Will Mitchell on Industry Analysis (5 Forces + 3 more)

Will presents his 5 forces plus 3 more framework. In the video, he discussed the standard 5 forces framework but adds the following 3 critical elements that are left out of the five forces: Complementors, Social forces, and new strategies. Complementors are organizations that provide complementary products or services to an industry (e.g., cases for iPhones). New strategies refer mostly to rivals who are pursuing distinct strategies that may alter the fundamental way that firms compete in the industry. Social forces refer to the customer values and norms that may affect their preferences and thus, their willingness to pay. In short, these additions may serve to unpack factors that drive change in the five forces over time in an industry. Here is the video:

Contributed by Will Mitchell

Will Pokémon Keep GOing?

The augmented reality (AR) game, Pokémon Go, has taken the world by storm as players roam the real world catching Pokémon and battling in Pokémon gyms. The game has set 5 records since its launch in July 2016 — including the most revenue by a mobile game in its first month ($206.5 million). Nintendo’s stock doubled 15 days into the release, adding $7.5B in value, but then settled back into a mere 50% increase when it became clear that Nintendo was a partner with limited ownership in the company that developed the game (Niantic, a Google spinoff). Although the game is free, users can make purchases in the app store to support their Pokémon ‘hunting’. The bewildering success must clearly be keeping Niantic’s CEO, John Hanke, and his crew awake at night. Besides the operational issues related to scaling up, intellectual property (IP) had become a big issue. A slew of imitators were emerging as well as a number of companies trying to steal the game’s data content and algorithm. In addition, the formidable international expansion faces roadblocks in the most populous Asian countries while potential users were impatient. There were many additional potential revenue sources to be tapped and explored such as the recent win-win partnership with McDonalds Japan. Moreover, while getting gamers out and about was good, there were a number of unintended consequences. On the plus side, many entrepreneurs were finding ways to make money from the game — for example restaurants could lure in customers if there was a Pokestop nearby. At the same time, users and non-users worried about possible injuries, trespassing, and invasion of privacy among other things. Naturally, this makes an outstanding ripped-from-the-headlines case for strategy courses. It is a great vehicle to cover key topics such as entrepreneurship, strategic alliances, internal analysis/capabilities, and external analysis. The following are some materials that are useful for the case:

Contributed by Aya Chacar and Russ Coff

Clowning Around About Time Compression Diseconomies

Students might be confused about time compression diseconomies as a foundational component of a resource-based advantage. However, Dierickx and Cool’s (1989) idea here is quite simple: It may take time to build a resource or capability and even if rivals know the source of an advantage, they may not be able to recreate the resource in a timely fashion. Of course, Barney (1991) captures this as history or path dependence being the barrier to imitation. This simple video illustrates the principle (in a darkly humorous way). Of course, in this case, our protagonist merely needs to incur some search costs to find a fully grown tree. There is no practical way to rush the process to get the tree to grow substantially faster.

Contributed by Russ Coff

K-Cosmetics: Covering the Globe

Successful strategy is often a combination of luck firm specific skills and favorable conditions. AmorePacfic makes a great ripped-from-the-headlines case since it rose to be the #1 South Korean firm buoyed by a growing and large domestic demand from a growing population. Hallyu – the Korean equivalent of Hollywood was also a driving factor as South Koreans want to look like their favorite stars and use the same cosmetic products and that includes men. In fact, it is estimated that a whopping 20% of South Korean men use cosmetic products on a regular basis. AmorPacific capitalized on this growing trend by building up its brand and investing in R&D and ultimately riding the popularity of K-pop and K-movies to expand internationally. At a time that demand is softening, K-cosmetics are still growing with exports increasingly exceeding imports and Korean cosmetics brands now more popular than European brands in China and increasing their penetration in many countries including China, Hong Kong, Japan, the US, Vietnam, and in a surprising list of other countries such as Poland where their addition to Sephora’s product line and other large retailers will ensure broad distribution. How has a $150 1.7 oz managed to gain global popularity? Some materials for the case might include:

Contributed by Aya Chacar

Cost Advantage & Org Alignment: Aldi mini case

w11uzAldi has been crushing the competition for years and makes an excellent case of how organizational alignment can deliver a strategic advantage (cost in this case). Here is the version of the case for Madison Wisconsin but it would be easy to customize to almost any location since Aldi has spread far and wide. I divide the students into groups reflecting segments of the market (Whole Foods/Kroger/Wal-Mart/Stop-n-go, etc.) and have them assess the competitive threat as Aldi expands in their market. The Whole Foods group typically concludes that there is no threat. However, the threat becomes more apparent once the other rivals decide to add services since they can’t compete with Aldi’s prices. This Bloomberg article shows that Aldi has been a much more direct threat to Whole foods. Ultimately, none of the rivals can duplicate Aldi’s cost structure because their assets are not aligned toward that strategy. Here are a few very funny ads demonstrating the simple principle — why pay more than you have to?


