Strategy Full VO WS2024 University of Vienna

2 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy 3 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Session 1 01 The Concept of Strategy Grant (2021) – Ch...

2 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy 3 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Session 1 01 The Concept of Strategy Grant (2021) – Chapter 1 06 Organization Structure and Management Systems Grant (2021) – Chapter 6 4 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy What is strategy? › https://www.youtube.com/watch?v=Kj7DRWX-_T8 5 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy What is strategy? › https://www.youtube.com/watch?v=HFxlSVVcNXk 6 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy What about success? › Is Sofia Vergara successful? › Was Queen Elizabeth II successful? › Talent? › Intelligence? › Good looks? › Reputation? › Luck? › Patriotism? › What do they have in common? 7 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy The key ingredients of a successful strategy 8 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy The key ingredients of a successful strategy › The theory behind it… Characteristics Description Clear, consistent, and long-term goals Focused commitment to (career) goals Objective resource appraisal Deploying the existing resources and drawing upon the resources of others Effectiveness as (market) leaders, creation of supportive organizations to provide decision Effective implementation support and operational implementation Understanding the competitive Deep and insightful appreciation of the external environment when defining roles and career environment goals (changing needs of British people vs. changes in show business) 9 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy The key ingredients of a successful strategy › Let’s work on them together! Characteristics Sofia Vergara Queen Elizabeth II Clear, consistent, and long-term goals Objective resource appraisal Effective implementation Understanding the competitive environment 11 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy From key ingredients to strategy analysis › The key ingredients of a successful strategy can be further classified Strategy Characteristics Elements Environment Clear, consistent, and long-term goals Goals and values The Internal Environment Objective resource appraisal Resources and capabilities “The Firm” Effective implementation Structure and systems Industry environment Understanding the competitive - Competitors The External Environment environment - Customers “The Industry” - Suppliers 12 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy From key ingredients to strategy analysis › Incompatibility with the external environment › Market readiness – Google Glass 2012 vs. Microsoft HoloLens 2022 10 years later… 13 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy The basic framework for strategy analysis › Strategic FIT between external and internal environment is key › Inconsistent strategies, may result in failure: external: vs. internal: vs. 14 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Understanding the external environment 15 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Understanding why… What is it that makes Ryanair successful? 16 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Understanding the internal environment › Internal FIT (based on Porter‘s Activity System) › How do the activities fit together, to form a consistent, mutually reinforcing system? › e.g. Ryanair’s Strategy: 17 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy The role of strategy analysis › Strategy analysis improves decision processes, but doesn’t give answers › Strategy analysis assists with the identification and understanding of main issues › Strategy analysis helps to manage complexity › Strategy analysis can enhance flexibility and innovation by supporting the learning process Examples for common tools? 18 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Limitations to common tools of strategy analysis Strength or Weakness for TESLA? internal S W external O T Opportunity or Threat for automobile industry? 19 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Limitations to common tools of strategy analysis 20 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Limitations to common tools of strategy analysis 21 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Limitations to common tools of strategy analysis – external shocks Themeparks vs Streaming Platforms 23 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy The essence of strategies › https://www.youtube.com/watch?v=TD7WSLeQtVw › What do these “strategy statements” have in common? › Be the low-cost provider › Integrate a set of regional acquisitions › Unrivaled customer service › To always be the first mover “A plan, method, or series of actions designed “The determination of the long-run goals and objectives of an enterprise, and to achieve a specific goal or effect.” the adoption of courses of action and the allocation of resources necessary for carrying out these goals”. Wordsmyth Dictionary, www.wordsmyth.net Alfred Chandler (1962). Strategy and Structure, Cambridge, MA: MIT Press 24 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Where to find strategy › Strategy begins in the thought processes of organizational leaders › For the entrepreneur, the starting point of strategy is the idea for a new business. At that point, the entrepreneur articulates the strategy in a business plan › In large companies, strategy formulation is an explicit management process and statements of strategy are found in board minutes and strategic planning documents, which are invariably confidential. › However, most companies—public companies in particular—see value in communicating their strategy to employees, customers, investors, and business partners through four types of statements: › The mission statement describes organizational purpose; it addresses “Why we exist.” › A statement of principles or values outlines “What we believe in and how we will behave.” › The vision statement projects “What we want to be.” › The strategy statement articulates the company's competitive game plan (objectives, business scope, and advantage) 25 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy 4 questions to challenge a strategy 1 Where do we compete? Markets, industries, regions 2 What unique value do we bring? Cost vs. differentiation 3 What resources & capabilities do we utilize? Human, tangible, intangible 4 How do we sustain our unique value? Barriers to imitation 26 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy The incorporation of strategy within the firm › Corporate strategy › Key question: WHERE to compete? › Responsibility: Top management team › Business strategy Interconnection › Key question: HOW to compete? › Responsibility: Divisional management Interconnection of strategies – The scope of a firm’s business has implications for the sources of competitive advantage, and the nature of a firm’s competitive advantage determines the industries and markets it can be successful in 27 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Strategy as a descriptive tool › Corporate and business strategy can be used to describe a business › The answers to the questions WHERE to compete? and HOW to compete? tell us a lot about a company ✓ Industry ✓ Products ✓ Customers ✓ Geographical scope ✓ Vertical scope ✓ Basis for competitive advantage 28 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Strategy as a descriptive tool › https://www.youtube.com/watch?v=E3X8AXE0Lns › Put your knowledge to use! ✓ Industry ✓ Products ✓ Customers/ Consumers ✓ Geographical scope ✓ Vertical scope ✓ Basis for competitive advantage 29 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Coca-Cola - basis for competitive advantage? 