Competitive Advantage and Profitability

Copyright 2012 eCornell. All rights reserved.
. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.
1
LSM541: Competitive Advantage and Profitability
Copyright 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.
2
This course includes:
Several discussions, of which you must participate meaningfully in two
One discussion review assignment
One tool to download and use on the job
One four-part scored project
Completing all of the coursework should take about six to eight hours.
What You'll Learn
Use structural analysis to discover why some industries are more profitable than others
Evaluate how an industry will respond to changes in the market environment
Identify threats to profits and potential remedies to these threats
Read critically the news and information presented in the business press
Recognize the key resources of a firm and how good strategies build on these resources
Course Project
The project for this course challenges you to apply three market-analysis frameworks to your own firm, or one that you
know well. You will build an ePortfolio to showcase your analysis and reflect on what you learn from several case studies.
Start Your Course
3
Success and profitability in an industry require the of value, not merely the creation of value. A firm's ability to capture
capture value is influenced both by market characteristics and the firm's strategies. In this course, you learn to use
industry analysis frameworks to evaluate both the structural characteristics of a market and the strategies that a firm
employs in it. You learn to take industry analysis beyond the question: Is a firm profitable today? You will answer
questions like: Why is a given industry or firm more successful than another? and What influences the long-term success
of a firm in a particular industry?
This course introduces you to three frameworks for industry analysis: Porter's Five Forces, the Value Net, and the
Resource-Based View of the firm. It explains how to use these tools to investigate the short-run or long-run prospects for
profitability and to determine whether a particular strategy provides insulation from distinct threats to profits. Through
illustrative real world examples, it provides a deeper understanding of the powers and limitations of the frameworks.
Potential remedies to strategic dilemmas are situation-dependent; strategies that worked well in one industry will not
necessarily work as well in others. You can create effective strategies that are right for your firm using the
economics-based frameworks presented here.
4
Justin Johnson
Associate Professor of Economics, Cornell University
Professor Johnson's research focuses primarily on applied theoretical microeconomic issues related to strategy and
industrial organization. Recent topics of research include: open source software, new car leasing with adverse selection
and moral hazard, the strategic revision of product lines in response to intensified competition, strategic defensive
publishing as an intellectual property management tool, constructing a general framework for analyzing changing demand
dispersion (as generated by advertising or product design decisions), and the use of entry-level products to control
consumer learning.
Start Your Course
5
Module Introduction: Industry Analysis Frameworks
When developing a market strategy, it's important to determine whether or not an industry is profitable. But more than that,
you must ask what makes the industry profitable in terms of its economic structure. Finding the answer to this question is
what structural analysis is all about.
This module presents three industry analysis frameworks: Porter's Five Forces, the Value Net, and the Resource-Based
View of the firm. As this module shows, the Resource-Based View of the firm and the Value Net provide complements to
the Five Forces framework, which is the most widely known. These three frameworks are valuable tools because they
enable business leaders to look toward and plan for the future.
Porter's Five Forces, one of three frameworks explored in this course, is a well-known tool for industry analysis. According
to the Five Forces model, you need to know the structural features of the market and the strategies that a firm utilizes in
that market in order to determine why a firm is successful-or whether it will be successful in the future. In this module we
find out about the Five Forces framework and what it can provide.
The Resource-based view (RBV) of the firm is a framework used to look at the strengths and weaknesses of that firm
compared to the industry. It is an internally focused view, asking whether the firm has a special set of resources that other
firms don't have. This module provides an introduction to RBV and presents a well-known retailer as an excellent example
of an organization suited to an RBV analysis. Additionally, it looks at what it means for a strategy to be "internally
consistent."
6
The Value Net, like Porter's Five Forces and the Resource-Based View of the firm, is a framework used in structural
analysis. This framework is based on the notion that not all aspects of the external market environment are threats. On the
contrary, some companies or forces in the market influence the success of your company in a positive way. These are
called . complementors
The Value Net viewpoint is useful because it allows you to think about how you might cooperate with entities in the market
to your mutual benefit. This module introduces Value Net and presents two examples that illustrate its power.
7
Watch: An Introduction to Porter's Five Forces
We start this course by establishing some common ground - after all, there are many ways to think about the competitive
environment within which firms operate. Using a standard framework to shape our analysis can both help reveal
underlying issues and create a shared understanding of the problems.
