Week 1 Class 1 – What is Strategy

1. Strategy within Markets: Foundation 4. Strategy Beyond Markets

• Industry analysis • Shared value creation
• Internal analysis
2. Strategy within Markets: Dynamic 3. Strategy Across Markets
Perspectives
• Business model innovation • Corporate strategy
• Disruptive innovation & competitive • Alliances & acquisitions
dynamics
• Network effects

Making Strategy – Conceptual Overview

Strategy comprises of…
• Goal
• The environment – threats & opportunities
• Entrepreneur’s values & attitude toward risk
• Entrepreneur’s resources & capabilities – strengths & weaknesses
Implementation levers
• People and rewards
• Organization structure
• Systems and processes
• Strategic leadership – lever and resource allocation decisions, develop support
among stakeholders
Outcome: performance
What is Strategy?
• An integrated and coordinated set of commitments and actions that an
organization takes to attain its ultimate goals (profit, growth, effectiveness, social
benefit)
• The essence of strategy is choosing to perform activities differently than rivals do
• For-profit companies à gain sustainable competitive advantage, or means of
creating value, over similar organizations
• Realized strategies are often combinations of intended and emergent strategies
3 overarching themes – corporate level strategy themes
• Crafting strategy is a creative process
o Subjectivity of assessment
o Influence of values, goals
o Importance of insight
• Crafting strategy is a recursive process
o Industries are dynamic
 o Strategies require constant learning
o Strategy formulation and implementation are intertwined
o Strategic positions often take years to establish
• Strategy implies trade-offs
o Allocating resources to maximize expected outcome
o Decision about actions and non-actions

Week 1 Class 2 – Industry Analysis

Atluri, Dietz, & Henke: Competing in a World of Sectors without Borders
• Digital revolution giving rise to opportunities for firms with distribution component
to have its borders redefined
• More movement towards “digital ecosystems” – access to end to end experience
for wide range of products & services through a single access gateway
• Rising expectations = need for more data to predict wants
3 factors contributing to demarcated retail sector:
1. Frame of reference – purchases will be understood as a consumer’s purchase
behaviour and will have predictive value
2. Growing idea of data & analytics to transform disparate info à insight about
needs
3. Network factor – many industries will co-exist, businesses will be fighting for
higher ground in the light of these changes
4 priorities in the game plan for sectors without borders
1. Adopt an ecosystem mindset – change mindset, innovate, think beyond the
company & industry
2. Follow the data – data diversity from other industries can be helpful
3. Build emotional ties to customers
4. Change partnership paradigm – companies need more & different kinds of
partners

Lecture – Industry Analysis

• 19% of variance in firm profitability is explained by industry
• Analytical tools help decision makers be systematic, thorough, direct attention on
important things, identify root causes, and justify recommendations, but do not
dictate strategic decisions
Porter’s 5 Forces + 3
3 forces of horizontal competition
• Threat of new entrants
o Barriers to entry:
 § Product differentiation, brand loyalty
§ Economies of scale
§ Large fixed costs
§ Absolute cost advantages independent of scale (proprietary
technology, access to raw materials, location)
§ Switching costs
§ Government regulation
§ National culture
• Industry rivalry
o Barriers to entry: strong brands, proprietary technology, start-up costs
o Barriers to exit: few other opportunities, sunk investments
o Intensity of rivalry is stronger when:
§ Competitors are numerous or equally balanced
§ High exit barriers
§ Slow industry growth
§ Competitors have high fixed costs
§ Little differentiation / low switching costs
§ Overcapacity in the industry
• Threat of substitutes
o Ex: bottled water à coke & Pepsi; Netflix à Blockbuster & Hollywood
video
o Strongest when:
§ Customers face few switching costs
§ Substitute product’s price is lower
§ Substitute product’s quality and performance capabilities are equal
to or greater than those of the competing product
§ Ex: oil, natural gas, electricity are relatively close substitutes for
home heating; train is a close substitute to air travel over short
distances
2 forces of vertical competition
• Bargaining power of suppliers
o When firms in the supply industry can dictate terms, they can extract
greater profits
o Suppliers have bargaining power when:
§ Supplier industry is dominated by few large companies
§ Their products are critical to the success of firms in the focal
industry (no suitable substitutes)
§ Difficult to switch supplier due to differentiated products
§ Suppliers can vertically integrate forward, but firms in the focal
industry can’t integrate backward to supply their own needs
• Bargaining power of buyers
o Many suppliers and few buyers à buyers capture greater share of profits
o Most powerful when:
§ Many small firms in the focal industry and few large players
§ Buyers purchase in large quantities
 § Buyers can switch sellers at low cost
§ Buyers purchase from multiple sellers at once
3 additional forces
• Threat of complementary organizations
• New strategies
• Social forces
Countering the 5 forces
• Neutralize supplier power – standardize specs
• Counter customer power – expand services, elevate switching costs
• Temper price wars – differentiate from competitors’ offering
• Scare off new entrants – elevate fixed costs of competing (ex: R&D)
• Limit threat of substitutes – offer value through wider product accessibility (ex:
soft drinks availability)
Position your firm where the forces are weakest!

Week 2 Class 1 – Gananoque Brewing Company

• North American beer industry is highly concentrated
• Classic economic theory predicts virtuous cycle of economies of scale & scope
à lower product costs à quality/price advantage à greater sales volumes
o But not the reality… Number of microbreweries tripled in past 5 years

Resource Space of a Market

Low vs. high industry concentration –
number of players competing across the
entire resource space

• High industry concentration leads to partitioning

o Resource space partitioned into core and periphery
o Core continues to concentrate, while niche players proliferate at the
periphery
 • Resource partitioning will happen in industries where mass producers cannot
enter niche markets, because of:
o Cultural constraints on their identity (ex: beer industry)
o Other constraints (ex: airline industry, railways: geographical distance
protects small niche players from larger generalists)
• In general, happens when it is too costly for generalists to expand offerings into
niche markets
Beer industry
• Core – generalist firm identity
o Automated process
o Large volumes
o Global
o Commoditized
o Standard / low quality
• Peripheral – specialist firm identity
o Craftsmanship
o Small volumes
o Local
o Authentic
o High quality
• Failure of “fake” microbrews – large producers tried to compete with
microbreweries with in-house fake “craft” à unsuccessful
o Then large producers turned to acquisition of microbreweries to enter the
segment

