Course_XIV_on_michael_e_porter_jg

gillis
A journey to…
Confidence
Context
Certainty
Courage
Welcome to Course XIV*
1

A Journey To
Self-Actualization
2

Strategy
Michael Porter
“Competitive Strategy”
The Free Press, 1980
3

Strategy
Michael Porter
“Competitive Advantage”
4

Strategy
Michael Porter
“The Competitive Advantage of Nations ”
5

gillis
Defining “Strategy”
 “…a consideration of the purposes the
development and explicit statement of a
strategy can serve for an organization:
1. To improve the ability of the firm to select basic,
long-term objectives for itself, and
2. To develop the means by which these objectives
can be achieved.”
C. Roland Christensen
Harvard University
Graduate School of Business Administration
6

gillis
Defining “Strategy”
 “A complete statement of
strategy, then, should convey both what a
company is trying to achieve and how it
hopes to achieve it.”
C. Roland Christensen
Harvard University
Graduate School of Business Administration
7

gillis
Tests of Consistency
 Internal Consistency
o Are the goals mutually achievable?
o Do the key operating policies address the goals?
o Do the key operating policies reinforce each
other?
Michael Porter, Competitive Strategy
8

gillis
 Environmental Fit
o Do the goals & policies exploit industry
opportunities?
o Do the goals & policies deal with industry threats?
o Does the timing reflect the ability of the
environment to absorb the actions?
o Are the goals and policies responsive to broader
societal concerns?
9

gillis
 Resource Fit
o Do the goals and policies match the resources
available to the company relative to competitors?
o Does the timing of the goals and policies reflect
the organization’s ability to change?
10

gillis
 Communications & Implementation
o Are the goals well understood by the key
implementers?
o Is there enough congruence between the goals
and policies and the values of the key
implementers to ensure commitment?
o Is there sufficient managerial capability to allow
for effective implementation?
11

gillis
General Analytical Techniques
Every firm competing in an industry has
a competitive strategy, whether explicit or
implicit…
12

gillis
implicit…there are significant benefits to gain
through an explicit process of formulating
strategy,
13

gillis
implicit…there are significant benefits to gain
through an explicit process of formulating
strategy, to insure that at least the policies
(if not the actions) of functional departments
are coordinated and directed at some
common set of goals. Michael Porter, Competitive Strategy
14

ManufacturingLabor
R & D
Purchasing Distribution
Sales
Marketing
Target
Markets
Product
Line
Finance &
Control
Objectives
For
profitability
growth,
market
share,
social
goals.
Goals
How the
business
is going
to
compete
Manufacturing
The Wheel of
Competitive
Strategy
15

Wheel of
Competitive
Strategy
Personal
Values
Of the Key
Administrators
Industry
Opportunities
And Threats
Company
Strengths
And
Weaknesses
Broader
Societal
Expectations
Factors
Internal
to the
Company
Factors
External
to the
Company
Michael Porter, Competitive Strategy 16

 “Although this process may be
intuitively clear, answering these
questions involves a great deal of
penetrating analysis. It is answering
these questions that is the purpose
of this book.”
Process for Strategy Formulation
17

 What is the business doing now?
o Implicit/explicit current strategy.
 What is happening in the environment?
o Industry/competitor/societal/strengths/
weaknesses.
 What should the business be doing?
o Tests of assumptions and current strategy.
o Strategic alternatives.
o Strategic choice.
Process for Strategy Formulation
18

Forces of Industry Competition
Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppliers
Threat of substitute
products/services
Bargaining power
of buyers
Threat of
new entrants
Industry
Competitors
19

gillis
Threat of Entry
 Six barriers to entry (and one)
o Economies of scale
o Product differentiation
o Capital requirements
o Switching costs
o Access to distribution channels
o Cost disadvantages independent of scale
o Government policy
Potential
Entrants
20

gillis
Intensity of Rivalry
 Firms are mutually dependent.
 Numerous competitors?
 Slow industry growth?
 High fixed costs?
 Lack of differentiation?
 High strategic stakes?
Industry
Competitors
21

gillis
Substitute Products
 Products very different in form that can
provide the same function.
 Limits industry profitability.
 Limits bonanza in boom times.
 Collective industry actions (quality
improvement, marketing efforts.)
products/services
Substitutes
22

gillis
Bargaining Power of Buyers
 Threat of backward integration.
 Relative importance of product to buyer.
 Cost enough to shop?
 Large volume buyers.
 Standard/undifferentiated products.
 Low-profit buyers.
Buyers
Bargaining power
of buyers
23

gillis
Bargaining Power of Suppliers
 Threat of forward integration.
 Dominated by a few companies?
 Importance of the suppliers’ product to the
buyer’s business?
 Substitute products?
Suppliers
Bargaining power
of suppliers
24

gillis
Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppliers
products/services
Bargaining power
of buyers
Threat of
new entrants
Industry
Competitors
25

gillis
Strategic Competitive Options
1. Positioning
o Take the structure of the industry as a given and
match strengths and weaknesses to it.
2. Influencing the balance
o Offensive – alter the causes of the forces.
3. Exploiting change
o Product life-cycle patterns.
4. Diversification Strategy
o “What is the potential of this business?”
26

