Competitive Strategy – Prof.

Martina Montauni
María Mercedes Redondo

COMPETITIVE STRATEGY

What is Competitive Strategy: How to prevail in a sector/industry by planning/adjusting a strategy

to create & maintain CA (value) against competitors, with the resources available.
Example: The Fast-Food Business Example:
It would be hard to enter this market, because: i) High competition, ii) High concentration; iii) Thin margins; iv) Volume-based (not much differentiation);
v) Changing customer preferences (hard to make customers loyal); vi) Saturated market; vii) Environment. We need a COMPETITIVE STRATEGY to compete

Levels of strategy: (1) Corporate (company-wide), (2) Competitive (business): CA regarding industry.
What is NOT CS about? Marketing (positioning comes after defining competitive strategy), short-
term oriented, one size fits all, regularly evaluated (implementation yes though).

How to formulate a competitive strategy? (Steps to always follow):

1. Environment-Industry Analysis: Understand how externalities and environment changes
with trends.
a. Industry Structure.
b. Competitive Behavior Analysis:
o Industry Boundary Definition.
o The Porter’s 5 Forces & Summary Assessment.
o Industry Profitability: Performance Indicators.
2. Company Analysis:
a. Generic Strategies: Low-Cost vs. Differentiation and Focus.
b. Sources of competitive advantage: Segmentation and Positioning.
c. Sustaining competitive advantage: VRIO framework and SWOT.
3. Competition Analysis: Understand the relationships (company is not alone).
a. Game Theory.
b. Entry Dynamics: Strategic Entrepreneurship.

ENVIRONMENT ANALYSIS

INDUSTRY ANALYSIS - Environment impact to a company and its strategy.

I. Industry Structure (IO framework).

II. Competitive Behavior:

 Define Industry Boundaries:

- Industry (Specific Segment).
- Sector (Large Segment).
- Country.
 Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

- Year.
- Stage of the Industry/Sector’s Life Cycle:
Introduction P. Growth Phase Maturity Phase Decline Phase
- New P/S. -Customers now -Consolidated market but slow - Industry cannot support
understand new P/S, + growth. Focus is on profits, growth. More consolidation
- Limited info. on demand, competitors and cost reductions, market follows (synergies and scale).
product demand and become apparent. share, CFs.
competitors. - Demand affected by
-Profit is not top priority. -Economies of scales are obsolescence and new
- Unprofitability due R&D continues, process achieved, entry barriers markets (decline in revenues).
high dvlpmnt & improvement, geographic become higher, competitors
marketing costs, and expansion. are clear. - End of viability for business
low revenues. model -- pushes to adjacent
-Companies in adjacent -Product differentiation markets (delayed with large-
- Highly fragmented industries enter (M&A or declines so price competition scale product improvements
industries. internal development). is more relevant or repurposing).

 The Porter’s 5 Forces:

Tips: Think what enhances or de-prices; run analysis from a perspective; refine boundary definition.
Advantages: Helps determine who’s a threat and why, for positioning/repositioning, for exploiting
industry changes (ex. Spotify for artists) or shaping the Industry Structure (Intel).

5forces Internal Rivalry Potential Entrants Substitutes Complements Supplier’s power Buyer-Customer’s
Threat - High threat: More competitors (& num. - High threat: The cheaper/less - High threat: If - Bad: If - High threat: Less - High: Smaller &
of its P/S), fiercer competition (drives time/easy to enter the market available, firms business is suppliers make powerful customer
prices towards costs). and be effective, more risk of goes compet. if slow for firm more base = more
incumbent position weakness. price elastic & complements. dependent and bargaining power for
- Low threat: Firm has more power to low complex. higher bargaining lower prices.
charge higher prices and set deal terms - Low threat: Stronger entry - Good: If power to drive up
for higher sales/profits. barriers, the lower the threat - Low: If no business is input costs. - Low: Big pool of
(less price competition). substitutes booming for - Low threat: Many customers (or
available or complements. suppliers or low significant), and easy
price is switching costs to find.
inelastic. (inputs costs low).
Criteria - Degree Seller concentration. - Capital requirements. - Available - Availability of - Supplier’s - Buyer’s concentration.
- Rate of Industry Growth. - Economies of scale (product substitutes. close concentration. - Buyer’s volumes
- Product diversity (less diversity means development costs). - Price complements. - Volumes purchases.
low chance of price competition). - Product differentiation (Ad: competition - Price-value purchases of - Availability product
- Product Differentiation (no Brand Recognition and based on characteristics other firms. substitutes.
differentiation; high threat). Loyalty) elasticity vs. of - Availability - Price sensitivity
- Prices and terms of sales transactions - Entrant’s access to distribution inelasticity. complements. supplier’s inputs (elasticity) and
observability. (Ex. If retailers have exclusivity - Complexity of substitutes. product
- Price elasticity of demand. agreements) the product - Threat of forward differentiation.
- Speed of price adjustments. - Entrant’s access/privileges on (the more integration by - Price competition
- Cost structure (F/VC) (Cost sensitivity to inputs: raw materials, complex the suppliers. between buyers and
capacity utilization and significant locations, experience, HR, product, the - Buyer’s price sellers.
differences btw. firms). absolute cost advantage, etc. less likely the sensitivity. - Threat of buyer’s
- Buyer’s cost of switching to competitor. - Network externalities consumer will - Relative backwards
- Size & frequency of sales orders (demand-side advantages to substitute (ex. bargaining power integration.
(overproducing leads to lowering prices incumbents from large Wine)). (depends on the - Relevance of
& + selling) installed base). industry [B2C, product’s cost
- Strength of Barriers E/E. - Legal barriers. B2B, retailer, structure on the
- Retaliation from incumbents. consumer]). buyer’s business.
Tools - Industrial organization. - Game Theory. - Economics of vertical relationships.

 Summary Assessment: Assess final threats in the 5 forces in several timeframes.

 Industry Profitability: Performance Indicators:

- Market Concentration: Sum of the market share of the top 2-3-4 largest companies.
- Herfindahl Index (HHI): For fragmented sectors (>1500, competitive / 1500-2500 moderately
concentrated / <2500 highly concentrated).
- Interviews with experts, insiders, press.
- Mean and variance of SD at the industry level (ROI, ROE ROA).
 Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

o Low Mean / Low SD: Improvement opportunities as everybody is doing poorly.

o L-M / H-SD: High differentiation (some well, others behind; there’s competition).
o High Mean / High SD: Not attractive - Very hard to compete in these sectors.
o High Mean / Low SD: ?
- Main financial ratios: For measuring CA:
o Return on Investment (ROI) = EBIT / (FA + WC) or (ROI) = ROS x CT
FA = Fixed Assets CA = Current Assets
CL = Current Liabilities CA – CL = Working Capital (WC)
Decomposes the competitive advantage of a firm into its ability to capture and create value.
o Return on Sales (ROS) = Operating Profit / Net Sales
ROS = Profits returns from sales. Measures the firm’s ability to capture value.
Operating Profit = Revenue – Operating Costs – COGS – Other day-to-day Expenses.
Net Sales = Gross Sales – Returns – Allowances – Discounts
o Capital Turnover (CT) = Total Sales / Shareholders’ Equity
Analysis: Firms ability to create value (How much sales and volume can a firm generate given its available capital).
 Industry is most likely dominated by large firms: CT lower than 3 exhibits sales that are 3 times the capital investment.
 Industry with high fragmentation: Values higher than 3.
 In capital intensive industries, CT denominator tends to be higher, leading to a lower CT.
o Return on Assets (ROA) = EBIT / TA
TA = Total Asset (includes all assets invested in the firm). EBIT = Firms ability to generate profits from operations.
o Return on Equity (ROE) = Net Income / Equity
Numerator = Firm ability to generate profits from operations. Denominator = Points to the capital invested by shareholders.