Week 2 Class 2 – Value Chain Analysis

Prahalad & Hamel: The Core Competence of the Organization
• Companies should view itself as a collection of competencies instead of
collection of businesses
• In the long run, competitiveness derives from ability to build at lower cost and
speedier than competitors; core competencies that spawn unexpected products
 • Core competency – collective learning in organization, especially how to
coordinate diverse production skills & integrate multiple streams of tech
o About the organization of work and delivery of value
o Doesn’t diminish with use; are enhanced as they’re applied but they need
to be nurtured & protected
o Cost of losing a core competence can only be partly calculated in
advance, and a company that fail to invest in core competency building
will have difficulty entering an emerging market
• Core product – physical embodiment of one or more core competencies;
components that contribute to the value of end products (ex: Honda’s engines)
o Components/subassemblies; contribute to value of end products
o Should seek to maximize world manufacturing share in core products
o Competence carriers should be brought together often to trade notes &
ideas, to build sense of community

Lecture – Internal Analysis

Why do some firms outperform others in the same industry?
• Competitive advantage is a firm’s ability to outperform its competitors
• Source of competitive advantage is value creation, via lower costs/ differentiation
• Sustained competitive advantage leads to higher profits than competitors
Value Chain
• Total of primary and support value-
adding activities by which a company
produces, distributes, and markets a
product/service (ex: Canadel)

• Outsourcing is the sourcing of function, product, or service of a value chain

activity from another company
o Objective: improve business focus; provide access to world-class
capabilities; share risks
o Cautions: greatest value à outsource only to firms possessing a core
competence in terms of performing the primary or support activity being
outsourced
 § Evaluate resources and capabilities à don’t outsource activities in
which the firm itself can create and capture value
§ Environmental threats and ongoing tasks à do not outsource
activities that are used to neutralize environmental threats
§ Firm’s knowledge base à do not outsource activities that stimulate
the development of new capabilities and competencies
• Offshoring is taking an activity from a high-cost country to a low-cost country
Resources and Capabilities (Competencies) à Strategy
• Resources – inputs to create goods and services
o Undifferentiated or firm-specific
o Tangible (financial, physical, organizational, technological) or intangible
(human, innovation, reputation, brand)
• Capabilities – things a firm can do, and the capacity or ability to integrate
resources to achieve a desired objective
o The combination of procedures and expertise on which a firm relies to
produce goods and services
o Unique combinations create core competencies that have strategic value
and can lead to competitive advantage
§ Provides access to various markets (ideally)
§ Increases perceived customer benefits
§ Difficult for competitors to imitate
o All core competencies have the potential to become core rigidities –
former competencies that now generate inertia and stifle innovation
4 criteria for sustainable competitive advantage (VRIO)
• Valuable – capabilities that help a firm neutralize threats or exploit opportunities
• Rare – capabilities that are not possessed by many others
• Costly to imitate – other firms cannot develop easily usually due to unique
historical conditions, casual ambiguity, or social complexity
• Exploitable by organization – capabilities that the organization is equipped to
utilize
o Awareness within top management
o Readiness to utilize
o Willingness to utilize
Sustaining competitive advantages
• Competitive advantages can disappear because of:
o Rate of competence obsolescence in the environment
o Easiness of imitability of core competence
o Availability of substitutes of core competence
o Learning capabilities from competitors (influenced by prior strategic
choices and capacity for learning)
• Dynamic capability – a firm’s ability to modify & revise resources & capabilities
in order to fit within an ever-changing environment
o Processes that integrate, reconfigure, acquire, or divest resources in order
to use the companies’ stock of resources and capabilities in new ways

Week 3 Class 1 – Strategic Positioning

Porter: What is Strategy?
• Operational effectiveness – performing competitive advantage better
o Can lead to others copying company’s practices, creating a shifting
outwards of a productivity frontier & competitive convergence
o Can be fixed through strategic positioning (achieve sustainable
competitive advantage by preserving company distinctions)
Principles of strategic positioning – business level strategy themes
1. Strategy is creation of unique & valuable position, involving different sets of
activities
a. Serving few needs of many customers
b. Serving broad needs of few customers
c. Serving broad needs of many customers in narrow market
2. Strategy requires tradeoffs in competing (what not to do)
3. Strategy involves creating “fit” among a company’s activities
• Company can outperform rivals if it establishes a difference that it can preserve
• Variety based positioning - based on choice of product/service varieties instead
of customer segments
Types of strategic fit
1. First order fit – consistency between strategy & activity
2. Second order fit – activities are reinforcing e.g. Neutrogena soap in hotels
3. Third order fit – optimization of effort – all systems & operations match strategy
• Very hard for existing companies/new entrants to copy fit 2 & 3
• Compromises & inconsistencies in pursuit of growth will erode competitive
advantage
Economic drivers of strategy
• There’s an optimal range for diseconomies of scale; at a certain point, you will
incur more costs
 • Economies of scale are not permanent; only applies to current scale (fixed cost
would cost a lot if you go down in output)
• The learning effect (through economies) – firms will learn from past operations &
lower costs / be more efficient over time
o These are permanent gains! You can’t unlearn something

Lecture
What is Strategy?
• It should be more than slogans; translate into identifiable actions and activities
• Concerned with positioning with respect to rivals
• Not to be confused with operating efficiency (which is only a component or result
of strategy)
• Should be a coordinated set of actions that run through the entire organization,
not just isolated initiatives
• Always involves tradeoffs (e.g. having the lowest cost might mean not having the
best service, ex: IKEA)
The productivity frontier
• There is not one “optimal” position; several positions on the frontier are viable

