Strategic Thinking in a Complex World Session 5 PDF

11/7/2024 ST310E - Strategic Thinking in a Complex World Session 5 Module Coordinator: Cilem Selin HAZIR (Ph.D) 2024-2025 Academic Year 1 Recap...

11/7/2024 ST310E - Strategic Thinking in a Complex World Session 5 Module Coordinator: Cilem Selin HAZIR (Ph.D) 2024-2025 Academic Year 1 Recap E S P T L embedded No direct E control Source: Thompson et al., Crafting and executing strategy 2  11/7/2024 The Five Forces Framework Source: Thompson et al. (2017) 3 Four steps to apply the five forces analysis 1 Define industry boundaries 2 3 Identify parties Evaluate Specify pressures (high, medium, low) 4 Conducive to profits? Source: Thompson et al. (2017) 4  11/7/2024 Evaluating the Forces: Competitive Rivalry Number of Degree of Growth Rate Fixed Costs Exit Costs Competitors Differentiation How many Is the industry What are the What are the How similar are significant in a mature or fixed costs financial, the products or players are declining phase involved in operational, or services in this there in the of its life cycle? running a social costs industry? industry? business in this associated with industry (e.g., leaving this Is price the How evenly main distributed is equipment, industry? production)? differentiator, the market Are companies or are there share? Are they high? "locked in" other factors even if they are that make not profitable? companies stand out? 5 Competitive Rivalry: airline industry Number of Degree of Growth Rate Fixed Costs Exit Costs Competitors Differentiation Numerous Mostly mature Fixed costs Exit cost Price is the competitors Most routes are comprise fleet involves main Large ones like already served, acquisition and liquidation of differentiator Lufthansa, Air and some leasing, airport long-term fees, setting up capital Price is France, etc. emerging correlated with markets have operations to investment on Low-cost comply with aircraft, ground which airports airlines like growth served, seating opportunities. safety services, etc. Transavia, regulations. options, food Easyjet, etc. options, on- They are high board entertainment and comfort options. Indicating high rivalry 6  11/7/2024 Evaluating the Forces: Competitive Rivalry Competitive rivalry is HIGH when: Many competitors Low growth rate – life cycle High fixed costs High exit costs Low differentiation 7 Evaluating the Forces: Threat of new entrants Reaction of Small Incumbents’ Attractiveness Entry Barriers Incumbents Advantages o Is this industry o What are the o How have existing o Can new entrants experiencing high startup costs (e.g., players reacted to easily replicate or demand or capital investment, new entrants in surpass the growth? know-how)? the past? incumbents' advantages? o Are profit margins o Are there o Are the attractive? regulatory or legal incumbents barriers that make aggressive in entry difficult (e.g., defending market patents, licenses)? share (e.g., price wars, legal actions)? 8  11/7/2024 Threat of new entrants: airline industry Reaction of Small Incumbents’ Attractiveness Entry Barriers Incumbents Advantages o Profit margins are o High capital o E.g., Lufthansa o Small firms are typically low in investment is responded to the more airlines industry required, entry of low-cost disadvantageous, regulatory carriers by creating e.g., incumbents o High fixed/variable approval is its own low-cost benefit from costs, price wars necessary, etc. subsidy economies of and intense Germanwings. scale. competition, pandemics, political tensions etc. Indicating low threat of entry 9 Evaluating the Forces: Threat of new entrants Competitive rivalry Threat of new entrants is HIGH when: Attractive market Low entry barriers Weak reaction of incumbents Small incumbents’ advantages Source: Thompson et al. (2017) 10  11/7/2024 Entry Barriers Economies of scale – production, distribution, advertising Costs Experience and learning curve Unique cost advantage of industry incumbents Strong brand preferences and customer loyalty Revenues Network effects in customer demand High capital requirements Supply and distribution network, retail shelves Restrictive government policies, legislation They are not the same for any potential entrant 11 Evaluating the Forces: Threat of substitutes Price- Attractive Switching Costs Performance Ratio Attributes o Are good substitutes o Do buyers view substitute o How easy or difficult is it readily available at an products comparable or for buyers to switch to attractive price? better in terms of quality, substitute products? performance, etc.? o Are there any financial, logistical, psychological costs etc. associated with switching? 12  11/7/2024 Evaluating the Forces: Threat of substitutes Price- Attractive Switching Costs Performance Ratio Attributes o Depending on the distance o High-speed train for o Switching to a train might and region traveled, good instance can have a good be easy (whereas switching substitutes may be price-performance ratio. to virtual meetings could available. They have many attractive require a behavioral attributes: (1) train stations change in the way we - Substitutes could be train, are often in the city center conduct business). bus, or in some cases and good for accessibility, virtual meetings. (2) trains are more E.g., for short distances environmental, (3) more where (rail) road network space is available, more is well developed, the room for a walk, substitute threat is high. restaurants available, etc. Otherwise, low. Indicating moderate threat of substitutes 13 Evaluating the Forces: Threat of substitutes Threat of substitutes is HIGH when: Low price-performance ratio Attractive attributes Low switching costs Competitive rivalry Threat of new entrants Source: Thompson et al. (2017) 14  11/7/2024 Evaluating the Forces: Supplier pressure Switching Forward Concentration Dependence Differentiation Costs integration o How easy or o How o Can suppliers o Do industry Do suppliers difficult is it concentrated enter your members offer highly to change is the supplier industry by account for a differentiated the supplier? base? producing the big fraction of or specialized o Are there same suppliers’ products that any financial, o Are there few products or sales? are hard to logistical, suppliers that services? substitute? costs etc. dominate the associated market? with switching? 