8
Key Points
Porter's Five Forces is an industry analysis framework for business strategy development
The weaker the five forces are, collectively, the greater the opportunity for higher profits and/or performance; the stronger
the forces, the more limited the opportunities
Read: A Guide to the Five Forces
Porter's
Five
Forces
is
a
convenient
industry
analysis framework used to guide business strategy development. You can use it to analyze the state of competition in an
industry, to find out why some firms and industries are more profitable than others, and to discover the sources of
profitability. Additionally, you can use it to gain insight into the profit potential or attractiveness of a market. By using an
analytical tool like Five Forces, you can gain an understanding of the structural features of a market-the features that set
the stage for firm behavior and influence the profitability of all firms in that market.
Porter's Five Forces
Entry Barriers
Factors that restrict the ability of new competitors to enter and begin operating in a given
industry
Supplier
Power
Pressure that suppliers can place on an industry
Buyer Power Pressure that buyers or customers can place on an industry
Internal
Rivalry
Competition for share by firms within a market
Substitutes Customer tendency to select alternate products or services
9
Using Porter's Five Forces
You can use Porter's Five Forces to develop an understanding of the competitive landscape and identify threats to profits.
The weaker the five forces are, collectively, the greater the opportunity for higher profits and/or performance; the stronger
the forces, the more limited the opportunities. It is useful to assess each of the five forces with this question: How much of
a threat is this force? Why is it threatening or not? Is there anything I could do to reduce the threat posed?
That is, when using the Five Forces framework, try to determine which forces pose the greatest threats. Ask why a given
force is problematic or not. For instance, is there fierce competition because there is no differentiation? Is there high buyer
power because buyers are concentrated? Take note of which forces can be influenced and which cannot. For example, in
some cases there may be little that can be done about supplier power, suggesting that you should focus your energies
elsewhere.
Use the Five Forces framework to answer questions about opportunities and threats inherent in the market environment,
to determine optimal positioning of a company in its industry, to learn where strategic changes may have the most impact
on firm profitability and performance, to discover industry trends that may be opportunities or threats, and to find
potentially profitable new markets.
Strengths and Weaknesses of the Framework
There are strengths and weaknesses to consider when using Porter's Five Forces as an analysis tool.
Strengths
Porter's Five Forces offers an analysis of an industry or market, and of the positioning of the firms within that
industry.
It highlights the strength of a firm's current competitive position in relation to the industry or market.
It reveals threats to profitability of the firm.
10
It informs the development of a firm's strategy by revealing the potential for profitability of a new product or service
that the firm is considering.
Weaknesses
All other firms are viewed as threats to profitability. A complete strategic analysis must take into account
competition cooperation, which can exist between a company and its competitors, suppliers, and and
complementary businesses.
It focuses on the whole industry rather than on individual firms; some individual firms may occupy a unique position
that insulates them from competitive forces.
It doesn't include products or services that add value to the firm's product or service. complementors,
Complementors may be a sixth force.
It is a qualitative analysis that doesn't give a simple formula for success.
11
Key Points
is the competition among firms for market share Internal rivalry
Analyzing internal rivalry on both price and non-price dimensions reveals the positioning of different firms relative to one
another
Switching costs incurred when moving from one supplier to another affect the competitiveness of the market
Read: Internal Rivalry and Switching Costs
Let's
begin
by
looking
at the market force Porter refers to as -the competition among firms for market share. Firms within an Internal rivalry
industry pressure one another and limit one another's profit potential. When rivalry is intense, firms are competing for
customers, profits, and market share.
Many factors influence the intensity of rivalry among firms within a market. Analyzing internal rivalry on both price and
non-price dimensions reveals the positioning of different firms relative to one another. Low intensity of rivalry makes an
industry more attractive and increases profit potential for the firms already competing within that industry. High intensity of
rivalry decreases profit potential. Understanding the internal rivalry within a market or market segment is critical to
development of an individual firm's strategy. Examine thoroughly each of the three categories below to build a good
understanding of the internal rivalry in a particular market:
Define the market
The number of firms competing
Product differentiation among and between firms
Market growth
Overall attitude of firms toward competition (for example, are firms extremely
aggressive and hostile or instead somewhat friendly and cooperative?)