Business Level Strategy

• An integrated and coordinated set of commitments and actions the firm uses to
gain a competitive advantage in a single product market
• At its most basic level, a firm’s business-level strategy comprises:
o Who it will serve (customer groups) à Position
o What needs those target customers have that it will satisfy (customer
needs), and which it won’t satisfy à Trade-offs
o How those needs will be satisfied (resources and capabilities) à Strategic
fit
• Business-level strategies are intended to create differences between the firm’s
position and those of its rivals
How to Increase Value Capture?
• Differentiation – integrated set of actions designed to produce or deliver
goods/services (at an acceptable cost) that customers perceive as being different
in ways that are important to them
o Charge sufficiently higher prices to more than off-set the added costs of
differentiation
o Firm must understand what attributes its target customers are willing to
pay a premium for
o Can be along one or more dimensions
o Differences can be real or perceived
o Key drivers: image, customer support, service, quality, design,
undifferentiation (when a business survives because of stability, ex: corner
grocery store)
o Purpose: to drive up customer’s willingness to pay and generate demand
sufficient to recoup added costs and generate enough profits to make
strategy worthwhile
• Cost leadership – an integrated set of actions designed to produce or deliver
goods/services at the lowest cost, relative to competitors
o Relatively standardized products
o Features acceptable to many customers
o Lowest competitive price, high volumes
• Firms sometimes try to pursue both lower costs and premium prices through
differentiation – very risky
o An integrated cost/differentiation business level strategy often involves
compromises (neither the lowest cost nor the most differentiated firm)
o Lack strong commitment and expertise that accompanies firms following
either a cost leadership or differentiated strategy
o Not possible to serve all segments in a market efficiently
o Delivering superior customer service is costly while reducing costs imply
lowering quality & cutting services … but some firms pull it off!
• Don’t be stuck in the middle (ex: Porter Airlines)
o Almost guaranteed low profitability
o Loses high-volume customers who demand low prices
o Loses high-margin businesses to firms who have achieved differentiation
o Also suffers from blurred corporate culture and conflicting activities and
motivations
Organizational requirements
Low-cost leadership Differentiation
Elements of • Scale-efficient production • Emphasis on branding and
strategy process and plant advertising
• Design or manufacture • Design, service, quality
(simplification)
• Control of overheads and R&D
• Avoidance of customer-driven
additional costs
Resources & • Access to capital • Marketing
organization • Process engineering • Product engineering &
requirements • Tight cost control innovation
• Job specification • Product improvement
• Incentives for quantitative • Qualitative metrics and
targets incentives
• Efficient logistics and supplier • Strong cross-functional
links coordination

Economic Drivers of Strategic Positioning

• Economies of scale – exist during a period of time if the average total cost for a
unit of production is lower at higher levels of output
o Must review costs: fixed, variable, marginal, total, average
o Sources: specialization, spreading fixed costs, technological scale, better
use of joint products
o Sources of diseconomies: bureaucracy, high labour costs, inefficient
operations
• Learning curve – permanent cost improvement with the cumulative level of
production
• Economies of scope – if a firm produces two or more products and can share
resources among two or more of these (share manufacturing machines), thereby
lowering the costs of each product
• Production technology – new entrances try to compete against industry
incumbents with significant scale and experience advantages by introducing a
production technology that’s subject to different economies
• Production design – alter to lower production costs
• Location – attain lower production costs by locating operations in cheaper labour
markets
Forced Positions
• An integrated set of actions taken to produce goods or services that serve the
needs of a particular competitive segment
o Specific buyer group (ex: youth or senior)
o Specific segment of a product line (ex: professional craftsmen vs DIY)
o Specific geographic markets (ex: East coast vs West coast)
 • Advantages:
o Large firms may overlook small niches – focused firm may be able to
serve a narrow market segment more effectively than can larger industry-
wide competitors
o Focus may allow firm to direct resources to certain value chain activities to
build competitive advantage
Expanding Out of Generic Strategies
• Path 1: start in low cost
o Source of cost advantage
becomes a source of
differentiation allowing
premium prices
o Hard to imitate by
competitors
o Ex: quality for Toyota,
customization for Dell
• Path 2: start in differentiation
o Expand market share by
entering larger market

Week 3 Class 2 – Lululemon Case

Week 6 Class 1 – Business Model Innovation
D’Aveni: Mapping Your Competitive Position
• Use price-benefit positioning map to capture competitive positions
Valuing intangible benefits
• Many companies seek to retain by offering intangible benefits without knowing if
customers will pay for them
o Should calculate premiums earned on intangible secondary benefits
• Anticipate shifts in value of benefits
• Finding paths of least resistance