30 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Strategy as a descriptive tool › A potential solution … 32 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Competing for the present, preparing for the future… & 33 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy How is strategy made? › Henry Mintzberg - intended, emergent, and realized strategies › Dwight D. Eisenhower “Plans are nothing, planning is everything!” 34 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Add-on: The Eisenhower Matrix for task prioritization 35 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Development of strategic plans › Planning horizons of 2-5 years › Summarizing specific actions to establish and achieve performance goals › Focus shift from control perspective (senior management responsible for strategic planning) towards coordination perspective (dialogue, knowledge sharing, consensus building) › Corporate priorities › strategic (gaining market leadership, new business development) › financial (sales growth, profitability) › Priorities of business strategies (primary basis for competitive advantages like cost reduction initiatives, innovation goals, …) › Strategic milestones (target dates for initiating or completing specific tasks) › Resource commitments › Performance targets and financial projections 36 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Implementation of strategic plans › Action (through the operating plan): implementing a strategy requires breaking down medium-term planning into a series of short- term plans that can be a focus for action and a basis for performance monitoring › Motivation and accountability (through performance management): setting performance targets and agreeing on budgets › Resource allocation (through capital budgeting): division of capital for implementing major projects from the business plans 37 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Developing & Implementing strategic plans “Strategic plan” Implementation Corporate priorities – strategic (market leadership, Action (operating plan): strategy implementation by new bus. dev.) and financial (sales growth, profitability) breaking down a plan into a series of short-term plans; Represents the basis for performance monitoring Business priorities – competitive adv. (cost reduction, Motivation and accountability (through performance innovation goals) management): setting performance targets and agreeing on budgets − Strategic milestones − Resource commitments Resource allocation (through capital budgeting): − Performance targets division of capital for implementing major projects − Financial projections from the business plans 38 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Next up: effective implementation – structures & systems 39 University of Vienna 2024W VO Strategy 1.1 The Concept of Strategy Follow up readings › Mandatory readings: Grant (2021), Chapter 1: “The Concept of Strategy” › Optional reading: R. H. Coase (1937). The Nature of the Firm. Economica, New Series, Vol. 4, No. 16, 386-405. H. Mintzberg; J.A. Waters (1985). Of Strategies, Deliberate and Emergent. Strategic Management Journal, Vol. 6, No. 3., pp. 257-272. 3 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Session 1 01 The Concept of Strategy Grant (2021) – Chapter 1 06 Organization Structure and Management Systems Grant (2021) – Chapter 6 4 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems The incomplete picture… ECONOMIC SYSTEM “Works itself” “No central control” “Supply adjusted to demand” “Production adjusted to consumption” A. Salter (1934) R. H. Coase (1937). The Nature of the Firm. 5 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Why do firms exist? There are costs involved with using the market mechanism that could be reduced/eliminated by operating as a firm: › Costs of discovering the relevant prices › Costs of negotiation Transactions › Costs of setting up contracts Costs (TC) › Costs of monitoring and enforcing terms of conditions If markets are costly, why do they still exist? As a firm gets larger, there may be decreasing returns to the entrepreneur function › Costs of organizing additional transactions within the firm (= administrative Cost (AC)) may rise › As the number of transactions increases (diversification), an entrepreneur may fail to make the best use of the factors of production R. H. Coase (1937). The Nature of the Firm. 6 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Who coordinates production best? ECONOMIC SYSTEM Price mechanism “Works itself” “No central control” “Supply adjusted to Coordination of demand” production “Production adjusted to consumption” Organizations A. Salter (1934) R. H. Coase (1937). The Nature of the Firm. 7 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Conclusion PRICE ENTREPRENEURS MECHANISM INSIDE THE FIRM OUTSIDE THE FIRM › Entrepreneurs should coordinate if … › Market mechanisms should coordinate if … › … firms can avoid certain costs › … firms become too big, too diverse › … managers act more efficiently than market mechanism › … managerial mistakes increase › … there is uncertainty › … there is perfect information (certainty) 8 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Why do firms exist? What costs might arise through that? › Efficiency advantages in producing goods and services › Specialization › Division of labor Adam Smiths’ pin factory Henry Ford’ assembly line - time savings on the model T (106h ➔ 6h) 9 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Why do firms exist? Cooperation problems › Incentive and information exchange problem › Integration of efforts by specialists and alignment of interests of all individuals › Agency problems (cooperation problems arising from goal misalignments) › Control mechanisms (supervision), performance incentives ($/output), shared values (church) Coordination problems › Information exchange problem › Harmonization of individuals and their different/conflicting activities › Rules and directives, mutual adjustment (without directions), routines 10 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Hierarchy in organizational design › Fundamental feature of organizational structure › Hierarchy arranges members of an organization in vertical layers › Through hierarchies a company achieves specialization, coordination, and cooperation › Hierarchy as mechanism for cooperation: bureaucracy = layered control system › Hierarchy as mechanism for coordination: modularity › Modularity manages the complexity of a system by dividing it into hierarchically organized components › e.g. the universe is a hierarchy – galaxies, solar systems, planets, …. , atoms 11 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Hierarchy as coordination Benefit: economizing on coordination – 4 relationships to be managed instead of 10 Complexity Benefit: adaptability to changes Loosely coupled & modular hierarchies + instead of tightly coupled integration system 12 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Defining organizational units On what basis are individuals assigned to organizational units within the firm? › Intensity of coordination needs: which individuals need to interact most closely with each other? › McDonalds: store managers and crew – food prep, cooking & cleaning ➔ Unit = store › Infosys Consulting: consultants and software engineers all over the world ➔ Unit = temporary project teams 13 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Alternative structural forms Division Division Division Division Product A Product B Product C Product D Finance Finance Finance Finance Logistics Logistics Logistics Logistics R&D R&D R&D R&D Functional Multidivisional Matrix 14 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Organization structures Functional structure › (Mainly used by) single-business firms – e.g. Airlines › Grouping of similar tasks to exploit scale economies, promote learning and faster technical