Firms that are competing in a geographic area
Identify weapons firms use to
compete
When firms compete on price, profits are eroded as firms Price Competition:
drive down margins. This is the most destructive form of competition in terms
of profitability for all firms competing in an industry.
This may erode profits by increasing fixed costs (e.g. Non-price Competition:
new product development) and marginal costs (e.g. adding product features).
The fashion industry may compete more on style, image, and brand than on
price. Coke and Pepsi compete through advertising campaigns and adding
new product varieties, rather than on price. Non-price competition can be
costly and tough but is often preferable to intense price competition.
In some cases firms can influence by their own actions whether competition will be
very aggressive and focused on price, or less aggressive and focused on non-price.
12
Examine industry factors
Internal rivalry may heat up when any of the following are present in an industry
Many sellers in the market
An industry that is stagnating or in decline
Firms are unable to "agree" on a suitable industry price
Excess capacity (the market is flooded)
Strong exit barriers, causing firms to struggle to survive instead of exiting
Firms with lower costs, able to reduce prices when other firms cannot
(Walmart is a good example)
Competitive products appear to be homogenous, so switching costs are low.
Switching Costs
"Switching costs", mentioned above, are important to a consideration of internal rivalry. A is the cost a switching cost
customer incurs when moving from one supplier or firm to another. When the switching costs to the buyer or customer are
low, internal rivalry price wars can be fierce. Mobile providers offer an example of low switching costs (for those
consumers who do not have existing contracts), now that US government regulation makes it possible to switch phone
companies and take an old phone number to a new company.
In the presence of higher switching costs, consumers are less likely to switch. Again, in the cell phone industry, a common
strategy to keep switching costs high is to lock customers into multi-year contracts with hefty penalties for switching before
the end of the contract.
Example: The Hotel Industry
When choosing a hotel, most consumers exhibit specific geographic preferences. They are also likely to
exhibit a preference for a particular category of hotel, for example, luxury hotel, budget hotel, or
family-style resort. An analysis of internal rivalry in the hotel industry is likely to show that competition is
local and varies by category of hotel. Consumers who participate in hotel loyalty clubs amass points that
are only redeemable by remaining loyal to the same hotel chain, so they experience a loss or cost when
they switch hotels. The points they lose are a kind of switching cost.
Switching costs may be about more than price, from the consumer's perspective.
Example: Bloomberg Terminals
The original 1980s version of Bloomberg terminals offered an email and chat function. Financial
professionals could access market data in real time on Bloomberg's proprietary network and communicate
throughout the day with anyone else who had a Bloomberg terminal. They perceived this as high add-on
value, and they didn't want to switch to competitive products and services as those products and services
emerged.
13
Key Points
Supplier power refers to the pressure that suppliers in an industry can place on buyers
Buyer power is the pressure that buyers or customers can place on the firm that is selling the product
Firms may decide to merge or consolidate in order to gain clout over a powerful supplier
Read: Buyer Power and Supplier Power
Let's look now at two
related and
important aspects of
the Five Forces
model - the power
held by the two sides
in a market
transaction.
Supplier Power
refers to the pressure that suppliers in an industry can place on buyers. A strong supplier for a particular Supplier Power
firm can make the industry more competitive and decrease profit potential for that firm. A weak supplier with less
bargaining power can make an industry less competitive and increases profit potential for the firms within the industry. A
firm can improve its strategic position by finding suppliers with the least power to impact the firm's profitability and
performance. Supplier bargaining power will be high in the following situations, and low when the opposite conditions
exist:
There are few suppliers and many buyers.
The cost of switching to a different supplier is high.
The company is not an important customer of the supplier and the supplier's profits are not tied to the profits of
the firm.
Substitute products are not readily available.
The company is not well-informed regarding the product or product marketplace.
Suppliers can easily vertically integrate forward and produce the company's products themselves.
Strong suppliers can exercise their power by raising prices to claim a larger share of profits, reducing the quality of their
goods and services, or reducing the availability of their products. However, smart suppliers recognize that charging too
much can ultimately hurt them, for example by causing buyers to become so unprofitable that they exit or take action
14
against the supplier. Firms can respond to and control buyer and supplier power using different methods as discussed
below.
Example of Supplier Power - Intel
Intel is a microprocessor manufacturer and supplier to the computer manufacturing and consumer
electronics industries. It has a long-standing relationship with Microsoft. As Intel develops new
microprocessors, Microsoft engineers develop new software and operating systems designed to optimize
the innovative features of the new microprocessor models.
