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Stanford University Dept. of Engineering-Economic Systems & Operations Research

EES&OR483 Strategy and Marketing Primer (version 3.0)

This set of "crib notes" is a review of mareting and strategy too!s and concepts that yo may find sef!

for yor pro#ect in EES&OR $%. The intention is notto give yo more wor or reading materia!' bt

rather to provide yo with an aid and reference in form!ating and ana!y(ing yor prob!em.

)!! of the concepts covered in !ectre and the assigned readings are reviewed here. *o might find thesmmaries a he!pf! reminder of what the concepts are and how they can be va!ab!e in yor pro#ect. )!so'

some topics fond here are notcovered in !ectres or assigned readings +specifica!!y' Sections ,.,' ,.$' and

.-./. These are additiona! topics on concepta! +i.e. 01)/ mareting and strategy. Since !ectres inthis pro#ect corse are !imited and emphasi(e 2antitative mode!s for strategy' we do not have the time to

cover a!! the topics in c!ass. 3owever' if yo are not a!ready fami!iar with basic mareting and strategy

framewors' we want to offer yo more e4posre to them. *o may find this broader e4posre he!pf! for

severa! reasons5

nderstand the conte4t of what iscovered in !ectre

proper!y frame yor pro#ect

find !eads to other concepts that may be partic!ar!y re!evant to yor pro#ect

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EES&OR $% Strategy 6rimer .C

1 Generic Strategy: Types of Competitive Advantage1asica!!y' strategy is abot two things5 deciding where yo want yor bsiness to go' and deciding how to

get there. ) more comp!ete definition is based on competitive advantage' the ob#ect of most corporate

strategy5Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm's cost

of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower pricesthan competitors for equivalent benefits or providing unique benefits that more than offset a higher price.

There are two basic types of competitive advantage: cost leadership and differentiation.

-- 0ichae! 6orter' Competitive dvantage' H%' p.

The figre be!ow defines the choices of "generic strategy" a firm can fo!!ow. ) firm7s re!ative position

within an indstry is given by its choice of competitive advantage+cost !eadership vs. differentiation/ and

its choice of competitive scope. 9ompetitive scope distingishes between firms targeting broad indstry

segments and firms focsing on a narrow segment. Beneric strategies are sef! becase they characteri(estrategic positions at the simplest and broadest level. 6orter maintains that achieving competitive

advantage re2ires a firm to mae a choice abot the type and scope of its competitive advantage. There

are different riss inherent in each generic strategy' bt being "a!! things to a!! peop!e" is a sre recipe for

mediocrity - getting "stc in the midd!e".

Treacy and ?iersema +HH/ offer another pop!ar generic framewor for gaining competitive advantage.

:n their framewor' a firm typica!!y wi!! choose to emphasi(e one of three Iva!e discip!ines!: product

leadership, operational excellence, and customer intimacy.

Porter2s "eneri Strategies+sorce5 6orter' H%' p.,/

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2 Conceptual Strategy Frameworks: How CompetitiveAdvantage is Created

8ramewors vs. 0ode!s

?e distingish here between strategy framewors and strategy mode!s. Strategy mode!s have been sed intheory bi!ding in economics to nderstand indstria! organi(ation. 3owever' the mode!s are diffic!t to

app!y to specific company sitations. :nstead' 2a!itative framewors have been deve!oped with the

specific goa! of better informing bsiness practice. :n another sense' we may a!so ta! abot IframeworsK

in this c!ass as referring to the giding ana!ytica! approach yo tae to yor pro#ect +i.e. decision ana!ysis'economics' finance' etc./.

Some 6erspective on Strategy 8ramewors5 :nterna! and E4terna! 8raming for Strategic Decisions

:t may be he!pf! to thin of strategy framewors as having two components5 interna! and e4terna! ana!ysis.

The externalana!ysis bi!ds on an economics perspective of indstry strctre' and how a firm can mae

the most of competing in that strctre. :t emphasi(es wherea company sho!d compete' and what7s

important when it does compete there. 6orter7s 8orces and >a!e 9hain concepts comprise the main

e4terna!!y-based framewor. The e4terna! view he!ps inform strategic investments and decisions. )nternalana!ysis' !ie core competence for e4amp!e' is !ess based on indstry strctre and more in specific

bsiness operations and decisions. :t emphasi(es howa company sho!d compete. The interna! view is

more appropriate for strategic organi(ation and goa! setting for the firm.

6orter7s focs on indstry strctre is a powerf! means of ana!y(ing competitive advantage in itse!f' bt it

has been critici(ed for being too static in an increasing!y fast changing wor!d. The interna! ana!ysis

emphasi(es bi!ding competencies' resorces' and decision-maing into a firm sch that it contines to

thrive in a changing environment. Thogh some framewors re!y more on one type of ana!ysis thananother' both are important. 3owever' neither framewor in itse!f is sfficient to set the strategy of a firm.

The interna! and e4terna! views most!y frame and inform the prob!em. The acta! firm strategy wi!! have totae into accont the partic!ar cha!!enges facing a company' and wo!d address isses of financing'

prodct and maret' and peop!e and organi(ation. Some of these strategic decisions are event driven

+partic!ar pro#ects or reorgs responding to the environment and opportnity/' whi!e others are the sb#ect

of periodic strategic reviews.

2.1 Porter's 5 Forces & Industry Structure

?hat is the basis for competitive advantageJ

)ndustry structureandpositioning within the industryare the basis for mode!s of competitive strategy

promoted by 0ichae! 6orter. The I8ive 8orcesK diagram captres the main idea of 6orters theory of

competitive advantage. The 8ive 8orces define the r!es of competition in any indstry. 9ompetitive

strategy mst grow ot of a sophisticated nderstanding of the r!es of competition that determine an

indstry7s attractiveness. 6orter c!aims' "The !timate aim of competitive strategy is to cope with and'

idea!!y' to change those r!es in the firm7s behavior." +H%' p. $/ The five forces determine indstryprofitabi!ity' and some indstries may be more attractive than others. The crcia! 2estion in determining

profitabi!ity is how mch va!e firms can create for their byers' and how mch of this va!e wi!! be

captred or competed away. :ndstry strctre determines who wi!! captre the va!e. 1t a firm is not a

comp!ete prisoner of indstry strctre - firms can inf!ence the five forces throgh their own strategies.