INDUSTRY ANALYSIS CASE EXAMPLE - RTE BREAKFAST CEREAL

STEP 1 - Define Industry Boundaries:

- Industry: Ready-to-Eat cereals.
- Sector: Food/breakfast.
- Country: United States.
- Year: 1994.
- Stage of the Industry/Sector’s Life Cycle: ?

STEPS 2-3 - Porter’s 5 forces analysis (Summary Assessment):

FORCES 1994 Comments At GM ann. Comments Nowadays Comments
Rivalry Low Concentrated, almost Increased (1) Kellogs [leader] (goal: profits, reputation - High
collusion, sort of oligopoly. behavior: incentive to maintain the status quo), (2)
PM (late entrant, wants mkt share - incentive to
adapt), (3) Quaker (smaller, wants mkt share - better
to adapt).
Barriers of Entry High Access to distribution (shelf Increased More Private labels (which increased customer’s Low to Adv, scale.
space), capital requirements, price sensitivity). Medium
advertising (scale), economies After ann. It took about 30 brands to react MES
of learning, preemptive (lowest point where a plant(firm) can produce such
proliferation (retaliation). that its long run avg costs are minimized) if all other
brands contributed to 0 sales [Post had 11, and
Quaker 11 % of new brands w/1% in 1993].
Threat of Substitutes Low Few, almost unhealthy options. Increased More options available. Very high Lots/options.
Power of C: Low Low price sensitivity, high C: Increase More low-price sensitivity (high prices [rising], but C: High
Buyers/Customers R: High loyalty. R: Increase promotions and couponing). R: High
Power of Suppliers Low High competition among Slight
suppliers. increase
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Reactions to General Mills’ Announcement:

- Kellogg followed and declared intention to reduce promotions.
- Quaker and Philip Morris stick to a price increase.
- General Mills and Kellogg: Losses in volumes + find the Quaker and Philip Morris behavior
opportunistic and retaliate through aggressive promotions.
- By the end of 1995, promotional activities result as increased.
- General Mills faces a scandal (oat supplier using unlicensed cereals - all Big 3 but Quaker).
- General Mills faces restructuring and takes some cereal production capacity off-line.

STEP 4 - Performance Indicators: Industry updates:

- The largest 2 companies:
- Control +80% of the market (concentrated).
- ROI = 15.7% (before was 18%).
- ROS = 13.7%
- Capital Turnover = 1.20
- Top performers have:
- Market share of 0.2%
- ROI = 70%
- ROS = 6
- Capital Turnover = 22.9
- What happened to the industry? More substitutes like Granola.

Main Takeaways:
 Endogenous change: Escalating internal rivalry, but profitability decreased for all (RTE Case).
 Ways to overcome barriers to entry: Private labels (where a consequence-not antecedent),
niche producers of organic products.
 Changing the competitive “norms” of a company can be costly:
- Profitability of some actions depends on rivals’ response.
- The leaders may be vulnerable to opportunistic attacks.
- Defensive retaliation ensues.
 Strong connection to Game Theory: Sanger’s announcement to reduce the price of cereals
and the couponing activity can be considered as SIGNALING.

COMPANY ANALYSIS

Generating or Capturing Value, Insulating from Competition or creating larger gap btw avg costs and
willingness to pay to gain Competitive Advantage.

1. Porter’s Generic Strategies:

SOURCE OF COMPETITIVE ADVANTAGE
Low Cost Differentiation
COMPETITIVE Broad Cost Leadership Differentiation
SCOPE Narrow Focus (and “niche” strategy).

 Cost Leadership: Supply identical P/S at lower cost.

Cost Reduction Principle:

Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Cost Drivers (determinants of Cost Advantage): These determine a firm’s unit cost.

Economies of Scale Avg cost p/unit decreases as output increases.

Key determinant of industry concentration & consolidation.
Economies of learning Pros: Repetition increases individual skills & organizational routines.
Cons: Inertia and “competency traps”.
Production Techniques Process innovation & re-engineering of business processes.
Superior technology (can drive costs down).
Product design Standardization of designs and components.
Input Costs Location advantages; ownership of low-cost inputs; wages; non-union labor; bargaining power.
Capacity Utilization FC-VC Ratio & fast/flexible capacity adjustment.
Residual Efficiency Ability to eliminate organizational slack or inefficiencies; motivation and organizational culture;
managerial effectiveness.

Key Strategy Elements: Scale-efficient plants, Design for manufacture, Control of overheads and
R&D, Process innovation, Outsourcing (specially overseas), Avoidance of marginal customer.

Resource and Organizational Requirements: Access to capital, Process and product engineering
skills, Frequent reports, Tight cost control, Cross-functional coordination, Specialization of jobs and
functions, Incentives to quantitative target accounts.

Value Chain Analysis: A way of systematizing the sequence of activities that a company or business
unit performs. Useful to analyze a firm’s cost position.

Cost-Benefit Analysis (CBA):

- Determine and itemize costs: Between tangible and intangible.
- Calculate benefits (ex. Income, equity, savings, reputation, etc.).
- Compare alternatives.
- Report and plan action (allow for adjustments).

Strategy: When it works & risks: *Very important for exam:

Works Best Risks
Price competition is vigorous Being overly aggressive cutting prices.
Product standardization or readily available from many Low-cost methods are easily imitated by rivals.
suppliers
Few ways to achieve differentiation that have value to buyers. Becoming too fixated on reducing costs and ignoring buyers’
interest in additional features.
Most buyers use product in same ways Declining buyer sensitivity to price.
Buyer incurs low switching costs Changes in how the product is used.
Buyers are large and have significant bargaining power. Technological breakthroughs open cost reductions for rivals.
Industry newcomers use introductory low prices to attract Ethical issues related to cost-control.
buyers and build customer base.
Example: McDonald (not Zara, Coca-Cola nor Etihad Airways) follows a low-cost strategy.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

 Differentiation Strategy: Supply P/S in a way that customer’s willing to pay a price premium (cost
of differentiation). Supply side (create uniqueness), demand side (customer preferences insights).

