and lack of product differentiation all
increase the degree of rivalry in an industry.
 Behavioural determinants
If competitors are diverse, face high exit barriers, or
attach high strategic value to their position in the
industry,
they
are
more
likely
to
compete
aggressively.
‘FIVE FORCES’ FRAMEWORK
2. THE THREAT OF ENTRY: industry profitability is also influenced by potential
competitors.
Entry Barriers may take on several forms:
 Structural (or natural) entry barriers including:
▪
▪
▪
▪
Economies of scale/scope
Network effects
Ownership or control of key scarce resources
High set-up costs ( sunk costs, R&D costs, etc.)
 Strategic (or artificial) entry barriers including:
▪
▪
▪
▪
▪
Predatory pricing
Limit pricing
Predatory acquisition
Switching costs
Advertising
▪
▪
▪
▪
▪
Strong brand
Loyalty schemes
Exclusive contracts
Patents and licensing
Vertical integration
‘FIVE FORCES’ FRAMEWORK
3. THE THREAT OF SUBSTITUTES: concerns all different ways of performing
similar functions for customer, not just physically similar product (e.g. airlines vs.
rental automobile and high speed train, but also vs. videoconferencing).
The threat is determined by:
 Relative price performance of substitutes
 Switching costs
 Buyer propensity to substitute
‘FIVE FORCES’ FRAMEWORK
4. BUYER POWER: the ability of buyers to squeeze industry margins. Among its
determinants we find
▪
▪
▪
Buyers concentration
Buyer volume
Buyer information
▪
▪
▪
Switching costs
Product differences
Etc.
When considering the buyer power, two other factors need to be addressed:
 The buyer’s willingness or incentive to use their inherent power
 The perceived risk of failure associated with a products’ use
‘FIVE FORCES’ FRAMEWORK
5. SUPPLIER POWER: the bargaining power of industry suppliers’ may depend on
▪
▪
▪
▪
▪
Supplier concentration
Supplier size
Differentiation in inputs
Presence of substitute inputs
etc.
Think of the potential damage that a service disruption in the airline
industry may cause following a strike organised by Trade Union.
This consideration may help understand why pilots and aviation
mechanics have been historically able to obtain wages and benefits to
levels well in excess of other industries.
‘FIVE FORCES’ FRAMEWORK
CRITICISMS
There are at least three dubious assumptions underlying the five forces
model by Porter:
• Buyers, competitors, and suppliers are unrelated as the possibility of
interactions and collusion are not explicitly considered.
• The main determinant of value in the model basically rely on the creation of
structural advantage (the creation of entry barriers).
• Uncertainty is low and the model allows participants in a given market to
plan for and respond to competitive behaviour.
THE ‘VALUE NET’
In 1996, Branderburger (Harvard) and Nalebuff (Yale) generalised the concepts
introduced by Porter’s ‘five forces’ Model developing the ‘VALUE NET’ framework.
The value net focuses on the critical role of
COMPLEMENTORS:
➢ On the demand side, complementors increase
buyers’ willingness to pay (WTP) for products.
➢ On the supply side, complementors decrease
the price that suppliers require for their
inputs.
THE ‘VALUE NET’
THE INTUITION
• In Porter’s model firms compete for ‘slices of one pie’ (zero-sum
game).
• While a competitor generally takes suppliers/buyers away from your
pie, a complementor adds suppliers/customers to the pie.
• Cooperation with complementors is expected to expand the size of the
pie, while there is still competition with them for sharing of the pie
(coopetition).
THE ‘VALUE NET’
THE ‘VALUE NET’
How to assess the relative bargaining power of complementors?
 Relative concentration
 Relative buyer/supplier switching costs
 Relative complementor/competitor switching costs
 Asymmetric integration threats
 Rate of growth of the pie
THE ‘VALUE NET’
RELATIVE CONCENTRATION
The more concentrated complementors
are relative to competitors, the higher their
bargaining power.