The five-forces framewor high!ights what is important' and directs manager7s towards those aspects most

important to !ong-term advantage. #e careful in using this tool5 #st composing a !ong !ist of forces in the

competitive environment wi!! not get yo very far L its p to yo to do the ana!ysis and identify the few

driving factors that rea!!y define the indstry. Thin of the 8ive 8orces framewor as sort of a chec!ist forgetting started' and as a reminder of the many possib!e sorces for what those few driving forces co!d be.

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Porter2s 1 'ores E5ements o6 #nd7stry Str7t7re +sorce5 6orter' H%' p.=/

Ne8 Entrants

97yersS7::5iers

S7;stit7tes

#nd7stry

Com:etitors

:ntensity

of Riva!ry

Threat of

S"bstit"tes

Threat of

;ew Entrants

1argaining 6ower

of S"pp!iers

1argaining 6ower

of 1"yers

)eterminants o6 97yer Po8er

9argaining ,everage

M 1"yer concentration vs. firm concentration

M 1"yer vo!"me

M 1"yer switching costs

re!ative to firm

switching costs

M 1"yer information

M )bi!ity to bacward

integrate

M S"bstit"te prod"cts

M 6"!!-thro"gh

Pri3e Sensitivity

M6riceNtota! p"rchasesM 6rod"ct differences

M 1rand identity

M :mpact on 2"a!ityN

performance

M 1"yer profits

M Decision maers

incentives)eterminants o6 S7;stit7tion

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to nderstand the behavior of costsand the e4isting and potentia! sorces of differentiation. Differentiation

res!ts' fndamenta!!y' from the way a firm7s prodct' associated services' and other activities affect its

byer7s activities. )!! the activities in the va!e chain contribte to byer va!e' and the cm!ative costs in

the chain wi!! determine the difference between the byer va!e and prodcer cost.

) firm gains competitive advantage by performing these strategica!!y important activities more cheap!y or

better than its competitors. One of the reasons the va!e chain framewor is he!pf! is becase itemphasi(es that competitive advantage can come not #st from great prodcts or services' bt from

anywhere a!ong the va!e chain. :t7s a!so important to nderstand how a firm fits into the overa!! value

system' which inc!des the va!e chains of its spp!iers' channe!s' and byers.

?ith the idea of activity mapping' 6orter +HH=/ bi!ds on his ideas of generic strategy and the va!e chain

to describe strategy imp!ementation in more detai!. 9ompetitive advantage re2ires that the firm7s va!echain be managed as a system rather than a co!!ection of separate parts. 6ositioning choices determine not

on!y which activities a company wi!! perform and how it wi!! configre individa! activities' bt a!so how

they re!ate to one another. This is crcia!' since the essence of imp!ementing strategy is in the activities -

choosing to perform activities different!y or to perform different activities than riva!s. ) firm is more than

the sm of its activities. ) firm7s va!e chain is an interdependent system or networ of activities'

connected by !inages.

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Constant improvement and upgrading- a firm mst be "rnning scared'" creating new advantages at

!east as fast as competitors rep!icate o!d ones.

References5

6orter' 0ichae!' Competitive dvantage' The 8ree 6ress' ;*' H%.

6orter' 0ichae!' The Competitive dvantage of -ations' The 8ree 6ress' ;*' HHC.

6orter' 0ichae!' "?hat is strategyJ" "arvard #usiness $eviewv@$' n= +;ov-Dec' HH=/5= +%pages/.

2.2 Core Competence and Capabilities

6roponents of this framewor emphasi(e the importance of a dynamic strategy in today7s more dynamic

bsiness environment. They arge that a strategy based on a "war of position" in indstry strctre wors

on!y when marets' regions' prodcts' and cstomer needs are we!! defined and drab!e. )s marets

fragment and pro!iferate' and prodct !ife cyc!es acce!erate' "owning" any partic!ar maret segment

becomes more diffic!t and !ess va!ab!e. :n sch an environment' the essence of strategy is not the

strctre of a company7s prodcts and marets bt the dynamics of its behavior. ) sccessf! company

wi!! move 2ic!y in and ot of prodcts' marets' and sometimes even bsiness segments. Under!ying it

a!!' thogh' is a set of core competencies or capabi!ities that are hard to imitate and distingish the company

from competition. These core competencies' and a continos strategic investment in them' govern the!ong term dynamics and potentia! of the company.

?hat are core competencies and capabi!itiesJ

6raha!ad and 3ame! +HHC/ spea of core competenciesas the co!!ective !earning in the organi(ation'

especia!!y how to coordinate diverse prodction si!!s and integrate m!tip!e streams of techno!ogy.

These si!!s nder!ie a company7s varios prodct !ines' and e4p!ain the ease with which sccessf!

competitors are ab!e to enter new and seeming!y nre!ated bsinesses. Three tests can be app!ied to

identify core competencies5 +/ provides potentia! access to wide variety of marets' +,/ maessignificant contribtion to end ser va!e' and +/ diffic!t for competitors to imitate.

xamples of core competence5 Sony in miniatri(ation' a!!owing it to mae everything from ?a!mans

to video cameras to noteboo compters. 9anon7s core competence in optics' imaging' and

microprocessor contro!s have enab!ed it to enter marets as seeming!y diverse as copiers' !aser printers'

cameras' and image scanners.

Sta!' Evans' and Sch!man +HH,/ spea of capabilitiessimi!ar!y' bt defined more broad!y to

encompass the entire va!e chain rather than #st specific technica! and prodction e4pertise.

xamples of capabilities5 ?a!-mart in inventory management' 3onda in dea!er management and

prodct rea!i(ation.