gillis
Three Generic Strategies
Strategic Advantage
Strategic
Target
Industry wide
Particular
Segment
Only
Uniqueness Perceived
By Customer Low Cost Position
FocusFocus
Overall
Cost LeadershipDifferentiation
27

gillis
Generic Strategies
Competitive Advantage
Competitive
Scope
Broad
Target
Narrow
Target
Lower Cost Differentiation
Michael Porter, Competitive Advantage of Nations
Cost Focus
Cost Leadership
Focused
Differentiation
Differentiation
28

gillis
Generic Competitive Strategies
 Cost Leadership
 Differentiation
 Focus
 Stuck in the middle
29

gillis
Competitor Analysis
There are four diagnostic components to a
competitor analysis: future goals, current
strategy, assumptions, and capabilities.
Understanding these four components will
allow an informed prediction of the
competitor’s response profile.
30

Competitor’s Response Profile
Is the competitor satisfied with its
current position?
What likely moves or strategy shifts
will the competitor make?
Where is the competitor vulnerable?
What will provoke the greatest and
most effective retaliation by the
competitor?
Future Goals
At all levels of
management
and in multiple
dimensions
Current Strategy
How the business is
currently competing
Assumptions
Held about itself
and the industry
Capabilities
Both strengths
and weaknesses
What Drives
the
Competitor
What the Competitor
is Doing and Can Do
31

gillis
Dimensions of Strategy
 Specialization
 Brand identification
 Push vs. pull
 Channel selection
 Product quality
 Tech leadership
 Vertical integration
 Cost position
 Service
 Price policy
 Leverage
 Relationships
32

Specialization
Vertical Integration
High Vertical Integration Assembler
Full
line
Narrow
Line
Group B
Narrow line
assembler,
hi price, hi
tech, hi qual
Group C
Moderate line,
assembler, med
price, very hi
cust svce, low
qual, lo price
Group D
Narrow line,
highly automated,
low price, low
service
Group A
Full line,
vertically integrated
low mfg cost, low
service, moderate
quality
Strategic
Groups
33

gillis
Introduction Growth Maturity Decline
Industry
Sales
Time
Stages of the Life Cycle
34

gillis
Life Cycle
 Legitimate criticisms:
o Duration of stages varies widely from industry to
industry.
o Unclear what stage an industry is in.
o Not always S-shaped.
o Companies can affect shape through innovation
and repositioning.
o Competition associated with each stage is
different for different industries.
o No underlying rationale for “why?”
35

gillis
Forecasting Evolution
Evolutionary
processes
Initial
industry structure
Potential
industry structure
36

gillis
Evolutionary Processes
 Long-run changes in
growth.
 Changes in buyer
segments served.
 Buyers’ learning.
 Uncertainty reduction.
 Diffusion of proprietary
knowledge.
 Experience increase.
 Scale expansion/
contraction
 Product, marketing,
or process innovation.
 Structural change in
adjacent industries.
 Government policy
change.
 Entries and exits.
37

gillis
Generic Industry Environments
 Industry concentration
 State of industry maturity
 International competition
38

gillis
Five Generic Environments
1. Fragmented industries.
2. Emerging industries.
3. Transition from rapid growth to maturity.
4. Decline.
5. Global industries.
39

gillis
Strategic Decisions
 Vertical Integration
 Major Capacity Expansion
 Entry
40

gillis
The Value Chain
Value Chain
41

gillis
Outbound
Logistics
Procurement
Technology Development
Human Resource Management
Firm Infrastructure (Finance, Planning, etc.)
Marketing
& Sales
Operations
(Mfg)
Inbound
Logistics
After-Sale
Service
The Value Chain
M
A
R
G
I
N
Michael Porter, Competitive Advantage of Nations
42

gillis
Subdividing a Value Chain
FI
HRM
TD
P
IL O OL MS S
Marketing
Mgmt
Advertising Sales
Force
Admin
Sales
Force
Operation
Technical
Literature
Promotion
Michael Porter, Competitive Advantage
43

gillis
The Value System
Supplier
Value Chains
Channel
Value Chains
Firm
Value Chain
Buyer
Value Chains
Channel
Value Chains
Channel
Value Chains
Buyer
Value Chains
Buyer
Value Chains
Supplier
Value Chains
Supplier
Value Chains
Single-Industry Firm
44

gillis
Supplier
Value Chains
Channel
Value Chains
Business Unit
Value Chain
Buyer
Value Chains
Business Unit
Value Chain
Business Unit
Value Chain
Firm Value Chain
Diversified Firm
Supplier
Value Chains
Channel
Value Chains
Buyer
Value Chains
The Value System
45

gillis
Value Chain Linkages
FI
HRM
TD
P
IL O OL MS S
FI
HRM
TD
P
IL O OL MS S
Firm Value Chain Buyer Value Chain
46

gillis
Cost Advantage
Cost is one of the two types of competitive
advantage. Cost is also of vital importance to
differentiation because a differentiator must
maintain cost proximity to competitors.
47