The more fragmented complementors are
relative to competitors, the lower their
bargaining power.
Examples:
•
In 1993, Chipmaker Advanced Micro Devices Inc.’s (AMD) signed a US$3-billion deal
to build Xbox One (owned by Ms) chips.
•
In 2005, Steve Jobs announced that Apple would begin producing Intel-based
computer beginning in 2006.
THE ‘VALUE NET’
RELATIVE BUYER / SUPPLIER SWITCHING COSTS
The higher the costs of switching across
complementors relative to the costs of switching
across competitors, the higher the
complementors’ bargaining power.
Examples:
•
The cost of switching software on a PC is typically higher than the cost of switching
the Internet service provider on that PC.  more bargaining power for software
providers.
•
The cost of switching operative systems on a computer is generally higher than the
cost of switching application programs  this is why these are purchased
independently.
THE ‘VALUE NET’
… do like the experts do . . .
THE ‘VALUE NET’
RELATIVE COMPLEMENTOR / COMPETITOR SWITCHING COSTS
If complementors play a significant role in pulling
demand or supply, their power is likely to extend.
Examples:
•
In 1991 Intel debuted with the campaign ‘Intel Inside’ that created a strong brand out
of something so far perceived as a mere ingredient, a chip, at a time when ingredient
branding was unheard of.
•
The advertising results were stunning. In 1991, Intel research indicated that only 24%
of European PC buyers were familiar with the Intel Inside® logos. One year later that
figure had grown to nearly 80% and by 1995 it had soared to 94% and continues at
these high levels today.
This was a clear example of a complementor
(Intel) trying to build an independent appeal to
buyers.
THE ‘VALUE NET’
ASYMMETRIC INTEGRATION THREATS
Complementors gain more power when can
threaten to invade competitors’ terrain more
credibly than competitors can threaten to
invade theirs
Example:
•
Intel’s forward integration into motherboards when PC manufacturers do not seem to
have any offsetting backward integration options.
THE ‘VALUE NET’
RATE OF GROWTH OF THE PIE
Competition with complementors is
be less intense when the size
available pie to be divided
competitors and complementors is
rapidly.
likely to
of the
among
growing
Example:
•
When Microsoft unveiled its Surface Tablets in 2012, intel executives were shocked
as they were not notified and did not play any role in the announcement, despite the
fact that the tablets used Intel chips.
•
Microsoft decision was one of the cracks in the so-called ‘Wintel alliance’ between the
two giant industries and it is related to the maturing of demand for personal
computers.
THE ‘VALUE NET’
The lessons
The lesson to learn from the ‘value net’ framework is NOT the one of trying to
minimize complementors’ bargaining power per se, in any situation
But rather …
Introducing into the analysis a new type of players, the ‘complementors’, and
understand how their presence shape the business landscape, and how it may
represent a threat and/or an opportunity for our business.
Example:
•
Microsoft was able to beat Apple over an extended period of time, despite not having superior operating
systems, just because it encouraged independent software vendors to develop software to run on its platform.
MAPPING THE BUSINESS LANDSCAPE
From mapping the business landscape to strategic planning and action
Once we know the business landscape where we operate in, we need to incorporate this
analysis into strategic action.
This can be done with the following six-step process (that may be cycled-through more
than once):
1. Gathering information
2. Drawing the boundaries
3. Identifying groups of players
4. Understanding group-level bargaining power
5. Thinking dynamically
6. Shaping the business landscape
MAPPING THE BUSINESS LANDSCAPE
1. Gathering information
•
Industry studies
•
Company sources
•
Government sources
•
Business press
•
Other WWW sources (blogs, business stories, etc.)
•
Business info databases (‘Dun & Bradstreet’, ‘Thomas Register’, CRIF, etc.)
•
Other (conferences, keynote speeches, trade shows, etc.)