:mp!ications for strategyJ

/ortfolio of competencies. )n essentia! !esson of this framewor is that competencies are the roots of

competitive advantage' and therefore bsinesses sho!d be organi(ed as a portfo!io of competencies +or

capabi!ities/ rather than a portfo!io of bsinesses. Organi(ation of a company into atonomos

strategic bsiness nits' based on marets or prodcts' can cripp!e the abi!ity to e4p!oit and deve!op

competencies - it nnecessari!y restricts the retrns to sca!e across the organi(ation. 9ore competenceis commnication' invo!vement' and a deep commitment to woring across organi(ationa! bondaries.

/roducts based on competencies. 6rodct portfo!ios +at !east in techno!ogy-based companies/ sho!d

be based on core competencies' with core prodcts being the physica! embodiment of one or more core

competencies. Ths' core competence a!!ows both focs +on a few competencies/ and diversification

+to whichever marets firm7s capabi!ities can add va!e/. To sstain !eadership in their chosen core

competence areas' companies sho!dsee to maximi0e their world manufacturing share in core

products. This part!y determines the pace at which competencies can be enhanced and e4tended

+throgh a !earning-by-doing sort of improvement/.

=

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Continuous investment in core competencies or capabilities. The costs of !osing a core competence

can be on!y part!y ca!c!ated in advance - since the embedded si!!s are bi!t throgh a process of

continos improvement' it is not something that can be simp!y boght bac or "rented in" by

otsorcing. ?a!-mart' for e4amp!e' has invested heavi!y in its !ogistics infrastrctre' even if the

individa! investments co!d not be #stified by ROR ana!ysis. They were strategic investments thatenab!ed the company7s re!ent!ess focs on cstomer needs. ?hi!e ?a!-mart was bi!ding p its

competencies' A-mart was otsorcing whenever it was cheapest. Caution: core competencies as core rigidities. 1owen et a!. ta! abot the !imitations to restricting

prodct deve!opment to areas in which core competencies a!ready e4ist' or core rigidities. Bood

companies may try to incrementa!!y improve their competencies by bringing in one or two new core

competencies with each new ma#or deve!opment pro#ect they prse.

References5

1owen' 9!ar' 3o!!oway' ?hee!right' 6erpeta! Enterprise 0achine' O4ford 6ress' HH$.

6raha!ad' 9.A. and Bary 3ame!' "The 9ore 9ompetence of the 9orporation'""arvard #usiness

$eview' v=%' n +0ay-ne' HHC/5@H + pages/.

Sta!' B.' Evans' 6.' and J

The R1> framewor combines the interna! +core competence/ and e4terna! +indstry strctre/

perspectives on strategy. ca!!s resorces.

9ompetitive advantage is !timate!y attribted to the ownership of a va!ab!e resorce. Resorces are more

broad!y defined to be physica! +e.g. property rights' capita!/' intangib!e +e.g. brand names' techno!ogica!now how/' or organi(ationa! +e.g. rotines or processes !ie !ean manfactring/. ;o two companies have

the same resorces becase no two companies have had the same set of e4perience' ac2ired the same

assets and si!!s' or bi!t the same organi(ationa! c!tre. )nd n!ie the core competence and capabi!ities

framewors' thogh' the va!e of the broad!y-defined resorces is determined in the interp!ay with maretforces. Enter 6orter7s 8orces. 8or a resorce to be the basis of an effective strategy' it mst pass a

nmber of externalmaret tests of its va!e.

9o!!ins and 0ontgomery +HH/ offer a series of five tests for a va!ab!e resorce5. )nimitability- how hard is it for competitors to copy the resorceJ ) company can sta!! imitation if the

resorce is +/physically unique' +,/ a conse2ence ofpath dependentdeve!opment activities' +/

causally ambiguous+competitors don7t now what to imitate/' or +$/ a cost!y asset investment for a

!imited maret' res!ting in economic deterrence.

,. %urability- how 2ic!y does the resorce depreciateJ

. ppropriability- who captres the va!e that the resorce creates5 company' cstomers' distribtors'

spp!iers' or emp!oyeesJ

$. 1ubstitutability- can a ni2e resorce be trmped by a different resorceJ

. Competitive 1uperiority- is the resorce rea!!y better relativeto competitorsJ

Simi!ar!y' bt from a more e4terna!' economics perspective' 6eteraf +HH/ proposes for theoretica!

conditions for competitive advantage to e4ist in an indstry5

. "eterogeneity of resources PQ rents e4ist

) basic assmption is that resorce bnd!es and capabi!ities are heterogeneos across firms. This

difference is manifested in two ways. 8irst' firms with sperior resorces can earn Ricardian rents

+profits/ in competitive marets becase they prodce more efficient!y than others. ?hat is ey is that

the sperior resorce remains in !imited spp!y. Second' firms with maret power can earn monopo!y

@

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profits from their resorces by de!iberate!y restricting otpt. 3eterogeneity in monopo!y mode!s may

res!t from differentiated prodcts' intra-indstry mobi!ity barriers' or first-mover advantages' for

e4amp!e.

,. x*post limits to competition PQ rents sstained

Sbse2ent to a firm gaining a sperior position and earning rents' there mst be forces that !imitcompetition for those rents +imitabi!ity and sbstittabi!ity/.

. )mperfect mobilityPQ rents sstained within the firmResorces are imperfect!y mobi!e if they cannot be traded' so they cannot be bid away from their

emp!oyer competitive advantage is sstained.

$. x*ante limits to competitionPQ rents not offset by costs

6rior to the firm estab!ishing its sperior position' there mst be !imited competition for that position.

Otherwise' the cost of getting there wo!d offset the benefit of the resorce or asset.

:mp!ications for strategyJ

0anagers sho!d bi!d their strategies on resorces that pass the above tests. :n determining what are

va!ab!e resorces' firms sho!d !oo both at e4terna! indstry conditions and at their interna!

capabi!ities. Resorces can come from anywhere in the va!e chain and can be physica! assets'

intangib!es' or rotines.

9ontinos improvement and pgrading of the resorces is essentia! to prospering in a constant!y

changing environment. 8irms sho!d consider indstry strctre and dynamics when deciding whichresorces to invest in.

:n corporations with a divisiona! strctre' it7s easy to mae the mistae of optimi(ing divisiona! profits

and !etting investment in resorces tae a bac seat.

