What you will learn in this Section ?

• Envisioning Strategy– Definition– Framework– Visual Models

• External Analysis– PEST– PEST Impact Analysis

• Industry and Competitive Analysis– Industry Structure– Evolution of Industries– Industry Supply Chain– Potential Industry Earnings– Porter’s 5 Forces Analysis– Competitive Intensity– Strategies for minimizing competitive forces– Perceptual Map– Barriers to Entry/Incumbency advantages– DSIR effect

• Company Resources and Capabilities– ARC Analysis/HR– SWOT Analysis– Value Creating Processes/Core

Competencies– Strategic Gameboard– Balanced Scorecard– Change Management © Sunil Mehrotra

New entrant

Barriers to Entry:Incumbency Advantage

Suppliers

Bargaining power of Suppliers

The incumbentfirms

Competitive rivalry

Customers

Bargaining power of

• Economies of Scale• Cumulative

Investments– Learning

economies– Innovation

advantage– Promotional

advantage• Customer loyalty

advantage• Switching costs

advantage• Demand Side

increasing returns advantage

Types of Incumbency Advantage

• Scale Advantage• Cumulative Investment advantage

– Learning economies– Innovation advantage– Promotional Advantage

• Consumer Loyalty advantage• Switching cost advantage• Demand Side Increasing return

advantage

Economies of scale

Incumbent firm's fixed cost/unit

New entrant's firm's fixed cost/unit

How economies of scale create

a barrier to entry

Source;http://www.wikinvest.com/images/d/d5/CYCLEOFFIXEDCOSTS.jpg

Cumulative Investment Advantages

• Learning economies– Unit cost to produce decreases with the

cumulative quantity produced (cost of goods barrier)

• Innovation advantage – Probability of innovation increases based on past

innovations (new entrants are disadvantaged)• Promotional Advantage

– When advertising has a cumulative effect on brand loyalty (new entrants have to invest more)

Cumulative Investment Advantages

• Learning economies– Unit cost to produce decreases with the cumulative

quantity produced (cost of goods barrier)

Qty. produced

Variable cost/unitNew entrant's firm's variable cost/unit

Incumbent firm's variable cost/unit

CumulativeAdvantage

Cumulative Investment Advantages: Innovation Advantage

• Innovation advantage – Probability of innovation increases based on past

innovations (new entrants are disadvantaged)– Or, Success breeds success!

R&D

Cumulative Investment Advantages: Promotional

Advantage• Promotional Advantage

– When advertising has a cumulative effect on brand loyalty (new entrants have to invest more)

http://www.slideshare.net/coolstuff/the-brand-gap?src=related_normal&rel=54574Branding Differentiation Positioning

Brand loyalty

Cumulative advertising

Consumer Loyalty advantage

• Consumer habits are formed, which are difficult for new entrants to change

• Consumer demand forces retailers to carry the brand limiting access to shelf space for new entrants. Creating a barrier to entry.

• New entrants have to spend more on advertising to induce trial to cause consumers to switch and incent retailers to carry their product.

Incumbency advantagesaccrue at each stage in the value

creation process

R&DInnovation advantage

Manfscale economiesLearning economies

Distributionscale & learning

RetailersPromotional Consumers

loyalty

New entrant

Barrier to entry

What is: “network effect”? “First mover advantage”?

13

Network Era Is Being Driven by the Interaction

of Three 'Laws'more computing power

More-valuable networks

more communication bandwidth

Moore’sLaw

Metcalfe’sLaw

Gilder’sLaw

Source: Prof. N. Venkatraman, Boston University

Moore’s Law

Metcalfe’s Law

Gilder’sLaw

Demand Side Increasing Returns

Network EffectNetwork Effects occur when the benefits of a product increase to each user as the number of users increases. An example of network effects is telephone service. The more people who use them the more valuable they are to each user. The Web is an example with even more rapidly increasing DSIR than telephones or fax machines.

Industries with Demand Side Increasing Returns have the characteristics of “winner takes all”. Many of the Web based industry exhibit this characteristic, example: eBay and more recently the social networking sites such as Facebook.

Source: www.wikipedia.com

Positive Feedback loop creates “winner takes all”

Base of users

Attracts new users

Gets a larger share of new purchases

Installed base grows

Competing in markets with DSIR

• Installed base and tipping point• Switching costs• Expectations matter• Bandwagons may emerge• Early adopters jump start the

process• Intermediate adopters (fence sitters)

are key and difficult to attract

Source: Strategic Management; Saloner, Shepard and Podolny; Wiley

Strategies for competing in markets with DSIR

http://web2.socialcomputingmagazine.com/Strategies in the Web 2.0 world

Nappie 14

• Types of Incumbency advantage• Scale Advantage• Cumulative Investment advantage

– Learning economies– Innovation advantage– Promotional Advantage

• Consumer Loyalty advantage• Switching cost advantage• Demand Side Increasing return

advantage

Mnemonic 6Incumbency advantages accrue at each stage in the

value chain

R&DInnovation advantage

Manfscale economiesLearning economies

Distributionscale & learning

RetailersPromotional Consumers

loyalty

New entrant

Barrier to entry

Mnemonic 7Demand Side Increasing Returns:

Positive Feedback loop creates “winner takes all”

Base of users

Attracts new users

Gets a larger share of new purchases

Installed base grows