On Strategy and Competition Insights

On Strategy and Competition
Ziya G. Boyacigiller
This presentation was created and given by Ziya
Boyacigiller who was leading Angel Investor and a loved
mentor to many young entrepreneurs in Turkey. We have
shared it on the web for everyone’s benefit. It is free to
use but please cite Ziya Boyacigiller as the source when
you use any part of this presentation. For more about
Ziya Boyacigiller’s contributions to the start-up Ecosystem
of Turkey, please go to www.ziyaboyacigiller.com

2
Ziya G. Boyacigiller © 2005
Macro Industry View*
Ziya G. Boyacıgiller
Sabancı University
Yonetim Bilimleri Fakultesi
* Ref: Based on Competitive Strategy, M. Porter

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The Seven Domains of
Attractive Opportunities
Ziya G. Boyacigiller (c) 2005 EMBA 3MODIFIED by ZGB, from “The New Business
Road Test”, by J. Mullins
MACROMICRO
MARKET DOMAIN INDUSTRY DOMAIN
COMPETITIV
E ANALYSIS
Note: Market is customers, industry is sellers…

4
Use Strategic Thinking to
Question: Can we win?
Do not get into
an industry
where
competitive
forces are
against you and
you don’t know
what you are
getting into...

5
Art of War, Sun Tzu
The main principles are:
– If you will wage war, make sure you are prepared to win -
war is first about preparation.
– To win you need to apply your strength to the weakest
points of your enemy – focusing all your might on one spot
works best.
– Speed in developing your forces and mobility creates
decisive advantages.
– To win you must: know yourself (your company),
know your enemy (competition), and know the
terrain (market).

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“What is Strategy?
Strategic positioning attempts to achieve
sustainable advantage by preserving what is
distinctive about a company.
It means:
performing different activities from rivals, or
performing similar activities in different ways.

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Difference from Rivals?

8
performing
different activities from rivals,

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performing similar activities in
different ways

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3 Key Principles
underlie strategic positioning:
1. Strategy is the creation of unique and
valuable position, involving a different
set of activities.
2. Strategy requires you to make trade-
offs in competing –
to choose “what-to-do” and “what-not-to-do”.
3. Strategy involves creating fit among a
company’s activities.

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“Fit”
• has to do with the ways a
company’s activities interact
and reinforce one another.
• drives both competitive
advantage and sustainability.
When activities mutually
reinforce each other (fit) ,
competitors can’t imitate them
easily.

12
Kinepolis Strategy Map resulting
from its Value Innovation
High Growth in Revenues & Profits

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Structural Analysis of
Industries
Michael Porter
Harvard Business School
9-376-054 Rev. June 30, 1983
http://www.quickmba.com/strategy/porter.shtml

14
Remember !
The single most important
determinant of entrepreneurial
success (that overwhelms all
other factors) is the selection
of the industry to compete in…

15
Industry vs Market
What is the difference?

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Industry vs Market
• Industry: Group of Competitors
• Market: Group of Customers
Industry sells “substitute
products/services” to
“customers” in Market

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Good Market/Bad Industry
Market
• Movie Customers
• Restaurant Customers
• Music Listeners
• Your Market
Industry
• Movie Theaters
• Restaurants
• Music Makers
• Your Industry?

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Starting point…
• Economic Theory predicts that risk-
adjusted rates of returns in an
industry and across industries should
be constant.
• Several Studies show this is not true.
different industries, and different companies
within a given industry can have different levels
of profitability.

19
Outside Forces…
… are significant primarily in a
relative sense, since forces
outside the industry (economy,
nature, etc.) usually affect all
firms in the industry – the key is
whether firms have different
abilities to deal with them or
not.
(Remember, when the tide comes in, all boats rise…)

20
Industry Structure…
… has a strong influence in
defining the competitive rules
of the game, as well as the
strategies potentially
available to the firm.

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“When a management with a reputation for
brilliance takes on a business with a
reputation for bad economics, it’s the
reputation of the business that remains
intact.”
Warren Buffet

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Who Has the Leverage?

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Forces Determine
Profitability

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Porter’s “Five Forces” that
influence competitiveness

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BY JOHN W. MULLINS
Let’s take a look at
Johnny’s “Lemonade Stand” Business
From a Competitiveness Viewpoint

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Johnny’s Lemonade Business

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Johnny…
Big Brother…

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Johnny…
Big Brother…
Good use of strategy
helps you to create your
legal “big brother” –
also known as “unfair
competitive advantage”

29
Determinants of
Profitability
1- Competitive Forces
2- Positioning

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Perform “Profitability
Analysis” on
your target industry

31
Force #1:
RIVALRY
• Economic theory predicts that profits are
driven to zero (marginal cost) over time.
• This rarely becomes true since competition
(industry) and markets are not perfect.
• Intensity of rivalry varies in industries.