Bood strategy re2ires contina! rethining of the company7s scope' to mae sre it7s maing the most

of its resorces and not getting into marets where it does not have a resorce advantage. R1> can

inform abot the riss and benefits of diversification strategies.

References5

9o!!is' David . 0ontgomery' 9ynthia ). "9ompeting on resorces5 strategy in the HHCs"'"arvard

#usiness $eview' v@' n$ +!y-)gst' HH/5% + pages/.

0.). 6eteraf' "The 9ornerstones of 9ompetitive )dvantage5 ) Resorce-1ased >iew'" in 1trategic

&anagement 2ournalHH' >o!. $' pp. @H-H.

2. (lternati)e Frame"or*s+ ,)olutionary C$ane and ypercompetition

Recent!y' strategy !iteratre has focsed on managing change as the centra! strategic cha!!enge. 9hange'

the story goes' is the striing featre of contemporary bsiness' and sccessf! firms wi!! be the ones that

dea! most effective!y with change' not simp!y those that are good at p!anning ahead. ?hen the direction of

change is too ncertain' managers simp!y cannotp!an effective!y. ?hen indstries are rapid!y and

npredictab!y changing' strategy based on indstry ana!ysis' core capabi!ities' and p!anning may be

inade2ate by themse!ves' and wo!d be we!! comp!emented by an orientation towards dea!ing with change

effective!y and continos!y.

Evo!tionary 9hange

Theories that draw ana!ogies between bio!ogica! evo!tion and economics or bsiness can very satisfying5

they e4p!ain the way things wor in the rea! wor!d' where ana!ysis and p!anning is often a rarity.

0oreover' they sggest that strategies based on f!e4ibi!ity' e4perimentation and continos change and

!earning can be even more important than rigoros ana!ysis and p!anning. :ndeed' overp!anning is a danger

to be avoided.

%

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:n Competing on the dge' Eisenhardt +HH%/ advocates a strategy based on what she ca!!s "competing on

the edge'" combining e!ements of comp!e4ity theory with evo!tionary theory. :n sch a framewor' firms

deve!op a "semi-coherent strategic direction" of where they want to go. They do this by having the right

ba!ance between order and chaos - firms can then sccessf!!y evo!ve and adapt to their npredictab!e

environment. 1y competing at the "edge of chaos'" a firm creates an organi(ation that can change andprodce a continos f!ow of competitive advantages that form the "semi-coherent" direction. 8irms are

not hindered by too mch p!anning or centra!i(ed contro!' bt they have enogh strctre so that changecan be organi(ed to happen. They sccessf!!y evo!ve' becase they prse a variety of moves' and in

doing so mae some mistaes bt a!so re!ent!ess!y reinvent the bsiness by discovering new growth

opportnities. This strategy is characteri(ed by being npredictab!e' ncontro!!ed' and inefficient' bt it

wors. :t7s important to note that firms sho!d not #st react we!! to change' bt mst a!so do a good #ob of

anticipating and !eading change. :n sccessf! bsinesses' change is time*paced' or triggered by the

passage of time rather than events.

:n#uilt to (ast' 9o!!ins and 6orras +HH$/ ot!ine habits of !ong-sccessf!' visionary companies.

Under!ying the habits is an orientation towards evo!tionary change5 try a !ot of stff and eep what wors.

Evo!tionary processes can be a powerf! way to stim!ate progress. :mportant!y' thogh' 9o!!ins and

6orras a!so find that sccessf! companies each have a core ideo!ogy that mst be preserved throghot the

progress. There is no one form!a for the "right" set of core va!es' bt it is important to have them. :n

strategy-spea' it is this core ideo!ogy that most fndamenta!!y differentiates the firm from competitors'

regard!ess of which maret segments they get into. They are deep!y he!d va!es that go beyond "visionstatements" - they are mechanisms and systems that are bi!t into the system over time. )ttention to the

core be!iefs may sometimes defy short-term profit incentives or conventiona! bsiness wisdom' bt it isimportant to maintain them. E4amp!es of core ideo!ogies are5 367s commitment to maing an "origina!

technica! contribtion" in every maret they enter' ?a!-mart7s "e4ceed cstomer e4pectations'" 1oeing7s

"being on the !eading edge of aviation'" and 07s "respect for individa! initiative." ;otice the "ma4imi(e

shareho!der wea!th" is notan ade2ate core ideo!ogy - it does not inspire peop!e at a!! !eve!s and provides

!itt!e gidance.

:n the conte4t of strategy and p!anning' this boo offers a cop!e of important !essons5

Unp!anned' evo!tionary change can be an important component to sccess. Strategy and p!anning

sho!d foster and comp!ement sch change' not sffocate it.

9ertain core be!iefs are fndamenta! to organi(ations' and sho!d be preserved at a!! costs. ;ot

everything abot an organi(ation is a candidate for change in considering a!ternative strategies.

3ypercompetition

Traditiona! approaches to strategy stress the creation of advantage' bt the concept of hypercompetitionteaches that strategy is a!so the creative destrction of an opponent advantage. This is becase in today7s

environment' traditiona! sorces of competitive advantage erode rapid!y' and sstaining advantages can be

a distraction from deve!oping new ones. 9ompetition has intensified to mae each of the traditiona!

sorces of advantage more v!nerab!e the traditiona! sorces are5 price & 2a!ity' timing and now-how'

creation of strongho!ds +entry barriers have fa!!en/' and deep pocets. The primary goa! of this new

approach to strategy is disrption of the stats 2o' to sei(e the initiative throgh creating a series of

temporary advantages. :t is the speed and intensity of movement that characteri(es hypercompetition.

There is no e2i!ibrim as in perfect competition' and on!y temporary profits are possib!e in sch marets.