- Note: Customers must be willing to pay the cost of differentiation (Not simply “look diff.”,
offering different product features [diversification] or claiming distinction [ex. Walmart]).
Differentiation Vs. Segmentation: NOT the same.
 Differentiation: Strategic choice by a firm; how it competes by offering uniqueness to customers. It implies segmentation though (ex. Microbrewery
movement).
 Segmentation: Feature of a market structure; helps indicate where a firm is positioned and competes (customer groups, locations, product types).

Differentiation Principle:

Differentiation drivers: Everything that influences the value perceived by customers (size, taste,
materials, speed, durability, resistance, etc.).
- Tangible (Performance features - R&D [link to resources and capabilities]) and intangible
(Distinctiveness, authenticity status - Mkting). Ex. “reliability, product design, speed are cost and
differentiation’s tangible drivers.
- Product Characteristics: Technical complexity (phones vs. socks); satisfy complex needs
(vacation vs. nails); non-conformity to certain technical standards (wine, vs. thermometer).

Tips for analyzing differentiation:

 Supply side: Capabilities and resources for being perceived as unique.
- Integrity (ex. Lifestyle foods, Harley Davidson [Key resource: The brand]).
- Signaling and reputation (ex. Experience goods, biodynamic wines).
- Branding and advertising (ex. Accountability, uncertainty, identity).
- Higher costs: Negative effect on scale economies and learning.
 Demand side:
- Understanding why customers buy a P/S.
- Relate product attributes to customer preferences (marketing research and techniques).
- Importance of social/psychological factors beyond functional ones (reinforce community
values, one’s identity, etc.).

Key Strategy Elements: Branding, advertising, design, service, quality, new product development.

Resource and Organizational Requirements: Marketing abilities, Creativity, Research capability,

Incentives linked to qualitative performance targets.

Strategy: When it works & risks:

Works Best Risks
There’re many ways to differentiate a product with value & please Trying to differentiate on a feature that buyers don’t perceive as lowering
buyers. their costs or enhancing their well-being.
Customer needs and uses are diverse. Over-differentiating such that product features exceed customers’ needs.
Few rivals are following a similar differentiation approach. Charging a price premium that buyers perceive as too high.
Technological change and product innovation are fast paced. Not understanding customers wants/likes / differentiating on “wrong” thing.

Main threats to differentiation: Erosion of differentiation advantage (Ex. AB InBev entry), Imitation.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Best Cost Strategy = Low Cost + Differentiation (low-cost upscale product; more value for money).
 A Best-Cost producer may outcompete both at Low-Cost provider and a Differentiator when standardized
features/attributes do not meet the diverse needs of buyers, and many buyers are price and value sensitive.
 Focus Strategy: Create value within a narrow set of industry segments. Avoids competitive
pressures. Can be combined with Low-Cost and/or Differentiation. Good=mature/decline
phases.

Different focuses:

a) Customer focus: 1 cust. group, diff. products (under or overserved), catering their needs.

b) Product focus: 1 product, different customers. Good for economies of scale & learning.

c) Geographic focus: Several products and customers in a narrow geography.

d) Niche Strategy: Single product (line) for a single market segment (ex. Precision instruments
for optometrists). Within this segment, the firm may:
a. Have lower cost p/unit that the broad-scope competitors.
b. Command a price premium relative to competitors.
c. Achieve both (less competition).

Advantages of Focus Strategy: Can still exploit economies of scale, respond better to underserved
and overserved customers, and insulates the focusing firm from the competition.

Strategy: When it works & risks:

Works Best Risks
Niche is big enough for profitability & good growth potential Competitors find effective ways to match a focuser’s capabilities.
The niche is not crucial to success of industry leaders. Niche buyers’ preferences shift towards product attributes desired
by majority of buyers (ex. Niche becomes part of overall market).
Niche is costly or difficult for multi-segment competitors to The segment/niche becomes so attractive it becomes crowded
meet specialized needs of niche members. with rivals, causing segment profits to be splintered.
The focuser has resources & capabilities to serve the niche.
Few other rivals are specializing in the same niche.
The focuser can better service niche (defense mechanism).

LOW-COST STRATEGY - WALMART CASE

To what degree is a cost advantage sustainable? Opportunities and limits of a low-cost strategy:

Industry Analysis:
STEP 1 - Define Industry Boundaries:
 Industry: Retailer (groceries, department, discount stores).
 Sector: Retail and wholesale business.
 Country: United States.
 Year: 1980s.
 Stage of the Industry/Sector’s Life Cycle: Growth/Maturity?

STEPS 2-3 - Porter’s 5 forces analysis (Summary Assessment):

FORCES ASSESSMENT COMMENTS
Rivalry High By 1986 industry became very concentrated (top 5 discounters accounted for 62% of industry sales).
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

By 1993 Walmart’s growth resulted in increased competition (Target, Kmart, etc.).

Barriers of Very High Capital requirements, economies of scale (Walmart built its own warehouse to buy in volume at attractive price and
Entry store merchandise), distribution networks, economies of learning.
No mercy either with the incumbents – not very profitable for new entrants. If industry starts becoming more
differentiated, the rivalry decrease (depends on customer’s price sensitivity).
Threat of Low Local stores.
Substitutes
Power of B/C C: High Price sensitive. Customer appreciates the prices and looks for lower price possible (very price sensitive customers;
means that they are not loyal).
Power of Low to medium Power, efficient operations, network effect (customer base, suppliers, stores).
Suppliers Walmart was good at locking the suppliers. The suppliers depended on the larger companies (concentrated industry
– few big incumbents) to sell at volume their products. Low to medium depending on how they locked the suppliers.
Overtime the bargaining power decreased.
Example: Eliminated manufacturer’s representative from negotiations w/suppliers; no supplier accounted for more
than 2.4% of purchases, etc.
 Bottom line: Not an easy market to be.
 Differentiator to compete: Efficient operations, network effect (customer base, supplies,
stores, location [scale - be almost everywhere]), hierarchical organizational structure
(vertical integration that allows control).

STEP 4 - Industry Profitability factors. Why are all ROE so high (above 13%)?
 It’s an asset intense industry / fixed cost are high, so operational efficiency is key.
 It’s hard to survive, but once you make it you do well.

Key factors behind Walmart’s competitive advantage? (What made them low-cost strategists):
a) Operational Efficiency. Most important part of the triangle (in case of differentiation, this
would have changed, while value proposition and organizational structure remain -
Operational efficiency would be quality in differentiation).
Tech, Inventory, Reduce average cost, Logistics, Location.
b) Value proposition / Positioning: “Everyday low prices”
Brand, Relationships / networks, Variety, Price.
c) Organizational Structure / Culture. Frugal.

+ Consistency = In discount retail is hard not to compete through prices (This industry is the one
that’s most subject to price competition -- compared to RTE, music, fast fashion).

Walmart charges prices that are genuinely lower: Yes.

