The StrategicThe StrategicManagement FrameworksManagement Frameworks

Arnoldo HaxArnoldo Hax

The Frameworks for Competitive PositioningThe Frameworks for Competitive Positioning

• • PorterPorter

• • Resource-Based View of the FirmResource-Based View of the Firm

• • The Delta ModelThe Delta Model

Porter’s Framework: Explaining the Profitability of a BusinessPorter’s Framework: Explaining the Profitability of a Business

Competitive PositioningCompetitive Positioning

Achieving sustainableAchieving sustainablecompetitive advantagecompetitive advantage

Industry StructureIndustry Structure

Factors affectingFactors affectingindustry profitabilityindustry profitability

Strategy FormulationStrategy Formulationand Implementationand Implementation

Defining and executingDefining and executingthe managerial tasksthe managerial tasks

Figure 5-1. Elements of Industry Structure: Porter’s Five- Forces

New Entrants

Suppliers Buyers

Substitutes

Industry Competitors

Intensity of Rivalry

Barriers to EntryEconomics of scaleProduct differentiationBrand identificationSwitching costAccess to distribution channelsCapital requirementsAccess to latest technologyExperience and learning effects Government actionIndustry protectionIndustry regulationConsistency of policiesCapital movements among countriesCustom DutiesForeign exchangeForeign ownershipAssistance provided to competitors

Bargaining Powerof Suppliers

Rivalry among CompetitorsConcentration and balance among competitorsIndustry growthFixed (or storage) costProduct differentiationIntermittent capacity increasingSwitching costsCorporate strategic stakes Barriers to ExitAsset specializationOne-time cost of exitStrategic interrelationships with other businessesEmotional barriersGovernment and social restrictions

Bargaining Powerof Buyers

Power of SuppliersNumber of important suppliersAvailability of substitutes for the suppliers productsDifferentiation or switching cost of suppliersproductsSuppliers threat of forward integrationIndustry threat of backward integrationSuppliers contribution to quality or service of theindustry productsTotal industry cost contributed by suppliersImportance of the industry to suppliers profit

Availability of SubstitutesAvailability of close substitutes

User’s switching costsSubstitute producer’s profitability and aggressiveness

Substitute price-value

Power of BuyersNumber of important buyersAvailability of substitutes for theindustry productsBuyers’ switching costsBuyers threat of backward integrationIndustry threat of forward integrationContribution to quality or service ofbuyers productsTotal buyers cost contributed by theindustryBuyers profitability

Threat of

Substitutes

Threat of

New

Entrants

Make a business in an attractive industry where you can excel; then Make a business in an attractive industry where you can excel; then excel by achieving a low cost of differentiation through unique activitiesexcel by achieving a low cost of differentiation through unique activities

The Value ChainThe Value Chain

Source: This setup for the value chain was suggested by Michael E. Porter (1985).Source: This setup for the value chain was suggested by Michael E. Porter (1985).

Merck’s Value ChainMerck’s Value Chain

There are two ways to compete:There are two ways to compete:Low Cost or DifferentiationLow Cost or Differentiation

The efficiency of the low cost provider’s cost structure allows pricing below the average The efficiency of the low cost provider’s cost structure allows pricing below the average competitor,competitor,

which in the long run may put average competitors out of business.which in the long run may put average competitors out of business.This is why the alternative to low cost needs to be differentiation, offering unique product This is why the alternative to low cost needs to be differentiation, offering unique product

attributesattributesthat the customer values and will pay a premium for.that the customer values and will pay a premium for.