Sccessf! strategy in hypercompetitive marets is based on three e!ements5

>ision for how to disrpt a maret +setting goa!s' bi!ding core competencies necessary to create

specific disrptions/

Aey capabi!ities enab!ing speed and srprise in a wide range of actions

Disrptive tactics i!!minated by game theory +shifting the r!es of the game' signa!ing' sim!taneos

and strategic thrsts/

H

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Additional Tools for Strategic T!inking and Analysis

3.1 /ame 0$eory

Bame Theory in Strategy

Bame theory he!ps ana!y(e dynamic and se2entia! decisions at the tactica! !eve!. The main va!e of gametheory in strategy is to emphasi(e the importance of thining ahead' thining of the a!ternatives' and

anticipating the reactions of other p!ayers in yor "game." Aey concepts re!evant to strategy are the payoff

matri4' e4tensive form games' and the core of a game. )pp!ication areas in strategy are5

new prodct introdction

!icensing verss prodction

pricing

R&D

advertising

reg!ation

The :mportance of Understanding "The Bame"

Sccessf! strategy cannot depend #st on one firm7s position in indstry' capabi!ities' activities' or what

have yo. :t depends on how others react to yor moves' and how others thin yo wi!! react to theirs. 1yf!!y nderstanding the dynamic with others' yo can recogni(e win-win strategies that mae yo better off

in the !ong term' and signa!ing tactics that avoid !ose-!ose otcomes. 0oreover' if yo nderstand thegame' yo can tae actions to change the r!es or p!ayers of the game in yor favor. 1randenbrger and

;a!ebff +HH/ give some good e4amp!es of this. One way a company can change the game and captre

more va!e is by changing the va!e other p!ayers can bring to it' as the ;intendo e4amp!e i!!strated. :n

smmary' companies can change their game of bsiness in their favor by changing5

players+">a!e ;et"/ - cstomers' spp!iers' sbstittors' and comp!ementors +not #st the

competitors/

added values- the va!e that each p!ayer brings to the co!!ective game

rules- !aws' cstoms' contracts' etc. that give a game its strctre

tactics- moves sed to shape the way p!ayers perceive the game and hence how they p!ay

scope- bondaries of the game.

Bame theory has been a brgeoning branch of economics in recent years. :t is a comp!e4 sb#ect that spans

games of static +one-time/ and dynamic +repeated/ natre nder perfect or imperfect information. The

references be!ow wi!! be he!pf! for those wishing to e4p!ore the theory and mode!ing of game theory inmore detai!. 8or strategy' thogh' it can often be a ma#or step #st to recogni(e certain sitations as games'

and thining abot how a p!ayer can set ot to change the game.

References5

:ntrodction to game theory in corporate strategy

Oster' S.0.'&odern Competitive nalysis' 9hapter' ' O4ford 6ress' HH$' pp.,@-,C.

1randenbrger' )dam 0. ;a!ebff' 1arry . "The right game5 se game theory to shape strategy"

"arvard #usiness $eviewv@' n$ +!y-)gst' HH/5@.

1asic introdction to game theory concepts

).A. Di4it and 1. . ;a!ebff' Thining 1trategically: The Competitive dge in #usiness, /olitics, and

veryday (ife' ?.?. ;orton & 9ompany' pp. $@-=@

Bibbons' R.' 3ame Theory for pplied conomists' 6rinceton5 6rinceton University 6ress' HH,.

1inmore' A.'4un and 3ames: Text on 3ame Theory'

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Rea! Options in 9apita! :nvestment' Trigeorgis'

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* try to generali0e the #lac*1choles basis for real options thining to a genera! adience. ) bit hoy and

simplistic.

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3.3 Strateic Scenarios

Scenarios are powerf! vehic!es for cha!!enging or menta! mode!s of the wor!d. The va!e is not in

predicting the ftre' bt in maing better decisions today. The decision maers co!d be individa!s'

bsinesses' or po!icy maers. Scenarios are a nice comp!ement to the princip!es of decision ana!ysis5 theD) cyc!e ends in decisions and insights' whi!e the scenario process ends in a scenario.

?hy Deve!op ScenariosJ - Uncovering the Decision

1esides predicting the ftre' scenarios aid in strategic decision maing5

&ae the decision conscious. The first step in the scenario process is maing the decision conscios.

6eop!e7s decision agenda is often nconscios' and peop!e sho!d not avoid a decision #st becase

they fee! power!ess.

rticulate current mindsets. Scenarios are !ie stories we can te!! orse!ves - they are a powerf! way

of sspending disbe!ief and avoiding the dangers of denia!. Often' peop!e may refse to thin abot

possibi!ities that are nappea!ing to them. The process of scenario bi!ding' considering both

optimistic and pessimistic and #st p!ain different ftres' over!y e4poses "menta! mode!s" and

assmptions that may be inbred in the organi(ation.

%evelop insights and solid instincts. :nsights come from asing the right 2estions - from having to

consider more than one scenario. )!so' scenario bi!ding he!ps deve!op a gt fee!ing for a sitation'

and assres s that we7ve been comprehensive in covering the bases re!evant to or decision.

3ow to Deve!op ScenariosJ

Deve!oping scenarios is simi!ar to deve!oping and prning inf!ence diagrams in D)' bt the scope of

consideration is a !itt!e broader with scenarios. Sti!!' scenario bi!ders sho!d consider both narrow

+sitation specific/ and broad 2estions. Typica!!y' the scenario bi!ding e4ercise wi!! res!t in no more

than for scenarios - any more is too comp!e4 to draw insights. The set of scenarios sho!d span a range of

otcomes typica!!y something !ie "same bt better'" "worse'" and "different bt better."

Steps to deve!oping scenarios are as fo!!ows5. :dentify the foca! isse or decision. +D) ana!oge5 frame the decision/

,. :dentify the basic driving forces inf!encing the otcome5 socia!' techno!ogica!' economic' po!itica!'

environmenta!. +D) ana!ogeJ/

. :dentify the ey forces in the !oca! environment5 determining the predetermined e!ements and critica!ncertainties. +D) ana!oge5 identify the ncertainties/

$. Ran the ncertainties in order of importance. +D) ana!oge5 tornado diagram/

. Se!ecting scenario p!ots +!ogics/. Scenario p!ots typica!!y rn according to certain !ogics' !ie5

winners & !osers' cha!!enge & response' evo!tion' revo!tion' cyc!es' etc.