gillis
Cost Analysis
 The starting point for cost analysis is to
define a firm’s value chain and to assign
operating costs and assets to value
activities:
o Operating costs should be assigned to the
activities that employ, control or most influence
their use.
48

gillis
Cost Analysis
 The starting point for cost analysis is to
define a firm’s value chain and to assign
operating costs and assets to value
activities:
o Assets must be assigned to value activities in
some (consistent) way that will permit an
analysis of cost behavior.
 Book or replacement value.
 Translate to operating cost via capital
charges.
 Timing should represent performance.
 Not the precision of financial reporting. 49

gillis
Operating Costs
40%
27%
Firm Infrastructure (9%)
Tech Development (9%)
Inbound
Logistics (3%)
HRM
(2%)
Operations (67%) Outbound
Logistics
(1%)
1%
Procure-
ment
(1%)
Mktg
& Sls
(6%)
Margin
(5%)
Service
(1%)
5%
Purchased operating inputs
50

gillis
Assets
8%
38%
Firm Infrastructure (16%)
Tech Development (2%)
Inbound
Logistics (3%)
HRM
(1%)
Operations (46%) Outbound
Logistics
(1%)
15%
Procure-
ment
(1%)
Mktg
& Sls
(1%)
Service
(2%)
5%
Liquid Assets
6%
Fixed Assets
51

gillis
Cost Behavior
 Managers recognize the importance of cost, and
many strategic plans establish “cost leadership” or
“cost reduction” as goals. However, the behavior of
cost is rarely well understood.
 The absence of a systematic framework for cost
analysis in most firms underlies this problem.
 A firm’s cost position results from the cost behavior
of its value activities.
 Cost behavior depends on structural factors that
influence cost. These are termed cost drivers.
52

gillis
Cost Drivers
1. Economies of scale.
2. Learning and spillovers.
3. The pattern of capacity
utilization.
4. Linkages.
5. Interrelationships.
 Ten major cost drivers determine the cost
behavior of value activities:
53

gillis
Cost Drivers
6. Integration.
7. Timing.
8. Discretionary policies not in
other drivers.
9. Location.
10. Institutional factors.
 Ten major cost drivers determine the cost
behavior of value activities:
54

gillis
Cost Advantage
 A firm must attempt to quantify the
relationship between cost drivers and the cost
of a value activity whenever possible.
 Isolating purchased inputs for separate
analysis will often yield additional insights.
 Segment cost behavior is an additional factor.
 A firm has a cost advantage if its cumulative
cost of performing all value activities is lower
than competitors’ costs.
55

gillis
Cost Advantage
 A firm’s relative cost position is a function of:
o The composition of its value chain versus the
value chains of its competitors.
(reconfigure the value chain)
o Its relative position vis-à-vis the cost drivers of
each activity.
(control the drivers better than competitors)
56

gillis
Controlling Cost Drivers
1. Controlling scale:
 Increasing scale by acquisitions, line extensions,
market expansions, marketing activity.
 Boosting local or regional scale.
 Assess the value of scale of different types.
2. Controlling learning:
 Manage with the learning curve.
 Keep learning proprietary (minimize spillover).
 Learn from competitors.
57

gillis
3. Controlling the effect of capacity utilization:
 Level throughput.
 Reduce the penalty of throughput variations.
 Tapered integration (peak load suppliers)
4. Controlling linkages:
 Exploit cost linkages within the value chain.
 Work with suppliers and channels to exploit
vertical linkages.
58

gillis
5. Controlling interrelationships:
 Share appropriate activities.
 Transfer know-how in managing similar activities.
6. Controlling integration:
 Systematic examination of possibilities for
integration and de-integration.
7. Controlling timing:
 Exploit first-mover or late-mover advantages.
 Time purchase in the business cycle.
59

gillis
8. Controlling discretionary policies:
 Modify expensive policies that do not contribute
to differentiation.
 Use technology to skew cost drivers.
 Avoid frills.
9. Controlling location:
 Optimize location.
10.Controlling institutional factors:
 Do not take as a given.
60

gillis
Three More…
11.Procurement and cost advantage.
12.Reconfiguring the value chain.
 How can the activity be done differently or
eliminated?
 Regrouping and/or reordering?
 Coalitions with other firms?
13.Cost advantage through focus.
 Dedication to a well-chosen segment.
61

gillis
Sustainability & Implementation
 Cost advantage will result in above-average
performance only if the firm can sustain it.
 The success of cost leadership hinges on a
firm’s skills in actually implementing it on a
day to day basis.
 Costs do not go down automatically or by
accident but rather as a result of hard work
and constant attention.
 Everyone in a firm has the potential to
affect cost.
62

gillis
Pitfalls - Cost Leadership Strategy
 Exclusive focus on cost of manufacturing
activities.
 Ignoring procurement.
 Overlooking indirect or small activities.
 False perception of cost drivers.
 Failure to exploit linkages.
63

gillis
Pitfalls - Cost Leadership Strategy
 Contradictory cost reduction.
 Unwitting cross-subsidy.
 Thinking incrementally.
 Undermining differentiation.
64

gillis
Steps in Strategic Cost Analysis
1. Identify the appropriate value chain and
assign costs and assets to it.
2. Diagnose the cost drivers of each value
activity and how they interact.
3. Identify competitor value chains and assess.
65