In the early days of personal computers, Intel negotiated a deal with computer hardware manufacturers so
that every computer sold by these manufacturers said "Intel Inside" on the front panel, in full view of the
consumer. Today, consumers who purchase a computer look for the "Intel Inside" logo as an indicator of
quality. As a result of this powerful brand image, and also the fact that Intel has significant manufacturing
expertise and abundant intellectual property, Intel is in a powerful position as a supplier. Computer
hardware and software manufacturers have educated, well-informed consumers demanding Intel Inside.
Intel can and does charge higher prices.
Buyer Power
Buyer power is the pressure that buyers or customers can place on the firm that is selling the product. Note that there are
three layers or sets of firms considered here: the suppliers to the industry, the firms in the industry, and those who buy
from the firms in the industry. Hence, when buyer power is strong that will not necessarily mean that supplier power is
weak. Buyer power in an industry affects the competitive environment and a firm's profitability. Strong buyers can exert
pressure on businesses to:
Provide lower prices
Raise the quality of products
Provide better customer service
Firms can exert power over buyers in various ways (see the section below for two options). However, there is a limit on
how far a firm can extend its power over buyers: namely, average costs. In the long run a firm can't pay a buyer less than
its average costs or that buyer will exit the market. Note that buyer power is diminished as the number of buyers in a
market increases, and that a strong buyer can make an industry more competitive and decrease profit potential for a
single firm or for all of the firms within an industry.
15
Remedies to Upstream or Downstream Market Power
Remedy #1 - Consolidation
Two firms may decide to merge or consolidate in order to gain clout over a powerful supplier or buyer. Note that the long
term effects of consolidation will depend on how easy it is for additional firms to enter the market. For example, consider
the computer manufacturing industry. I were to increase profits but entry barriers were low, then additional f consolidation
firms could enter the market and that would tend to push input prices up once again, potentially undoing the effects of the
original consolidation. This highlights the importance of considering multiple forces in analyzing the likely impact of a
change in strategy. Consolidation is also referred to as . Horizontal Integration
Remedy #2 - Vertical Integration
A firm can influence buyer and supplier power though vertical integration. is the combining into one Vertical integration
firm of two or more firms that had been working separately as part of a supply chain. For example, Apple vertically
integrated by developing a network of Apple retail outlets. Note that vertical integration does not always increase a firm's
profits. For example, if it is sufficiently costly or difficult for a firm to become its own supplier, then doing so may not be
advantageous.
16
Watch: Barriers to Entry
When a firm makes a decision to enter a new market, there are several considerations they must take into account.
Among others, the costs associated with getting started in the industry, the presence of strong market players and the
acceptance of new brands in the minds of customers can all be barriers to market entry.
17
Watch: Introduction to Resource-Based View
Where the Five Forces framework looks at market pressures as a way to analyze a firm's opportunities for competitive
advantage and profitability, a resource-based view of the market considers the structural control mechanisms as a way of
predicting market success.
18
Key Points
The Resource-Based View (RBV) of the firm is a framework that looks at the resources a firm controls
For your strategies to be successful, they must flow from your firm's resources
Read: A Guide to RBV
The
Resource-Based
View (RBV) of the
firm is a framework
you can use to look
at the internal
strengths and weaknesses of a firm. By looking at the resources that a firm controls, you can understand the firm's
profitability and whether your strategy will be successful in that firm's market. By looking at your own firm's resources, you
will understand your own profitability. For your strategies to be successful, they must flow from your firm's resources.
A firm's resources are both physical and intangible. The key resources are those that are valuable, scarce, or hard to
imitate-so other firms are less likely to assemble the same portfolio of resources and successfully enter the market. Key
resources may include:
Patents
Brand-name
reputation
Installed base
Human assets
Corporate culture
Capabilities (activities that a firm does better than its
competitors)
A firm's strategies must be "internally consistent" with its resources. That is, its strategies, like its competitive advantage,
must be built on its resources.
A Resource-Based View of Walmart
Walmart's two primary resources are:
An expansive network of outlets
A sophisticated inventory tracking and distribution system
19
Over the last 30 years, Walmart has developed an expansive network of outlets and a sophisticated inventory tracking and
distribution system. The overall effect of Walmart's strategy and resources is to maintain a significant cost advantage.