transfer, capability building › Cross-functional integration becomes necessary › High degree of centralized control at the top of the firm › Due to growth and diversification, functional companies tend to adopt to a divisional structure. › However, with increasing maturity of their industries (see industry life cycle), companies often revert to functional structures due to efficiency and centralized control. Ryanair Holding (2021) 15 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Functional structure Steve Jobs about Apple‘s organizational structure › How are employees grouped? › How does cross-functional integration occur? › What is the top management‘s responsibility? › What is it that makes their organizational structure so successful? › https://www.youtube.com/watch?v=xcTtQ0hiHbE 16 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Organization structures Multidivisional structure › Divisions are separate businesses, defined by product or geography › Loosely-coupled, modular organization › Divisional autonomy with regards to operating decisions › Divisions: potential for decentralized decision-making › Corporate HQ: corporate planning, budgeting, providing common services › Main advantage: applying a common set of corporate management tools to all divisions, while divisional autonomy is still secured Sony Group (2020) 17 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Multidivisional structure › Typically organized in 3 levels (e.g. General Electric, 2009) 1. Corporate Center 2. Divisions 3. Business Units 18 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Matrix structure › Multiple products, multiple functions, multiple locations must be coordinated › Coordination across all three dimensions › Applied by many multinational companies (Philips, Nestlé, Unilever) and abandoned equally often › Usually, there is one dominant dimension › E.g. in the case of Shell, “region” had control over budgeting, personnel appraisal, or strategy formulation › What are the main disadvantages? 19 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Matrix structure › Royal Dutch Shell Group (pre-1996) Disadvantages: › Excessive complexity, larger head-office staffs, slower decision making and diffused authority. › „Conflict and Confusion“ - information blockage, overlapping responsibilities, lack of accountability 20 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems What is the best way to organize? 1970s 21 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Contingency approach to organization design › 1970s: contingency theory – “there is no one best way to organize, it depends on the environment” … McDonald’s has a mechanistic form (bureaucracy) Vs. … Alphabet (Google) has an organic form (flexibility) › https://www.youtube.com/watch?v=f_R3XG7s2hw 22 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Trends in organizational design Delayering › Flattening of hierarchical structures › Motive - Reduction of costs & increase of organizational responsiveness › Effect on control - less supervision and greater decentralization of initiative Adhocracy and team-based organizations › High levels of participation, flexible communication, spontaneous coordination › Hierarchy, authority, control mechanisms are largely absent Project-based organizations › consulting and construction companies Networks › Informal structures, with emphasis on patterns of communication and interaction rather than formal relationships The Humanistic Company › Dedicated to the dignity, liberty, integrity and well-being of their members › E.g. Patagonia – as one prominent example of Frederic Laloux’s approach for self-management, human wholeness and purpose 23 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Trends in organizational design › Frédéric Laloux - Reinventing Organizations › https://www.youtube.com/watch?v=nTgUYKsbHWk&ab_channel=EgonZehnder 24 University of Vienna 2024W VO Strategy 1.2 Organization Structure & Management Systems Follow up readings › Mandatory readings: Grant (2019), Chapter 6: “Organization Structure and Management Systems: The Fundamentals of Strategy Implementation” › Optional reading: R. H. Coase (1937). The Nature of the Firm. Economica, New Series, Vol. 4, No. 16, 386-405. H. Mintzberg; J.A. Waters (1985). Of Strategies, Deliberate and Emergent. Strategic Management Journal, Vol. 6, No. 3., pp. 257-272. F. Laloux (2014). Reinventing Organizations: A Guide to Creating Organizations Inspired by the Next Stage of Human Consciousness, Nelson Parker, 2014. 3 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Session 2 03 Industry Analysis Grant (2021) – Chapter 3 04 Further Topics in Industry and Competitive Analysis Grant (2021) – Chapter 4 4 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis The limits of industry analysis › Does industry matter? › Profitability differences within industries are greater than between industries › However, IA is important for identifying competitive threats, attractive segments and the sources of competitive advantage › Winner-take-all industries › In some industries profitability differences between firms are so great that the notion of “industry attractiveness” gets irrelevant › Competitive advantage is defined by market share, which mainly results from network externalities › = users gravitating to the firm that has the most users (e.g. Google) › Hypercompetition? › The Five Forces framework suggests that industry structure determines competitive behavior, which in turn determines industry profitability 5 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Hypercompetition › But what if it is the other way around? Could potential industry profitability unleash competitive forces? › The quest for profit fosters innovation and entrepreneurship and forms industry structures › Schumpeter’s “creative destruction”: competition is a dynamic process with the power to shape industries › Should competitive behavior be seen as an outcome or a determinant of industry structure? › Development of hyper-competition › Intense and rapid competitive moves due to faster technological change › Less stable industry structures › Competitive advantage becomes temporary (“transient advantages”) 6 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Extending the framework: Complements › A missing force to the five forces framework? › Complements increase the value of a product, while substitutes decrease the value › Complementary products usually have no or only little value in isolation › Examples? 7 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Extending the framework: Complements › Appropriating returns › Where two products complement each other, the firm with the stronger market position will take profits away from the other company. › e.g. Apple’s ownership of iOS allows it to choose which apps are offered and take 30% of the revenue › Platforms › Competition in digital markets tends to be among rival platforms › Platforms attract large numbers of complementors › e.g. Amazon – 450 million different products in the US › Platforms are subject to network externalities (users >< complementors) 8 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Extending the framework: Competitive Interaction & Game Theory › Interdependence – decisions of one player are dependent on the actual and anticipated decision of another player Game theory… › … provides a structure to describe and understand competitive behavior in terms of › Who are the players? › What are each player’s options? › What are the payoffs from every combination of moves? › What is the sequence of decisions? › … can predict the outcome of competitive situations and identify optimal strategic choices 9 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: the prisoners‘ dilemma › Two prisoners are interrogated separately by a police officer › The two players cannot communicate with each other › They have to