However, the Total Customer Solutions positioning offers aHowever, the Total Customer Solutions positioning offers apossible preferred alternative by introducing significant costpossible preferred alternative by introducing significant costsavings (and/or revenue increases) to the customersavings (and/or revenue increases) to the customer

Critical Elements in Porter’s FrameworksCritical Elements in Porter’s Frameworks

PorterPorterFocus of Strategic Attention Industry/ BusinessFocus of Strategic Attention Industry/ Business

Types of Competitive Advantage Low Cost or DifferentiationTypes of Competitive Advantage Low Cost or Differentiation

Basic Unit of Competitive Advantage ActivitiesBasic Unit of Competitive Advantage Activities

Porter’s Winning FormulaPorter’s Winning Formula

Pick a business in an attractive industry in which you canPick a business in an attractive industry in which you canexcel. Notice that Porter’s Framework stressed rivalryexcel. Notice that Porter’s Framework stressed rivalryand competition. Therefore, an attractive industry is oneand competition. Therefore, an attractive industry is onein which we can achieve as close to a monopolistic positionin which we can achieve as close to a monopolistic positionas possible. In turn, the message of the value chain is toas possible. In turn, the message of the value chain is toachieve sustainable advantage by beating yourachieve sustainable advantage by beating yourcompetitors, if not in all, at least in those activities that arecompetitors, if not in all, at least in those activities that aremost crucial to competition.most crucial to competition.

Strategy is War!Strategy is War!

The Resource-Based View ofThe Resource-Based View ofthe Firm Frameworkthe Firm Framework

Resources can be classified into Resources can be classified into three broad categoriesthree broad categories

• Tangible assets are the easiest to value, and often are the only resources that appear on a firm’s balance sheet. They include real estate, production facilities, and raw materials, among others. Although tangible resources may be essential to a firm’s strategy, due to their standard nature, they rarely are a source of competitive advantage. There are, of course, notable exceptions.

Resources can be classified into three Resources can be classified into three broad categories (continued)broad categories (continued)

• • Intangible assets include such things as companyIntangible assets include such things as companyreputations, brand names, cultures, technological knowlereputations, brand names, cultures, technological knowledge, patents and trademarks, and accumulated learning dge, patents and trademarks, and accumulated learning and experience. These assets often lay an important role iand experience. These assets often lay an important role in competitive advantage (or disadvantage), and firm valn competitive advantage (or disadvantage), and firm value.ue.

Resources can be classified into three Resources can be classified into three broad categories (continued)broad categories (continued)

• • Organizational capabilities are not factor inputs likeOrganizational capabilities are not factor inputs liketangible and intangible assets; they are complextangible and intangible assets; they are complexcombinations of assets people, and processes thatcombinations of assets people, and processes thatorganizations use to transform inputs into outputs. The organizations use to transform inputs into outputs. The list of organizational capabilities includes a set of list of organizational capabilities includes a set of abilities describing efficiency and effectiveness: low cost abilities describing efficiency and effectiveness: low cost structure, “lean” manufacturing, high quality structure, “lean” manufacturing, high quality production, fast product development.production, fast product development.

Source: David Collis and Cynthia MontgomerySource: David Collis and Cynthia Montgomery

A Resource-Based Approach to Strategy Analysis: A Practical FrameworkA Resource-Based Approach to Strategy Analysis: A Practical Framework

Source: Robert M. GrantSource: Robert M. Grant

The Resource-Based View: Elements of Competitive AdvantageThe Resource-Based View: Elements of Competitive Advantage

Source: Adapted from Peteraf (1993) and Ghemawat (1991).Source: Adapted from Peteraf (1993) and Ghemawat (1991).

The Resource-Based View of the Firm Winning FormulaThe Resource-Based View of the Firm Winning Formula

Develop resources and capabilities which are rare,Develop resources and capabilities which are rare,valuable non-tradeable, that form the basis of the corevaluable non-tradeable, that form the basis of the corecompetencies of the firm; make those resulting advantagecompetencies of the firm; make those resulting advantagesustainable by precluding imitation or substitution fromsustainable by precluding imitation or substitution fromcompetitors; appropriate the resulting economic rent bycompetitors; appropriate the resulting economic rent bypreventing negative hold-up and slack conditions; andpreventing negative hold-up and slack conditions; andmake sure that the implementation process is done in suchmake sure that the implementation process is done in sucha way that its associated costs do not upset the resultinga way that its associated costs do not upset the resultingbenefits.benefits.