Walmart's resources and strategy fit together. Any firm can charge low prices. The challenge is, how can a firm make a
profit on the basis of low pricing? This is where Walmart's key resources-the distribution and logistics system, and the
wide network of stores-come into play. Both are very difficult for other firms to replicate. All of Walmart's policies are
consistent with its strategy, which makes them internally consistent.
Intellectual Capital as a Resource
refers to the informational resources a company has and can use to create new products, attract new Intellectual capital
customers, and drive profits. It includes employee knowledge and competence, brand awareness, trademarks, proprietary
databases, customer relationships, and more. Intellectual capital is a real business asset, along with physical and financial
assets, but it is intangible, so it is difficult to measure except subjectively.
One important aspect of intellectual capital is or the capabilities of the firm that are contributed by its human capital,
workforce. Human capital, like the employees in which it resides, is able to leave the firm, making the retention of human
capital a focus for human resources managers. Sometimes the success of a firm is heavily reliant on the expertise of its
workforce. This is the case with technology giants Apple, Microsoft, and Google, for example.
Other aspects of intellectual capital include the firm's information systems, proprietary databases, patents, processes-and
even the firm's image. The value of processes is demonstrated in industry leader Walmart, the success of which is owed
at least in part to the powerful and efficient distribution system it possesses. The value of image is illustrated well by
innovators like Apple and ZipCar, both of which find great value in their devoted customer bases.
20
Read: A Resource-Based View of "The Jewelry Place"
Case Study The Jewelry Place
In this case study, we analyze a fictional jewelry store chain using a . Resource-Based View
The Jewelry Place chain of stores was founded in Chicago, Illinois, where the first stores became known for selling
inexpensive jewelry on liberal credit terms. In addition to low prices, the stores offered a friendly, service-oriented sales
staff. The Jewelry Place's strategy led to profitability and rapid growth. By the late 1980's, the company had three
divisions: , stores that targeted budget-conscious shoppers; , stores that catered to The Jewelry Place Sparkle Shack
teenagers; and , a small division that offered more expensive jewelry. Amara
Company profitability varied by division in the 1980s. The Jewelry Place brand became well-known to its target market
through niche marketing campaigns that advertised lower cost products to thrifty consumers. The stores ran TV marketing
campaigns advertising $99 diamonds, and they ran other low-price specials that resulted in soaring sales. The Jewelry
Place was positioned low on the vertical quality chain, though not at the very bottom, and it did well. The Jewelry Place's
typical customer in the 1980s is male, between the ages of 25 and 65, and doesn't know much about buying diamonds
and gems. He is looking for something more upscale and more personal than what he can find at the big discount stores.
He shops at The Jewelry Place both for the prices and for the friendly, personal buying experience.
Company Resources
The particular resources in which the company had a strong position were: multiple brands, an established customer base
consisting of cost-conscious shoppers who didn't know a lot about diamonds or jewelry, well-trained, friendly sales staff,
and storefronts widely distributed in malls and strip malls rather than premium malls
The Jewelry Place, from a resource standpoint, was well situated. To build on these resources, the company targeted
working class people, tailoring their marketing campaigns to these customers and offering liberal credit terms.
The Jewelry Place in 2004
The competitive landscape changed in the 1990s, and customers of The Jewelry Place who sought low-cost jewelry found
that they had new options, including discount retailers.
By 2004, The Jewelry Place had declined in profitability. Its executive team cited increased competition from big box
retailers. The team decided to cut costs and cut product lines to focus on the upscale jewelry niche. The Jewelry Place got
21
rid of its lower-priced jewelry lines, including the $99 diamond. They eliminated many promotions and ad campaigns. They
reduced or eliminated the monthly payment plan option that made it easy for their customers to buy on credit. They ran
new ad campaigns designed to attract more upscale customers. To cut costs, they fired most of their well-trained sales
representatives and replaced them with an army of part-time, untrained sales clerks. Sales and profitability plummeted.
Why?
RBV Analysis Conclusions
The Jewelry Place may not have had the resources or assets to successfully implement their strategy of moving up to the
next level of quality and price. Their new strategy was not internally consistent with what they knew about their customer
base or with their customers' understanding of The Jewelry Place brand. The stores were not in premium market locations
and did not feature a premium "look," so they could not support The Jewelry Place's efforts to become an upscale jewelry
retailer.