decide whether or not they want to confess or stay silent › The decisions of both players contribute to the individual time spent in prison https://www.youtube.com/watch?v=t9Lo2fgxWHw 10 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: the prisoners‘ dilemma › Payoff Matrix Cooperating Defecting (staying silent) (betraying) Cooperating 1 0 (staying silent) 1 3 Defecting 3 2 (betraying) 0 2 11 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: the prisoners‘ dilemma › Best outcome for the group? › 1+1= 2 years in prison Cooperating Defecting (staying silent) (betraying) Cooperating 1 0 (staying silent) 1 3 Defecting 3 2 (betraying) 0 2 12 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: the prisoners‘ dilemma › Best outcome for Ms Red Cooperating Defecting (staying silent) (betraying) Cooperating 1 0 (staying silent) 1 3 Defecting 3 2 (betraying) 0 2 13 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: the prisoners‘ dilemma › Best outcome for Mr Blue Cooperating Defecting (staying silent) (betraying) Cooperating 1 0 (staying silent) 1 3 Defecting 3 2 (betraying) 0 2 14 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: the prisoners‘ dilemma › Nash equilibrium › No player has an incentive to deviate from his/her chosen strategy after considering an opponent’s choice. › An individual can gain no benefit from changing his/her strategy, given that the opponent does not change strategies. Cooperating Defecting (staying silent) (betraying) Cooperating 1 0 (staying silent) 1 3 Defecting 3 2 (betraying) 0 2 15 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis John F. Nash › 1928 - 2015 › 1994: Nobel prize › Princeton University's Department of Mathematics https://www.youtube.com/watch?v=2d_dtTZQyUM 16 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: the prisoners‘ dilemma › Solution? › From single to multiple transactions. (Learning curve) › Mafia = enforcing the “code of silence” through credible threats Cooperating Defecting (staying silent) (betraying) Cooperating 1 0 (staying silent) 1 3 Defecting 3 2 (betraying) 0 2 17 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Game theory: examples › Pepsi Co. vs. Coca-Cola 18 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Time for an experiment! 20 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Is game theory useful? › Mathematically sophisticated body of theory with unrealistic assumptions › lack of generalizability › Game theory is better at explaining the past than predicting the future › However, game theory provides us with a better understanding of business situations › Game theory provides us with a set of tools that allows us to structure our view of competitive interaction › Variables: players, choices, outcomes, etc. › Describing the structure of the game provides us with suggestions of how to change the game 21 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Competitor analysis and competitive intelligence › Competitive intelligence: systematic collection and analysis of information about rivals › Forecasting competitors’ future strategies and decisions › Predicting competitors’ likely reactions to a firms’ strategic initiatives › Determining how competitors’ behavior can be influenced to make it more favorable › The key requirement of competitive intelligence is to understand competitors, to predict their responses to environmental changes, and to determine our own competitive moves accordingly 22 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis A framework for competitor analysis › What information is required to predict rival’s competitive behavior, “get inside their heads” and be prepared for a variety of scenarios? e.g. A company whose primary goal is attaining market share is likely to be much more aggressive as a competitor than one that is mainly interested in profitability e.g. If our rival has a massive cash pile, it would be unwise to unleash a price war 23 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Segmentation analysis › Recap from earlier this session: › It‘s not easy to draw industry boundaries › Industry boundaries should remain flexible for different types of decisions › It may be convenient to draw industry boundaries broadly and narrow them down for a more detailed analysis of competition › Segmentation = the process of disaggregating industries into specific markets › Particularly important if competition varies across the different submarkets within an industry › Main purpose is to identify attractive segments, to select strategies for different segments, and to determine how many segments to serve 24 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Segmentation procedure 1. Identification of key segmentation variables 2. Construction of a segmentation matrix 3. Analysis of segment attractiveness (Porter 5 forces – adapted from industry to segment) 4. Identification of segment‘s key success factors (e.g. technology, reputation, low cost) 5. Selection of segment scope (segment specialist or competing across multiple segments) 25 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis 1. Identification of key segmentation variables › What is the basis for segmentation? › Which customers do we want to serve and what do we offer them? › Segmentation variables relate to the characteristics of customers and the product/service › Typically, segmentation analysis generates far too many segmentation variables, a reduction to 2 or 3 variables is therefore useful › Identification of the most strategically significant segmentation variables › Combination of segmentation variables that are closely correlated › Possible segmentation variables: price, buyer type, geographic regions, product type,... (very specific to industry) 26 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis 2. Construction of a segmentation matrix › Combination of the 2 or 3 most important segmentation variables › Crossing points serve as basis for further analysis › e.g. - The world automotive industry: PRODUCT TYPES x REGIONS › The variable PRODUCT TYPES combines size, price, design, etc. 27 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis 3. Analysis of segment attractiveness › Determining attractiveness within the segment › Porter‘s Five Forces-framework can help with that and can also be applied to segments › However, some adjustments are necessary › Threat of substitute competition: not only substitutes from other industries, but also from other segments › Entry barriers (industry) should rather be considered as mobility barriers (segment) – low barriers to mobility make a segment very attractive for new entrants › Blue Ocean Strategy – Identification of unoccupied market segments (e.g. suburban car rental) 28 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis 4. Identification of segment‘s Key Success Factors (KSFs) › Differences in competitive structures and customer preferences determine KSFs for individual segments › KSF-questions: › What do our customers want? › How do we survive competition? › Example: Bicycle market › High-priced bikes for enthusiasts sold through specialist bike stores KSFs: technology, reputation, dealer relations › Moderately-priced bikes sold through discount stores KSFs: low-cost manufacturing, supply contracts with leading retail chains 29 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis 5. Selection of segment scope › Do we want to be a segment specialist or compete across multiple segments (generalist)? › When are generalists better off? › Similarity of KSFs (application of a similar strategy, similar ways of thinking) › Presence of shared costs (distribution, manufacturing, technology, components,...) 