Lecture
Strategic Analysis Tool: Price-Benefit Map
Creating the map
1. Specify boundaries of the market (geographic, customer segment)
2. Define price dimension: initial price vs life-cycle cost; with or without transaction
costs; bundled or unbundled service
3. Define primary benefit dimension: list possible dimensions, determine which
commands most variance in price (regression analysis)
4. Research and plot various firms on the map, using as much objective data as
possible (ratings)
Understanding Competitive Dynamics
• Commoditization – to render a product or service widely available and
interchangeable with one provided by another company
o Fundamental phenomenon in market evolution
o May affect any industry
o Increasingly common in recent years
o May follow different trajectories
3 market trajectories (“commodity traps”)
1. Deterioration trap – caused by a dominant low cost, low benefit firm that
swallows market share
o In the long run, you can’t compete with the discounter (scale advantage)
o Possible response strategies:
i. Escape the trap: sidestep the discounter
§ Moving upscale (ex: Hermes, Chanel) – reduce offerings,
target non-seasonal items, reduce stores and licenses to
create exclusivity
§ Move away (ex: Starbucks) – create new value proposition
through new channel or geographical reach
§ Move on – move out of commoditized business, diversify in
other high-end market (ex: Armani, Versace, Bulgari
designer hotels and restaurants, furniture)
ii. Destroy the trap: undermine the discounter
§ Redefine value (ex: H&M guest designers for low-priced
items)
§ Redefine price (ex: bundling services, “club” warehouse
pricing Costco)
iii. Turn the trap to your advantage: contain and control the
discounter
§ Contain by surrounding (ex: H&M introduced specialized
stores for children, accessories)
§ Contain by moving customers up market (ex: Gillette against
Bic disposable razors)
2. Proliferation trap – caused by multiple threats (substitutes, imitators, market
fragmentation) which create new price-benefit positions, surrounding and eroding
the firm’s product uniqueness
 o Ex: SEARS attacked by specialty catalogues, boutique stores, wholesale
clubs, high-end department stores
o Possible response strategies:
i. Escape the trap: select your threats (narrow the fronts)
§ Move to growing segments, scale down threatened
segments
ii. Destroy the trap: overwhelm the treats
§ Concentrate your resources geographically
§ Attack proliferators sequentially (ex: Microsoft’s attacks on
Corel)
iii. Turn the trap to your advantage: outflank the threats
§ Seek “white space” or new segments (ex: fast casual
restaurants: Chipotle)
3. Escalation trap – caused by rising benefits for the same or lower price;
competition moves to the lower right-hand corner of the price-benefit map
o Possible response strategies:
i. Escape the trap: re-seize momentum (ex: Geico, AllState in
insurance)
ii. Destroy the trap: reverse the momentum
§ Freeze positions through long-term contracts (requires
market power)
iii. Turn the trap to your advantage: harness the momentum
§ Grow market share by lowering prices (ex: Apple’s iPod and
iPhone strategy)
o Escalation leads to ultimate value where customers get a lot but margins
have eroded; at that point, firms need to define a new primary benefit to
start a new escalation cycle
o Learn to anticipate emerging primary benefits that will structure an
industry
o Learn to transition from one primary benefit to the next; similar to a relay
race: handing off the baton is as important as the speed of individual
runners
o Innovation capabilities are critical to drive (or counter) escalation
Strategic Groups within Industries
Within an industry, firms in a competitor group use similar strategies that differ from
other industry groups. Implications include…
• The closest industry competitors are those in the group
• Various industry groups are differentiated; they compete on different things
• Mobility barriers may inhibit the movement of competitors from one strategic
group to another
Four Actions Framework of New Market Creation
The key to discovering a new value curve lies in answering four basic questions
• Reduce – what factors should be reduced well below the industry standard?
• Create/add – what factors the industry never offered should be created/added?
• Raise – what factors should be raise well above the industry standard?
• Eliminate – what factors that the industry has taken for granted should be
eliminated?
 Week 7 Class 1 – Disruptive Innovation
Bower & Christensen: Disruptive Technologies: Catching the Wave
• Companies often focus on main customers so much that they become
blind to new technologies in emerging markets
o Managers must beware of ignoring new technologies that don’t
initially meet the needs of their mainstream customers
• Tech changes that damage established companies are usually not radically
new/difficult from a tech POV, but have 2 characteristics:
o Different package of performance attributes (not immediately valued by
existing customers)
o Performance attributes consumers do value improve so rapidly that new
tech invade established markets
• Managers must be able to recognize these technologies, and protect them from
processes & incentives geared towards customers
o Well-managed companies are consistently ahead of their industries in
developing and commercializing new technologies to address next-
generation performance needs
• Managers can avoid missing the next wave by paying careful attention to
potentially disruptive technologies that do not meet current customers’ needs
Method to spotting & cultivating disruptive technologies
1. Which upcoming tech is disruptive, of those which are real threats
2. Define strategic significance of disruptive technology
3. Locate initial market for disruptive technology
4. Place responsibility for building a disruptive tech business in an independent
organization
5. Keep the disruptive organization independent

Lecture – Disruptive Innovation

The “Technology Mudslide” Fallacy
• Relies on the assumption that leading firms fail because they can’t continuously
develop technology to “keep up” with competition and increasing customers’
demands
o It always takes constant running just to stand still in terms of competition
o Firms that become complacent lose ground and lose market share
• In reality, rate of technological change often exceeds customer demand
• Firms fail because they are so good at sticking to what their customers want
Disruptive Innovation

Key characteristics
• Introduce non-standard functional attributes that attract new customers in a niche
market
o Very different package of attributes from the one mainstream customers
historically value
• Perform in an inferior manner on 1-2 attributes that mainstream customers value
• Generally make possible the emergence of new markets
• Make steadily progress until it meets the performance standards of mainstream
market
Innovator’s dilemma
• The logical, competent decisions of management that are critical to the success
of their companies are also the reasons why they lose their positions of
leadership 


Why do market leaders fail to adequately respond to disruptive innovations?

1. Companies depend on customers and investors, but leading firms’ most
profitable customers do not want to use the products/services based on the
disruptive technology
 2. Small markets don’t solve the growth needs of large companies
a. Initially, disruptive technologies promise lower margins, not higher profits
3. Markets that don’t exist cannot be analyzed
a. Disruptive innovations are first commercialized in insignificant markets;
demanding quantification of market size and expected returns leads to
paralysis
4. An organization’s capabilities define its disabilities
5. Technology supply may not equal market demand
a. Pace of technological progress exceeds what mainstream customers can
absorb
What can managers do to protect their firms from disruptive innovations developed by
competitors?
1. Should I enter the market space created by the disruptive business model?
2. Can I serve the new customers with my existing business model, or do I need a
new one?
3. Should I adopt the invading business model that’s disrupting my market?
4. If I develop a new business model, how separate should it be organizationally
from my existing business model?
5. If I create a distinct business unit, what are the distinct challenges of pursuing 2
business models at once?

Week 8 Class 1 – Network Effects

Shapiro & Varian: Networks and Positive Feedback – How to Exploit Network Effects
• Old industrial industry driven by economies of scale; information economy
(especially high-technology industries) is driven by economics of networks
• The value of connecting to a network depends on the number of people already
connected to it
o Network effects = demand-side economies of scale
o One network can dramatically increase a company’s value by
interconnecting with other networks
• Positive feedback – success begets success; failure breeds failure
o Can lead to winner take all effect
• Negative feedback – strong gets weaker; weak gets stronger
• Large networks are more attractive to users than smaller ones à network
externalities
• Collective switching costs – combined switching costs of all users
o Biggest force working in favour of incumbents, and barrier for entrants and
innovators
To evolve & provide consumers with easy migration
• Requires ability to achieve compatibility with existing products
• Build a new network by linking to old one
 • Obstacles:
o Technical obstacles – use creative design, think in terms of systems,
consider converts & bridge technologies
o Legal obstacles
• Firms will need to decide between being “open” with their new product or
maintaining “control” of it
Lessons
• Positive feedback is the dynamic process by which the strong gets stronger, and
weak gets weaker
• Adoption dynamics in the presence of positive feedback follows a predictable
pattern – slow start, explosive growth, then saturation
• Consumers value ITs that are widely used, just as they value communication
networks with broad reach – resulting demand-side economies of scale
• Positive feedback works to the advantage of large networks and against small
networks
• Consumer expectations are vital to obtaining the critical mass necessary to fuel
growth – expectations management!!!
• Firms introducing new products and technologies face fundamental tradeoffs
between openness vs control and performance vs capability

