Competitive Advantage and Profitability

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LSM541: Competitive Advantage and Profitability


This course includes:

Several discussions, of which you must participate meaningfully in twoOne discussion review assignmentOne tool to download and use on the jobOne 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 othersEvaluate how an industry will respond to changes in the market environmentIdentify threats to profits and potential remedies to these threatsRead critically the news and information presented in the business pressRecognize 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 youknow well. You will build an ePortfolio to showcase your analysis and reflect on what you learn from several case studies.

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Success and profitability in an industry require the of value, not merely the creation of value. A firm's ability tocapturecapture value is influenced both by market characteristics and the firm's strategies. In this course, you learn to useindustry analysis frameworks to evaluate both the structural characteristics of a market and the strategies that a firmemploys in it. You learn to take industry analysis beyond the question: Is a firm profitable today? You will answerquestions like: Why is a given industry or firm more successful than another? and What influences the long-term successof a firm in a particular industry?

This course introduces you to three frameworks for industry analysis: Porter's Five Forces, the Value Net, and theResource-Based View of the firm. It explains how to use these tools to investigate the short-run or long-run prospects forprofitability and to determine whether a particular strategy provides insulation from distinct threats to profits. Throughillustrative 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 notnecessarily work as well in others. You can create effective strategies that are right for your firm using theeconomics-based frameworks presented here.


Justin Johnson Associate Professor of Economics, Cornell University

Professor Johnson's research focuses primarily on applied theoretical microeconomic issues related to strategy andindustrial organization. Recent topics of research include: open source software, new car leasing with adverse selectionand moral hazard, the strategic revision of product lines in response to intensified competition, strategic defensivepublishing as an intellectual property management tool, constructing a general framework for analyzing changing demanddispersion (as generated by advertising or product design decisions), and the use of entry-level products to controlconsumer learning.

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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 iswhat structural analysis is all about.

This module presents three industry analysis frameworks: Porter's Five Forces, the Value Net, and the Resource-BasedView of the firm. As this module shows, the Resource-Based View of the firm and the Value Net provide complements tothe Five Forces framework, which is the most widely known. These three frameworks are valuable tools because theyenable 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. Accordingto the Five Forces model, you need to know the structural features of the market and the strategies that a firm utilizes inthat market in order to determine why a firm is successful-or whether it will be successful in the future. In this module wefind 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 firmcompared to the industry. It is an internally focused view, asking whether the firm has a special set of resources that otherfirms don't have. This module provides an introduction to RBV and presents a well-known retailer as an excellent exampleof an organization suited to an RBV analysis. Additionally, it looks at what it means for a strategy to be "internallyconsistent."


The Value Net, like Porter's Five Forces and the Resource-Based View of the firm, is a framework used in structuralanalysis. This framework is based on the notion that not all aspects of the external market environment are threats. On thecontrary, some companies or forces in the market influence the success of your company in a positive way. These arecalled .complementors

The Value Net viewpoint is useful because it allows you to think about how you might cooperate with entities in the marketto your mutual benefit. This module introduces Value Net and presents two examples that illustrate its power.


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 competitiveenvironment within which firms operate. Using a standard framework to shape our analysis can both help revealunderlying issues and create a shared understanding of the problems.


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 strongerthe forces, the more limited the opportunities

Read: A Guide to the Five Forces

Porter'sFiveForcesisa

convenientindustryanalysis framework used to guide business strategy development. You can use it to analyze the state of competition in anindustry, to find out why some firms and industries are more profitable than others, and to discover the sources ofprofitability. Additionally, you can use it to gain insight into the profit potential or attractiveness of a market. By using ananalytical tool like Five Forces, you can gain an understanding of the structural features of a market-the features that setthe stage for firm behavior and influence the profitability of all firms in that market.

Porter's Five Forces

Entry BarriersFactors that restrict the ability of new competitors to enter and begin operating in a givenindustry

SupplierPower

Pressure that suppliers can place on an industry

Buyer Power Pressure that buyers or customers can place on an industry

InternalRivalry

Competition for share by firms within a market

Substitutes Customer tendency to select alternate products or services


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 strongerthe forces, the more limited the opportunities. It is useful to assess each of the five forces with this question: How much ofa 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 givenforce is problematic or not. For instance, is there fierce competition because there is no differentiation? Is there high buyerpower because buyers are concentrated? Take note of which forces can be influenced and which cannot. For example, insome cases there may be little that can be done about supplier power, suggesting that you should focus your energieselsewhere.