gillis
Steps in Strategic Cost Analysis
4. Develop a strategy to lower relative cost
position by controlling cost drivers or
reconfiguring the value chain and/or
downstream value.
5. Do not erode differentiation, except on
purpose.
6. Test for sustainability.
66

gillis
Differentiation
A firm differentiates itself from its competitors
if it can be unique in something that is
valuable to buyers. Differentiation is one of
the two types of competitive advantage a firm
may possess.
67

gillis
Differentiation
Firms view the potential sources of differentiation
too narrowly. They see differentiation in terms of
the physical product or marketing practices, rather
than potentially arising anywhere in the value
chain.
68

gillis
Drivers of Uniqueness
1. Policy choices
o What activities to perform and how to perform
them.
2. Linkages
o Within the value chain.
o Supplier and channel.
3. Timing
o Early – preempt others.
o Late – employ more modern technology.
69

gillis
Drivers of Uniqueness
4. Location
5. Interrelationships
o Shared sales forces, sister business units, etc.
6. Learning
o Proprietary vs. spillover to competitors
7. Integration
8. Scale
9. Institutional factors
70

gillis
Buyer Value and Differentiation
 A firm creates value for a buyer that justifies
a premium price (or preference at an equal
price) through two mechanisms:
o By lowering buyer cost
o By raising buyer performance
 Differentiation requires that a firm be
uniquely able to create competitive
advantage for its buyer in ways besides
selling to them at lower price.
71

gillis
Value Chain and Buyer Value
FI
HRM
TD
P
IL O OL MS S
FI
HRM
TD
P
IL O OL MS S
Firm Value Chain Buyer Value Chain
A firm lowers buyer cost or raises buyer performance through
the impact of its value chain on the buyer’s value chain.
72

gillis
Lowering Buyer Cost
 Anything a firm can do that lowers the
buyer’s total cost of using a product (or other
buyer costs) represents a potential basis for
differentiation.
73

gillis
Raising Buyer Performance
 Understanding desirable performance from
the buyer’s viewpoint.
 What creates differentiation for them?
 Noneconomic goals (status, image, prestige).
 For consumers, better satisfying needs.
74

gillis
Buyer Perception of Value
 Buyers often have a difficult time assessing
value in advance.
 Cannot always gauge the performance of a
firm and its product even after use.
 Buyers frequently do not understand all the
ways in which a supplier actually or
potentially might lower their costs or improve
their performance.
 Often inferred or judged (signals of value).
75

gillis
Signals of Value
 Buyers will not pay for value that they do not
perceive, no matter how real it may be.
 Price premium hinges on real and perceived
value.
 Different decision makers value different
things about a firm.
 Different signals of value will be convincing
to different decision makers.
 The identity of the real buyer?
76

gillis
Buyer Purchase Criteria
 Use criteria – Purchase criteria that stem
from the way in which a supplier affects
actual buyer value through lowering buyer
costs or raising buyer performance.
 Signaling criteria – Purchase criteria that
stem from signals of value, or means used by
the buyer to infer or judge actual value.
77

gillis
Buyer Purchase Criteria Example
Frequency of
Sales Calls
Speed of Order
Processing
Channel Margin
Reliability of Service
Promotional Support
Advertising
Shelf Positioning
In-Store Displays
Availability
Taste
Nutritional Value
Texture
Appearance
Price
Availability
End user
Channels
Use Criteria Signaling Criteria
78

gillis
Buyer Purchase Criteria
Lower
Buyer
Cost
Raise
Buyer
Performance
Readily Measurable Difficult to Measure
Source
of
Value
Measurability of Value
?
?
?
?
79

gillis
Differentiation Strategy
 Proliferate the sources of differentiation.
 Make actual product use consistent with
intended use.
 Employ signals of value to reinforce use criteria.
 Employ information bundled with the product.
 Exploit all sources of differentiation that are not
costly.
 Control cost drivers, particularly signaling.
 Reduce costs that do not affect buyer value.
80

gillis
Routes to Differentiation
 Change the rules to create uniqueness.
o Shift the decision maker.
o Educate the buyer about new bases for the
decision.
o Discover unrecognized purchase criteria.
o Preemptively respond to changing buyer or
channel circumstances.
o Reconfigure the value chain to be unique in
entirely new ways.
o Sustain differentiation by continued focus on
perceived value to buyers and growth of imitators.
81

gillis
Pitfalls – Differentiation
 Uniqueness that is not valuable.
 Too much differentiation.
 Too big a price premium.
 Ignoring the need to signal value.
 Not knowing the cost of differentiation.
 Focus on the product vs. the whole value chain.
 Failure to recognize buyer segments.
82

gillis
Steps in Differentiation
1. Determine who the real buyer is.
2. Identify the buyer’s value chain and the
firm’s impact on it.
3. Determine ranked buyer purchasing criteria.
4. Assess the existing and potential sources of
uniqueness in a firm’s value chain.
5. Identify the cost of existing and potential
sources of differentiation.
83