Lecture – Network Effects

• Metcalfe’s Law: the value of a network goes up as the square of the number of
users
Traditional Markets
• Auto, steel, petroleum, chemicals
• Structured by supply-side economies of scale – larger companies have lower
unit costs due to this
• Negative feedback mechanisms often prevent monopolies from emerging
• Diseconomies of scale limit the growth of largest firms
o Traditional economies of scale based on manufacturing have generally
been exhausted at scales well below total market dominance
o Positive feedback based on supply-side economies of scale ran into
natural limits
• Small firms can flourish in niche markets
• Often result in oligopolies
Network Markets
• Railway, telephone, IT, social media
• Structured by demand-side economies of scale – customers want a product
because it is widely used (ex: Microsoft Word)
 o Buyers are wary of products that are not yet popular, fearing they will pick
a loser and be left stranded with marginally valuable equipment
• Positive feedback mechanisms result in the strong becoming stronger, and the
weak becoming weaker
• Customer expectations and luck play a major role
• Marketing tactics to influence consumer expectations are key
• Tend toward monopolies; “winner-take-all” markets
Customer Perceived Value
• Network-independent value – provided by the product independently of the
network (ex: clock or camera on your phone)
• Direct network effect – value provided by the cumulative number of users in the
network (ex: number of phone users)
• Indirect network effect – value added by complementary products or services
(ex: number of apps available on a smartphone)
Competition in Network Markets
• Being a first mover in a network market is not necessarily decisive
• Many first movers have failed (ex: Apple’s Newton, Picture Phone)
• But supply-side and demand-side economies of scale can add up, accelerating
growth
• When two or more firms compete for a market where there is strong positive
feedback, only one may emerge as the winner
o Such market is tippy – it can tip in favour of one player or another
• Users will choose the network with the most users
When are Network Effects Strongest?
• Network effects don’t exist in some industries
• Strong scale economies (supply-side or demand-side) make market tippy
(unstable?)
• Markets most likely to tip toward a single technology are those with high
economies of scale and low demand for variety
Compatibility vs. Performance Tradeoff: Evolution or Revolution?
• Revolution: let customers bear the pain of switching
• Usually, early adopters are enthusiasts who care about the performance gain
• Key: attract influential users, and kick start a bandwagon
• Tactics: low early pricing, sponsor early adopters
• Manage expectations to convince consumers and competitors of future success
• More realistic in fast growing markets: new users alone can provide critical mass
Openness vs. Control Tradeoff
• To maximize value of new technology, you often need to share that value with
other players in the industry
 • In choosing between openness and control, ultimate goal is to maximize value of
your technology, not your control over it
• Your reward = total value added to industry * your share of industry value
Generic Network Strategies
Control Openness
Compatibility Controlled migration Open migration
Performance Performance play Discontinuity

Controlled network strategies

• Controlled migration – improved technology, compatible with existing, but
proprietary
o Only possible for market leaders
o Ex: Microsoft’s Windows, Apple’s OSX
• Performance play – new, incompatible technology, with strong proprietary
control
o The boldest and riskiest strategy, usually adopted by outsiders (new
entrants, startups), for real technological ruptures
o Ex: Nintendo Entertainment System
Open network strategies
• Open migration – new, compatible technology, supplied by many vendors
o Friendliest strategy to customers, because low switching costs
o Ex: modems, fax machines, USB drives
• Discontinuity – new technology, incompatible with existing technology, but
available from multiple vendors
o Favours efficient manufacturers, or providers of value-added services
o Ex: CD system created by Sony and Phillips
Crafting Strategy in Network Markets
Questions to ask when creating strategy in network markets
1. How strong are the network effects in my market?
2. What are the drivers of network effects: direct effect (social dynamics)? Or
indirect effects (complementary products/services)?
3. What are the individual and collective switching costs?
4. What network strategies are competitors using?
5. Performance vs. compatibility tradeoff: should I favour evolution or revolution?
6. Openness vs. control trade-off: what are the costs and benefits of opening the
network?
 Week 9 Class 1 – Diversification
Collis & Montgomery: Creating Corporate Advantage
• Corporations create value through coordination with its multi-business activities
Triangle of corporate strategy

Competitive
advantage

Resources Businesses

Organization

Coordination Control

Resource continuum
• Resources – general vs. specialized
• Scope of business – wide vs. narrow
• Coordination mechanisms – transferring vs. sharing
• Control systems – financial vs. operating
• Corporate office size: small vs. large
Lessons in long-term success
1. Strategy guided by vision of how a firm creates value
2. Strategy is a system of interdependent parts; success depends on both quality of
individual elements & how they reinforce each other
3. Strategy must be consistent with and capitalize on outside opportunities
4. Benefits of corporate membership must outweigh costs
5. Strategy is not one size fits all!