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 impacton firm profitability and performance, to discover industry trends that may be opportunities or threats, and to findpotentially 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 thatindustry.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.


It informs the development of a firm's strategy by revealing the potential for profitability of a new product or servicethat the firm is considering.

Weaknesses

All other firms are viewed as threats to profitability. A complete strategic analysis must take into accountcompetition cooperation, which can exist between a company and its competitors, suppliers, andandcomplementary businesses.It focuses on the whole industry rather than on individual firms; some individual firms may occupy a unique positionthat 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.


Key Points

is the competition among firms for market shareInternal rivalry

Analyzing internal rivalry on both price and non-price dimensions reveals the positioning of different firms relative to oneanother

Switching costs incurred when moving from one supplier to another affect the competitiveness of the market

Read: Internal Rivalry and Switching Costs

Let'sbeginbylookingat the market force Porter refers to as -the competition among firms for market share. Firms within anInternal rivalryindustry pressure one another and limit one another's profit potential. When rivalry is intense, firms are competing forcustomers, profits, and market share.

Many factors influence the intensity of rivalry among firms within a market. Analyzing internal rivalry on both price andnon-price dimensions reveals the positioning of different firms relative to one another. Low intensity of rivalry makes anindustry more attractive and increases profit potential for the firms already competing within that industry. High intensity ofrivalry decreases profit potential. Understanding the internal rivalry within a market or market segment is critical todevelopment of an individual firm's strategy. Examine thoroughly each of the three categories below to build a goodunderstanding of the internal rivalry in a particular market:

Define the market

The number of firms competingProduct differentiation among and between firmsMarket growthOverall attitude of firms toward competition (for example, are firms extremelyaggressive and hostile or instead somewhat friendly and cooperative?)Firms that are competing in a geographic area

Identify weapons firms use tocompete

When firms compete on price, profits are eroded as firmsPrice Competition:drive down margins. This is the most destructive form of competition in termsof 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 onprice. Coke and Pepsi compete through advertising campaigns and addingnew product varieties, rather than on price. Non-price competition can becostly and tough but is often preferable to intense price competition.

In some cases firms can influence by their own actions whether competition will bevery aggressive and focused on price, or less aggressive and focused on non-price.


Examine industry factors

Internal rivalry may heat up when any of the following are present in an industry

Many sellers in the marketAn industry that is stagnating or in declineFirms are unable to "agree" on a suitable industry priceExcess capacity (the market is flooded)Strong exit barriers, causing firms to struggle to survive instead of exitingFirms 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 aswitching costcustomer incurs when moving from one supplier or firm to another. When the switching costs to the buyer or customer arelow, internal rivalry price wars can be fierce. Mobile providers offer an example of low switching costs (for thoseconsumers who do not have existing contracts), now that US government regulation makes it possible to switch phonecompanies 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 commonstrategy to keep switching costs high is to lock customers into multi-year contracts with hefty penalties for switching beforethe end of the contract.

Example: The Hotel Industry

When choosing a hotel, most consumers exhibit specific geographic preferences. They are also likely toexhibit a preference for a particular category of hotel, for example, luxury hotel, budget hotel, orfamily-style resort. An analysis of internal rivalry in the hotel industry is likely to show that competition islocal and varies by category of hotel. Consumers who participate in hotel loyalty clubs amass points thatare only redeemable by remaining loyal to the same hotel chain, so they experience a loss or cost whenthey 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. Financialprofessionals could access market data in real time on Bloomberg's proprietary network and communicatethroughout the day with anyone else who had a Bloomberg terminal. They perceived this as high add-onvalue, and they didn't want to switch to competitive products and services as those products and servicesemerged.


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 tworelated andimportant aspects ofthe Five Forcesmodel - the powerheld by the two sidesin a markettransaction.