32
How to Quantify Rivalry?
• Economists measure rivalry by indicators
of industry concentration.
• The Concentration Ratio (CR) is one such
measure.
• The Bureau of Census periodically reports
the CR for major Standard Industrial
Classifications (SIC's).
• The CR indicates the percent of
market share held by the four largest
firms (CR  8%, 25%, 50%, etc.)

33
Competitive Markets
• With only a few firms holding a large market
share, the competitive landscape is less
competitive (closer to a monopoly).
• A low concentration ratio (CR) indicates that the
industry is characterized by many rivals
(fragmented), none of which has a significant
market share.
• These fragmented markets are said to be
competitive.

34
Disciplined Industries
• If rivalry among firms in an industry is low, the industry is
considered to be disciplined.
• Discipline may result from
– the industry's history of competition,
– the role of a leading firm, or
– informal compliance with a generally understood code of conduct.
(Explicit collusion generally is illegal and not an option)
• In low-rivalry industries competitive moves must be
constrained informally. However, a maverick firm seeking a
competitive advantage can displace the otherwise disciplined
market.
• Almost all new markets start not disciplined.

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http://files.posterous.com/jaysteele Roger L. Martin

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Intense Rivalry
• When a rival acts in a way that elicits a
counter-response by other firms, rivalry
intensifies.
• Points of Pressure:
– Changing prices
– Improving product differentiation
– Creatively using channels of distribution (EX: using a
distribution channel that is novel to the industry
(Timex)).
– Exploiting relationships with suppliers (EX: Sears 1950-
70)

37
Intensity is Affected by
threats…
• Large number of competitors (opportunity web-sites)
• Slow market growth (industrial, agricultural)
• High fixed costs, sunken costs (steel)
• High storage costs/highly perishable products (produce)
• Low switching costs (cell phone numbers)
• Low levels of product differentiation (keyboards)
• Strategic stakes are high (IBM)
• High exit barriers (shipbuilding)
• A diversity of rivals (hospitals)
• Industry shakeout (networking)

38
Rule of Three and Four
• BCG founder Bruce Henderson generalized this
observation: A stable market will not have
more than 3 significant competitors, and the
largest competitor will have less than 4 times
the market share of the smallest.
• If this rule is true, it implies that:
– If there is a larger number of competitors, a shakeout is
inevitable
– Surviving rivals will have to grow faster than the market
– Eventual losers will have a negative cash flow if they attempt
to grow
– All except the two largest rivals will be losers
– The definition of the "market" is strategically important.

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Summary Checklist:
1 - DEGREE OF RIVALRY
-Ease of entry
-Exit barriers
-Industry concentration
-Fixed costs/Value added
-Industry growth
-Intermittent overcapacity
-Product differences
-Switching costs
-Brand identity
-Diversity of rivals
-Corporate stakes

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Force #2 :
Threat Of Substitutes
• Threat of substitutes exists when a product's
demand is affected by the price change of an
existing substitute product.
• A product's price elasticity is affected by
substitute products - as more substitutes become
available, the demand becomes more elastic since
customers have more to choose from.
• A close substitute product constrains the ability
of firms in an industry to raise prices. (diapers,
cans, tires)

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Summary Checklist:
2 - THREAT OF SUBSTITUTES
-Switching costs
-Buyer inclination to
substitute
-Price-performance
trade-off of substitutes (value)

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Force #3 :
Buyer Power
• When buyer power is strong, the
relationship to the producing
industry is near to, what an
economist terms, a monopsony - a
market in which there are many
suppliers and one buyer where
buyer sets the price
– (government vs. contractors)

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Buyers are Powerful if …
– Buyers are concentrated - there are a few buyers with
significant market share (military / contractors)
– Buyers purchase a significant proportion of output /
distribution of purchases or if the product is
standardized (Wall Mart / retail good producers)
– Buyers possess a credible backward integration threat -
can threaten to buy producing firm or rival (beverage
firm/ bottlers)