Lecture – Diversification
Key Questions in Corporate Strategy
• Corporate strategy – selecting and managing a group of businesses competing
in different product markets
o Should make the corporate whole add up to more than the sum of its
business unit parts (creating a corporate advantage)
• How is economic value created through multi-market activity? à value creation
question (diversification, vertical integration)
 • When and why should multi-market activity be undertaken inside the corporation
rather than through contracts, joint ventures, or other institutions arrangements?
à scope question (M&A, strategic alliances, internal venturing and divestiture)
Creating Value through Multi-Market Activity
• Diversification – what businesses should the firm be in? What synergies can be
created by entering new, related, or unrelated markets?
• Vertical integration – which function should be kept in-house, which should be
outsourced (transaction cost theory)? Can subcontractors provide a function at
lower cost/higher quality than we would internally?
Diversification
Disadvantages of operating in a single business
• Higher vulnerability to market risk (all eggs in one basket)
• Limited growth opportunities (if saturated market)
• Vulnerability to suppliers and buyers
• Limited opportunity for economies of scope
Contrasting perspectives
• Conglomerate discount: failing to create corporate advantage and undervalued
on stock market after diversification
• Creating corporate advantage is difficult and risky
Types
• Related diversification – entry into new business activity that shares
commonalities with existing businesses in one or more components of the value
chain
• Unrelated diversification – entry into a new business area that has no obvious
relationship with any area of the existing business
o May be pursued due to: anti-trust regulation, tax laws, low performance,
uncertain future CF, firm risk reduction
o Capturing benefits when holding unrelated businesses in the corporate
portfolio is difficult
o Building corporate advantage rests on the capabilities and skills of
corporate managers and intangible relationships (brand value, financial
expertise)
o Ex: Boeing diversifying into smartphones: using strength of security; Apple
electric car
The triangle of corporate strategy – successful diversification requires fit with all sides
• Resources – what is the nature of resources that create corporate advantage?
• Organization – in which businesses can the corporation best leverage those
resources?
 • Businesses – which coordination mechanisms, incentives and control systems
should the corporation implement?
Creating corporate advantage through economies of scope
• Sharing activities and/or resources across business units (easier and most
effective with private goods ex: sales force, component manufacturing)
o Tangible relationships arise from the ability to share activities in the value
chain because of common customers, channels, technology, and other
factors
o They provide competitive advantage if sharing activities lowers costs or
enhances differentiation enough to exceed the cost of sharing
o Can be achieved when jointly performing one activity (ex: sharing sales
force) or having multiple activities (ex: cross-selling)
o Ex: Volkswagen
• Transferring resources across business units (easier with public goods ex:
brand name, best practices)
o Intangible relationships arise from the ability to transfer know-how (core
competencies) among separate value chains
o Businesses can benefit from one another even though they cannot share
activities
o They can share the skills and know-how generated from commonalities
(ex: type of customer, purchase, manufacturing process each deals with,
following a common strategy and a similar configuration of the value
chain)
o Ex: Bombardier
Costs of Diversification
• Number of businesses – info overload can lead to poor resource allocation
decisions and create inefficiencies (diseconomies of scope)
• Coordination among businesses – resource sharing and pooling arrangements
that create value also cause coordination problems; as the scope of
diversification widens, control and bureaucratic costs increase
• Extent of diversification must be balanced with bureaucratic costs
Why diversification efforts fail
• Wrong motives (ex: manager’s ego, higher salary expectations)
• Complexity of implementation or integration between businesses
• Sharing of control on common resources or services
• Illusory synergies
Vertical Integration
• Incorporate new stages of the raw-material-to-consumer value chain into the firm
• Backward integration into supplier functions: assures constant supply of inputs,
protects against price increases
• Forward integration into distributor functions: assures proper distribution of
outputs, captures additional profits beyond activity costs, superior control of
brand and marketing
Advantages
1. Builds entry barriers to new competitors by denying them inputs and/or
customers
2. Facilitates investment in highly-specific assets that would be too risky for either
the buyer or supplier to make otherwise
3. Assures supply & distribution channels
4. Protects product quality through control of input quality and distribution and
service of outputs
5. Improves internal scheduling (ex: JIT inventory systems) responses to changes
in demand
6. Protects proprietary info and technology
Disadvantages
1. Cost disadvantages of internal supply purchasing (internal suppliers not subject
to market forces)
2. Remaining tied to obsolescent technology (sunk costs on supply or distribution
side)
3. Lack of strategic flexibility in times of changing technology or uncertain demand
4. Increased costs of internal coordination, communication, and control
Alternative to vertical integration…
• Outsourcing – allowing subcontractors to perform value creation activities,
particularly those outside of core activities
• Advantages:
o Efficient subcontractors reduce overall costs
o Allows for the concentration of available resources in core activities
o Firm becomes more flexible and responsive
• Disadvantages:
o Failure to learn from outsourced activity
o Too much dependence on a single supplier
o Danger of outsourcing value creation activities leading to competitive
advantage
• Spectrum of alternatives: spot market contracting – alliances – vertical integration
o Former two seeks to capture benefits of VI while avoiding bureaucratic
costs
 Week 10 Class 1 – Strategic Alliances and Acquisitions
Dyer, Kale, & Singh 2004: When to Ally and When to Acquire
• Ally ß you want another company’s workforce (talent tends to leave when
acquired)
• Acquire ß if you want manufacturing plants for economies of scale
o When there are abundant resources
o When you want redundant resources to cut costs (eliminate) or create
economies of scale
• Management must consider uncertainty – tech/product uncertainty; will
consumers use/like the product?
• If uncertainty is high, should enter non-equity/equity alliance
• Be careful of competitor companies who also want to acquire

Lecture
Types of Cooperative Strategies
• Equity strategic alliances: cooperative agreements between firms to share
resources and capabilities, with equity sharing
• Non-equity strategic alliances: cooperative agreements between firms to share
resources and capabilities, without equity sharing
• Joint venture: two or more firms create an independent company to share
resources and capabilities, in which they share equity
Expected Synergies
• Modular synergy: resources are managed separately, only results are pooled
o Relies on pooled interdependence à departments operate independently
but contribute pieces to the overall puzzle; blind and indirect dependence
on each other
o Ex: alliance between airline and hotel chain
o Non-equity alliances best suited
• Sequential synergy: resources are combined to achieve a common goal
o Relies on sequential interdependence à one unit produces an output
necessary for performance by the next unit (ex: assembly line)
o One company complete its tasks & passes on results to partner to do its
bit
o Ex: biotech firm developing new drug, partnering with pharma giant who
masters the drug approval process
o Equity alliances best suited
• Reciprocal synergy: resources are combined iteratively, in a complex process
o Relies on reciprocal interdependence à output of one department
becomes the input of another, but in a cyclical manner
o Ex: oils companies partnering in oil exploration, marketing and distribution
o Acquisitions best suited
Choosing between Alliances and Acquisitions
Extent of redundant resources (duplication)

Non-equity alliance Equity alliance Acquisition

• Eliminate redundant resources in acquisition to cut costs

Importance of “soft” resources (people, knowledge)

Non-equity alliance Acquisition Equity alliance

• When synergy generating resources are hard, acquisitions are better; hard
assets are easy to value, and companies can generate synergies from them
relatively quickly
• When companies have to generate synergies by combining HR, avoid
acquisitions
o Employees of acquired companies become unproductive
Degree of market uncertainty (market risk)

