Brendan Boyle

2007

International Business Strategy

Lecture 2: The Industry-Based Views of Strategy & The Resources-Based View of Strategy

Brendan Boyle

2007

Principle Learning Objectives

Develop an understanding of what the term strategy means in practical and theoretical terms.

Develop an understanding of the industry-based view of strategy and the five forces framework of industry analysis.

Develop an understanding of the resource-based view of strategy and its implications for IB strategy formulation.

Develop an understanding of the implications of the above for the strategy formulation and implementation in multinational enterprises.

Brendan Boyle

2007

What is Strategy?

• Strategy is how firms sustainsustain and renewrenew their competitive advantages in an external competitive environment

• Strategy is a fit between the firm’s external situation and its internal resources and capabilities

• Fundamental questions

- Why do firms differ?

- How do firms behave?

- What determines the scope of the firm?

- What determines the international success or failure of firms?

Brendan Boyle

2007

The Essence of Strategy

Brendan Boyle

2007

Key questions in the study of International Business Strategy

• What Determines the International Success or Failure of Firms?

– In the West - In the 1960s and 1970s: Conglomeration

– Since the 1980s: Diversification that focused on core competencies

• Why Do Firms Differ?

– Western firms (US/UK vs. German/French)

– Have different (shorter- versus longer-term) planning horizons.

– Emerging economies (China, Korea, Russia)

The challenge is to understand the roots of these differences.

• What Determines the International Success or Failure of Firms?

– Acquiring and leveraging competitive advantage

– The Key: Sustaining such an advantage over time and across countries (regions) through replication and innovation.

• How do firms behave?

Brendan Boyle

2007

How Do Firms Behave?

Brendan Boyle

2007

Industry Competition and the IO Model

• Industry:

– A group of firms producing products (goods and/or services) that are similar to each other.

• Structure-Conduct-Performance (SCP) model

– The primary contribution of the Industrial Organization (IO) economics model

Structure: Structural attributes of an industry

Conduct: The firm’s actions

Performance: The result of the firm’s conduct in response to industry structure

Brendan Boyle

2007

The profitability of industries varies greatlyThe profitability of industries varies greatly

Pharmaceuticals 26.8 Gas & Electric Utilities 10.5Tobacco 22.0 Food and Drug Stores 10.3Household & Personal Products 20.5 Motor Vehicles & Parts 9.8Food Consumer Products 20.3 Home Equipment 9.5Medical Products & Equipment 18.8 Railroads 9.0Beverages 18.8 Hotels, Casinos, Resorts 8.0Scientific & Photographic Equipt. 16.5 Insurance: Life and Health 7.6Commercial Banks 16.0 Building Materials, Glass 7.0Publishing, Printing 14.3 Metals 6.0Petroleum Refining 14.3 Semiconductors &Apparel 14. 3 Electronic Components 5.8Computer Software 13.5 Insurance: Property & Casualty 5.3Electronics, Electrical Equipment 13.3 Food Production 5.3Furniture 13.3 Telecommunications 3.5Chemicals 12.8 Forest and Paper Products 3.5Computers, Office Equipment 11.8 Communications Equipment (4.0)Health Care 11.5 Airlines (34.8)

Median return on equity (%), 1999-2002

Brendan Boyle

2007

Five Forces Model and Firm Strategy

• The Five Forces Framework

– “Translated” and extended from the SCP model in 1980 by Michael Porter.

– A key proposition:

The focal firm performance critically depends on the degree of competitiveness of the five forces within an industry.

The stronger and more competitive these forces are, the less likely the focal firm is able to earn above-average return, and vice versa.

• Although firms benefit from a favorable Five Forces environment in their industry, they are not simply passive recipients of those competitive forces.

– Firms can use the Five Forces Model to evaluate what new industries to enter.