The Jewelry Place's customers were not willing to pay higher prices. Some of them went to shop at discount stores. Those
who were willing to pay slightly higher prices for the level of service they had come to expect went to higher-end jewelry
stores.
Through its changes in strategy, The Jewelry Place alienated its core customer base and lost its market share.
22
Watch: RBV and Porter's Five Forces Compared
We have now considered two different frameworks, or approaches, for thinking about how firms analyze their competitive
advantage in the marketplace. Do you need to choose one or the other approach when planning your market strategy?
23
Watch: An Introduction to the Value Net
We move now to a third way of looking at markets. Where the Five Forces model focuses on external competitors, and the
RBV model examines internal factors, the Value Net approach looks at the network of market players.
24
Key Points
The Value Net approach assesses opportunities and includes the "complementors" force
A complement is any product or service that adds to the attractiveness of the firm's product
Firms should be cognizant of the fact that other firms may present both threats and opportunities
Read: A Guide to the Value Net
The Value Net is another
framework through which
we can analyze the
competitiveness of a firm.
It is similar to Porter's
Five Forces and includes
many of the "forces"
considered in that model, including suppliers, buyers (customers), and competitors. However, whereas the Five Forces
model assesses threats to profits, Value Net assesses opportunities. Toward this end, Value Net analysis includes a force
that is not found in the Five Forces model: complementors.
Within the Value Net, a is defined as any product or service that adds to the attractiveness of the firm's complement
product. are the other firms that provide these complements. The idea behind the Value Net is that Complementors
complementors, by their interactions, may enhance industry profits and the profits of individual firms. Analyzing a firm from
the Value Net perspective may reveal new strategic directions or opportunities.
Using the Value Net, it's easy to see that a group of firms may raise its profits by working together. Firms should be
cognizant of the fact that other firms may present both threats and opportunities.
One good example of a complement is Intel's well-known microprocessor. For Microsoft, Intel is a complementor. The two
25
companies work closely together to ensure that the products they develop-operating systems and microprocessors-are
tightly integrated for the benefit of both. They cooperate, but they remain competitors, as well-both are interested in
maximizing their share of profits generated by the sale of personal computers.
Another example of cooperation is found in the manufacturing of a computer memory product, DRAM. DRAM
manufacturers develop new memory products and new upgraded memory standards jointly every few years. Why do they
work together? No single manufacturer wants to release upgrades alone. They don't want consumers to view them as
more difficult to work with than their competitors. So DRAM manufacturers work together. At the same time, they compete
with each other to develop faster memory products.
26
Watch: A Look at Apple
The Value Net concept tells us that firms need to work cooperatively with other firms in the market. What is the price of not
doing so?
27
Module Introduction: Applications of the Frameworks
The industry analysis frameworks introduced in Module 1 -Porter's Five Forces, the Resource-based View, and the Value
are used to evaluate the structural characteristics of a market and the strategies that a firm employs. In this module, Net-
we turn to illustrative real world examples to gain a deeper understanding of the powers and limitations of these
frameworks. Here, you discover why particular strategies did or did not provide insulation from distinct threats to profits.
Find out how to put the various industry analysis frameworks to practical use by examining several brief cases. See how
Ticketmaster and Live Nation came into conflict and eventually resolved their conflict. A Five Forces analysis makes that
clear. Then see how a Resource-based View of satellite radio makes guessing traditional radio's response easy.
In this module, we look at Netflix, a company that became successful by offering mail-order DVD rentals. Today Netflix is
moving into a different line of business-streaming video content over the Internet. This topic examines Netflix's initial
success and then uses some of industry analysis tools to determine the threats and opportunities for Netflix going forward.
In it, we look at Netflix's resources and advantages in both markets to attempt to answer the question: Will Netflix be
successful going forward?
Less-than-load (LTL) trucking companies consolidate small shipments from a number of shipping customers to create as
close to a full truck load as possible. The LTL trucking business is very different from full load trucking, which handles
much larger shipments from individual shipping customers. In this topic, we ask why the LTL market has been more
profitable over time compared to full load trucking. To answer this question, we use both the Five Forces and RBV
frameworks.
28
Watch: A Look at Ticketmaster
We turn now to looking at how the frameworks you learned about in the first module can be applied to real-world markets.