30 University of Vienna 2024S VO Strategy 2.2 Further Topics in Industry and Competitive Analysis Follow-up reading › Mandatory readings: Grant (2021), Chapter 4: “Further Topics In Industry And Competitive Analysis” 4 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Recap Session 1 AC TC 6 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Session 2 03 Industry Analysis Grant (2021) – Chapter 3 04 Further Topics in Industry and Competitive Analysis Grant (2021) – Chapter 4 7 University of Vienna 2024W VO Strategy 2.1 Industry Analysis From environmental analysis to industry analysis The business environment of a firm consists of external influences that… › … impact the firm’s decisions and › … impact the firm’s performance The industry environment’s 3 important principles: 1. A firm must understand its customers 2. A firm must understand its suppliers 3. A firm must understand its competitors › Classification by source: e.g. PEST analysis 8 University of Vienna 2024W VO Strategy 2.1 Industry Analysis The PEST/PESTLE Analysis Classification of influential environmental factors by source › PEST: Political Economic Social Technological › PESTLE: Political Economic Social Technological Legal Environmental The PEST/PESTLE analysis can be used to keep firms alert to what is happening in the world and how these changes affect the firm’s industry environment. › e.g. global warming However, the systematic scanning is costly, may result in an information overload 9 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Implications of the PESTLE analysis on the industry environment Environ For example ski resorts and farmers are directly affected by changes mental in the weather patterns. For example automobile producers are subject to carbon taxes and Legal environmental regulations. CUSTOMERS: Will customers switch to electric cars? Global warming COMPETITORS: Will there be new entrants into the auto industry? 10 University of Vienna 2024W VO Strategy 2.1 Industry Analysis “What determines the level of profit in an industry?” Price customers are willing to pay for a product or service - Cost incurred by the firm for offering that product or service = Value creation The value created is distributed between customers and producers by forces of competition Strong competition ➔ more value is received by customers (consumer surplus) Weak competition ➔ more value is received by producers (producer surplus) 11 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Consumer & Producer Surplus 15 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Power distribution within an industry › Imagine a rainy day in Vienna… › One umbrella seller can charge high prices › The more umbrella sellers pop up, the lower prices will get › But prices do not only depend on competition! › What else might have an impact? 16 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Porter‘s Five Forces of competition Profitability of an industry (rate of return on capital relative to cost of capital) › Determined by 5 sources of competitive pressure › BRESS vertical competition horizontal competition 17 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Bargaining power of buyers - BRESS How much pressure can customers exert on a company? › Buyers’ price sensitivity › Cost of product relative to total cost (e.g. AL for soft drink companies) › Degree of differentiation of the product (e.g. light bulbs vs. cosmetics) › Intensity of competition between buyers (e.g. food retail suppliers) › Product criticality (e.g. computing chips, lithium, titanium) › Relative bargaining power › Size and concentration of buyers relative to suppliers › Buyers’ level of information (price, quality, other suppliers, …) › E.g. Bazaar of Marrakech › Ability of vertical integration (backwards) › e.g. Beer companies starting to produce cans, to lower dependency 18 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Bargaining power of suppliers - BRESS How much pressure can suppliers exert on a company? › Buyers’ price sensitivity › Relative bargaining power › Analysis of supplier power is precisely analogous to analysis of buyer power › The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers Commodities vs. Key Components Suppliers of complex, technically Suppliers of commodities using cartels sophisticated components exert to outbalance their lack of power considerable bargaining power 19 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Rivalry between established competitors - BRESS How many competitors are in the market? The degree of competition within an industry depends on: › Seller concentration (number and size of competitors) › Concentration ratio (CR): the combined market share of the leading producers › Diversity of competitors (differences in goals, cost strategies, etc.) › Product differentiation › The more similar the products, the more likely customers switch, hence companies will cut prices to boost sales › Excess capacity › Unused capacity encourages firms to offer price cuts to attract new business › Exit barriers › Costs associated with capacity leaving an industry › Cost conditions (ratio of fixed to variable costs) › E.g. Airline industry: excess capacity leading to price wars and industry wide losses (heavy discounts since variable cost of filling empty seats is very low) 20 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Threat of new entrants - BRESS › How attractive is the industry for new entrants? (return on capital > cost of capital) › Threat of new entrants depends on the height of entry barriers › The main sources of barriers to entry are: › Capital requirements (e.g. beer vs. petroleum industry) › Economies of scale › Absolute cost advantages (e.g. gas industry: access to cheap raw materials) › Product differentiation (e.g. cosmetic industry: brand recognition & loyalty) › Access to channels of distribution (e.g. retail: shelf space, retail networks, trust) › Governmental and legal barriers (e.g. car industry: JVs with local companies) 21 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Threat of new entrants - BRESS › High popularity of craft beer + low capital requirements Production Volumes Number of companies # 1990 2014 2002-2019 241 1485 284 2822 1860-2019 22 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Competition from substitutes - BRESS › Can the product or service be substituted easily? › High threat: travel agencies, newspapers & telecommunication all suffered from internet-based substitutes › Low threat: tobacco industry, petroleum industry › Attention: substitutes refer to replacements, not to other companies offering the same product or service › In the presence of close substitutes: elastic demand with respect to price › In the absence of close substitutes: inelastic demand with respect to price 24 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Porter‘s Five Forces: The Airline Industry Threat of Entry Supplier Power Industry Rivalry Buyer Power Threat of Substitutes 25 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Forecasting industry profitability › Current profitability is a poor indicator of potential returns in the future › Understanding how industry structure determines the current profits of an industry, helps to forecast the profitability in the future, by observing structural trends and environmental shifts › e.g. changes in the customer buying behaviour or technology (see music industry) › Stages: 1. Understanding the current & recent levels of profitability as a consequence of its present structure 2. Identify trends (new players, product differentiation, technological-based substitutes) 3. Identify how structural changes will affect the five forces and thus the profitability 26 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Forecasting industry profitability – world automobile industry Force Structural Features Impact (2016-2020) Changes in Industry Structure Impact (2021-2025) Alternative modes of transportation (bicycles, Congestion and environmental concerns Substitutes public transport) Weak Increasing will increase substitute competition Also telecommuting Internationalization by domestic producers New Entry Moderate Increased competition from both sources. Increasing New producers of EVs 22 companies with annual output of >1 million M&A to reduce no. of producers cars Positive impact of M&A Continuing excess capacity due to exit Massive excess capacity (global capacity offset by negative impact Industry Rivalry Strong barriers (especially government support) utilization approx. 