gillis
Steps in Differentiation
6. Choose the configuration of value activities
that creates the most valuable
differentiation for the buyer relative to cost
of differentiating.
7. Test the chosen differentiation strategy for
sustainability.
8. Reduce cost in activities that do not affect
the chosen forms of differentiation.
84

gillis
Technology and Strategy
Technology pervades a firm’s value chain and
extends beyond those technologies associated
directly with the product. There is, in fact, no such
thing as a low technology industry if one takes this
broader view.
85

gillis
Outbound
Logistics
Procurement
Technology Dev.
Human Resource Mgmt
Firm Infrastructure
Marketing
& Sales
Operations
(Mfg)
Inbound
Logistics
After-Sale
Service
The Value Chain Technologies
M
A
R
G
I
N
Transportation
Mtl Handling
Storage &
Preservation
Commo Sys
Testing
Info Sys
Media
Audio &Video
Commo Sys
Info Sys
Process
Machine Tool
Mtl Handling
Packaging
Maintenance
Building
Design & Ops
Transportation
Mtl Handling
Storage &
Preservation
Packaging
Commo Sys
Info Sys
Diagnostic &
Testing
Commo Sys
Info Sys
Info Sys Technology Commo Sys Technology
Transportation Sys Technology
Product Tech Software Info Sys
Computer-aided design Pilot Plant
Training Motivation Research
Info Systems
Finance Planning
Budget Office
86

gillis
Technology & Generic Strategies
Process for
the segment
value
Process for
the segment
cost
Quality
control, buyer
value
Learning
curve, scale
economies
Process
Tech
change
Meet the
needs of the
segment
Performance
for the
segment cost
Enhance
product quality
Reduce
product cost
Product
Tech
change
Differentiation
Focus
Cost
Focus
DifferentiationCost
Leadership
87

gillis
Tech Leadership & Advantage
Pioneer the lowest
cost product design.
Be first down the
learning curve.
Low cost value
activities.
Lower cost of product
or value activities by
learning from the
leader’s experience.
Avoid R&D costs
through imitation.
Pioneer a unique
product.
Innovate in activities
to increase buyer
value.
Adapt more closely
to buyer needs by
learning from the
leader’s experience.
Tech Leadership Tech Followership
Cost Advantage
Differentiation
88

gillis
Industry Segmentation
Segments of industry have a structure just as
industries do, and the strength of the five
competitive forces often differs from one part
of an industry to another.
89

gillis
Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppliers
products/services
Bargaining power
of buyers
Threat of
new entrants
Industry
Competitors
90

gillis
Crucial Strategic Questions
 Where in an industry to compete?
 In what segments will focus strategies be
sustainable because barriers can be built
between segments?
91

gillis
Segmentation
 Market Segmentation
o Differences in buyer needs.
o Differences in purchasing behavior.
o Focus on marketing activities.
 Industry Segmentation
o Division of an industry into subunits for purposes
of developing competitive strategy.
o Differing value chains and buyer value chains.
o Competitive scope within an industry.
92

gillis
Bases for Industry Segmentation
 Structural bases for segmentation
o Differences in products or buyers create industry
segments if they alter one or more of the five
competitive forces.
o Structural analysis applies to industry segments.
 Value chain differences and segmentation
o Differences in products and buyers also create
segments if they affect the requirements for
competitive advantage.
o Affect drivers of cost or uniqueness?
93

gillis
Five Forces Among Segments
Threat of
Buyer
Power
Segment
Rivalry
Supplier
Power
Threat of
Mobility
Product
Varieties
Buyers
Substitution
94

gillis
Segmentation Variables
1. The discrete product
varieties that are, or could be
produced.
Product Segments
2. The types of end buyers that
purchase the industry’s
products.
Buyer Segments
3. Alternative distribution
channels employed (Immediate
Buyer).
Channel Segments
4. Locality, region, country,
group of countries.
Geographic Segments
95

gillis
New Ways of Segmenting
 Are there other technologies or designs to
perform the required functions in the the
buyer’s value chain?
 Could additional functions be performed by
an enhanced product?
 By reducing the number of functions (and
price?) could the needs of some buyers be
better served?
 Are there different bundles (narrower or
broader) that could be sold as a package?
96

gillis
Matrix
INDUSTRY
Product
Varieties
Buyers
97

gillis
Matrix
INDUSTRY
Product
Segments
Buyer Segments
98

gillis
Matrix
INDUSTRY
Geographic
Segments
Channel Segments
99

gillis
Steps - Segmentation Process
1. Identify the discrete product varieties, buyer
types, channels, and geographic areas in the
industry that have implications for structure
or competitive advantage.
2. Reduce the number of segmentation
variables by applying the significance test.
3. Identify the most meaningful discrete
categories for each variable.
100

gillis
Steps - Segmentation Process
4. Collapse correlated variables together.
5. Plot two-dimensional segmentation matrices
for pairs of variables, and eliminate
correlated variables and null segments.
6. Combine these segmentation matrices into
one or two overall industry segmentation
matrices.
7. Test the matrices by locating competitors on
them.
101

gillis
Alternative Focus Strategies
Buyer Type
Insurance
Companies Banks
Finance
Companies
Company A Company B Company C
Product
Varieties
Databases
Models
Consulting
102