=. 8!esh ot scenarios. Each p!ot wi!! !ead to a different decision today. 8rom the different p!ots' narrow

and combine them to form two or three coherent scenarios.@. )ssess imp!ications of scenarios on decision.

%. :dentify !eading indicators and signposts.

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3. t$er Particularly Rele)ant ,,S&R Core Concepts

Stdents in EES&OR have a host of ana!ytica! too!s avai!ab!e to add insight to strategic thining and

ana!ysis. Some of the more direct!y re!evant topics inc!de5

Decision )na!ysis

- decision hierarchy and framing

- strategy tab!es- tornado diagrams- ana!ysis of decisions nder ncertainty

- va!e of information

- options in decisions

8inance

- investment ana!ysis

- rea! options

Economics

- demand-oriented pricing +dynamic' monopo!istic pricing/- game theory

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" #arketing #odels for $roduct StrategyEES&OR $% teaches two prodct p!anning methodo!ogies that may be sed independent!y or as

comp!ements to each other. They add rigor to strategy at the !eve! of prodct p!anning and imp!ementation.

)n e4ce!!ent reference for these and other mareting mode!s is

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:mportant Bide!ines for 0aret 8orecasting

The mode! forecasts totalmaret potentia! for a prodct' notsa!es for a partic!ar company. 9ompany

sa!es wo!d depend on maret share of the tota!' which depends on partic!ar prodct variab!es !ie

2a!ity' cost' and promotion' and distribtion. Diffsion mode!s on!y he!p with the big pictre se

con#oint ana!ysis or other methods to forecast maret share.

:n practice the acta! coefficients are sa!!y estimated by ana!ogy to past prodcts. 9oefficients for

past prodcts are genera!!y avai!ab!e in tab!es' or may be estimated by regression. Remember that diffsion mode!s on!y represent demand associated with the tria! of a prodct.

)dditiona! terms need to be added to accont for repeat prchase. ) mode! that taes into

consideration both tria! and repeat prchase demand wo!d be a comp!ete sa!es forecast.

The 1ass mode! is a predictive mode! that is most appropriate for forecasting sa!es of a discontinuous

new techno!ogy or drab!e prodct that has no competitors. :n sch sitations' the sccess of the

prodct may be partic!ar!y ncertain' and the 1ass mode! forecast may on!y depict one possib!e

otcome.

?here yo are in the prodct !ife cyc!e dictates the mareting and cstomer segmentation strategy.

?ith discontinos innovations different mareting strategies are ca!!ed for at different stages of the

techno!ogy !ife cyc!e to ensre that the prodct reaches a mass maret +see Section ./.

0ore recent research has focsed on re!a4ing the assmptions of the 1ass mode!5

)!!owing maret potentia! to vary over time ;ot restricting that diffsion of an innovation be independent of a!! other innovations

)!!owing geographica! bondaries of the system in which diffsion taes p!ace to vary over time

:ncorporating the effect of mareting actions sch as pricing' advertising' etc. on the diffsion process

9onsidering spp!y restrictions

9onsideration of ncertainty

9onsider variations in diffsion rates in different contries

)!!ow word of moth effects to vary over time

The area of mareting p!anning mode!ing inc!des the incorporation of feedbac effects into diffsion

mode!s to trn advertising and pricing decisions over time into optima! contro! prob!ems.

References

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consmers wo!d choose among new' modified' and e4isting prodcts. 9on#oint ana!ysis a!!ows s to

ana!y(e ftre maret scenarios based on primary maret research. Other techni2es' sch as historica!

ana!ysis' wo!d be insfficient to forecast the maret for new prodcts' whereas con#oint ana!ysis can

mode! consmers reaction to hypothetica! prodcts that may not yet e4ist.

9on#oint ana!ysis is a decompositionalmode! in that va!es are derived from consmers responses to

interview 2estions' as compared to asing consmers to direct!y estimate mode! parameters. :n directassessment' respondents are ased how !ie!y they are to by a certain prodct or how mch they wo!d be

wi!!ing to pay for a prodct with an attribte improvement. This techni2e is !imited in that prodcts are

not shown in a competitive conte4t and these 2estions do not genera!!y represent rea!istic prchase

decisions. )!ternative!y' con#oint ana!ysis ses inference' which provides a more accrate pictre of

consmers bying behavior. :n the ana!ysis of responses to 2estions abot hypothetica! prodct

concepts' we can infer the va!e to each respondent of having each attribte !eve!. Rather than e4pectingrespondents to provide direct assessments' they are ased to mae a nmber of decisions that are more

rea!istic and natra!. :n a typica! pairwise comparison' two prodct concepts are considered

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Re6erenes+organi(ed by needsNinterest and ordered by sef!ness/5

) host of references and gides to choosing software are avai!ab!e at http5NNwww.sawtoothsoftware.comN

Betting Started with 9on#oint on *or 6ro#ect 9rry' oseph' I9on#oint )na!ysis5 )fter the 1asicsK

Orme' 1ryan' I?hich 9on#oint 0ethod Sho!d : UseK +HH@/

9!ient :nteraction

9rry' oseph' IUnderstanding 9on#oint )na!ysis in 0intesK

Orme' 1ryan' I3e!ping 0anagers Understand the >a!e of 9on#ointK

Sawtooth Software' IUsing 9hoice-1ased 9on#oint to )ssess 1rand Strength and 6rice SensitivityK

+HH=/

9hoosing the )ppropriate Software

Sawtooth Software' I)9) System L )daptive 9on#oint )na!ysis' >ersion $.CK +HH-HH=/

Sawtooth Software' I9>) L ) 8!!-6rofi!e 9on#oint System from Sawtooth Software' >ersion ,.CK

Sawtooth Software' IThe 919 System for 9hoice-1ased 9on#oint )na!ysisK +an HH/

Strh!' Steven' IDiscrete 9hoice 0ode!ing5 Understanding a I1etter 9on#oint than 9on#ointK

9on#oint 0ethodo!ogy Design and Research

Breen' 6a! E. and )bba 0. Arieger' I9on#oint )na!ysis with 6rodct-6ositioning )pp!ications'K