72%) of new entry and of and falling demand due to lower personal High fixed costs and large-scale economies declining demand ownership of cars encourage quest for market share Producers selling directly to end Buyer Power Distribution through franchised dealers Weak consumers through online platforms and Decreasing show-rooms Consolidation among component Consolidation among component suppliers Supplier Power Moderate suppliers Increasing Suppliers control key technologies Suppliers control key technologies 27 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Defining industries What is the industry of this product? › Motor vehicle industry? › Automobile industry? › Performance car industry? › National industry (Italy)? › Regional industry (Europe)? › Global industry? Ferrari 488 pista 28 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Defining industries – who is competing with whom? › Substitutability on demand side › Are buyers willing to substitute only between performance cars? ➔ Performance car industry › Are buyers willing to substitute between Ferraris and other cars? ➔ Broader automobile industry › Substitutability on supply side › Are producers willing/able to switch between performance cars and minivans? ➔ Broader automobile industry › Drawing industry boundaries is a matter of judgement that depends on the purpose and context of the analysis, hence seldomly a clear-cut is possible 29 University of Vienna 2024W VO Strategy 2.1 Industry Analysis How to win in industries? – identifying Key Success Factors (KSF) › KSF are the factors within an industry that influence a firm‘s ability to outperform rivals › To identify KSF a firm needs to answer the two following questions: 31 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Key Success Factors (KSF) - example Supermarket 1. Customers want… 2. Competition is… 3. KSFs… 32 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Key Success Factors (KSF) – more examples What do customers want? How do firms survive Key success factors (Analysis of demand) competition? (Analysis of competition) Steel Low price Intense price competition Cost efficiency requires: large-scale Product consistency results from undifferentiated plants, low-cost raw materials, rapid Reliability of supply products, excess capacity, capacity adjustment Technical specifications and high fixed costs. High-tech small-scale plants viable flexibility and Survival requires cost efficiency high productivity and financial strength. Quality and service can yield a price premium Fashion Diversity of customer preferences Low barriers to entry and Combining differentiation with low costs clothing Customers will pay premium for many competitors imply Differentiation based upon style, brand appeal, brand, style, exclusivity, and quality intense competition quality, and market responsiveness Mass market is highly price sensitive Differentiation offers price Cost efficiency requires manufacturing to be premium, but imitation is rapid in low-wage countries Limitations › The existence of common success factors in an industry does not imply that firms should adopt similar strategies › In the fashion clothing industry, there are a number of key success factors (see above), yet all the leading companies like Inditex (Zara), H&M, Diesel, and Mango, have adopted unique strategies to exploit these key success factors 33 University of Vienna 2024W VO Strategy 2.1 Industry Analysis Follow-up reading › Mandatory readings: Grant (2021). Chapter 3: “Industry Analysis: The Fundamentals” 3 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Session 3 05 Analyzing Resources and Capabilities Grant (2021) – Chapter 5 09 Technology-Based Industries and the Management of Innovation Grant (2021) – Chapter 9 7 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Recap previous lecture oxo P5 x x 9 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Excursus Time for an experiment! 13 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Excursus Game theory – understanding the players and their decisions Behavioural economics – “economic decision-making processes of individuals and institutions” › Bridging the gap between economics and psychology › Treats with cognitive biases such as bounded rationality, prospect theory (loss aversion), anchoring effects, ect. › „Nudge Theory“ as a solution for bounded rationality: › how public and private organizations can help people making better choices in their daily lives 14 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Excursus Bounded Rationality › People are frequently acting irrational › E.g. „Mental Accounting“ › Concept of fairness regulates the market in the LR Until 100% e.g. 150€ 15 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Excursus Nudging Examples 16 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities The role of resources and capabilities in strategy formulation › Recap from session 1: › Remember the importance of strategic fit with the external and internal environment is key › Strategy is concerned with matching resources and capabilities to the opportunities that arise in the external environment › Focus of this session: interface between strategy and the internal environment of the firm (firm-strategy interface) 17 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Strategic Fit with the exertal environment 18 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Basing strategy on resources and capabilities The resource-based view by Prahalad & Hamel (1990) › “The Core Competence of the Corporation” › Resources and capabilities are the basis for firm strategy and the primary source of profitability › A market-focused strategy may not provide long-term stability and guidance › Resources and capabilities have the potential to be the › “roots of competitiveness” › “the sources of new products” › “the foundation for strategy” › Basing strategy on internal rather than on external factors, is especially relevant in industries with volatile customer preferences and fast changing technology 19 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Basing strategy on resources and capabilities › Honda Motor Company › Among the world’s biggest motorcycle producers and leading supplier of automobiles › Never defined itself either as a motorcycle company or a motor vehicle company › Its strategy has always been built around its expertise in the development and manufacturing of engines 20 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Basing strategy on resources and capabilities › 3M Corporation › Expanded from sandpaper into adhesive tapes, audio- and videotapes, road signs, medical and household products › Its product list comprises over 50,000 different products › Its product range rests on a cluster of technological capabilities that it has systematically developed for more than a century 21 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Basing strategy on resources and capabilities › Not changing the strategy in the face of radical technological change, firms experience huge difficulties in building the new capabilities needed to serve their customers › Eastman Kodak filed for bankruptcy in 2012, after formerly dominating the world market of photographic products › Kodak invested billions of dollars into digital technologies and digital imaging products instead of developing applications of its chemical based capabilities to plastics, industrial coatings, pharmaceuticals and health care 22 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Resources