How: Being consistent with Low-Cost Strategy.
1. Lower prices than competitors + discount stores extended to general merchandise by
charging gross margins 10-15% lower than conventional department stores, compensating
the discounts by cutting costs to the bone.
2. Lower expenses than competitors.
ROS = Operating Income / Net Sales  The lower the ROS, the less efficient the firm.
Operating Income = Gross Income {Revenue - COGS} - Operating Expenses - Depreciation - Amortization.
3. Lower variance in Operations Expenses: The lower the variance the better. It means the
firm’s consistent and solid in terms of operations (machinery of Low-Cost Strategy).
4. Administrative Cost Savings: 1% savings is worth $700 million to Walmart.

How can a cost advantage become more sustainable?

 First Mover Advantage (FMA) (first one to implement it). Best guarantee to make it more
sustainable.
a. Low cost (kept prices below everyone else, frugality; technological superiority).
b. Data driven company “training” (had consumers data on preferences and demand).
c. Located big stores in isolated rural areas and small towns (underserved market).
d. Push from inside out pattern of expansion.
 Vertical integration (control).
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Note: Example: To keep the “low-cost strategy” UBER in its early version had to subsidize the side of
the Drivers market.

DIFFERENTIATION STRATEGY - ARROGANT BASTARD CASE

Creates value through actual and perceived benefit to the customer (sound differentiation strategy).

Describe the beer industry:

 In 1997: In its infancy / small for craft beer (most Americans had never heard nor tasted craft
beer, the majority who had tasted it found it too intense). Normal beer was popular and
known (big players existed).
 Now (2014): Once regarded as an industry created exclusively by beer purists for a niche
clientele of hobbyists and homebrewers, craft beer consumption has erupted to become
one of the fastest growing segments of alcoholic beverage sales in the United States. Since
2005, industry revenue has grown by more than 300.0%. Became the 10 th largest craft
brewer, building a $100 million business without spending on advertising.

What are the sources of Arrogant Brewery’s competitive advantage?

 Took advantage of the niche and owned their differentiation (rather than tone down their
beer, amped up attitude and created a brand that took pride in being nonmainstream.
 Wore public’s early reaction as a badge of honor (proudly stated their beer was strong and
not for everyone)  This created deep loyalty among the drinkers who did like the beer.
 Poke fun at the giants in the industry.
 Sold their bottles in 22-ounce containers (against traditional 12-ounce bottles)  This
allowed the company to find its way to breakeven.
 Leadership position: Co-founded the San Diego Brewers Guild,  Now there are more than
80 craft brewers in the regions (fostered a competitive industry).

Can you estimate the margins of Arrogant Brewery vs. large incumbents' ones?
Ab-Inbev Stone Brewing
Barrels 95 million (45% US market) 200k barrels (0.1% US market)
Fixed Costs 1 bottle = $1.60 1 bottle = $1.91
Marginal Costs $0.90 $1
ROS 29% -7%
Operating Margin Given Sales of $47 billions = $13.6 billions Givens Sales of $120 millions = $56.4 millions
 Stone B has 18% greater margins than AB-Inbev, but Ab-Inbev has 242k times higher profits.
 They can coexist without harming each other.

What are the threats to Arrogant Brewery’s business model now?

 Craft beers has become more mainstream.
 Internal Rivalry: High degree of seller’s concentration now = more competition.
 Now people do like and know craft beers. Them not investing in advertising could result in
consumers preferring to buy (or recognizing more easily) other brands.

Performance Indicators of the Beer Industry: Can compete through efficiency or value creation.

FOCUSED/NICHE STRATEGY - HALO TOP CASE

Is it possible to generate advantage by reducing or even avoiding competitive pressure?

HALO TOP has a narrow competitive scope.

 Brand identification: Lower-calorie substitute for traditional ice cream.
 Branding issues: No claims of being frozen yogurt to avoid that competition.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

 Challenge: Replacing sugar.

 Peculiar segment: Thousand social media followers (fitness).
 Turning point: Halo Top's growth didn't really tick up until 2016. GQ Article went
viral, and product took off (77% growth rate in 3 months).
 Rebranding (2013): Name change (Eden Creamery to Halo Top). Avoid lawsuits.
 Ice Cream Market: Increased desire for healthier alternatives to regular ice cream.
 Doubts: Some nutritionists are cautious about stevia and erythritol.
 Marketing: Halo Top has leveraged its key nutrition differentiator.
 Packaging: Their updated packing is more eye catching, and highlights their unique
product offering: very low calories per pint.
 Competition:
 January 2017, Halo Top surpassed Häagen-Dazs and Ben & Jerry’s.
 Other players in the market had another unique angle for their lower caloric
content: monk fruit juice (DanoneWave’s, Talenti’s gelato) & other’s joining.
 Unilever has lost 1.5 share points due to the rising popularity of Halo Top.
 New opportunities: A major gap in ice cream offerings is vegan ice cream.

SUSTAINING CA: RESOURCES AND CAPABILITIES & VRIO ANALYSIS

How does a company keel generating advantage by becoming and staying unique?

Resources and Capabilities: Help sustain and retain competitive advantage.

Strategy: Matching a firm’s resources and capabilities to the (structural) opportunities that arise in
the external environment.
 Resources: Firm-specific assets that other firms cannot easily acquire.
 Capabilities: Activities that the firm does better than rivals given its resources.
a. Core competence: Unique strength that creates value.
Resource-Based View (RBV) Links between R-C and CA:

* Look into the composition and characteristics of the resources to exploit their potential.
* Intangibles tend to be more valuable.

Why resources and capabilities?

 Focus solely on industry (often volatile) and market leads to similar strategies.
 It’s a more stable basis for strategy than an industry or market focus. Example:
a. Apple: Combining technology, aesthetics and usability  Desktop computers, iPods…
b. Kodak: Focus on photographic products and not on its chemical know-how.
 A primary source of profitability (however, alone don’t ensure that a firm can sustain CA).
VRIO: They need to be Valuable, Rare, difficult to Imitate, and Organized to capture value.

The VRIO Framework: The R/C adds competitive advantage if it possesses all 4 VRIO attributes.
Valuable When the R/C brings/adds value to the company by allowing the firm to exploit opportunities, defend from threats,
and increase customer’s perceived value (reducing or increasing price differentiation). Ex. Drivers of cost reduction or
differentiation, past recognitions, access to resources, special relationships w/key players in the sector, “star”
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

employees, brand equity, etc.

Rare When it can be acquired by few companies, few indeed have it, and it’s not easy to develop them in the near future.
Inimitable When cannot be easily acquired or it’s very expensive, not easy to duplicate/learn/develop substitute, protections
exits (patents, etc.), social complexity or casual ambiguity (3 last are insulating mechanisms for entry barriers).
Organized Organizational structure and culture are design and maintained to retain, exchange, and develop its R/C (ex.
Organizational design, effectiveness of management process, control systems, incentive systems).

After determining the resources and capabilities, they can be

added to a SWOT analysis. STEPS: (1) Industry Analysis, (2)
VRIO framework, (3) SWOT.