Non-equity alliance Acquisition Equity alliance

• When uncertain, should enter non-equity or equity alliance – limits exposure to

risk as less money is invested than in an acquisition
Stock Market Response to Announcements
• Alliances à 84% average stock market gains 10 days following announcement
• Acquisitions (acquirers) à 0% stock market gains
o Acquisitions on average either destroy or don’t add shareholder value
Business-Level Cooperative Strategies
• Vertical complementary strategic alliance – formed between firms that agree to
use their skills and capabilities in different stages of the value chain to create
value for both firms (ex: Apple and Foxconn)
• Horizontal complementary strategic alliance – formed between partners who
agree to combine their resources and skills to create value in the same stage of
the value chain (ex: Renault-Nissan)
Building the Case for an Alliance
Enhancing competitive advantage through…
1. Improving operations – gaining economies, enhancing resources, managing
risks, sharing costs (ex: Husky and Shell share refineries and have agreements
to use each other’s facilities)
 2. Enhancing competitive conditions – expanding distribution networks,
developing common standards, providing for collusion (ex: the Blue Ray format
was sponsored by SONY, in partnership with Phillips and other firms)
3. Facilitating market entry and exit – providing low cost entry and exit, managing
uncertainty (ex: GE and BP collaborate to develop hydrogen power projects)
Using alliances to discover new possibilities…
• P&G revitalized the old “Mr. Clean” brand through strategic alliances with Magla
and Old World Industries
Screening Potential Partners
1. Strategic fit – are the partners’ objective compatible? For how long?
2. Resource and financial fit – are partners willing and able to contribute the
resources and competencies?
3. Cultural fit – can the partners understand each other? Do they share the same
business logic and commitment?
4. Structure, systems, and processes fit – can the decision-making and control
mechanisms be aligned?
5. Additional fit criteria – what other key questions should be on the table, such
as timing, other alliances, alliance alternatives, environmental context, and
competitive pressures?
Approaches for Managing Cooperative Strategies
• Cost minimization approach (bounded allies) – formal contracts specify how
the cooperative strategy is to be monitored and how partner behavior is to be
controlled
• Opportunity maximization approach (open-minded) – maximize partnership’s
value-creation opportunities
o Partners take advantage of unexpected opportunities to learn from each
other and to explore additional marketplace possibilities
o Fewer formal, limiting contracts
Alliance Portfolios
• Early strategy theories implied an atomistic view of firms
• In practice, inter-firm collaboration is widespread, and is increasingly critical to
firm performance
• Firm’s “portfolio of ties” – collection of all strategic alliances for a focal firm
• Benefits of alliance portfolio – resource sharing, information sharing, economies
of scale
• Important variables
o Strength of tie
o Characteristics of partner firms
o Portfolio size, density, diversity
Characteristics of alliance portfolios…
• Large – more resources (info, technology), but higher cost of maintaining the
portfolio (managing alliances)
• Dense – stronger interconnectedness, may facilitate shared norms, but also risk
of info redundancy
• Sparse – less in-depth cooperation, shared norms and trust among partners, but
more informational benefits
Firms with dedicated alliance function do better!
• Higher stock market gains on alliance announcements
• Higher long-term alliance success rate
Network Cooperative Strategies
• Network strategy – cooperative strategy where several firms agree to form
multiple partnerships to achieve shared objectives
o Stable alliance network
o Dynamic alliance network
• Effective social relationship and interactions among partners are keys to a
successful network cooperative strategy
Key principles of network advantage…
1. Links among alliance partners transfer information, cooperation, and power
2. Even though networks transfer information, power, and cooperation, these
advantages are not evenly distributed within the network!
3. Success comes to firms that actively manage their alliance portfolios
4. Network advantage accrues to those firms which are best positioned in their
alliance networks
Risks of Cooperative Strategies
• Partner may act opportunistically
• Misrepresentation of competencies brought to the partnership
• Partner fails to make committed resources and capabilities available to its
partners
• Firm may make investments that are specific to the alliance while its partner does
not
• Coordination costs; divorce costs
Seller beware!
• Alliance can be a temporary deal leading to a subsequent merger or acquisition
• Good idea for the buyer, but not for the seller!
• Acquisition after an alliance leads to lower premium paid by the buyer

Week 11 Class 1 – Shared Value Creation?

Porter & Kramer: Creating Shared Value
• Markets defined not just by economic needs, but also societal needs
• Competitiveness of company & health of communities around it are closely
intertwined (they’re interdependent)
• Shared value – policies & operating practices that enhance
competitiveness of company while advancing economic & social
conditions
o Identifying and expanding the connections between societal and economic
progress
o Expanding the total pool of economic and social value using benefits
relative to costs
How shared value is created
1. Reconceiving products & markets (is this product good for our customers?)
2. Blurring profit/non-profit boundary
3. Redefining productivity in value chain (innovation can increase productivity and
profit as well as be good for society, ex: lower energy usage)
Lecture – Shared Value Creation?
Zara’s Recent Controversy
• Zara shoppers find labour complaints inside clothes
• Syria refugee sweatshop; exploiting children to make cheap clothes for the chain
Insights
• Social/environmental issues are often morally ambiguous
• Blind application of standard strategy frameworks may lead to flawed decisions
• Are strategy frameworks themselves part of the problem?
The Responsibility Paradox
• Nikefication of the Economy (vertical disintegration) leads to opacity in the value
chain
• But in parallel, there is an increasing accountability of firms
• Responsibility paradox: firms have less control over the actions of a myriad of
suppliers, but public scrutiny and expectations of corporate sustainability have
increased
Strategic Analysis Tools are Amoral
• They help you be systematic but can also provide a false sense of
comprehensive analysis
o People (and other living creatures) impacted by the decision may not be
represented
• It’s the manager’s job to speak for those who are not present at the table but will
be affected by the decision being made
• Let your brain do the analysis but give your heart a veto
Moving Beyond Traditional CSR
• Management theorists have long seen social and environmental issues as an
externality of market exchange
• This leads to seeing social issues as costly burden separate from core business
activities
• Paradoxically, this framing has long been shared by businesses, governments,
and environmentalists alike; it leads to framing social issues as a problem of
regulatory compliance, or as social responsibility
• How can social and environmental issues become integrated in core business
strategies?
Creating Shared Value (CSV)
Explore ways to create financial value by addressing social needs…
1. Reconceive products to meet unmet needs – ex: low-cost cellphones as new
market to the poor
o Meeting needs in underserved markets, ex: microfinance was invented to
serve unmet financing needs in developing countries; now it’s growing
rapidly in the US, filling an important yet unrecognized gap
o Starting point is to identify all the societal needs, benefits, and harms that
are or could be embodied in the firm’s products
2. Redefine productivity in the value chain – ex: reducing excess packaging in
product distribution to reduce cost and limit environmental impact
o Energy use and logistics à redesign shipping routes
o Reduce resource consumption à water in production
o Employee productivity à provide health benefits for better productivity
o Location à local sourcing for reducing carbon emissions and building
better relationships with local suppliers
3. Enable cluster development – ex: enable suppliers’ skill development
o Build clusters to improve company productivity while addressing gaps or
failures in the framework conditions surrounding the cluster
o Nestlé: build agricultural, technical, financial, and logistical firms and
capabilities in each coffee region to further support efficiency and high-
quality local production