gillis
Segmentation and Strategy
WHERE?
Product
Varieties
Buyers
103

gillis
 Where in the industry a firm should compete?
 How strategy should reflect this segmentation?
 The attractiveness of a segment?
o Structural attractiveness.
o Segment size and growth.
o Firm position vis-a-vis a segment.
o Segment interrelationships.
o Segment spillover.
o Sustainability.
104

gillis
 Sustainability of a focus strategy.
o Against broadly-targeted competitors.
o Against imitators.
o Against segment substitution.
105

gillis
Pitfalls and Opportunities
 Successful focus strategies must involve
compromise costs for competitors.
 Identifying a new way of segmenting an
industry can be a major opportunity.
 Broad targeting does not necessarily lead to
competitive advantage.
106

gillis
Pitfalls and Opportunities
 Broadly targeted firms often serve too many
segments.
 The relevant segments and breadth of target
must be continually examined.
 New technology is changing old assumptions
about segmentation.
107

gillis
Where one actually chooses to draw industry
boundaries is not so essential as long as both
segmentation and strategic interrelationships are
examined as part of structural analysis.
108

gillis
Substitution
Use of Personal Computers in Small Businesses
0
20
40
60
80
Sales Dollars
Percentageof
Companies
Small Business
Computer
Manual Methods
Service Bureau
109

gillis
Economics of Substitution
 Current relative value/price (RVP)
o When there are no switching costs and the
product is consumed quickly, the relevant “relative
value/price” is solely a function of current
conditions.
110

gillis
Economics of Substitution
 Expected relative value/price (RVP)
o When there are costs of switching or the product
is durable, the attractiveness of a substitute is the
expected RVP over the planning horizon.
o Same as in differentiation, a substitute is valuable
if it lowers buyer cost or improves buyer
performance relative to the product.
111

gillis
Corporate Strategy
Economic, technological, and competitive
developments are increasing the competitive
advantage to be gained by identifying and exploiting
interrelationships among distinct but related
businesses.
112

gillis
Corporate Strategy
This has made horizontal strategy, which cuts
across divisional boundaries, perhaps the most
critical item on the strategic agenda facing a
diversified firm.
113

gillis
Strategy Levels
 Business Strategy
o Charts the course for a firm’s activities in
individual industries.
o Strategic business units (SBUs).
 Corporate Strategy
o Addresses the composition of a firm’s portfolio of
business units.
o The concept of synergy.
 Horizontal Strategy
114

gillis
Horizontal Strategy
 Coordinated set of goals and policies across
distinct but interrelated business units.
 A concept of group, sector and corporate
strategy based on competitive
advantage, not on financial considerations or
stock market performance.
115

gillis
Horizontal Strategy
 Diversification philosophy is changing.
 Emphasis is shifting from growth to
performance.
 Technological change is proliferating
interrelationships and making them more
achievable.
 Multipoint competition is increasing.
116

gillis
Horizontal Strategy
 Achieving interrelationships:
o Long been present.
o Unexploited and untapped.
o Organizational barriers to achieving
interrelationships in practice.
 Synergy is vague
o Not one idea but three – tangible, intangible and
competitor.
o Intangible is the most ephemeral.
117

gillis
Interrelationships
 Tangible interrelationships
o Opportunities to share activities in the value
chain among related business units.
o There is a competitive advantage if sharing
lowers cost or enhances differentiation enough to
exceed the cost of sharing.
118

gillis
Interrelationships
 Intangible interrelationships
o Transference of management know-how among
separate value chains.
o Competitive advantage through transference of
generic skills from one business unit to another.
119

gillis
Interrelationships
 Competitor interrelationships
o Multipoint competitors necessarily link industries
together because actions toward them in one
industry may have implications in another.
o A firm may have to match an interrelationship or
face a competitive disadvantage.
120

gillis
Explicit Horizontal Strategy Need
 Business units will value interrelationships
differently and not agree to pursue them.
 Business unit strategies will evolve in ways
that weaken interrelationships.
 Pricing and investment decisions taken
independently may erode firm position.
121

gillis
Explicit Horizontal Strategy Need
 Business units will have a tendency to go
outside to form alliances.
 Business units may ignore key potential
competitors.
 Transfer of know-how among generically
similar business units will not occur.
122

gillis
Formulating Horizontal Strategy
1. Identify all tangible interrelationships.
2. Trace tangible interrelationships outside the
firm.
3. Identify possible intangible interrelationships
 Isolate value activities.
 Identify new industries.
 Generic strategies, buyer types, value chain
configuration.
123

gillis
4. Identify competitor interrelationships.
 Multipoints, patterns of interrelationships.
5. Assess the importance of interrelationships
to competitive advantage.
 Advantages and costs of sharing.
 Difficulties in matching the interrelationship.
124

gillis
6. Develop a coordinated horizontal strategy.
 Share appropriate value activities.
 Coordinate strategic postures of related units.
 Distinguish the horizontal goals of business units.
 Coordinate offensive and defensive strategies.
 Exploit important intangible interrelationships through
formal programs for exchanging know-how.
125