SUSTAINING COMPETITVE ADVANTAGE - DISNEY CASE:

Resources and Capabilities: Value proposition: user experience (“no one has the same”).
VRIO Framework: V R I O CA
Resources Characters X X X X X
Social Capital X X X X X
Brand X X X X X
IP Rights X X X X X
Cos flows
Technology
Capabilities Consistency X X X X X
Creativity-design X X X X X
Cross-marketing X X X X X
Leadership
Adaptation (prod tech)
Organizational culture
Risk-taking behavior
Operational efficiency

MOST important core capability: Cross-Marketing.

The characters of Disney allow for transferability (movies, music, theme parks, etc.). For instance,
Netflix is trying to kill this by creating new characters.

Example: Manufacturing of Engines is a Key capability for Honda Motor Company.

COMPETITORS ANALYSIS

GAME THEORY & COMPETITIVE STRATEGY

Competitive behavior as a determinant of industry structure:

Game Theory: Analysis of optimal decision making. Asking what to do given competitors actions
(helps deal with increasing competition/rivalry).

- Assumptions: All decision makers are presumed rational & each is attempting to anticipate
the actions and reactions of its competitors.
- When does Game Theory Works and Doesn’t:
- Doesn’t work: Perfectly competitive firms (lots of competitors whose decisions don’t
have big impact, anticipating industry prices and maximizing against usually doesn’t
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

apply in competitive markets because prices are transparent & it’s impossible to
anticipate the decisions of all firms).
- Works: When there are few players (Oligopolies, Duopolies). Anticipating how rivals
may react (Game Theory is most valuable in such situations).

Opportunities and Limitations of Game Theory:

Opportunities: Solid theory w/math rigor, can diagnose the past, structured framework for analysis.
Limitations: Limited application to real world situations (restrictive assumptions & highly sensitive
outcomes if they change, few players and external variables), it’s not a solution to predict the future.

Two Competing Models of Oligopolies:

Bertrand Cournot
- Control price - they are quantity takers. - Control quantity – price takers.
- Fierce price competition can really impact industry profitability. - If firm expands capacity and produces more, others will follow.
- Example: Pharma companies w/patents (price setters). - Ex. Weapons compete on quantity bcz price is given by Gvmt.

Nash Equilibrium: Each player is doing its best it can, given what others are doing/their strategies
 A’s strategy maximizes its profits, given B’s / B’s strategy maximizes its profits, given A’s.
 It’s not necessarily the outcome that maximizes the aggregate profit of the players (if both
cooperate, both are better off). However, self-interest leads parties to take an action that’s
detrimental to their collective interest.

16/16 is the most satisfactory solution (maximizes the interest). However, at the
industry level, 18/18 is the best.

Prisoner’s Dilemma: In pursuing self-interest, each party imposes a cost on the other that the
doesn’t consider.
- A expects B not to expands capacity and refrains from expanding its own to prevent a drop in the industry price level. B
(pursuing self-interest) would expand its capacity and make A worse off than it expected to be  We are expecting the other
player to be selfish. By doing so, it imposes a cost to the others. Not maximize situation (but decisions are rational).

Fine Aspects of Strategy Behavior:

Cooperation or Competitors that sometimes cooperate. Ex. Coca-Cola and Pepsi when investing in vending machines.
co-opetition
Deterrence Impose a cost on other player’s undesirable actions (works with credible deterrent and willingness of adversaries
(retaliation) to be deterred). Ex. Gillette decided not to retaliate.
Strategic Elimination of strategic options. Ability of a firm to stick to a specific side of action (and not reverse it). Why is it a
Commitment strategic behavior: Airbus decided to advertise its aircraft before the model was produced (this is commitment
because it’s a way to prompt the airline companies to buy the aircrafts, but also, it’s a form of making the
competition avoiding making the same product as the firms have already commitments with me to buy).

Shouldn’t be easy for companies to leave commitments, otherwise lose credibility. Ex. Build factories, contracts,
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

launch adv campaigns, adopt tech. It signals other firms (you then expect them to behave a certain way).

Escalation of commitment: Justifying an increased investment in a decision based on a cumulative prior

investment, despite the evidence suggests that the costs of sticking to the decision outweigh the expected
benefits. Ex. Firm that invests in technology that is not working, but the action cannot be reverted and instead of
repairing the situation they keep investing hoping to make it better (irrational – be cautious with game theory as
its assumptions don’t take into ponderation human emotions).
Changing the Alliances, agreements, creating competition. Ex. Breakfast cereal industry. Ex. AMD and INTEL. Intel should have
game structure deterred the entry of AMD, however, Intel needed AMD to legitimate the industry and increase the customer
base (the decision to accommodate the competition is an example of changing the game structure).
Signaling Selective communication of info to influence competitors’ perceptions and trigger reactions (reputation). When
there’re a few players. You expect others to receive your signal and act accordingly. Ex. P&G reputation of being
very aggressive (this reputation prevents other players to retaliate).

Type of CA vs. Range of Segments/Customers Served and Product Portfolio

Type of Competitive Advantage (Cost vs. Differentiation).
Range of Competitive Stand Up Battle Cold War
Advantage (# of (Firms w/ similar business models and compete (Same customers but serves 2 diff. types of tastes
segments/customers served for the same space in the industry) [one high elastic and one differentiation]).
and extend of product Guerrilla Armed Neighbors
portfolio) (Firms have same competitive advantage (ex. (Firms diff. in competitive advantage and target
Costs), but target diff. customer types (B2B, B2C) segment (Cost adv. B2B and differentiation B2C)

Fundberd & Tirole Matrix: Useful, for ex., to know how to react if there is an imitation threat.
Potentially outcome of potentially entrants on incumbents.
Post Entry Behaviors
Aggressive Accommodating
Ex-ante High Top-Dog Fat-Cat
Barriers (Aggressive PEB + HEB - Incumbent retaliates when (Accommodating PEB + HEB - Incumbent doesn’t
sees new entrant) - Underinvestment tougher. retaliate, as new entrant will be also accommodating)
- Overinvestment tough
Low Lean & Hungry Puppy Dog
(Aggressive PEB + LEB - Incumbent. retaliates if not, (Accommodating PEB + LEB - Incumbent doesn’t
competition increases) - Underinvestment that retaliate, as competition doesn’t increase) -
accommodates entry by turning the incumbent as a Overinvestment that accommodates entry by playing
friendly competitor less aggressively post-entry
PEB = Post Entry Behavior / HEB = High Entry Barriers / LEB = Low Entry Barriers.

Lean & Hungry:

 + num. beer producers  industry + fragmented  but neg. impact on incumb. mkt shares.
 Happens when the product features and value of the incumbent and newcomer are similar.
 And when the feeling of community among players decreases with new entrants.
Puppy Dog:
 + num. new entrants  industry more fragmented  but null impact on incumb. mkt shares.
 Happens when the product features and value of the incumbent & new entrant are different.
 & When the feeling of community [ex., craft producers] is increasing with new entrants.