Economic Theory as Self-fulfilling Prophecy

• Every agent is actuated only by self interest
o It is also a learned behavior
• People often voluntarily share resources with others, but economics graduates
are more likely to free-ride than others
o More likely than nurses to tend toward inefficient free-riding equilibrium in
threshold games
o Less likely to give to charity and more corruptible
• Framing and language about strategy and about the nature of human interactions
become self-fulfilling
How can social and environmental issues be integrated into the core activity of
businesses?
What assumptions about human nature and behavior are embedded in our strategic
choices?
Do our strategic choices contribute to creating the kind of world we want to live in?
Nestle in China: How to create shared value along a value chain?

How does Nestle appear to have defined creating shared value (CSV)?
Objectives:
1. Product/need: Chinese coffee consumers; Work conditions/wages; Producer
communities
2. Redefining value chain productivity: focus on bean quality
3. Cluster development: farmer communities

Looking forward, how much CSV translate into improvements in marketing or the
supply chain to enhance Nestle’s corporate strategy?
CSV principle Farming Processing Marketing/distrib
ution
Address unmet Work conditions Vision statement
needs
Redefine Tools, expertise Searching for Differentiate
productivity in to increase bean economies of brand image
value chain quality scale & energy (premium
reductions product)
Cluster Improving crop Recycling options
development yield sustainable in stores
practices

Should Nestle focus on buying green coffee beans that are socially & environmentally
certified (e.g. FairTrade), or should it instead emphasize and expand its efforts to work
directly with farmers in China?
⁃ FairTrade
⁃ Easier
⁃ Less risk
⁃ Recognized premium: can charge more
⁃ Established brand
⁃ Work with farmers
⁃ Less imitable
⁃ Reputation risk if things go wrong
⁃ Not easily recognized by consumers
⁃ Potential for improvement in productivity
⁃ Potential brand value & drive consumer willingness to pay if demonstrate going
beyond FairTrade

What would be the advantages and disadvantages of backward integration to achieve

the sustainability objectives set by Nestle? *Exam: pros & cons of backward
integration*
Pros:
⁃ More control over sourcing of raw materials —> provide insight on backward
integration
⁃ Protects against price volatility —> How exactly does it affect the case
⁃ Scale by reducing fragmentation
⁃ Capturing incremental margins
Cons:
⁃ Long-term investment (coffee beans take 4 years to mature)
⁃ Tied to the investment; may suffer lower productivity

***
MC, T/F, SA, Mini case (worth most)
***

Automakers being involved in the financing of their cars is an example of:

A) vertical integration
B) horizontal integration
C) related diversification
c) synergistic integration

In the fast food industry, real estate and site location skills are:
A) strength and a weakness
B) competence and a tradeoff
C) resource and a capability
D) opportunity and a threat

Buyers may have bargaining power when
A) there are high switching costs
B) there are few sellers
C) there is a threat of forward integration
D) products are standardized

WestJet is an airline company that targets price sensitive travellers by providing good
CS, using one of plane and flying out of secondary airports. This company is pursuing
a _____ strategic approach
A) low cost leadership
B) differentiation
c) focused cost leadership
D) focused differentiation

Bargaining leverage, price sensitivity, threat of backward integration are some

elements influencing the five-forces factor of
A) threat of new entrants
B) buyer power
C) supplier power —> more affected by forward integration?
D) threat of substitutes

A conglomerate is a business that is so diversified it does not fit into one specific
industry category
A) true
B) false

As industries enter periods of rapid growth, early movers are virtually guaranteed rapid
growth
a) true
b) false

A valuable resource that’s readily available contributes to competitive advantage

a) true
b) false

A firm that is a second mover is also, by definition, a late mover

a) true
b) false

SA: gives value to use examples

Explain what the network effect is and how it affects the business environment
⁃ Effect of positive and negative feedback on a company’s network of users
⁃ Affects especially information industries, where a network’s value depends on
the number of people connected to it
⁃ Positive feedback: success —> success; failure —> failure
⁃ Creates winner-take-all markets
⁃ Negative feedback: strong gets weaker; weak gets stronger
⁃ Prevent monopolies from emerging
⁃ Competition makes the market tippy - can tip in favour of one player or another
- users will choose the network with the most users
⁃ Large networks are more attractive to users than smaller ones - positive network
externalities (when I buy a fax machine, the value of your fax machine is enhanced)
⁃ Collective switching costs is the biggest force working in favour of incumbents;
barrier for entrants and innovators
⁃ Firms need to decide between being open vs. maintaining control, and
compatibility vs. performance
⁃ Network strategies: controlled migration, performance play, open migration,
discontinuity
⁃ Network effects strongest - markets most likely to tip towards a single
technology where there is high economies of scale and low demand for variety

Explain what the innovator’s dilemma is and how it would apply to a full-service
stock brokerage vs. an online stock brokerage
⁃ The logical, competent decisions of management that are critical to the success
of their companies are also reasons why they lose their leadership positions
⁃ Firms’ most profitable customers do not want to use products based on
disruptive technology
⁃ Companies focus on these main customers (with higher margins) so much that
they become blind to new technologies in emerging markets (which there is little
information and low margins)
⁃ Stock brokerages have stuck to traditional, full-service offerings to meet
customers’ values of security and trust
⁃ Online stock brokerage is a disruptive innovation that offers convenience while
compromising security, but it can reach a larger audience quickly (higher adaptability)
⁃ Traditional stock brokerages slow to recognize and adapt these technologies

Why does resource partitioning happen in some industries, as it did in the NA

beer industry?
⁃ High industry concentration leads to partitioning - resources partitioned into
core and periphery
⁃ Core continues to concentrate, while niche players proliferate at the periphery
⁃ Happened in the beer industry because mass producers cannot enter niche
markets - cultural constraint on identity
⁃ Mass producers could not imitate the craftsmanship and local, authentic image
of microbreweries
⁃ Proliferation of smaller niche firms