and capabilities as sources of profit › Looking back at Porters 5 forces, the framework suggests that industry attractiveness often derives from the possession of strategic resources: › e.g. patents, know-how, distribution channels, brand reputation, etc. › These are typically used as entry barriers for other companies › Each company possesses a unique collection of resources and capabilities and the key to profitability is to exploiting differences rather than doing the same as other firms › Establishing competitive advantage involves formulating and implementing a strategy that exploits a firm’s unique strengths › e.g. David & Goliath – recognizing and exploiting own strengths while minimizing vulnerability 23 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Linking resources, capabilities, and competitive advantage Competitive When two or more firms compete within the same market, one firm possesses a competitive advantage Advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit. (Grant, 2021) 24 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Identifying resources › Resources – “productive assets owned by the firm” I. Tangible resources (financial resources and physical assets) II. Intangible resources (technology, intellectual property, networks, corporate culture, …) › For most companies more valuable than tangible resources › Tend to be undervalued in the balance sheet, hence leading to growing divergence between companies' book value and stock- market value (e.g. Netflix – 26 times higher) › Organizational culture is “an amalgam of shared beliefs, values, assumptions, rituals, and symbols III. Human resources (know-how, skills, talents, motivation, …) 25 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Identifying resources › Large companies (>$75bn market capitalization) with highest market-to-book ratios (2017) Company Nationality Market Cap ($ bn) Market Book Ratio Lockheed Martin US 88 40.8 Home Depot, Inc. US 189 27.8 Netflix, Inc. US 80 26.0 Amazon.com US 472 22.8 Mastercard, Inc. US 152 22.8 26 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Identifying capabilities › Organizational capabilities – “what the firm can do” › Resources are not productive on their own › Organizational capability is a “firm’s capacity to deploy resources for a desired end result” › Core capabilities are the basis for a firm’s strategy and performance › Distinctive capabilities are firm-specific strengths that allow a company to gain competitive advantage by differentiation and/or low cost › Before capabilities can be classified into “distinctive” and “core”, the firm needs to take a comprehensive view of its full range of organizational capabilities 27 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Classification of capabilities › Two basic approaches for classifying and disaggregating a firm’s activities: › Functional analysis: identifies organizational capabilities within each of the firm’s functional areas (e.g. operations, purchasing, logistics/supply chain management, etc.) › Value chain analysis: identifies a sequential chain of the main activities that the firm undertakes › Primary activities: concerned with the transformation of inputs and with the interaction with the customer › Support activities: assisting primary activities 28 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities From individual resources to organizational capabilities: Routines › Combining resources does not automatically lead to strong organizational capabilities › Several examples prove where resource rich teams/ organization are outperformed by competitors with strong capabilities and modest levels of resources like … › Dyson vs. Electrolux › Hyundai vs. Toyota › Borussia Dortmund vs. Real Madrid › Capabilities are based upon routinized behaviour › Routines make task completion more reliant and efficient › Organizational routine: regular and predictable behavioural patterns (repetitive patterns of activity) › Routines are viewed as the fundamental building block of organizations › Firms grow through the replication and adaptation of routines 29 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Strategy formulation › Before we can answer the questions on how to exploit key strengths most effectively or how to address key weaknesses in terms of both, reducing our vulnerability to them and correcting them, we have to understand two determinants of resources and capabilities: › Strategic importance › Relative strength 30 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Strategic importance of resources and capabilities › Strategically important resources and capabilities have the potential to generate substantial profit streams › Their success depends on the following factors: › Establishing a competitive advantage › Sustaining a competitive advantage › Appropriating the returns from competitive advantage › Who owns the rights on the returns, firm or employee? 31 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Establishing a competitive advantage › Scarcity: if resources are widely available within the industry, › Relevance: a resource or capability must be relevant to the they are “needed to play”, but they are not “sufficient to win“ key success factors in the market, thus creating value for the › Example: oil and gas exploration customers › Certain drilling rights and analytical procedures are required, but they are no basis for a competitive advantage 32 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Sustaining a competitive advantage › Durability: the more durable a resource, › Transferability: if resources and › Replicability: if resources and capabilities the greater its ability to support a capabilities are easily transferable cannot be acquired, they must be build, competitive advantage over the long (bought and sold), they can be copied - and if they can be replicated, competitive term competitive advantages based on them advantages based on them will be will be eroded eroded › e.g. technology vs. brands › e.g. Managers vs Fiji Water › Not so for routines (e.g. Apple Events) 33 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Relative strength of resources and capabilities › An objective appraisal of a company’s resources and capabilities relative to its competitors’ is often difficult since managers frequently fall victim to: › past glories › hopes for the future › their own wishful thinking › Benchmarking offers an objective and quantitative way to overcome this problem › Comparing one’s processes and performance to those of other companies › e.g. Xerox Corporation, a pioneer of benchmarking during the 1980s, observed the massive superiority of its Japanese competitors in cost efficiency, quality, and new-product development › Recent popularity for benchmarking shows that substantial productivity differences between firms within the same industry are primary resulting from different management practices 34 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Management Styles 35 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Developing strategy implications › Back to the questions: › How to exploit key strengths? › How can we address our key weaknesses? › The notion of the vertical scope of the firm (see chapter 11) is providing answers for these questions: › Outsourcing parts of the value chain where the firm has it’s largest weaknesses is often the best option › On the other hand, the firm must ensure that its critical strengths are deployed to the greatest effect 36 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Identifying KSFs, resources, capabilities, and the competitive advantage https://www.youtube.com/watch?v=C3eCo-El_RY 37 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Put your knowledge to use! Resources Capabilities Key Success Factors Competitive Advantage » Tangible? » Core? » What do customers » Scarcity? want? » Relevance? » Intangible? » Distinctive? » How to survive » Durability? competition? » Transferability? » Human? » Replicability? 