Let's begin with the issue of relative power described by Porter.
29
Read: A Look at Satellite Radio
In 2001, the satellite radio industry was launched with the appearance of two firms, XM Radio and Sirius Radio. After a
period of five years working to gain government approval, each announced satellite radio services.
XM and Sirius had a number of advantages over traditional radio, which offered listeners a live broadcast radio
experience. The two satellite radio firms controlled critical resources not available to terrestrial radio. Let's take a look at
some of them:
Each firm owned its satellites when it launched its service. It would require substantial time and resources Satellites:
for rival firms to launch their own satellites.
Satellite radio is not regulated by the same FCC restrictions that impact traditional radio Regulatory environment:
programming. These include:
The five-year process required to gain government approval presented a significant barrier Government approval.
to entry for other firms.
Satellite radio is not required to abide by the same FCC regulations as terrestrial radio More controversial content.
is.
The government permits satellite radio broadcasters to encrypt their broadcasts, which Encrypted broadcast.
traditional broadcasters are not allowed to do. This enables satellite radio broadcasters to charge a subscription
fee.
Satellite radio can develop rich programming for different niche markets and then offer it to customers Wide territory:
with the same interests across the country.
Satellite radio's deal with car manufacturers ensured that new cars were "satellite Installation in many new cars:
radio-ready."
Radio programs are not dependent on geography or radio broadcast signal Different and wider range of programs:
strength
Satellite radio offers a higher quality signal. Clearer transmission:
How did Terrestrial Radio Respond to Satellite Radio?
30
Understanding satellite radio's advantages made guessing traditional radio's response easy. Traditional radio began
emphasizing the local interests that it could offer its customer base. Traditional radio stations invested in digital radio
equipment so they could offer clearer signals. In addition, they looked for opportunities to syndicate their content to reach
a national audience. NPR is a good example of a traditional radio group that utilized this strategy.
What Happened Next?
When XM Radio and Sirius Radio were launched, the competitive landscape they understood and developed their
strategies around consisted of terrestrial radio. What they were not prepared for was a new entry coming that seemed to
come out of nowhere. The Apple iPod was announced exactly one month after the launch of satellite radio, and it
completely changed consumers' music and audio listening experiences and preferences.
XM and Sirius ran into competitive pressures that had a significant negative impact on their profitability. After several
years of fighting regulatory limitations, the two companies successfully merged in 2008 to become Sirius XM Radio. This
merger meant:
They aren't competing with each other for subscribers.
They're no longer competing to sign high-profile show hosts and the merged company is therefore in a much better
bargaining position.
Suppliers, or the show hosts and talent, have less bargaining power to negotiate price.
The merged company has significantly lower costs than either of the two firms realized separately.
31
Watch: A Look at Netflix
Since its founding in 1997, Netflix has seen its market evolve in cataclysmic ways-often the result of actions the company
itself instigated. As it continues to respond to the changes in its volatile market, Netflix is challenged to assess its threats
and opportunities.
32
Watch: Netflix Going Forward
As you consider Netflix's future position in the marketplace, a resource-based view will be helpful in assessing where it
has strengths and weaknesses.
33
Watch: LTL Trucking
As we saw earlier, Porter's Five Forces are a great way to evaluate the potential for profitability in a given market. It can
be a useful framework for firms to use when deciding what segment of a given market to pursue based on the existing
forces.
34
Download The Tool
Download and use this to help make a decision about which type of analysis will fit the situation you are PDF overview
contemplating. Remember that you may want to conduct more than one type of analysis.
Tool: A Guide to the Frameworks
This
is
a
short
guide
to three industry analysis frameworks: Porter's Five Forces, the Value Net, and the Resource-Based View of the firm.
Though each one offers a different perspective on a market or firm, the three are related in that the Resource-Based View
of the firm and the Value Net provide complements to the Five Forces.
Five Forces
Porter's Five Forces is a framework designed to look at the environment external to the firm or industry. The five forces
are all threats to profitability.
is the pressure that Supplier power suppliers can place on an industry. When there are few suppliers they have more
power to impact profitability.
is the pressure that customers (buyers) can place on an industry. Sometimes a customer or buyer may be Buyer power
large enough to be able to effect changes that impact profitability.