 To see a few more Aldi commercials,  Continue reading

Cutthroat Kitchen & Strategic Factor Markets

kt0201_alton-brown_s4x3_lgThis cooking competition show begins with an auction of resources needed to cook including space to work and cooking utensils. The contestants bid to preempt rivals by obtaining access to key resources while saddling them with inferior resources. This is ultimately quite similar to the egg drop auction exercise but it can be assigned as a “video case.” This is a nice way to introduce to students to the fact that fierce competition occurs in resource markets – an arena that they may be less familiar with. One can then explore different resources and how they are acquired (human capital, locations, technologies, etc.). It might even be an opportunity to assign them Barney’s original article on strategic factor markets.

Contributed by Isabel Coff

China’s Comparative Advantage of Low Labor Costs: Think Again

globalbizComparative advantage is about nations leveraging their unique resource advantages. There was a time when, for China, that referred to cheap labor. There was once a notion that good manufacturing jobs were “shipped” to China because wages were so low. This narrative still bubbles up in today’s political rhetoric. However, today’s news also highlights that Foxconn, the World’s largest contract manufacturing company, is replacing 60,000 workers with robots. Wages in China do remain below those in other countries. However, the comparative advantage is no longer about cheap unskilled labor. In fact, China has produced about 60 million college graduates in the last ten years. At this rate, the World Bank predicts there to be up to 200 million by 2030. This is greater than the entire U.S. workforce. In short, they seek a comparative advantage based on human capital as opposed to generic labor. Cheap labor, in turn, may be replaced by capial investments (Foxconn seems to be on the leading edge in this trend). A question for a global strategy class might be how should other countries respond? Would an education arms race help or hurt comparative advantage?

Contributed by Russ Coff

Princess Bride Iocane Powder: Anticipating rivals

20120522-143633Most students quickly grasp the concept of game theory–figuring out what your opponent is likely to do helps you decide what you ought to do. As this clip shows, however, failing to understand the real decision choices to be made can lead to deadly, but funny results. In class, after introducing simultaneous vs. sequential games, I show the clip, pausing it just before the 2:11 mark. At this point the poison is in the goblet, and I ask the students who haven’t seen the movie which goblet they think is poisoned. I record answers, and then show the clip (up to anywhere between 4:45 and 5:02). I then ask if they were surprised. I then show the remainder of the clip, and we discuss what mistake Vazinni made. Students see the real payoff matrix as: a) if I (Vazinni) guess wrong, I’m dead; b) If I guess right, then the Dread Pirate Roberts knows it too has incentive to kill me before he dies. I only live if Iocane powder kills instantly. My correct answer can only be not to drink either goblet if I want to live. After watching this video clip and class discussion, students can:

  • identify what is a simultaneous decision
  • identify the true payoffs in a payoff matrix
  • understand the value of changing the game
  • never get into a ground war in Asia (okay, just kidding about that one).

Princess Bride fans might also appreciate this clip illustrating non-substitutability…

Contributed by Russ Coff and Jay Janney

What Strategic Change Feels Like

Managing change is given little time in most strategy courses. We often understate how difficult strategic change actually is and then wonder why organizations struggle so much with implementation (and our students think its all common sense). You can think of it as walking blindfolded on a tightrope between two solid foundations. During the transition, there is great uncertainty about whether the desired path is attainable. This, of course, is another way of looking at Lewin’s unfreeze/change/refreeze model. This video can help to illustrate the issue:

Contributed by Russ Coff

Fun and Game Theory

Economics-games.com is a free educational games site for teaching microeconomics, industrial organization and game theory. This site includes some simple (short) simulations designed to demonstrate specific principles. This should not be confused with longer simulations that extend across many class sessions. Instructors set up user IDs & passwords for their class and students are paired with others in the class (or even across universities if desired). These are really nice interactive online exercises that can be done between classes. In this sense, they are an excellent online complement beyond the usual readings and talking head videos. Here are some of the games:

  • Cournot and Stackelberg games
  • Public good financing game
  • Common-pool resources game
  • Prisoner’s dilemma
  • Asymmetric matching penny game
  • An air transport economics simulation covering price discrimination, vertical differentiation and peak-load pricing.