– Firms can also use the Five Forces Model to compete more effectively within their industry

Brendan Boyle

2007

SUPPLIERS

POTENTIALENTRANTS SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Bargaining power of suppliers

Bargaining power of buyers

Threat of

new entrants

Threat of

substitutes

Five Forces Framework

Brendan Boyle

2007

Threats of the Five Forces

Threats indicative of strong competitive forces that can

Five forces depress industry profitability

Rivalry among A large number of competing firms

competitors Rivals are similar in size, influence, and product offerings

High-price, low-frequency purchases

Industry slow growth or decline

High exit costs

Threat of Little scale-based low-cost advantagespotential entry (economies of scale)

Insufficient product differentiation

Little fear of retaliation

No government policy banning or discouraging entry

Brendan Boyle

2007

Threats of the Five Forces (cont’d)

Threats indicative of strong competitive forces that can

Five forces depress industry profitability

Bargaining power • A small number of suppliers

of suppliers • Suppliers provide unique, differentiated products

• Focal firm is not an important customer of suppliers

• Suppliers are willing and able to vertically integrate forward

Bargaining power • A small number of buyers

of buyers • Products provide little cost savings or quality of life enhancement

• Buyers purchase standard, undifferentiated productsfrom focal firm

• Buyers are having economic difficulties

• Buyers are willing and able to vertically integrate backward

Brendan Boyle

2007

Threats of the Five Forces (cont’d)

Threats indicative of strong competitive forces that can

Five forces can depress industry profitability

Threat of • Substitutes superior to existing products in quality and of substitutes quality and function

• Switching costs to use substitutes are low

Brendan Boyle

2007

Competitor Analysis Objectives

- What are competitor’s current goals?- Is performance meeting its goals?- How are its goals likely to change?

Objectives

- What are competitor’s current goals?- Is performance meeting its goals?- How are its goals likely to change?

Strategy

- How is the firm competing? Strategy

- How is the firm competing?

Assumptions

- What assumptions does the competitor

hold about the industry and itself?

Assumptions

- What assumptions does the competitor

hold about the industry and itself?

Resources and Capabilities

- What are the competitor’s key

strengths and weaknesses?

Resources and Capabilities

- What are the competitor’s key

strengths and weaknesses?

Predictions

- What strategy changes will

the competitor initiate?

- How will the competitors

respond to our strategic

initiatives?

Predictions

- What strategy changes will

the competitor initiate?

- How will the competitors

respond to our strategic

initiatives?

Brendan Boyle

2007

Lessons from the Five Forces Framework

Not all industries are equal in terms of their potential profitability.

The task for strategists is to assess the opportunities (O) and threats (T) underlying each competitive force affecting an industry, and then estimate the likely profit potential of the industry.

The key is “to stake out a position that is less vulnerable to attack from head-to-head opponents, whether established or new, and less vulnerable to erosion from the direction of buyer, suppliers, and substitutes.

Brendan Boyle

2007

Three Generic Strategies

Brendan Boyle

2007

Three Generic Strategies

• Cost leadership: centers on low costs and prices.

» A high-volume, low margin approach.

• Differentiation: Strategically focusing on how to deliver products that perceive to be valuable and different.

• A low-volume, high-margin approach

• Research/development and marketing/sales are important functional areas.

• Focus strategy: Serving the needs of a particular niche of an industry such as a geographical market, or product line.

• A specialized differentiator has a smaller, narrower, and sharper focus than a large differentiator.

• A specialized cost leader deals with a narrower segment compared with the traditional cost leader.

• Focusing may be successful when a firm possesses intimate knowledge about a particular segment.

Brendan Boyle

2007

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

RESIDUAL EFFICIENCY

ECONOMIES OF LEARNING

ECONOMIES OF SCALE

• Culture; Managerial efficiency

Speed of capacity adjustment

• Location advantages• Ownership of low-cost inputs •Bargaining power

• Standardizing designs & components• Design for manufacture

• Process innovation• Reengineering business processes

• Increased dexterity• Improved organizational routines

• Indivisibli\ties Specialization

Drivers of Cost Advantages

Brendan Boyle

2007

TOTAL CUSTOMER RESPONSIVENESSDifferentiation not just about the product, it embraces the whole relationship between the supplier and the customer.