Internal rivalry is the competition for market share by firms within a market. When internal rivalry is intense, firms may
strive to make switching costs high.
are factors that restrict the ability of firms to enter and begin operating in a given industry. When entry Entry barriers
barriers are high, new competitors are less likely to enter the market.
35
are products or services that are alternatives to the firm's product or service. For example, a bottle of flavored Substitutes
water could be a substitute for a bottle of cola for some customers. The presence of substitutes may compel firms to
compete on price.
The Resource-Based View
The Resource-Based View is a framework designed to look at characteristics inherent in the firm or industry. It is internally
focused on strengths (resources). According to this view, you need to have a certain set of resources to be successful,
and you should base your strategy on those resources. This is in contrast to a Five Forces analysis, which presents a
collection of competitive threats and recommends that you develop potential remedies to those threats. You can use Five
Forces and the Resource-Based View together to perform a kind of SWOT (Strengths, Weaknesses, Opportunities,
Threats) analysis.
The Value Net
The Value Net framework is similar to the Five Forces analysis, but includes the additional "force" of complementors.
Complementors are other entities in the market who provide opportunities for cooperation. According to Value Net, there
are many situations when the potential exists to improve profits by working closely with other firms in the market. The
Value Net also allows that the same firms that are complementors may also be competitors.
36
Watch: Thank You and Farewell
Loading the player ...
Let me summarize what we've been talking about. We've been focusing on industry analysis. Why are some firms in some
industries more profitable than others? I introduced three frameworks. First, Porter's Five Forces framework. Second, the
Resource-based View of the firm. Third, Value Net. Each of these frameworks has a different utility, but combined, all
three frameworks help us better understand why firms can be successful and why some industries are more profitable
than others.
Thanks for taking part in this course, and I hope you'll consider taking additional courses in the series.
37
Stay Connected
38
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Reading List
Besanko, David et al. . Wiley, 2010. Economies of Strategy
Note: Good stuff as far as textbooks go.*
Brandenburger, Adam M., and Barry J. Nalebuff. . Currency Doubleday, 1997. Co-opetition
Note: This is a fun book with some easy game theory in it.
Dixit, Avinash K., and Barry J. Nalebuff. Thinking Strategically: The Competitive Edge in Business,
. W.W. Norton & Co., 1993. Politics, and Everyday Life
Note: Recommended for general strategic thinking beyond business.
Ghemavat, Pankaj. . MIT Press, 1997. Games Businesses Play
Note: This is a good book, especially the introductions and conclusions.
Ghemavat, Pankaj. . Prentice Hall, 2001. Strategy and the Business Landscape
Note: This book covers many of the topics explored in this series and has case studies as well.
Gibbons, Robert. . Princeton University Press, 1992. Game Theory for Applied Economists
Note: If you want to learn more technical game theory using calculus and probability, this is a good place to start.
Porter, Michael E. . Competitive Strategy: Techniques for Analyzing Industries and Competitors
Free Press, 1980.
Note: This is a classic, very thoughtful, and solid book incorporating economic reasoning as the basis of strategy.
Porter, Michael E. . Free Competitive Advantage: Creating and Sustaining Superior Performance
Press, 1998.
Note: The follow-up to . Competitive Strategy: Techniques for Analyzing Industries and Competitors
Saloner, Garth, Andrea Shepard, and Joel M. Podolny. Management. John Wiley, 2008. Strategic
Note: Also a decent textbook.
Schelling, Thomas C. Strategy of Conflict . Harvard University Press, 1960.
Note: This older book is a game theory classic, especially interesting for its perspective on Cold War military
doctrine, brinksmanship, and more. Also, Schelling won (half of) the 2005 Nobel Memorial Prize in Economics.
Some parts are a little mathy but they can be easily skipped if desired.
Shell, G. Richard. Make the Rules or Your Rivals Will . Crown Business Random House, 2004.
Note: Great book on law and strategy!
Sun, Tzu. Art of War .
Note: This book is 2400 years old and people still read it, so that puts it in rare company. Frankly, I get sleepy
reading it, but others rave-you decide! You can read it for free on the web.
*All notes are from Professor Justin Johnson of the Cornell University Johnson School of Business
39
40

Competitive Advantage and Profitability

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Competitive Advantage and Profitability

Uploaded by

Copyright:

Available Formats

Copyright 2012 eCornell. All rights reserved.

You might also like