It is Strategy by Real Estate!It is Strategy by Real Estate!

Comparison of Critical Elements in Porter’s and Resource-BasedComparison of Critical Elements in Porter’s and Resource-BasedView FrameworksView Frameworks

Porter Porter Resource-Based ViewResource-Based ViewFocus of Strategic Attention Industry/Business Focus of Strategic Attention Industry/Business Corporation CorporationTypes of Competitive Advantage Low cost or Differentiation Resources,Types of Competitive Advantage Low cost or Differentiation Resources, CapabilitiesCapabilities

Core CompetenciesCore CompetenciesBasic Unit of Competitive Activities Core Products,Basic Unit of Competitive Activities Core Products,Advantage StrategicAdvantage Strategic ArchitectureArchitecture

Comparison Among Strategy FrameworksComparison Among Strategy Frameworks

Porter’s Five Forces ModelPorter’s Five Forces Model

The Delta Model- An Integrative Strategic FrameworkThe Delta Model- An Integrative Strategic Framework

1. Create a powerful 10x force to change the rules of the game. Reject initiation of competitors, a product-centric mentality,and a commoditization mindset.2. Generate significant barriers around the customers through a unique customer value proposition based on deep customersegmentation, and consumer understanding.3. Do not use competitors as a central benchmark to guide your strategic actions. The key industries to concentrate on arethose of your customers, suppliers, and complementors. Strategy is not war with your competitors; it is love with yourcustomers, suppliers, consumers, and complementors.4. Develop and nurture the integrated value chain with your key suppliers and customer. Bring in all the power of B2B andB2C to accomplish this objective. This is critical for customer lock-in.5. Add a new player: the complementors. Seek complementor support and investment in your business. Make them keypartners in seeking the delivery of Total Customer Solutions. Extend the unique value proposition to includecomplementors, as well as suppliers. This is the key for obtaining complementor lock-in, competitor lock-out, andultimately System Lock-In.6. If your customer, suppliers, and complementors are numerous and fragmented you could also provide them with state-ofthe-art management practices and a wealth of information and intelligence that they could never acquire otherwise. Yourlock-in will be admirably enhanced.

The Required Resources and CapabilitiesThe Required Resources and Capabilitiesfor the Delta Modelfor the Delta Model

1. First and foremost, you need a deep customer and1. First and foremost, you need a deep customer andconsumer understanding obtained via a detailedconsumer understanding obtained via a detailedsegmentation and supported by aggregated and granularsegmentation and supported by aggregated and granularmetrics.metrics.2. This understanding should also be extended to critical2. This understanding should also be extended to criticalsuppliers and complementors. Do not get trapped in yoursuppliers and complementors. Do not get trapped in yourindustry trends alone.industry trends alone.3. The implementation of the new business model is realizable3. The implementation of the new business model is realizablemostly because the opportunities and potentials offered bymostly because the opportunities and potentials offered bythe Internet and its associated technologies: e-business, ecommthe Internet and its associated technologies: e-business, ecommerce,erce,e-systems. The appropriation of this skill ise-systems. The appropriation of this skill isessential.essential.

The Required Resources and CapabilitiesThe Required Resources and Capabilitiesfor the Delta Model for the Delta Model (Continued)(Continued)

4. Create the dynamic and entrepreneurial environment of4. Create the dynamic and entrepreneurial environment ofrisk-taking and reward-sharing originated by therisk-taking and reward-sharing originated by theprofessional challenges associated with the “newprofessional challenges associated with the “newtechnologies.”technologies.”5. The ultimate output is the development and implementatio5. The ultimate output is the development and implementationnof unique and exciting value propositions for all the keyof unique and exciting value propositions for all the keyplayers: customers, consumers, suppliers, andplayers: customers, consumers, suppliers, andcomplementors. The first mover advantage iscomplementors. The first mover advantage isoverwhelming. You have to be fast.overwhelming. You have to be fast.