WAR OF ATTRION: When 2 or more firms compete, each one losing money but hoping that the
competitor will eventually five up and exit the industry. * Usually used in politics. But also common
in business; each firm must decide whether to cut its losses and exit or tough it out in the hope that
the competitor will soon exit.

Characteristics:
 Industry with increasing returns before consolidation (usually emergent stages).
 Limited demand.
 Usually, 2 firms trying to capture largest portion of market, with substantial initial investment.
 Learning investment for customers or legal constraints  Demand more inelastic and higher
switching costs.

Example: Streaming platforms in a specific country where number of viewers is limited. They don’t
want to back up as they have made a substantial investment. Sky Television and British Satellite
Broadcasting.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

FOCUS STRATEGY & GAME THEORY - RYANAIR CASE

Opportunities and Threats

Opportunities Threats
First Mover Advantage (potential) Deep pocketed rivals w/heterogeneous motives
Entry design to avoid retaliation Potential for retaliation
Market potential Price war
Anticipation of structural changes Undermine long-term Industry Profitability
Market creation (ferry?) Low cost: really?
Experience Regulations
Value 4 $ (customer service + lower prices) Volatility of profits

Ryanair used a FOCUS strategy (in terms of differentiation and low cost it is unclear). Its main entry
strategy problem was that it had an unclear positioning.

Can the Ryan brothers make money at the 98 Irish Pounds fare that they propose?
 Exhibit 4; Classify the assumptions; Quantitative approach.
 Take British Airways as benchmark, assume superior efficiency by reducing costs. From
there, make assumptions: (1) Greater efficiency, (2) 100% utilization.
 Ryanair’s proposed fare:
a. Each year, 750,000 round-trip passengers from DUB-LON opt for the sea ferries (9-
hour trip).
b. Ryan air proposes 4 trips p/day with a 44-seat turboprop at $98 Irish pounds.
i. 4 trips * 44 seats * 365 days = 64,240 round-trip seats of capacity.
c. Can 64,240 passengers can be convinced out of 750,000? Can you make money at
$98 Irish pound? YES. It’s possible, assuming efficiency.

Should Air Lingus, British Airways accommodate or retaliate? Game Theory

Retaliate: Change their pricing, become more efficient Vs. Accommodate: Let them be?
 Accommodation: Keep the fares at the current level and let Ryanair fill the annual 64,240
round-trip seats.
- Do they come from ferries or from competitors? (assumptions).
- Each passenger contributes to BA and LA as follows: Revenue-marginal cost = 166.5-29=137.6 Irish pounds to cover fixed
costs.
- Hence 64,240 seats * 137.5 per passenger = 8.8 million losses (if we consider accommodation. Not even considering if
Ryanair expands (even worse).
 Untargeted Retaliation: We cut all fares. Not making any price discrimination w/ no mercy.
- BA and AL cut all fares.
- Assumption: They reduce the fare down to 98 Irish pounds (optimistic).
- (166.5 revenue - 98 new fare) * 500,000 current passengers = 34.3 million losses.
 Targeted Retaliation: Only cut the selected fares (BA and AL).
- Assumption: About 100,000 of the current 500,00 passengers.
- Assumption: Most likely, the switching ones will be those playing the highest fares (e.g., 208 Irish Pounds).
- (208-98 new fare) * 100,000 passengers = 11 million Irish Pounds losses.
- Notice that AL generates an operating profit of 0.5 million Irish Pounds in 1984-85. Losses for AL (still painful).

TO SUM-UP
It seems that on paper, at least from the assumption,
accommodation seems to be more viable. However, is it the
solution to implement? Yes
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

What actually happened:

 Initially, BA and LA dropped the restricted fare by 3 Irish Pounds.
a. In Game Theory terms, reducing by 3 pounds is signaling (“watch out Ryanair”).
 Some modest success and positive press made Ryanair’s managers overconfident.
a. However, managers of Ryanair became proud and expanded regardless. This
escalated the situation.
 Ryanair expands rapidly.
 AL retaliates fiercely.
a. Ryan’s brother’s father was working for Air Lingus.
 Ryanair is hours away from bankruptcy.
a. Don’t only rely on quantitative, also take qualitative approach into consideration
(take both in hand).
 Afterwards, the company decided to just have focused strategy. They were full low cost
(100% the identity that they are low cost). Back then they were in an in between generic
strategy of differentiation and low cost (and had the risk of attracting extra competitors).

Main Takeaways:
 Analyze the entry strategy based on both Costs and Willingness To Pay (WTP) to determine
the company’s positioning relative to competitors.
 Assess the cost of accommodating vs retaliating both quantitatively and qualitatively.
Assumptions are important.
 BA seemed to behave like a “fat cat”; AL like a “top dog”.
 Air Lingus reaction to Ryanair’s expansion is an example of predatory pricing (game theory).
 Airline Industry is the MOST difficult to enter:
a. Music and Fast Food are RELATIVELY easy to enter, but difficult to survive. Pharma and Airline = very high barriers
to entry, but for different reasons. In RELATIVE terms, Airline looks more difficult to enter than Pharma, because of
the high capital requirements (think of the oil's price too), the entrenchment and scale of incumbent airlines with a
close control of own hub airports, the potential retaliation from incumbents, the aggressive price competition, etc.

ENTRY DYNAMICS: STRATEGIC ENTREPRENEURSHIP

What happens to the “risk-tolerant entrepreneur” when we move our focus of attention to the
industry (or sector) level of analysis?

Why focus on Barriers of Entry/Exit: Dynamics of Competition: Incumbent entrants’ dynamics is the
perfect example of a Game Theory application.
 Entry:
a. New firm: That didn’t exist before enters the market.
b. Diversified/lateral entrant: Active in business A [product or geographic market] but
decides to enter to business B (has more resources, capabilities, relationships/links
within the industry, etc.).
c. Spin-off entrant: A company which derives from a parent company that is already
established in the same business [product/geographic].
 Exit: When a firm ceases to produce in a market.

Empirical facts and strategic implications: Structures against we need to test our ideas:
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Determining barriers to entry:

 Entry is an investment: Entrant must sink some capital that cannot be fully recovered. Strategy
adds the post conditions and post entry competition.

 Post entry competition: How will the others react. Even when you think you are creating a new
environment where there will be no competition, sooner or later they will appear.
a. Entry is convenient if post-entry profits (revenues - operating expenses) exceed sunk
entry costs. These profits vary according to demand and cost conditions, and nature of
post-entry competition (conduct and performance of incumbents).
b. Extend of sum costs & post-entry competition determined the extend of entry barriers:
i. Structural: Economies of scale/scope, marketing advantage.
ii. Strategic or endogenous [from inside].

Bain’s Typology and Entry Conditions:

Types of Predatory Acts:

More likely to happen the demand is very inelastic.

Note: They way to avoid entrants varies greatly. Ex. Loyalty is a great barrier of entry.