15 Evaluating the Forces: Supplier pressure Switching Forward Concentration Dependence Differentiation Costs integration o Changing o The supplier o For aircraft o Airlines Aircraft and suppliers is base is highly and engine represent a engines are challenging. concentrated manufacturers big proportion highly o Airlines for critical entering into of sales for specialized depend on a components airlines aircraft and with few few major like aircraft industry is not engine substitutes suppliers for and engines. probable. manufacturers available. aircraft They lack. (Boeing and operational Airbus), expertise. engines, and specialized equipment. Indicating high supplier pressure 16  11/7/2024 Evaluating the Forces: Supplier pressure Threat of substitutes The pressure of suppliers is HIGH when: High switching costs High concentration Competitive rivalry Forward integration Low dependence Differentiated Critical in process Threat of new entrants Source: Thompson et al. (2017) 17 Evaluating the Forces: Buyer pressure Backward Switching Costs Concentration Dependence Price Sensitivity integration o How easy or Is the buyer  Can the o How o Are buyers inexpensive is base highly buyers easily dependent likely to it for buyers concentrated, start are buyers on switch to a to switch to a with few large producing the a specific cheaper competitor’s buyers product or product? dominating? service company or option if themselves? brand for prices o Are there any costs their needs? increase? (financial, time, effort) associated with switching? 18  11/7/2024 Evaluating the Forces: Buyer pressure Switching Backward Concentration Dependence Price Sensitivity Costs integration o Passengers Buyers are  Passengers o For central o Economy can easily mostly are not likely hubs, buyers class and compare individual to create have low leisure prices and passengers. their own dependence passengers services and airline on a single are highly choose company. airline, but for sensitive to between other routes, price. airline for a given companies. date, they may depend on only one airline. Indicating high buyer pressure 19 Evaluating the Forces: Buyer pressure Threat of substitutes The pressure of buyers is HIGH when: Low switching costs Competitive rivalry High concentration The pressure of suppliers Backward integration Low dependence Price sensitivity Threat of new entrants Source: Thompson et al. (2017) 20  11/7/2024 Evaluating the Forces Threat of substitutes is HIGH when: Low price-performance ratio Attractive attributes Low switching costs The pressure of suppliers is Competitive rivalry is HIGH when: The pressure of HIGH when: buyers is HIGH when: Many competitors High switching costs Low switching costs Low growth rate – life cycle High concentration High concentration High fixed costs Backward integration Forward integration Low dependence High exit costs Low dependence Differentiated Low differentiation Price sensitivity Critical in process Threat of new entrants is HIGH when: Attractive market Low entry barriers Weak reaction of incumbents Small incumbents’ advantages Source: Thompson et al. (2017) 21 Four steps to apply the five forces analysis 1 Define industry boundaries 2 3 Identify parties Evaluate Specify pressures (high, medium, low) Where is the highest pressure – NOT: the average 4 Conducive to profits? Source: Thompson et al. (2017) 22  11/7/2024 The Value Net Porter’s Five Forces The Value Net Drive Profits Up Drive Profits Down Strength of Competition Complementors Potential for Entry Cooperation (with Buyers and Suppliers) Power of Buyers Coordination Power of Suppliers (among Competitors) Srength of Substitutes Source: Walker, G. and Madsen, T. (2016) Modern Competitive Strategy (4th Ed). Irwin – McGraw Hill. 23 The Value Net: Complementors Complements increase the value customers receive from the industry’s products. Complementors are the independent providers of complementary products to shared customers. E.g., app providers are complementors to smartphone and tablet suppliers such as Apple. Image source: https://images.app.goo.gl/e3ukPkNWjaK2Tov99 24  11/7/2024 The value net: cooperation and coordination Sharing resources and capabilities, e.g.: Toyota transferred quality management methodologies to its suppliers. Joint research and development by Orange Labs and Sony Mobile. Common policies on: sales, environmental issues, etc. 25 Strategic Group Maps Who are close and distant rivals? Are all players affected by macro factors in the same way? Are all players affected by 5-forces in the same way? Do profits vary by group? Mobility barriers Source: Thompson et al. (2017) and Rothaermel (mobility barriers) 26  11/7/2024 How to Draw a Strategic Group Map? Plot firms on Define Identify key map with 2 key strategic characteristics characteristics groups e.g. Selected variables Can you draw a circle Price/quality range Not highly correlated around a group? Geographic coverage Product line breadth Most important Use different Degree of service characteristics variables Degree of vertical integration Quantitative or Degree of discrete diversification Circles reflect sales 27 Strategic Group Maps: an example Source: Whittington et al. (2020) 28  11/7/2024 Industries Change over Time Identify Assess their Define 3-4 drivers joint impact strategies e.g. changes in Adjustments Long-term growth Demand Globalization Immediately Technology Internet capabilities Competition Entry/exit major firms Stop now Diffusion of know-how Uncertainty Profitability Regulatory influences Prepare now Societal patterns Source: Thompson et al. (2017) 29 Industry Life Cycles Source: Whittington et al. (2020) 30  11/7/2024 Industry Dynamics - Reduction of number of rivals Consolidation - Often by mergers and acquisitions (M&A) Oligopolistic - After external shock – regulation, technological -> Fragmented change or globalization - Formerly unrelated industries begin to satisfy the Convergence same customer need - Often triggered by technology Source: Rothaermel (2021) 31 THANK YOU! 32