INTANGIBLE DIFFERENTATION

Unobservable and subjectivecharacteristics relating to image, status, exclusivity, identity

TANGIBLE DIFFERENTATIONObservable product characteristics:• size, color, materials, etc.• performance• packaging• complementary services

DEFINITION: Providing something unique that is valuable to thebuyer beyond simply offering a low price. (M. Porter)

THE KEY IS CREATING VALUE FOR THE CUSTOMER

The Nature of Differentiation

Brendan Boyle

2007

Industry-based View: Implications for Strategy

•For strategic practice, the industry competition-based view provides:

–A systematic foundation for industry analysis and competitor analysis

–A set of answers to the four fundamental questions in strategy

–Evidence that industry-specific conditions play an important role in determining firm performance

Brendan Boyle

2007

Competing on Resource/Capabilities/Competence

• A firm consists of a bundle of productive resources and capabilities.

Resources - The tangible and intangible assets a firm uses to choose and implement its strategies.

Capabilities - The skills a firm can use to bring its resources to bear.

Brendan Boyle

2007

Resources and Capabilities

Brendan Boyle

2007

FUNCTION CAPABILITY EXEMPLARSCorporate Financial management GEManagement Strategic control IBM, Samsung

Coordinating business units BP, P&GManaging acquisitions Citigroup, Cisco

MIS Speed and responsiveness through Wal-Mart, Dell rapid information transfer

R&D Research capability Merck, IBMDevelopment of innovative new products Sony, 3M

Manufacturing Efficient volume manufacturingContinuous Improvement Harley-DFlexibility Zara, Southwest Air

Design Design Capability Apple, Nokia

Marketing Brand Management P&G, PepsiCoQuality reputation Johnson & JohnsonResponsiveness to market trends MTV, L’Oreal

Sales, Distribution Sales Responsiveness PepsiCo, Pfizer& Service Efficiency and speed of distribution Amazon, Dell

Customer Service Singapore AirlinesCaterpillar

Identifying Organizational capabilities: A Functional Classification

Brendan Boyle

2007

TEAMS 1998-2003

EXPENDITURES ON KEY PLAYERS, 1998-2003

Valencia (Sp) Pablo Aimar ($20.4m), Ruben Baraja ($12m)

Real Madrid (Sp)

Zinedine Zidane ($68m), Luis Figo ($55m), Ronaldo ($43m), Nicolas Anelka ($36m), David Beckham ($26m),

Deportivo La Coruna (Sp)

Sergio Gonzales ($16m), Alberto Luque ($15m)

Juventus (It) Gianluigi Buffon ($49m), Pavel Nedved ($38m), Lilian Thuram ($33m), David Trezeguet ($21m), Marco de Viao ($10m)

AC Milan (It) Rui Costa ($42m), Alessandro Nesta ($30m), Andriy Shevchenko ($24m), Andrea Pirlo ($16m), Kaka ($9m)

Parma (It) Hidetoshi Nakata ($30m), Sdrian Mutu ($9m)

Manchester United (Eng)

Rio Ferdinand ($45m), Juan Veron ($42m), Ruud van Nistelrooy ($30m), Cristiano Ronaldo ($18m), Fabien Bartez ($12m), Diego Forlan ($10m), Kleberson ($9m), Silvestre ($6m)

Arsenal (Eng) Sylvain Wiltord ($20m), Thierry Henry ($16m), Dennis Bergkamp ($12m),Kanu ($7m), Silva ($7m), Vieira ($6m)

Liverpool (Eng)

Emile Heskey ($16m), El Hadji Diouf ($15m), Dietmar Hamann ($12m), Chris Kerkland ($8m), Harry Kewell ($8m),

HIGHEST EXPENDITURES ON NEW PLAYERS (Top 3in Spain, Italy & England)

1. Barcelona2. Chelsea3. Lazio4. Manchester United5. Inter Milan6. Juventus7. AC Milan8. Arsenal9. Real Betis

Note: Spain, Italy &England only).

