1. COMPETITIVE STRATEGIES IN CREATIVE INDUSTRIES
What is strategy?
The means by which individuals or organizations achieve their objectives.
Why do we need a strategy?
Enhances the quality of decision-making.
Facilitates coordination.
Focuses organizations on the pursuit of long-term goals.
What is the primary goal of business enterprises?
Profits
Market share
Social impact
Cultural impact
How do we go about generating profits?
Industry Analysis:
Where do firms compete?
Firms compete in customers’ heads and preferences (abstract)
Firms compete on markets and in industries, market fits inside of an industry
We will think about firms competing in industries
Structure of the industries:
Most industries fall between perfect competition and monopoly
Perfect competition: in reality there is no such thing as a perfect competition industry.
There are some industries that have similar characteristics to this structure. There are
many firms in this structure, no entry or exit barriers, no product differentiation so
homogenous products, and in terms of info availability there is perfect information.
, Monopoly: one firm, high barriers, potential for product differentiation, imperfect
availability of information
Duopoly: two firms, significant barriers, potential for product differentiation, imperfect
availability of info
Oligopoly: a few firms, significant barriers, potential for product differentiation,
imperfect availability of info
To understand the structure of an industry we need to perform an industry analysis
Objective of industry analysis:
To understand how industry structures drives competition, which determines the level
of industry profitability
To assess industry attractiveness. Does this look like an industry that we would want to
enter, or does it look like one which makes no sense to enter
To use evidence on changes in industry structure to forecast future profitability and
observe trends. It may be the case that trends might look beneficial to enter or
competition may seem to be increasing so makes no sense to enter
To formulate strategies to change industry structure to improve industry profitability.
To identify key success factors. If you can understand how the industry is structured
then you can understand how to position yourself in the industry.
The primary forces shaping an industry:
At the core of the macro environment is the industry environment.
Players in the industry environment: competitors, new entrants, suppliers, buyers,
substitutes
Getting a sense of the industry as a whole
Note that we are concerned with the industry’s forces, not the forces affecting the focal
firm that you are analyzing
, Are industries really that different?
If there are structural differences across industries then one place where you should be
able to identify these is the profitability of these industries.
There is a wide variation of profitability across industries and this suggests that these
industries are experiencing different structural forces that are conditioning these levels
of profitability.
The structural determinants of competition:
The structural forces that are determining competition and therefore profitability.
Porter’s five forces framework: this will essentially capture the major structural
component of an industry
Threat of substitutes: Extent of competitive pressure from producers of substitutes
depends upon:
Buyers’ propensity to substitute (ex: the opera, the movies, trip to como). When we
think of an industry substitutes can sometimes look very different than the industry
itself but it is likely that in many cases the substitutes will significantly shape the
structure of the industry.
The price-performance characteristics of substitutes. How much cheaper does a
substitute need to be if it is not the preferred choice due to its lower performance. (ex:
city to city travel by plane vs. train)
What counts as a substitute? Sth that might fulfill the same or similar needs. Not easy to
determine substitutes clearly.
Threat of new entry: Entrants’ threat to industry profitability depends upon the height
of barriers to entry, which are disadvantages that new entrants face relative to
established firms.
The principal sources of barriers to entry are: capital requirements, economies of scale,
absolute cost advantage, product differentiation, access to channels of distribution,
legal and regulatory barriers, retaliation
, Bargaining power of buyers: ex: we are a firm making handbags. The extent to which
buyers are able to depress profitability in an industry depends upon: buyer’s price
sensitivity and the relative bargaining power between the buyer and the supplier.
Buyer’s price sensitivity:
o importance of item in relation to buyer’s total costs (leather)
o differentiation of the purchased item (leather quality)
o intensity of competition among buyers (LV, tods etc.)
o whether item is critical to the quality of buyer’s own output
Relative bargaining power:
o size and concentration of buyers relative to sellers (are there many or few high
quality leather providers)
o buyer’s information
o ability to backward integrate
The same logic that applies to buyers will apply to suppliers
Rivalry between established competitors:
The extent to which industry profitability is depressed by aggressive price competition
depends upon
Concentration:
o How many competitors are there, how big are they, how are sales distributed
across these competitors
Diversity of competitors:
o Differences in goals, cost strategies. The greater the diversity the greater the
competition.
Product differentiation
Excess capacity:
o Unused capacity increases competition.
Exit barriers:
o When you have durable and specialized resources the cost of exit is high because
you can’ transition those resouces into another efficient use.
Cost conditions:
o Ratio of fixed to variable costs
Where fixed costs are high relative to variable costs, firms will take on
marginal business at any price that covers variable costs.
o Extent of scale economies
Encourage companies to compete aggressively on price in order to gain
the cost benefits of greater volume.