44
Buyers are Weak if…
– producers threaten forward integration - producer can
take over own distribution/retailing (Sony / theaters)
– significant buyer switching costs exist - products not
standardized and buyer cannot easily switch to another
product (Microsoft Office)
– buyers are fragmented (many, different) - no buyer has
any particular influence on product or price (consumer
products)
– producers supply critical portions of buyers' input -
distribution of purchases (Dell’s relationship with PC
manufacturers)

45
Summary Checklist:
3 - BUYER POWER
Bargaining leverage
Buyer volume
Buyer information
Brand identity
Price sensitivity
Threat of backward integration
Product differentiation
Buyer concentration vs. industry
Substitutes available
Buyers' incentives

46
Force #4 :
Supplier Power
• A producing industry requires
raw resources - labor,
components, and other supplies.
• Suppliers, if powerful, can
exert an influence on the
producing industry

47
Suppliers are Powerful if:
• credible forward integration threat by
suppliers exits (Baxter/AHSupply)
• suppliers concentrated (drugs/hospitals)
• significant cost to switch suppliers (Intel)

48
Suppliers are Weak if:
• many competitive suppliers - product is
standardized (automotive Tier 2s)
• purchase commodity products (store labels)
• credible backward integration threat by
purchasers (timber / paper)
• concentrated purchasers (department stores /
garments)

49
Summary Checklist:
4 - SUPPLIER POWER
Supplier concentration
Importance of volume to supplier
Differentiation of inputs
Impact of inputs on cost or differentiation
Switching costs of firms in the industry
Presence of substitute inputs
Threat of forward integration
Cost relative to total purchases in industry

50
Force #5 :
Threat of Entry
• possibility that new firms may enter the industry
also affects competition
• if free entry and exit exists, then profits always
should be nominal
• high profits attract new entrants
• however, industries possess characteristics that
protect the high profit levels of firms in the
market and inhibit additional rivals from entering
the market

51
Entry Barriers
keep competitors out

52
What Creates
Barriers?
• Government (regulation, quotas)
• Patents and proprietary knowledge
• Complexity of business/technology
• Asset specificity (ship building)
• Organizational (Internal) Economies of
Scale (Minimum Efficient Scale – SOM
to sustain firm) (UPS)
• Market Leadership (Facebook, Google)

53
Easy to Enter
• If there is:
– Common technology
– Little brand franchise
– Access to distribution channels
– Low scale threshold

54
Difficult to Enter
• If there is:
– Patented or proprietary know-how
– Difficulty in brand switching
– Restricted distribution channels
– High scale-threshold

55
Easy to Exit
• If there are:
– Saleable assets
– Low exit costs
– Independent businesses

56
Difficult to Exit
• If there are:
– Specialized assets
– High exit costs
– Interrelated businesses

57
Exit Barriers
can keep you trapped…

58
Entry & Exit Barriers determine
quality of returns (profit)
LOW HIGH
L
O
W
low
returns
worst
case
returns
H
I
G
H
best
returns
high
returns
but risky
ENTRYBARRIERS
EXIT BARRIERS

59
Value Migration
• Over time, leading firms are
replaced by others as value
propositions degrade, and new
value propositions are created.
• Lesson Learned: Be Agile
– “We will create faster than they can
copy…” Walt Disney

60
Summary Checklist:
5 – THREAT OF ENTRY
Absolute cost advantages
Proprietary learning curve
Access to inputs
Government policy
Economies of scale
Capital requirements
Brand identity
Switching costs
Access to distribution
Expected retaliation
Proprietary products

61
Determinants of
Profitability
1- Competitive Forces
2- Positioning

62
Position within an Industry is
a second determinant of
profitability
Q:
Where
does a
300 kg.
Gorilla
sit?

63
A well positioned
company in an
unattractive industry,
can still generate
desirable returns
EX: Southwest Airlines

64
Firms position themselves
using their strengths
• Strengths are one of:
– Cost, or
– Differentiation
• Strengths can be applied with:
– Narrow Focus (Niche), or
– Broad Focus (Industry Wide)

65
Porter’s Generic Strategies

66
Which Strategy Should I
Use?

67
Each Strategy has its
Risks
• Cost Leader can lose: if competition reduces
costs even further (US vs Japan in memory),
invents disruptive technologies (CD vs vinyl), or
focuses on niches.
• Differentiator can lose: if competition imitates
(chips, PCs), customer requirements (tastes)
change, or to differentiators focused on niches.
• Focus can lose: if broad focus competitors imitate
(Microsoft), to others even more focused
(sensors), or when market requirements change
(low gas mileage cars).