MAPPING THE BUSINESS LANDSCAPE
2. Drawing the boundaries
The strategist needs to chose the INDUSTRY DEFINITION, meaning that he needs to
decide how broadly/narrowly to draw the boundaries.
➢ Horizontal scope –
the boundaries of the landscape should be drawn a bit more broadly to include
not only the segments that the business serves, but also unserved segments with which it shares
customers and technology (competitors) and complements.
➢ Vertical scope –
attains to the choice of how many vertically linked stages of the supplier/buyer
chain to consider. If a competitive market for third-party sales exists between vertical stages (or could be
created), the stages should be analysed separately, o/w they can be merged.
➢ Geographical scope –
how broadly to define the business landscape in terms of physical locations
covered? Key to answering the question are the degree of geographical market integration and the type
of decision at stake.
IMPORTANT REMARK: it is, generally, more useful to focus on ensuring that the
boundaries are drawn clearly and that there is consistency in treatment of what is IN
vs. what is OUT, instead of looking for the ‘right way’ of drawing boundaries.
MAPPING THE BUSINESS LANDSCAPE
3. Identifying groups of players
Make sure you identify the main groups of players:
-
Competitors
Potential entrants
Substitutes
Complements
- Buyers
- Suppliers
- Etc.
It is also important to distinguish within the groups when sub-groups show
substantial differences in bargaining power (e.g. labour within the group
suppliers).
MAPPING THE BUSINESS LANDSCAPE
4. Understanding group-level bargaining power
This is, probably, the core objective in the attempt to map the business landscape.
➢ Concentrate on (sub)groups with particular potential to influence a business’
payoff (do not insist on looking at all groups in equal depth).
➢ Extension of the analysis to other groups of players such as governments or
non-profit organisations requires some modifications to the basic approach
outlined.
➢ This phase is usually accompanied and supported by a cross-checking of the
hypotheses using data on average profitability of players.
MAPPING THE BUSINESS LANDSCAPE
5. Thinking dynamically
➢ You want to understand the business landscape AS IT WILL BE rather than as it
is or as it was.
Case: IBM/Microsoft (from “The dumbest moments in business history…”, 2004).
➢ Use different time horizons:
• short-run – to keep track of industry and economy-wide business cycle.
• long-run – to capture trends such as market growth, the evolution of buyers need,
the rate of innovation, required changes in scale, input costs.
➢ Do not forget discontinuities and shocks: differently from business cycles, they
lead to a resetting of the structure itself.
MAPPING THE BUSINESS LANDSCAPE
6. Shaping the business landscape
USING KNOWLEDGE FOR STRATEGIC ACTION
• Anticipating long-run performance (removing the effect of business cycles).
• Identifying groups of players/forces that must be countered to achieve good performance.
• Testing decisions to enter, invest in, or exit from an industry.
• Assessing the effects of a major change in the business landscape to respond to it.
• Identifying ways to shape the business landscape.
‘To know’
To know
Be sure that, by the end of this module, you are able to illustrate:
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•
•
•
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•
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The business landscape metaphor.
The supply-demand analysis and its limitations.
The different types and approaches to benchmarking.
The SWOT analysis and its limitations.
The ‘five forces’ framework and its limitations.
The main determinants of the ‘five forces’.
The different types of ‘entry barriers’.
The ‘value net’ framework and its limitations.
The concept of co-opetition and its insights.
How to assess the relative bargaining power of complementors.
The landscape analysis, its phases, insights and limitations.
Glossary
Glossary:
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Benchmarking
Business landscape
Complementors
Co-opetition
Demand/supply curve
Dynamic thinking
Entry barriers
‘Five forces’ framework
Geographical scope
Horizontal scope
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Non-market relationships
Price-elasticity of demand
Product homogeneity
Purchasing power
Strategic groups
Strategic fit
Substitutes
Supply-demand analysis
Switching costs
Value net
Vertical scope
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