gillis
 Diversify to strengthen important
interrelationships or create new ones.
 Sell business units that do not have
significant interrelationships with others
(or that make the achievement of important
interrelationships difficult).
7. Create horizontal organizational mechanisms
to assure implementation.
126

gillis
Pitfalls
 Misreading strategic contributions of
business units.
 Misreading position vis-à-vis key diversified
competitors.
 Portfolio management.
 Negative leverage from sharing or
transferring know-how.
 Making too much of an interrelationship.
 Illusory interrelatedness.
127

gillis
Achieving Interrelationships
Horizontal organization overlays the business unit
structure and facilitates collaboration. Mechanisms
include the grouping of business units, standing
committees, management systems, human
resources policies, etc.
128

gillis
Achieving Interrelationships
Any firm with significant interrelationships
needs a horizontal corporate organization to
supplement its vertical organization.
129

gillis
Interrelationship Impediments
 Asymmetric benefits.
 Loss of autonomy and control.
o Protection of turf.
o Perceived dilution of buyer relationships.
o Inability to “fire” a sister division.
o Conflicts over priorities in shared activities.
o Unfair blame for poor performance.
130

gillis
 Biased incentive systems.
o Lack of credit for contributions.
o Measurement biases.
 Capitalized assets vs. expenses.
 Split revenues.
 Differing business unit circumstances.
o Strong business unit identities.
o Differing cultures.
o Management, procedural, and geographic
differences.
131

gillis
 Fear of tampering with decentralization.
o Dampening entrepreneurship.
o Desire for a consistent organization.
o Difficulty of measuring importance.
o Fear of providing “excuses.”
 Interrelationships and equity.
o Fairness.
o “Carrying” other units.
132

gillis
Interrelationship Mechanisms
 Horizontal structure.
 Horizontal systems.
 Horizontal human resource practices.
 Horizontal conflict resolution processes.
133

gillis
Relationship Devices
 Market focus committees. Cross-business
unit forums.
 Technology and channel committees.
 Temporary task forces.
 Interrelationship champions.
 Horizontal strategic planning, procedures &
incentives.
134

gillis
Relationship Devices
 Personnel rotation.
 Firmwide role in hiring and training.
 Education on interrelationship concepts.
135

gillis
A New Organizational Form
 Business unit managers will have to modify
their conception of what managing their own
business means.
 Recognition of the value of
decentralization, and also:
 Recognition of both vertical and horizontal
dimensions.
136

gillis
A New Organizational Form
 Modification of the narrow view of
autonomy.
 Role of group and sector executives.
 Less simplicity, greater ambiguity, more
subjectivity, and potentially more conflict.
 More competitive advantage.
137

gillis
Complementary Products
Complements are the opposite of
substitutes, because the sale of one promotes the
sale of another. They represent a form of
interrelatedness that involve a firm’s competitive
scope and how it should compete.
138

gillis
Complementary Practices
 Control over complementary products.
o Full range.
o “We sell both.”
 Bundling
o Sell together only as a bundle, at a single price.
o “We only sell both together.”
 Cross-subsidization
o Sell one product at terms that promote the sale
of another product.
o “We sell one to sell another.”
139

gillis
Scenarios
Scenarios can be used as tools to understand
the strategic implications of uncertainty more
fully. A scenario is an internally consistent
view of what the future might turn out to be.
140

gillis
Scenarios
 Macroscenarios
o Macroeconomic and macropolitical factors.
o National or global environment.
o Rate of economic growth, inflation, protectionism,
regulation, energy prices, interest rates.
 Industry Scenarios
o Move away from dangerous single-point forecasts.
o Make implicit assumptions explicit.
o Think beyond the confines of conventional wisdom.
o Translate uncertainty into its strategic implications.
141

Identify the uncertainties that may affect
industry structure.
Determine the causal factors driving them.
Make a range of plausible assumptions about
each important causal factor.
Combine assumptions about individual factors
into internally consistent scenarios.
Analyze the industry structure that would
prevail under each scenario.
Determine the sources of competitive advantage
under each scenario.
Predict competitor behavior under each scenario.
The Process of Constructing Industry Scenarios
142

gillis
Identifying Industry Uncertainties
 Hard to recognize.
 Hard to detect discontinuous changes.
 Hard to shed conventional wisdom.
 Each element of industry structure must be
examined and placed into one of three
categories:
1. Constant
2. Predetermined
3. Uncertain
143

gillis
 List all industry trends and possible industry
changes mentioned by industry observers or
discussed internally:
o Long-run changes in growth - changes in buyer
segments served - buyer learning - reduction of
uncertainty.
o Diffusion of proprietary knowledge - accumulation
of experience.
o Product, marketing, process innovation.
o Structural change in adjacent industries - entries
and exits.
144

gillis
o Product, marketing, process innovation.
o Structural change in adjacent industries - entries
and exits.
 Independent uncertainties.
o Inside or outside the industry.
 Dependent uncertainties.
o Determined by the independent uncertainties.
(e.g. advertising levels may be a function of
casual user demand).
145