Supplier Power

refers to the pressure that suppliers in an industry can place on buyers. A strong supplier for a particularSupplier Powerfirm can make the industry more competitive and decrease profit potential for that firm. A weak supplier with lessbargaining power can make an industry less competitive and increases profit potential for the firms within the industry. Afirm can improve its strategic position by finding suppliers with the least power to impact the firm's profitability andperformance. Supplier bargaining power will be high in the following situations, and low when the opposite conditionsexist:

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 ofthe 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 theirgoods and services, or reducing the availability of their products. However, smart suppliers recognize that charging toomuch can ultimately hurt them, for example by causing buyers to become so unprofitable that they exit or take action


against the supplier. Firms can respond to and control buyer and supplier power using different methods as discussedbelow.

Example of Supplier Power - Intel

Intel is a microprocessor manufacturer and supplier to the computer manufacturing and consumerelectronics industries. It has a long-standing relationship with Microsoft. As Intel develops newmicroprocessors, Microsoft engineers develop new software and operating systems designed to optimizethe innovative features of the new microprocessor models.

In the early days of personal computers, Intel negotiated a deal with computer hardware manufacturers sothat every computer sold by these manufacturers said "Intel Inside" on the front panel, in full view of theconsumer. Today, consumers who purchase a computer look for the "Intel Inside" logo as an indicator ofquality. As a result of this powerful brand image, and also the fact that Intel has significant manufacturingexpertise and abundant intellectual property, Intel is in a powerful position as a supplier. Computerhardware 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 arethree layers or sets of firms considered here: the suppliers to the industry, the firms in the industry, and those who buyfrom the firms in the industry. Hence, when buyer power is strong that will not necessarily mean that supplier power isweak. Buyer power in an industry affects the competitive environment and a firm's profitability. Strong buyers can exertpressure 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 onhow far a firm can extend its power over buyers: namely, average costs. In the long run a firm can't pay a buyer less thanits average costs or that buyer will exit the market. Note that buyer power is diminished as the number of buyers in amarket increases, and that a strong buyer can make an industry more competitive and decrease profit potential for asingle firm or for all of the firms within an industry.


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 longterm effects of consolidation will depend on how easy it is for additional firms to enter the market. For example, considerthe computer manufacturing industry. I were to increase profits but entry barriers were low, then additionalf consolidation firms could enter the market and that would tend to push input prices up once again, potentially undoing the effects of theoriginal consolidation. This highlights the importance of considering multiple forces in analyzing the likely impact of achange 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 oneVertical integrationfirm of two or more firms that had been working separately as part of a supply chain. For example, Apple verticallyintegrated by developing a network of Apple retail outlets. Note that vertical integration does not always increase a firm'sprofits. For example, if it is sufficiently costly or difficult for a firm to become its own supplier, then doing so may not beadvantageous.


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 theacceptance of new brands in the minds of customers can all be barriers to market entry.


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 competitiveadvantage and profitability, a resource-based view of the market considers the structural control mechanisms as a way ofpredicting market success.


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

TheResource-BasedView (RBV) of thefirm is a frameworkyou can use to lookat the internalstrengths and weaknesses of a firm. By looking at the resources that a firm controls, you can understand the firm'sprofitability and whether your strategy will be successful in that firm's market. By looking at your own firm's resources, youwill 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 toimitate-so other firms are less likely to assemble the same portfolio of resources and successfully enter the market. Keyresources may include:

Patents

Brand-namereputation

Installed base

Human assets

Corporate culture

Capabilities (activities that a firm does better than itscompetitors)

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 outletsA sophisticated inventory tracking and distribution system


Over the last 30 years, Walmart has developed an expansive network of outlets and a sophisticated inventory tracking anddistribution 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 aprofit on the basis of low pricing? This is where Walmart's key resources-the distribution and logistics system, and thewide network of stores-come into play. Both are very difficult for other firms to replicate. All of Walmart's policies areconsistent 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 newIntellectual capitalcustomers, and drive profits. It includes employee knowledge and competence, brand awareness, trademarks, proprietarydatabases, customer relationships, and more. Intellectual capital is a real business asset, along with physical and financialassets, 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 itshuman capital,workforce. Human capital, like the employees in which it resides, is able to leave the firm, making the retention of humancapital a focus for human resources managers. Sometimes the success of a firm is heavily reliant on the expertise of itsworkforce. 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-andeven the firm's image. The value of processes is demonstrated in industry leader Walmart, the success of which is owedat least in part to the powerful and efficient distribution system it possesses. The value of image is illustrated well byinnovators like Apple and ZipCar, both of which find great value in their devoted customer bases.