"andboos in $ ; &1, v. +HH/5$=@ + pages/

?, -o.@ +ne HH=/ 3ber' oe!' Dan )rie!y' and Bregory 8ischer' IThe )bi!ity of 6eop!e to E4press >a!es with

9hoices' 0atching and RatingsK +HH%/

Orme' 1ryan' 0ar )!pert' and Ethan 9hristensen' I)ssessing the >a!idity of 9on#oint )na!ysis-

9ontinedK

3ber' oe!' Dic ?ittin' and Richard ohnson' Ierss Standard 9on#ointK +HH,/

?ittin' Dic' and oe! 3ber' ohn 8ied!er' and Richard 0i!!er' IThe 0agnitde of and an

E4p!anationNSo!tion for the ;mber of . Srinivasan ' I9on#oint )na!ysis in 0areting5 ;ew Deve!opments with

:mp!ications for Research and 6racticeK +post-H@%/

Breen' 6a! and >. Srinivasan ' I9on#oint )na!ysis in 9onsmer Research5 :sses and Ot!oo'K

2ournal of Consumer $esearch, Vol. A +H@%/

H
http://www.sawtoothsoftware.com/http://www.sawtoothsoftware.com/

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)ssess the ftre profit potentia! of each bsiness by consider the maret growth rate and the

companys fit.

Deve!op a strategic game p!an that maes sense in !ight of the companys indstry position' ob#ectives'

si!!s' and resorces.

The bsiness strategic p!anning process5

1"siness

mission

E4terna!

environmenta!

ana!ysis

:nterna!

environmenta!

ana!ysis

Boa!

form"!ation

Strategy

form"!ation

6rogram

form"!ation :mp!ementation8eedbac

and contro!

1oston 9ons!ting Brop Browth-Share 0atri45 I:nvest in the stars' get rid of the dogsK The frameworpromotes the importance of maret growth rate and maret share in determining the strategic importance of

a prodct.

StarsQuestion

Marks

Cash Cows Dogs

MarketGrowthRate

0%

10%

20%

10x 1x .1x

Relative Market Share

)!ternative >iews Of The >a!e 9reation 6rocess5

One traditiona! bsiness approach ignores the impact of mareting research on prodct design. Under this

framewor' the first step is to mae the prodct' and then the second step is to figre ot how and to whom

it wi!! be so!d. This is sti!! a common prob!em in many companies today. ) more sophisticated paradigmrecogni(es that the consmer demand sho!d drive prodct design. 0areting research' segmentation'

positioning' and con#oint ana!ysis are a!! e4amp!es of this more sophisticated approach. The diagramsbe!ow i!!strate the two paradigms.

Traditiona! physica! process se2ence5

,

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0ae the 6rod"ct Se!! the prod"ct

Design

prod"ct6roc"re 0ae 6rice Se!!

)dvertiseN

6romoteDistrib"te Service

The va!e creation and de!ivery se2ence +0cAinsey/5

9hoose the va!"e 9omm"nicate the va!"e

So"rcing

0aing

Distrib"ting

Servicing

6rovide the va!"e

9"stomer

segmentation

0aret

se!ectionN

foc"s

>a!"e

6ositioning

6rod"ct

deve!

Service

deve!6ricing Sa!esforce

Sa!es

promotion

)dvertising

5.3 4ar*et Sementation8 0aretin8 and Positionin

IST6 0aretingK is one way to characteri(e the modern strategic mareting approach. ST6 stands for

1egmenting' Targeting' and/ositioning. The idea is to se a more direct Irif!eK approach instead of an

ndirected IshotgnK approach5

. :dentify segmentation

variab!es and segment themaret.

,. Deve!op profi!es of

res"!ting segments.

Market argeting Market PositioningMarket Segmentation

. Eva!"ate the

attractiveness of each segment.

,. Se!ect the target

segment+s/.

. :dentify possib!e

positioning concepts for each target segment.

,. Se!ect' deve!op' and comm"nicate

the chosen positioning concept.

)dditiona! ;otes On Segmentation' Targeting )nd 6ositioning5

The fo!!owing set of notes provides a brief ot!ine some of the ey ideas in this area.

)!ternative approaches to mareting strategy5

0ass mareting5 one prodct for a!! cstomers

6rodct-variety mareting5 a variety of prodcts for cstomers to choose from

Target mareting5 targeted prodcts for specific cstomer grops

6atterns of maret segmentation5

3omogeneos preferences

Diffsed preferences

9!stered preferences

0aret segmentation procedre +one common approach/ +Aot!er' HH@/5

/ Srvey Stage5 E4p!oratory interviews and focs grops' fo!!owed by 2estionnaires to assess5

)ttribtes and their importance ratings

,,

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1rand awareness

6rodct-sage patterns

)ttitdes toward the prodct category

Demographics' etc.

,/ )na!ysis Stage5

8actor ana!ysis app!ied to remove high!y corre!ated variab!es.

9!ster ana!ysis app!ied to Icreate a specific nmber of ma4ima!!y different segmentsK./ 6rofi!ing Stage5 Each c!ster is profi!ed in terms of its distingishing attitdes' behavior' V Each

c!ster is a maret segment.

0aret targeting5 criteria for eva!ating maret segments5

Segment si(e and growth

Segment strctra! attractiveness +6orters forces/

9ompany ob#ectives and resorces

8ive patterns of target maret se!ection +)be!!/ +p. ,%$/5

M1 M2 M3 M1 M2 M3 M1 M2 M3 M1 M2 M3 M1 M2 M3

P1 P1 P1 P1 P1

P2 P2 P2 P2 P2

P3 P3 P3 P3 P3

Singleseg!ent

"on"entration

Singleseg!ent

"on"entration

Market

s#e"iali$ation

Pro%u"t

s#e"iali$ation

&ull "overage

P ' Pro%u"t M ' Market

Deve!oping a positioning strategy5

I6ositioning is the act of designing the companys offer and image so that it occpies a distinct and

va!ed p!ace in the target cstomers minds.K +Aot!er/

US65 Uni2e Se!!ing 6osition. 6romotion of a sing!e benefit to the maretp!ace. Effective strategy+as opposed to toting m!tip!e benefits/.