In addition, you may wish to check out some of their longer, commercial games (http://aireconsim.com).
Contributed by Nicolas Gruyer

Differentiation Can be a Pain in the Butt

Differentiation can be a challenge if existing products have identified the most central value propositions for customers. Increasingly, firms must differentiate using paths that may not follow others and there may be good reasons that rivals have left the path uncharted. Here is an example of differentiation whose time may not have come…

Contributed by Russ Coff

Bring Me Your Confusions!

Presenting material clearly and concisely may not be the best way to help students learn. In fact, presenting ambiguous information that leverages common sources of confusion may be a much better route to learning. This post is intended to serve as a BLEG to solicit examples of confusions that students experience. Accordingly, this is a starting point for developing new material that draws on confusion to teach strategy. We begin by understanding what confuses students. Here are some examples that come to mind (please add your own examples in the comments):

  • What does 5 Forces tell us about the firm’s advantage? Students often put a focal firm in the center and consider rivals to be substitutes. They don’t understand that the framework addresses the industry and not the firm.
  • What industry to choose for 5 forces? Students often choose an umbrella industry instead of the specific segment they are considering entering (e.g., beer instead of micro brews in South Africa). The result, then, is almost useless for making decisions and the analysis is not used to make recommendations.
  • Some resources are valuable while others are Inimitable (VRIO): Students think they are looking for some resources that fit in each bucket (V,R,I, & O) instead of a few resources that meet all of the criteria. They don’t understand that VRIO is a filter to evaluate all strengths in the value chain.
  • What is that “O” for anyway (in VRIO)? It seems to make sense but students often don’t really understand how a firm can have all of the pieces and still not execute. I use Xerox PARC as an example.
  • How do we make decisions using VRIO? Students often think they understand but don’t really know how to use it to make a decision. For example, how are capabilities relevant to decisions like entering new markets or fending off rivals?
  • Motivation for diversification: guilty until proven innocent. Students often suggest that a firm should acquire a successful target. They fail to see that future success is built into the acquisition price and don’t ask why the buyer could create unique value over other bidders.
  • Technology advantages erode rapidly. People see technology as key but miss that it can be easy to reverse engineer (leading to a temporary advantage). While the iPhone confers an advantage to Apple, Samsung has more market share.
  • Core competence is not what a firm does well if rivals can do it better. Core competence must refer to VRIO resources in order to create value.

Again, please add your own examples in the comments below. The following TED talk by Derek Muller describes the technique in teaching science.

 You can find a string of educational videos that leverage this “confusion” technique to teach principles of science here.

Contributed by Rich Makadok and David Kryscynski

Research Chatter: Coffee talk for geeks

Ronnie Chatterji and Charlie Williams have put together an excellent research podcast series. They describe it as “Big ideas from business school professors.” It offers an excellent bridge between cutting edge business research and the world of practice. The podcast is sponsored by the Strategic Management Society (publisher of the Strategic Management Journal, Strategic Entrepreneurship Journal, and Global Strategy Journal). You can find the podcasts at iTunes, Soundcloud, and YouTube among other places. Want a quick taste? Here are some of the topics that this reviewer found especially interesting in the realm of entrepreneurship and innovation:

Contributed by Russ Coff

JebBush.com & Late Mover Disadvantages

DillonEdwardsEarly movers stand to lose if late movers learn from their mistakes and enter with better product offerings or better strategies. Classic early movers who lost include Osborne Computer Company  (subsequently overtaken by Compaq) or EMI’s exit from the CT Scanner business. Myspace and AoL might also be counted among early entrants that ultimately fizzled.

That said, early movers can can gain key assets that make it hard for rivals to enter and compete. You may have noticed that “JebBush.com” takes one to Donald Trump’s home page and there are numerous other political misdirections along these lines for other candidates. Similarly, Tesla Motors has only just gained ownership of the Tesla.com domain (probably at a handsome price). In this way, there can be a race to secure resources and capabilities to take advantage of an opportunity and others are in competition for those resources even if the resources are firm specific (as candidate domains tend to be). From a scholarly standpoint, such resources can be approached from a variety of perspectives including strategic factor market theory, Coasean bargaining, or first mover advantages. Of course, there is a humorous side to all of this. SNL has captured this nicely in their spoof commercial for Dillon Edwards Investments (note that this may be a bit “saucy” for many classrooms but we’re all adults here).

https://video.yahoo.com/dillon-edwards-investments-000000517.html

Contributed by Peter Klein