Superior Resources do not necessarily mean Superior Capabilities: Transfer Fees and Team Performance in European Soccer

Brendan Boyle

2007

The VRIO Framework

• VRIO

– An matrix analysis of the “sticky” nature of resources and capabilities of a firm and the difficulty of their replication elsewhere.

• Two Key Assumptions:

– Resource heterogeneity

Each firm has a unique combination of resources and capabilities such that no two firms are “twins.”

– Resource immobility

Resources and capabilities unique to one firm cannot easily migrate to competing firms.

Brendan Boyle

2007

The VRIO Framework: Features of a Resource or Capability

The VRIO Framework: Value

Only value-adding resources can lead to competitive advantage, whereas non-value-adding capabilities may lead to competitive disadvantage.

–If firms do not shed non-value-adding resources and capabilities, they are likely to suffer below-average performance or become extinct.

Overall, the search for valuable resources and capabilities is an ever present challenge for virtually all firms.

Brendan Boyle

2007

The VRIO Framework: Rarity

• The Question of Rarity

– Valuable common resources and capabilities can lead to competitive parity but no advantage.

– Valuable rare resources and capabilities can provide, at best, temporary competitive advantage.

– Resources and abilities that add value in new areas needed to keep up with the competition (benchmarking).

Once competitors develop equal abilities, then no unique and distinctive capability remains on which to build a competitive advantage.

Brendan Boyle

2007

The VRIO Framework: Imitability

• The Question of Imitability

– Valuable and rare resources and capabilities are a source of competitive advantage only if competitors have a difficult time imitating them.

Imitation of tangible resources (such as plants, software, or trucking fleet) is easy.

Imitation of intangible resources (knowledge, managerial talents, and organizational culture) is much more difficult.

• Why is imitation so difficult?

Time compression diseconomies

Path dependencies

Causal ambiguity

Brendan Boyle

2007

The VRIO Framework: Organization

• The Question of Organization

– How is a firm organized to develop and leverage the full potential of its resources and capabilities?

• A More Fundamental Question

– Why do firms exist? In other words, why do people organize firms?

The resource-based view suggests that firms exist to develop and leverage resources and capabilities better than individuals could.

Brendan Boyle

2007

Resource-based View: Implication for Strategy

• The strategic imperative is to focus on identifying the resources and capabilities that really count and developing new ones.

• Strategists need to focus on when, where, and how resources and capabilities are useful.

– A fundamental challenge is how to do this, not just once or every now and then, but consistently.

• The resource-based view offers a set of answers to the four fundamental questions in strategy.

Brendan Boyle

2007

Resource-based View: Implication for Strategy

• Why do firms differ?

– The assumption of resource heterogeneity, that is, every firm is unique in its bundle of resources and capabilities, directly addresses this question.

• How do firms behave?

– The answer boils down to how they take advantage of their strengths embodied in resources and capabilities and overcome their weaknesses.

• What determines the scope of the firm?

– Value chain analysis suggests that the scope of the firm is determined by how a firm performs different value-adding activities relative to rivals.

Managers often fail to assess them relative to competitors, resulting in an unnecessarily broad scope with some mediocre units.

• What determines the international success and failure of firms?

– The resource-based view identifies firm-specific resources and capabilities as the determinants.

Brendan Boyle

2007

Principle Learning Objectives – revisited

Have you developed an understanding of what the term strategy means in practical and theoretical terms?

Have you developed an understanding of the industry-based view of strategy and the five forces framework of industry analysis?

Have you developed an understanding of the resource-based view of strategy and its implications for IB strategy formulation?

Have you developed an understanding of the implications of the above for the strategy formulation and implementation in multinational enterprises?