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 sellinginexpensive jewelry on liberal credit terms. In addition to low prices, the stores offered a friendly, service-oriented salesstaff. The Jewelry Place's strategy led to profitability and rapid growth. By the late 1980's, the company had threedivisions: , stores that targeted budget-conscious shoppers; , stores that catered to The Jewelry Place Sparkle Shackteenagers; 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 marketthrough niche marketing campaigns that advertised lower cost products to thrifty consumers. The stores ran TV marketingcampaigns advertising $99 diamonds, and they ran other low-price specials that resulted in soaring sales. The JewelryPlace was positioned low on the vertical quality chain, though not at the very bottom, and it did well. The Jewelry Place'stypical customer in the 1980s is male, between the ages of 25 and 65, and doesn't know much about buying diamondsand 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 baseconsisting 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 targetedworking 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 foundthat they had new options, including discount retailers.

By 2004, The Jewelry Place had declined in profitability. Its executive team cited increased competition from big boxretailers. The team decided to cut costs and cut product lines to focus on the upscale jewelry niche. The Jewelry Place got


rid of its lower-priced jewelry lines, including the $99 diamond. They eliminated many promotions and ad campaigns. Theyreduced or eliminated the monthly payment plan option that made it easy for their customers to buy on credit. They rannew ad campaigns designed to attract more upscale customers. To cut costs, they fired most of their well-trained salesrepresentatives 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 thenext level of quality and price. Their new strategy was not internally consistent with what they knew about their customerbase or with their customers' understanding of The Jewelry Place brand. The stores were not in premium market locationsand did not feature a premium "look," so they could not support The Jewelry Place's efforts to become an upscale jewelryretailer.

The Jewelry Place's customers were not willing to pay higher prices. Some of them went to shop at discount stores. Thosewho were willing to pay slightly higher prices for the level of service they had come to expect went to higher-end jewelrystores.

Through its changes in strategy, The Jewelry Place alienated its core customer base and lost its market share.


Watch: RBV and Porter's Five Forces Compared

We have now considered two different frameworks, or approaches, for thinking about how firms analyze their competitiveadvantage in the marketplace. Do you need to choose one or the other approach when planning your market strategy?


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 theRBV model examines internal factors, the Value Net approach looks at the network of market players.


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 anotherframework through whichwe can analyze thecompetitiveness of a firm.It is similar to Porter'sFive Forces and includesmany of the "forces"considered in that model, including suppliers, buyers (customers), and competitors. However, whereas the Five Forcesmodel assesses threats to profits, Value Net assesses opportunities. Toward this end, Value Net analysis includes a forcethat 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'scomplementproduct. are the other firms that provide these complements. The idea behind the Value Net is thatComplementorscomplementors, by their interactions, may enhance industry profits and the profits of individual firms. Analyzing a firm fromthe 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 becognizant 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


companies work closely together to ensure that the products they develop-operating systems and microprocessors-aretightly integrated for the benefit of both. They cooperate, but they remain competitors, as well-both are interested inmaximizing 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. DRAMmanufacturers develop new memory products and new upgraded memory standards jointly every few years. Why do theywork together? No single manufacturer wants to release upgrades alone. They don't want consumers to view them asmore difficult to work with than their competitors. So DRAM manufacturers work together. At the same time, they competewith each other to develop faster memory products.


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 notdoing so?


Module Introduction: Applications of the Frameworks

The industry analysis frameworks introduced in Module 1 -Porter's Five Forces, the Resource-based View, and the Valueare 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 theseframeworks. 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 howTicketmaster and Live Nation came into conflict and eventually resolved their conflict. A Five Forces analysis makes thatclear. 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 ismoving into a different line of business-streaming video content over the Internet. This topic examines Netflix's initialsuccess 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 besuccessful going forward?