Buyers
Suppliers
Potential
Entrants
Suppliers
Substitutes
Bargaining power
of suppliers
products/services
Bargaining power
of buyers
Threat of
new entrants
Industry
Competitors
146

gillis
Chain Saw Industry Variables
 A. Entry Barriers
o Will there be new proprietary product designs?
o How high will scale economies in manufacturing
be?
o In Marketing (media mix and spending rates)?
o How difficult will gaining access to each channel
be?
o What safety regulations will be enacted?
147

gillis
 B. Buyers
o What will casual user demand be? (1)
o What will professional/farm demand be? (5)
o What will be the mix of dealer vs. nondealer
sales? (3)
o How significant will private labeling be? (4)
o Will distribution be direct or through distributors?
o How price sensitive will buyers be?
148

gillis
 C. Competitors
o What will be the shape of the casual user
penetration curve? (2)
o How will traditional competitors behave?
o How will newly acquired competitors behave?
o Will additional foreign firms be attracted?
o How high will fixed costs be?
o How committed is each competitor to chain
saws?
149

gillis
 D. Substitutes
o How much will electric saws penetrate vs. gas
saws? (6)
 E. Suppliers
o Relatively constant.
150

gillis
 Most important scenario variables
o What will casual user demand be? (1)
o What will be the shape of the casual user
penetration curve? (2)
o What will be the mix of dealer vs. non-dlr sales? (3)
o How significant will private labeling be? (4)
 Less important scenario variables
o What will professional/farm demand be? (5)
o How much will electric saws penetrate vs. gas
saws? (6)
151

gillis
Chain Saw Causal Factors
(1) What will casual user
demand be?
External
Social trends /Energy costs
Wood burning stove and fireplace
installations
Number of households formed
Channels selling casual saws
Internal
Marketing activity and product
changes by competitors
(2) What will be the shape of
the casual user penetration
curve?
External
Economic conditions
Pattern of energy price changes
Pattern of social trends
Replacement rate for saws
Channel strategies/chain saws
Internal
Marketing activity by competitors
Scenario Variables Causal Factors
152

gillis
Chain Saw Causal Factors
(3) What will be the mix of
dealer vs. nondealer sales?
External
Channel product line policies
Consumer shopping habits
Ability of channels to provide
service
Usage patterns of casual saws
(spare parts usage, service, etc)
Internal
Channel policies of competitors
(4) How significant will
private labeling be?
External
Channel branding policies
Channel product policies
Internal
Channel policies of competitors
Branding policies of competitors
Scenario Variables Causal Factors
153

Scenario
Variables
Dependent
Elements
of
Structure
Future
Industry
Structure
Predeter-
mined
Structural
Changes
Constant
Elements of
Structure
Causal
Factors
154

gillis
Range of Assumptions/Chain Saw
(1) Level of casual
unit demand
Low Medium High
(2) Shape of casual
user penetration
curve
Steady
increase
Peaked
(3) Mix of dealer vs.
non-dealer sales
Dealers
dominate
High non-
dealer share
Short-term
shift to non-
dealers, return
to dealers in
long term
(4) Extent of private
label vs. branded
sales through
nondealers
High percent
branded
High percent
private label
Scenario Variables Assumptions
155

gillis
Consistent Scenarios – Chain Saw
Low Medium High
Casual User Demand
Shape of the
Casual User
Penetration
Curve
Steady
Rise
Peaked
156

gillis
Casual User Demand
Channel
Mix
Med/
Steady
Low/
Steady
High/
Steady
High/
Peaked
Dealers
Dominate
High %
Through
Non-dealers
Short-term
Shift to
Non-dealers
157

gillis
1 2
3 4 5
876
9
10
Low/
Steady
High/
Peaked
Med/
Steady
High/
Steady
High %
Branded
High %
Branded
High %
Private
Label
High %
Private
Label
Casual User Demand
Channel
Mix
Dealers
Dominate
High %
Through
Non-dealers
Short-term
Shift to
Non-dealers
158

gillis
Porter Summary – Key Terms
Differentiation Linkages
Focus Strategy Structural Analysis
Industry Segmentation Substitution
Integration Sustainability
Interrelationships Value Chains
159

gillis
160

gillis
161

gillis
162

gillis
163

gillis
164

gillis
165

gillis
“You must love the questions
themselves.”
Rainer Maria Rilke
166

gillis
“It’s the level underneath, not
the level on the surface, that
affects relationships.”
Marianne Williamson
167

gillis
Seek to understand the level
underneath and you will grow in:
 Confidence
 Context
 Certainty
 Courage
168

gillis
Course XIV*
 Thank you.
 Please come again.
 First Light LLC
 John Gillis (Principal)
 jgillis767@aol.com
 248-770-0485
169

gillis
Course XIV*
170
* Course XIV is named in honor of the
original Course XIV, which was the
“Department of Social Science and Economics”
at the Massachusetts Institute of Technology
(MIT)
VERITAS

Course_XIV_on_michael_e_porter_jg

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Similar a Course_XIV_on_michael_e_porter_jg

Similar a Course_XIV_on_michael_e_porter_jg (20)

Más de John Gillis

Más de John Gillis (20)

Último

Último (20)

Course_XIV_on_michael_e_porter_jg