38 University of Vienna 2024W VO Strategy 3.1 Analyzing Resources and Capabilities Follow up readings › Mandatory readings: Grant (2021), Chapter 5: “Analyzing Resources and Capabilities” 3 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Session 3 05 Analyzing Resources and Capabilities Grant (2021) – Chapter 5 09 Technology-Based Industries and the Management of Innovation Grant (2021) – Chapter 9 4 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Competitive advantage in technology-intensive industries › Innovation forms the key link between technology and competitive advantage › It is the quest for competitive advantage that causes firms to invest in innovation › It is innovation that is responsible for new industries coming into being › It allows some firms to dominate their industries But what is innovation? 5 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation The innovation process › Invention: creation of new products or processes through the development of new knowledge or from new combinations of existing knowledge › Innovation: initial commercialization of an invention or an idea in the form of a new product or process › Once introduced, innovations diffuse: › on the demand side, through customers purchasing the good/service › on the supply side, through imitation by competitors 6 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation The first automobile introduced by Karl Benz (1885) Invention #2: The internal combustion engine, invented 9 years Invention #...: earlier Seats, footrest, … Invention #1: The wheel, invented 5.000 years earlier 7 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation The profitablity of innovation › Profitability of an innovation to the innovator depends on the value created by the innovation and the share of that value that the innovator is able to capture › The value created by an innovation is distributed among a number of different parties › Parties may involve: › Innovator(s) › Follower(s)/Imitator(s) › Customers › Suppliers 8 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation The regime of appropriability › The regime of appropriability describes the conditions that influence the distribution of returns of innovations › Strong regime of appropriability: innovator captures a substantial share of the value created › Pfizer – Viagra › Dyson – dual-cyclone vacuum cleaner › Weak regime of appropriability: other parties derive most of the value › e-book readers (competition from tablets, diversity of rivals, substitute products, …) › Music streaming, online brokerage › Subject to fierce price competition, hence most value is received by the customers 9 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Property rights › Appropriating the returns from innovations depends on the ability to establish property rights › Intellectual property can be protected through: › Patents - exclusive rights to a new and useful product, process, substance, or design › Copyrights - exclusive production, publication, or sales rights to the creation of artistic, literary, dramatic, or musical works › Trademarks - words, symbols, or other marks used to distinguish the goods and services supplied by a firm › Trade secrets - modest degree of legal protection for recipes, customer lists, industrial processes or other knowledge acquired in the course of business 10 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Tacitness and complexity of the innovation › Appropriating the returns from innovations depends on the extent to which an innovation can be imitated by a competitor › Tacitness: › Is the innovation codifiable? Can it be written down? › Coca-Cola’s recipe is codifiable and in the absence of trade-secret protection easily copied › Complexity: › How complicated is it to imitate the innovation? › Gucci’s 2017 Marmont bag vs. intel core i9 processor vs. 11 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Lead time of the innovation › Appropriating the returns from innovations depends on the lead time the innovator has compared to the main competitors › Tacitness and complexity of innovations do not provide lasting barriers to imitation, but they provide the innovator time › Temporary competitive advantage › Lead time is the time it takes followers to catch up › This lead time can be used to build up capabilities, market position, efficient manufacturing, a customer base, market shares, … Intel in microprocessors, Cisco Systems in routers, and Nvidia in graphics chips were brilliant at exploiting lead time to build advantages in efficient manufacture, quality, and market presence 12 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Complementary resources › Appropriating the returns from innovations depends on the diverse resources and capabilities required to finance, produce, and market the innovation › Complementary resources may be accessed through alliances with other firms, cooperations, business deals, … › Think of start-ups 13 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation To lead or to follow? – some examples First/Early-mover advantages depend on … › the extent to which innovations can be protected by property rights › lead time-advantages › the importance of complementary resources › the potential to establish a standard 14 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Managing risks Risk of emerging industries › Technological uncertainty - unpredictability of technological evolution › Market uncertainty - size and growth rates of the markets for new products How to limit this risk? › Cooperating with lead users - they provide a source of leading market indicators › Limiting risk exposure, if possible - avoiding debt and keeping fixed costs low; e.g. with Strat. Alliances › Flexibility - uncertainties require rapid responses to unpredicted events 15 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Competing to become an industry standard Establishment of industry standards is a key event in industry evolution › A competitive advantage is the basis for an innovation to become an industry standard Types of standards: › Public (open) standards › available to all either for free or for nominal charge; typically do not involve any privately owned intellectual property (e.g. Linux) › Mandatory standards: standards that are enforced by the government (TV-broadcasting) › Private (proprietary) standards › technologies are owned by companies or individuals, others buy or license the technology (e.g. iOS, Android) › De facto standards › voluntary adoption by producers and users (e.g. Apple iTunes (iPod), Microsoft Windows (laptops)) 16 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Emergence of network externalities Industry standards emerge in markets that are subject to network externalities › A network externality exists whenever the value of a product to an individual customer (positive and negative), depends on the number of other users of that product › Network externalities arise from several sources: › Products where users are linked to a network (Telephone, Social Media, Dating platforms, etc.) › Availability of complementary products and services (Operating system >< number of applications) › Economizing on switching costs (no cost of switching if I already belong to the group: e.g. PowerPoint vs Prezi) › Tipping › Once a technology or system gains market leadership, it attracts more and more users › However, when market leadership is lost, a downward spiral is likely › The result is a winner-takes-all market 17 University of Vienna 2024W VO Strategy 3.2 Technology-Based Industries and the Management of Innovation Winning or losing the standard war How to win? What if you loose? › Control over an installed customer base › Ensure compatibility between systems or › Owning intellectual property rights to new technology