68
The Goal of Strategic
Analysis…
…is to find a position in the
industry where the
company can best
defend itself against these
forces or
can influence them.

69
Cost Leadership Strategy
• Low cost enables:
– Higher profits when product sold at market prices, or
– Higher market share when product sold below market price
• Cost leader can win price wars, and price attrition
by time – others lose.
• This strategy usually targets a broad market
• Enablers are: access to low cost capital, skill in
efficient production/design, efficient distribution
channels, access to low cost materials…

70
How to Achieve Cost
Leadership
• Process efficiencies
• Access to low cost material /
suppliers
• Avoiding costs by innovative process
or design changes
• Good management
• Quality
• etc. etc.

71
Low Cost Strategy
ENTRY Ability to cut price in retaliation deters
potential entrants
BUYERS Ability to offer lower price to powerful
buyers
SUPPLIER Better insulated from powerful suppliers
SUBSTITUTES Can use low price to defend against
substitutes
RIVALRY Better able to compete on price

72
Porter’s “Five Forces”: Low Cost Strategy
cut prices to keep
new entrants out
offer lower
prices to
powerful
buyers
better
insulated from
powerful
suppliers
defend with
lower prices
better
structured to
compete on
cost

73
Differentiation Strategy
• Perception of Valuable Differentiation by customers
enables:
– Charging premium prices than competition
– If costs increase (buyer power) company can pass the cost to
customers
• Customers pay higher prices to have early access to
products that will make them more competitive (thus make
more profits)
• Enablers are: access to leading research, highly skilled or
creative team, strong sales team to communicate the value,
brand reputation for quality and innovation.

74
Differentiation Strategy
ENTRY Customer loyalty can discourage potential
entrants
BUYERS Large buyers have less power to negotiate
because of few close alternatives.
SUPPLIER Better able to pass on supplier price increases
to customers
SUBSTITUTE
S
Customer's become attached to
differentiating attributes, reducing threat of
substitutes.
RIVALRY Brand loyalty to keep customers from rivals

75
Porter’s “Five Forces”: Differentiation Strategy
customer loyalty to
keep new entrants out
 no close
alternatives
for powerful
buyers
better able
to pass
supplier price
increases to
buyers
defend with strong
differentiators
brand
loyalty and
defendable
differentiation

76
Focus Strategy
• Targets a small enough (niche) market segment,
whose needs are not met by broad market supplier
• Provides either low cost or differentiation for
this niche market.
• Focus enables:
– Strong customer loyalty (better service  relationship)
– Discourages competitors from entry.
– Pass supply cost increases to customer (buyer power)
• Enablers are: expert understanding of customer
problems, and whole product/custom solution

77
Focus Strategy
ENTRY Focusing develops core competencies that can
act as an entry barrier.
BUYERS Large buyers have less power to negotiate
because of few alternatives
SUPPLIER Suppliers have power because of low volumes,
but a differentiation-focused firm is better
able to pass on supplier price increases
SUBSTITUTE
S
Specialized products & core competency
protect against substitutes
RIVALRY Rivals cannot meet differentiation-focused
customer needs

78
Porter’s “Five Forces”: Focus Strategy
focus develops core competencies
to keep new entrants out
 no close
alternatives
for powerful
buyers
better able
to pass
supplier price
increases to
buyers
defend with specialized products
and core competencies
rivals can’t
meet
differentiation
focused needs

79
Stuck in the Middle?
• Generic strategies are not
compatible with each other.
• Pick one and stick to it –
otherwise brand image becomes
confusing for customers
(EX: high quality & low cost)

80
McDonalds Denny’s
SushiHot Dog
Stands

81
SWOT Analysis Using the Five-Forces
1. Make a list of your company’s strengths thinking about the
Five Forces.
2. Repeat for you competitor(s) !
3. Repeat both steps for your weaknesses.
4. Analyze and make a list of opportunities you see (what will
make you “win”) – remember Sun Tzu
5. Analyze and make a list of the risk (threats) you see (what
will “kill” you)
6. See if you can turn threats into opportunities using your
creativity.

82
Caution !
Many people, with a shallow understanding of
the concept, try to make use of SWOT
without a competitor defined...
SWOT analysis is a competitive analysis tool.
“Competitive” implies you need to compare
your business to at least one competitor. You
cannot (should not) try to use SWOT without
defining a competitor - SWOT becomes a
powerful tool only when used properly.

83
Again: Remember !
The single most important
determinant of entrepreneurial
success (that overwhelms all
other factors) is the selection
of the industry to compete in…

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