Time to entry (timing): Game Theory, early movers (leaders) and late movers (followers) face
opportunities & risks.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Sometimes being the copycat is the best way to go. Non necessarily being the first mover is the best
way to go. It depends on the industry.

Early-mover disadvantages: High R&D expenses, Lack of complementary assets to commercialize

the product, Wrong bets on technologies/products, Uncertainty about customer needs and
preferences, late entrant may leverage the work done by the pioneer and improve it at a lower cost.

Logic: The commercial winner of the market, is not necessarily the firm that came up with the
invention. Do you want to be the market maker [then sell], taker [buy / copy] or both?
- Performance vs. Distinctiveness: Intermediate level of distinctiveness is the best way to
go (if not enough distinctiveness you’re like everyone else, if too much, it seems as too
risky, not trusted, etc.).

Assessing the optimal timing to entry:

1. Existence of a market: You need the existence of customers (with stable preferences,
somehow. If the preferences are very volatile maybe, it’s not the best time to enter).
2. Stability and predictability of consumer preferences.
3. Ability to adapt and innovate: Incremental Vs. Disruptive Innovation [be fast].
4. Enabling technologies’ state of the art.
5. Availability of complementary foods (there is strength in complements).
6. Barriers to entry.
i. Low: Be fast.
ii. High: You can afford taking you time.
7. Increasing return to adoption (timing is very critical if you enter too late you are already out, if
too early you lose the chance of becoming the dominant product).
8. Resource endowment: Reality check (do you have the resources?).
9. Reputation (very important).

ENTRY DYNAMICS - JUST MAYO

What market dynamics gave Hampton Creek’s Just Mayo a strategic advantage?
 First movers, mayo with no eggs (vegan).
 Changing customer trends (Demand was becoming more inelastic).
a. Vegan options
b. Sustainability in production process.
c. Alternative ingredients.
d. Healthier.
 Operational efficiency (potential cost advantages).
 Other companies are on the way.
 Regulated industry (eggs).

Assessing the optimal timing to entry:

1. Existence of a market: There was a market.
2. Stability and predictability of consumer preferences: There where customers interested in
the healthy-vegan options.
3. Enabling technologies’ state of the art: It’s both tech and food company. Is it good in R&D,
marketing, etc.
4. Availability of complementary goods: yes.
5. Barriers to entry: ?
6. Increasing returns adoption: ?
7. Resource endowment: ?
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

8. Reputation: Good.

Hampton Creek: Opportunity or Threat to Unilever?

 It depends.
 Once they crack the recipe, they can easily copy.

How disruptive is Hampton Creek’s entry for the existing industry? How does it provide, instead,
an industry for the industry?
 It depends on how you see the prior answer.
 Disrupting whole industry.

How should Unilever respond to Hampton Creek’s Just Mayo?

1. Partnership/acquisition.
2. Own vegan line.
3. Lawsuit (make the court determine it’s a different market segment, so it doesn’t eat market
share).
a. Unilever wanted vegan mayo to be considered as a different market so that the
products were shown in a different shelf and not eat market share.
i. The lawsuit happened but they received back-lash.
ii. At the end they launched their own vegan line (Unilever became a Lateral
Entrant to the Vega Condiment Segment).
Company Updates:
 2015: FDA emphasize egg-free content.
 2016 (February): Unilever launches a new line of vegan mayo.
 2017: dozens of vegan varieties of mayo available for purchase + launch of Just Scramble
(research for cultured meat, Eat Just) + Just Eat (previously known as HC’s) valued at $1 b).
 2018: Adv. of different varieties of Just Mayo (ex. Kosher).
 2020-2021: Growth.

Industry Trends:
 Changing consumer tastes.
 Proportion of vegetarian/vegan households is growing rapidly in some countries, particularly
among younger consumers (this phenomenon is creating new food giants).
 Rise of non-dairy milk, for example, has been almost unstoppable (example: Oatly has
ramped up production 1250% since its 2016 launch in the US).
 With more consumers interested in plant-based diet trend and eating at home amid the
pandemic, Just Eat is set to expand globally.

Main Takeaways:
 Hampton Creek/Just: A market maker or a market taker? Unilever’s response provides an
answer (Market taker).
 Trade-off between innovation and protection (like Nintendo Vs. Atari).
 The critical issues are shelf-space and the relationship with retailers.
 Different interpretations of the lawsuit.
 Not always incumbents retaliate through price competition.
 Innovation as pushing industry boundaries.
 Sustainability of HC’s strategy.

STRATEGY AND INNOVATION FOR COMPETITIVE STRATEGY

Industry Lifecycle:
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Recurrent patterns in the Industry Lifecycle:

Strategic Options in Each Stage:

From inventions to Innovation (The Product):

Regime of appropriability: Who benefits from an innovation:

 Strong: The innovator captures a substantial share of value.
 Weak: Other parties capture most of the value.

Examples:
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Extent of appropriability (4 determinants):

 Property rights: But they make the information public.
 Tacitness and technological complexity.
a. Codifiable means replicable (Coca Cola’s recipe).
b. Simple means replicable.
 Lead time: for followers to catch up:
a. Build the capabilities and market position to entrench industry leadership.
b. Move down the learning curve (Intel).
 Complementary resources (Android Vs. IOS):
a. Specialized: raise barriers to imitation.
b. Unspecialized: power the innovator.

The Innovation Landscape Map:

Fits with Requires DISRUPTIVE ARCHITECTURAL
existing new Open-source software for software companies Personalized medicine for pharma companies /
/ ride sharing services for taxi and limo digital imaging for Kodak-Polaroid
business BM companies.
model? Leverages ROUTINE RADICAL
existing BM Next-generation Intel Processor / Automated Biotechnology for pharma companies / electric
warehouse of Amazon vehicles for auto companies.
Leverages existing competences Requires new competences
Fits with Existing Technical Competences?

Implications for Strategy:

 At the Industry Level:
a. Identify stage of Industry Lifecycle and strategize accordingly.
b. Each stage brings opportunities for the 2 generic strategies (low-cost vs. differentiation).
 At the Product Level:
a. Which type of innovation are you dealing (disruptive, architectural, routine, radical).
b. Assess extent of value appropriability (strong vs. weak - using the 4 determinants).
 At the Firm Level:
a. Establish or re-assess the positioning having the Industry Lifecycle in mind.
b. VRIO framework to secure the innovation and understand the extent to which you can
appropriate value from it.

* Innovation through eliminating bad practices is more plausible in stable, homogenous industries,
where very firm does pretty much the same thing in the same way.

STRATEGY AND INNOVATION - MOBILEYE

Five potential threats and how Mobileye responded  Competitive Advantage:

Threats Solutions
Imitation FMA, customized HW and SW, long cycles, data, test and validation, after pricing, contracts, patenting.
Substitutes: Bundles, modular technology
Hold-up (by OEM) Tier 2, multiple Tier 1, work on BP.
Market Saturation Regulation and safety.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Organizational slack And implementation.

