Threat of New Entrants

• Economies of Scale - Supply and Demand side.

• Customer Switching Costs • Capital Requirements • Pre-existing incumbency

benefits • Technology Protection, Patents • Unequal access to distribution

channels • Restrictive Government Policy • Expected retaliation - existing

firms have sizeable cash, might cut prices, have existing excess capacity.

Threat of Substitute • Substitute Performance • Whether consumers identify

Supplier Power • Number of suppliers. • Size of Suppliers • Uniqueness of what they are

offering • Your ability to substitute what

they are offering • Switching Costs • Whether supplier group can

come after your industry if denied fair share of profits.

Buyer Power • Number of customers. • Volumes bought by customer

relative to industry size. • Ability to substitute. • Switching Costs • Are customers price

sensitive? • If intermediary buyer, can he

influence end customers decision to buy?

Rivalry • Number of competitors. • Size of competitors • Undifferentiated production

offer by rivals. • Switching cost for consumers • Customer loyalty • Exit barriers • Do rivals compete on similar

dimensions?

The concept of Competitive Advantage - New Game Strategies

The sources of Competitive Advantage -

Sustaining Competitive Advantage

• Identification: Obscuring Superior performance - Dont let other know how profitable/ successful you are. Easier for private companies as compared to publicly listed ones.

• Deterrence and Pre-emption: Undermine incentives for imitation. Persuade potential rivals they will be unprofitable. This deters new entrants from joining the market. Pre-empt new market niches before others. Setting up a large production facility is a warning sign to new entrants. Patent your technology/ drug/ process so others cant imitate.

• Causal Ambiguity and Uncertainty: If a firm wants to imitate another, it must first understand what to imitate. What drives success of the imitation firm. It is difficult to link resources and capabilities that result in success.

• Acquiring Resources: Even after figuring out causal ambiguity, a firm needs to acquire the resources and capabilities before it can imitate another firm. It can do this by buying another firm or by creating internal processes. Both have issues associated with them.

First Mover Advantage

The idea that the first occupant of a strategic position gains access to resources and capabilities that a follower cannot match. This may be true if:

• Where the resources for a company are scarce.• Initial competitive advantage allows form to invest in extending and upgrading its resource base

ie. it grows on its advantage.• First mover establishes reputation with suppliers, distributors and customers that cant be

matched.• Where a learning curve lead results in a cost advantage.• Where the first mover can set an impending industry wide technical standard.

First-mover status can confer advantages, but it does not do so categorically. Much depends on the circumstances.

Looking for Competitive Advantage on the inside

1. Question of value - do resources add value?2. Question of rareness - Are resources rare?3. Question of imitability - Can they be imitated or substituted?4. Question of organisation - Comprises of reporting structure, compensation policies,

management control systems etc.

Other sources of sustained internal competitive advantage:

1. Small decisions: Smaller decisions that bring about a major change in the long run. Hard to identify and imitate. Almost as if they are a part of company culture. Invisible to outside firms.

2. Socially Complex Resources: Intangibles like reputation, trust, friendship, teamwork, culture - while not patentable, are very hard to imitate.

Other topics

How industries changeDiversificationInternationalisationDisruptive innovations

COLA WARS

SWAirlines

Entry Barriers

Suppliers Buyers (Bottlers)

Substitutes

Limited Competition (Just 2 Players)

Bargaining power

Bargaining power

Threat of substitute products

Threat of new entrants (LOW)

- Brand (Time, Money, $ 65-70 Billion) - Access to Network of Bottlers - Strong Retaliation from Coke/Pepsi - Technology – maybe not!!

Very High

- Many Bottlers vs. 2 CPs - CPs forward integrated With own bottling (30%)

Very Low - CPs bought commodities - Many suppliers for them - CPs had very low switching costs

Very Low

- Strong Brand of Coke/Pepsi - Excellent Availability - Declining Retail Price

Quite Low

Rivalry between Industry Players

- Very Intense? - Don’t compete on Price!! - Compete fiercely on other aspects

Concentrate Production Industry: Very Attractive Gross Margin (83%); Pre-Tax Margin (35%)

Structure of the Airline Industry Î Low Industry Profitability

Entry Barriers

Suppliers Buyers

Substitutes

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute products or services

Threat of new entrants

(QUITE HIGH) -Multiple options -Well informed -Low switching costs

Rivalry

(HIGH) -Multiple players -Similar offerings -Perishable product (QUITE HIGH) - Unionized Labor

- Only two aircraft suppliers - Concentrated oil suppliers

( QUITE HIGH?)

-Availability of capital/leases -Availability of gates -Threat of Retaliation

- Alternate transportation modes - Alternate communication modes

(INCREASING)

DUCATI

APPLE