6ositioning strategies5

)ttribte positioning

1enefit positioning

UseNapp!ication positioning

User positioning

9ompetitor positioning

6rodct category positioning

a!ityNprice positioning

Three steps5. :dentify differences

,. 9hoose most important differences

. Effective!y signa! differences to the target maret

Economics5 Differentiationpremim pricing

Treacy and ?iersema5 strategies that !ead to sccessf! differentiation and maret !eadership5

Operationa! e4ce!!ence

,

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9stomer intimacy

6rodct !eadership

Differentiation5

6rodct differentiation5

Service differentiation5

6ersonne! differentiation5 :mage differentiation5

5. (naly9in Industries and Competitors

:ndstries and competition p!ay a centra! ro!e in strategic ana!ysis. The fo!!owing notes reiterate these ideas

from a mareting perspective.

:ndstry concept of competition - factors affecting indstry strctre and competition5

;mber of se!!ers and degree of differentiation

Entry and mobi!ity barriers

E4it and shrinage barriers 9ost strctres

>ertica! integration

B!oba! reach

:ndstry strctre types5

6re monopo!y

6re o!igopo!y

Differentiated o!igopo!y

0onopo!istic competition

6re competition

0aret concept of competition5 :t may be important to consider competitors which mae different prodctsbt which meet simi!ar needs. This is different from an indstry perspective when the view of competition

is !imited to those firms offering the same or very simi!ar prodcts.

6rodct segmentation

0aret segmentation

9ompetitive inte!!igence5 gathering data abot competitors. 1enchmaring.

Tre maret orientation ba!ances consmer and competitor considerations. 9hanging consmer needs and

!atent competitors are ey factors and can be more devastating than e4isting competitor actions.

,$

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5.5 0$e 0ec$noloy (doption :i#e Cycle+ iscontinuous Inno)ations

Some basic mareting concepts sho!d be considered when thining abot maret forecasts and new

prodct strategies. 8or instance' thining of the new prodct diffsion cyc!e +1ass mode!/ as an inevitab!e

cyc!e of sa!es can be very mis!eading. 8irst of a!!' the diffsion mode! forecasts tota! maret potentia!' andsays nothing abot the maret share at a partic!ar company. Second' the decisions of the firm can

inf!ence the sa!es. This is fair!y obvios when it comes to the inf!ence of prodct 2a!ity and cost' btmareting strategy is a!so critica!!y important when introdcing new prodcts that are discontinos

innovations. :n these cases' the maret is not yet aware of the need for the new prodct' and an

nderstanding of how a prodct moves throgh the techno!ogy !ife cyc!e wi!! he!p a prodct reach its f!!

potentia! faster and with higher !ie!ihood of sccess.

Beoff 0oore' in his boos Crossing the Chasm+HH/ and)nside the Tornado+HH/' draws on maretingtheory and high-tech e4perience to describe the e!ements of the prodct !ife cyc!e for techno!ogy

innovations. 3is wor e4amines how commnities respond to discontinuous innovations - or any new

prodcts or services that re2ire the end ser in the maretp!ace to dramatica!!y change their past behavior.

3e describes how companies mst position their prodcts different!y throgh the cyc!e to reach their f!!

sa!es potentia! and become an indstry standard instead of a nove!ty. 0any new hi-tech prodcts start

a!ong a c!assic new prodct diffsion crve' bt fai! soon thereafter. )nyone deve!oping strategy for

discontinuousinnovations sho!d be fami!iar with the ideas 0oore writes abot. Throgh the variosphases of the techno!ogy adoption !ife cyc!e' very different strategies for prodct and service offering and

positioning are ca!!ed for.

The basis of the techno!ogy adoption !ife cyc!e is simi!ar to the basis for diffsion mode!s5 different grops

of potentia! cstomers react different!y to innovations' and adoption proceeds from most enthsiastic to

most conservative. 9ommnities respond to discontinos innovation - when confronted with the

opportnity to switch to a new infrastrctre paradigm' cstomers se!f-segregate a!ong an a4is of ris-

aversion. 0oore separates cstomers into five categories' a!ong which the cyc!e of new techno!ogy

adoption proceeds5

. :nnovators * technology enthusiastswho are fndamenta!!y committed to new techno!ogy on the

gronds that sooner or !ater it wi!! improve their !ives.,. Ear!y )dopters - visionariesand entrepreners in bsiness and government who want to se the

innovation to mae a brea with the past and start an entire!y new ftre. Ear!y 0a#ority -pragmatistswho mae p the b! of a!! techno!ogy infrastrctre prchases their

prchasing behavior is based on evo!tion rather than revo!tion' and they by on!y when there is a

proven trac record of sef! prodctivity improvement.

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The #owling lley

) period of niche-based adoption in advance of the genera! maretp!ace' driven by compe!!ing

cstomer needs and the wi!!ingness of vendors to craft niche-specific who!e prodcts. ) whole

productis the minimm set of prodcts and services necessary to ensre that the target cstomer wi!!

achieve his or her compe!!ing reason to by. 6ragmatists want a who!e prodct' with the necessaryser infrastrctre and cstomer spport. )t this stage' companies sho!d resist the temptation to try to

provide a genera! prpose who!e prodct and simp!ify the who!e prodct cha!!enge. To get cstomerson board' service content is high' RO: to end ser mst be high' and partnerships with other companies

may be ca!!ed for. Sccess in the niche can then be !everaged e!sewhere. The two eys to targeting

the right niche cstomers here are +/ the segment has a compe!!ing reason to by' and +,/ the segment

is not crrent!y we!! served by any competitor.

The Tornado

)n g!y and fren(ied period of mass-maret adoption' when the genera! maretp!ace +ear!y ma#oritycstomers/ switches over to the new infrastrctre paradigm. :t7s a herd menta!ity. Aeys to sccess in

this period are to ignore cstomer needs and prodct modifications and

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483primerV3(1)