How should Sashua and Aviram handle OEAM demands for lower prices? Should they mantaining
“full price strategy” or “discount” for the low-end bundle?
Mobileye is in a stage of starting to grow. So, it´s dangerous to lower the price, is critical to maintain
the quality of the technology. You want costumers to believe in the product. Having a segmentation
and they can provide different range of products. At this point it’s critical to grant legitimacy to the
product (high regulatory risks - lawsuits).

Most important resource for Mobileye to build its favorable competitive positioning: FIRST
MOVER ADVANTAGE in software, namely in collecting and storing scalable mapping data. Absent
such a first mover advantage, all the other factors (modular technology, good relationship with
OEM’s, flexible organizational structure, etc.) would be of less importance - if not useless - to the
company.

How should Sashua and Aviram approach Google? Cooperate or keep them at arm’s length?
Second option.
NETWORK-BASED STRATEGIES
ATARI-NINTENDO CASE

Porter’s 5 Forces:
Internal Environment:
- Nintendo subcontracted manufacturing, however, final assembly took place in the company’s
facilities. Little leakage of the company’s trade secrets (maintain differentiability).
- Monopoly: Handicapped most of its rivals by contracting licenses so that their contractors
cannot venture with other rivals for a period of 2 years thus forcing loyalty.
- R&D: maintained technological advantage and hence spends more R&D.
Reducing Bargaining powers of suppliers:
- Outsourced most if its products from chips to console to controllers. The main game based chips
were licensed (with a chip to avoid unlicensed use).
- They issued licenses (20% royalty % to Nintendo; minimum cap of around 10000 units
mandatory; Nintendo’s approval before games could be released; place a minimum order of
30000 and developers had to wait for 3 months before shipping.
Reducing bargaining power of buyers:
- They were asked not to sell below the cost of $99.95.
- Control of supply: when retailers requested 110 million cartridges, they just supplied a mere 33
million copies.
Mitigating Threat of new entrants: Low.
- Distribution networks, and gaming market size + cost associated with entering that market kept
new entrants out.
Substitutes: Since this is a technology intensive gaming system which was in itself a substitute to the
traditional games it currently has no substitutes. However the video game industry is also a source of
entertainment.
Complements: Game developers are Complementors to the console manufacturer. Complementors
enhance the value of the platform owners, the same as game developers - through the game -
enhance the value of the console to the gamers thus, indirectly, to the platform owners.
Chipmakers, for instance, act as the suppliers to console manufacturers, while other console
manufacturers act as rivals (e.g. Nintendo vs. Sony).
Competition from Rivalry: Atari filled a suit against Nintendo for using unfair trade practices for
monopolizing the market.

How different is the video game industry compared to the computer industry?
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

Video Games
- Video game = Hardware + Software
- Shorter/fast life cycle of video games (also hardware, they make new games only compatible with
new hardware which obliges you to change it). The value of the console, once it is outdated goes
downs dramatically (very quick depreciation).
- More Protection (Ips).
- More attachment from customer.
- More leeway to appropriate vale: Easier to appropriate value than computers. More appropriability.
BUT: (however the way you manage the network effects is very critical, there is a huge need of
Governance [IP rights (Atari did not, Nintendo did [licenses], Bargaining power [Nintendo prohibitions
to deal with competitors)]. Also, there is a uncertainty that needs to be managed [ex. Atari’s over
production vs. Nintendo control on supply]. Main elements that differentiate Atari and Nintendo:
Governance and Quality [low quality Atari and high-quality Nintendo). Additionally, creating a hype in
this industry is very important.
- Value for customers is contingent on number of games.
Computer:
- Depreciation of computer once a new one is launched, is not as fast as consoles
- Value for customers is contingent on the use.
- Appropriability (average) at the industry level.
- Different ways of building Competitive Advantage.

When networks: Economies of scales are replaced by the network size.

Why did Atari Collapse: Because of Lack of Quality + Lack of Governance [main cause of failure).
 They gave too much freedom [governance] to 3rd parties developers and the market was
swamped with rubbish [quality] games.

How the industry is doing now:

 Mobile games revenues in 2021 will account for 52$ of the global market (93.2 billion).
 55% of global players are in Asia-Pacific, and the region still houses some of the fastest-
growing markets worldwide.
 Year 2021. Once you win a cycle, you stay there on top until the latest console is release.
They should ensure that the next cycle of consoles is still there.

Nintendo’s company updates:

 Diversification into animated products: Nintendo is great at Governance. Now they are
creating characters to create cycles.
 Released the NX videogame platform (Nintendo Switch) worldwide in 2017 (fastest growing
console in the company’s history).
 Pandemic caused delays in production and distribution of some of its products (yet in May
2020, the company reported a 75% increase in income compared to previous year [NX
Online Service).
 August 2020: Richest company in Japan.
 2022: Acquired SRD Co, Ltd (Donkey Kong).

Main Takeaways:
 Network effect as a crucial Barrier of Entry (BTW). In this case, it has very high because you
need a huge scale network. Economy of scale = size of the network.
 Platform governance and quality are important for the sustainability of this business model.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

 Be aware of envelopment attacks: Entry by one platform provider into another's market by
bundling its own platform's functionality with that of the target's to leverage shared user
relationships and common components. Ex: Snapchat was subject to an envelopment attack.
 Role of regulators.
 Winner Takes it All (WTA) markets: Is there a way to penetrate these markets and survive?
 Example: WhatsApp is a platform subject to a Direct Network Effect.

[BIG] DATA FOR STRATEGY

Strategy & Data: Reasons behind using Big Data for strategy: The pattern part. The transitioning of
the performance/empirical must be backed up.

Resources/Capabilities and Data:

 Data: Critical source of competitive advantage.
 Resources: Some companies have real power in data, which translates:
- Barrier to entry: it’s a big barrier to entry in certain industry.
- Barrier to imitation: It’s a huge barrier of imitation [hard to copy/match the knowledge
gained from data that certain companies have]. Ex. A stable network of users provide a
barrier to imitation to a platform owner.
- Rare, inimitable access to large datasets. Q: Which data, how large & costly.
 Capabilities: Data allows for:
- Better understanding of the environment.
- More accurate scenario building.
- More rapid feedback on strategy. Q: What capabilities, then.

Group Activity - Music Industry

Talent scouting: Most sensitive thing to do and gives you a sense of the competition.
Hard to target stablish artists.
Spotify: Breaks genres.

Data Analysis Reflections:

 Description not equal to explanation.
 Explanation requires:
a. Background information.
b. Assumptions.
c. Appropriate methods.
d. Ruling out alternatives.
e. In-depth knowledge of the context/
 Importance of asking the right questions.
Competitive Strategy – Prof. Martina Montauni
María Mercedes Redondo

 Importance of visualization.

Good Analysis: Potential questions to ask:

1. How does the environment look like? Industry Analysis.
2. Where to position: VRIO more than generic strategies / Importance of genres.
3. Whom to engage? How? Importance of genres (for how long?) / Creating vs. entering
existing genres.
4. Think of different audiences (Mobileye).