Less-than-load (LTL) trucking companies consolidate small shipments from a number of shipping customers to create asclose to a full truck load as possible. The LTL trucking business is very different from full load trucking, which handlesmuch larger shipments from individual shipping customers. In this topic, we ask why the LTL market has been moreprofitable over time compared to full load trucking. To answer this question, we use both the Five Forces and RBVframeworks.


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.


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 aperiod 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 radioexperience. The two satellite radio firms controlled critical resources not available to terrestrial radio. Let's take a look atsome 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 barrierGovernment approval.to entry for other firms.

Satellite radio is not required to abide by the same FCC regulations as terrestrial radioMore controversial content.is.

The government permits satellite radio broadcasters to encrypt their broadcasts, whichEncrypted broadcast.traditional broadcasters are not allowed to do. This enables satellite radio broadcasters to charge a subscriptionfee.

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?


Understanding satellite radio's advantages made guessing traditional radio's response easy. Traditional radio beganemphasizing the local interests that it could offer its customer base. Traditional radio stations invested in digital radioequipment so they could offer clearer signals. In addition, they looked for opportunities to syndicate their content to reacha 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 theirstrategies around consisted of terrestrial radio. What they were not prepared for was a new entry coming that seemed tocome out of nowhere. The Apple iPod was announced exactly one month after the launch of satellite radio, and itcompletely 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 severalyears of fighting regulatory limitations, the two companies successfully merged in 2008 to become Sirius XM Radio. Thismerger 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 betterbargaining 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.


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 companyitself instigated. As it continues to respond to the changes in its volatile market, Netflix is challenged to assess its threatsand opportunities.


Watch: Netflix Going Forward

As you consider Netflix's future position in the marketplace, a resource-based view will be helpful in assessing where ithas strengths and weaknesses.


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 canbe a useful framework for firms to use when deciding what segment of a given market to pursue based on the existingforces.


Download The Tool

Download and use this to help make a decision about which type of analysis will fit the situation you arePDF overviewcontemplating. Remember that you may want to conduct more than one type of analysis.

Tool: A Guide to the Frameworks

Thisisa

shortguideto 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 Viewof 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 forcesare all threats to profitability.

is the pressure that Supplier power suppliers can place on an industry. When there are few suppliers they have morepower to impact profitability.

is the pressure that customers (buyers) can place on an industry. Sometimes a customer or buyer may beBuyer powerlarge 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 maystrive to make switching costs high.

are factors that restrict the ability of firms to enter and begin operating in a given industry. When entryEntry barriers barriers are high, new competitors are less likely to enter the market.


are products or services that are alternatives to the firm's product or service. For example, a bottle of flavoredSubstitutes water could be a substitute for a bottle of cola for some customers. The presence of substitutes may compel firms tocompete 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 internallyfocused 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 acollection of competitive threats and recommends that you develop potential remedies to those threats. You can use FiveForces 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, thereare many situations when the potential exists to improve profits by working closely with other firms in the market. TheValue Net also allows that the same firms that are complementors may also be competitors.


Watch: Thank You and Farewell

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Let me summarize what we've been talking about. We've been focusing on industry analysis. Why are some firms in someindustries more profitable than others? I introduced three frameworks. First, Porter's Five Forces framework. Second, theResource-based View of the firm. Third, Value Net. Each of these frameworks has a different utility, but combined, allthree frameworks help us better understand why firms can be successful and why some industries are more profitablethan others.

Thanks for taking part in this course, and I hope you'll consider taking additional courses in the series.


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Reading List

Besanko, David et al. . Wiley, 2010. Economies of StrategyNote: Good stuff as far as textbooks go.*

Brandenburger, Adam M., and Barry J. Nalebuff. . Currency Doubleday, 1997. Co-opetitionNote: 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 PlayNote: This is a good book, especially the introductions and conclusions.

Ghemavat, Pankaj. . Prentice Hall, 2001. Strategy and the Business LandscapeNote: 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 EconomistsNote: 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 CompetitorsFree 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 PerformancePress, 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. StrategicNote: 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 militarydoctrine, 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 sleepyreading 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

Competitive Advantage and Profitability

Documents

marketanalysis frameworks

particular industry

sole property

trade names

given industry

respective owners

firms strategies

market characteristics