Porter’s five forces uses:
We can use porter’s five forces to forecast the industry profitability
o Can perform this analysis to understand why the industry’s current level
profitability is what it is. We can identify the changes in industry structure that
are likely to occur over the next few years like is new entry likely or will
innovation create new substitutes. We can also use five forces to predict the
impact of these structural changes on competition and profitability
What is strategy?
The means by which individuals or organizations achieve their objectives.
Why do we need a strategy?
Enhances the quality of decision-making.
Facilitates coordination.
Focuses organizations on the pursuit of long-term goals.
What is the primary goal of business enterprises?
Profits
Market share
Social impact
Cultural impact
How do we go about generating profits?
Industry Analysis:
Where do firms compete?
Firms compete in customers’ heads and preferences (abstract)
Firms compete on markets and in industries, market fits inside of an industry
We will think about firms competing in industries
Structure of the industries:
Most industries fall between perfect competition and monopoly
Perfect competition: in reality there is no such thing as a perfect competition industry.
There are some industries that have similar characteristics to this structure. There are
many firms in this structure, no entry or exit barriers, no product differentiation so
homogenous products, and in terms of info availability there is perfect information.
, Monopoly: one firm, high barriers, potential for product differentiation, imperfect
availability of information
Duopoly: two firms, significant barriers, potential for product differentiation, imperfect
availability of info
Oligopoly: a few firms, significant barriers, potential for product differentiation,
imperfect availability of info
To understand the structure of an industry we need to perform an industry analysis
Objective of industry analysis:
To understand how industry structures drives competition, which determines the level
of industry profitability
To assess industry attractiveness. Does this look like an industry that we would want to
enter, or does it look like one which makes no sense to enter
To use evidence on changes in industry structure to forecast future profitability and
observe trends. It may be the case that trends might look beneficial to enter or
competition may seem to be increasing so makes no sense to enter
To formulate strategies to change industry structure to improve industry profitability.
To identify key success factors. If you can understand how the industry is structured
then you can understand how to position yourself in the industry.
The primary forces shaping an industry:
At the core of the macro environment is the industry environment.
Players in the industry environment: competitors, new entrants, suppliers, buyers,
substitutes
Getting a sense of the industry as a whole
Note that we are concerned with the industry’s forces, not the forces affecting the focal
firm that you are analyzing
, Are industries really that different?
If there are structural differences across industries then one place where you should be
able to identify these is the profitability of these industries.
There is a wide variation of profitability across industries and this suggests that these
industries are experiencing different structural forces that are conditioning these levels
of profitability.
The structural determinants of competition:
The structural forces that are determining competition and therefore profitability.
Porter’s five forces framework: this will essentially capture the major structural
component of an industry
Threat of substitutes: Extent of competitive pressure from producers of substitutes
depends upon:
Buyers’ propensity to substitute (ex: the opera, the movies, trip to como). When we
think of an industry substitutes can sometimes look very different than the industry
itself but it is likely that in many cases the substitutes will significantly shape the
structure of the industry.
The price-performance characteristics of substitutes. How much cheaper does a
substitute need to be if it is not the preferred choice due to its lower performance. (ex:
city to city travel by plane vs. train)
What counts as a substitute? Sth that might fulfill the same or similar needs. Not easy to
determine substitutes clearly.
Threat of new entry: Entrants’ threat to industry profitability depends upon the height
of barriers to entry, which are disadvantages that new entrants face relative to
established firms.
The principal sources of barriers to entry are: capital requirements, economies of scale,
absolute cost advantage, product differentiation, access to channels of distribution,
legal and regulatory barriers, retaliation
, Bargaining power of buyers: ex: we are a firm making handbags. The extent to which
buyers are able to depress profitability in an industry depends upon: buyer’s price
sensitivity and the relative bargaining power between the buyer and the supplier.
Buyer’s price sensitivity:
o importance of item in relation to buyer’s total costs (leather)
o differentiation of the purchased item (leather quality)
o intensity of competition among buyers (LV, tods etc.)
o whether item is critical to the quality of buyer’s own output
Relative bargaining power:
o size and concentration of buyers relative to sellers (are there many or few high
quality leather providers)
o buyer’s information
o ability to backward integrate
The same logic that applies to buyers will apply to suppliers
Rivalry between established competitors:
The extent to which industry profitability is depressed by aggressive price competition
depends upon
Concentration:
o How many competitors are there, how big are they, how are sales distributed
across these competitors
Diversity of competitors:
o Differences in goals, cost strategies. The greater the diversity the greater the
competition.
Product differentiation
Excess capacity:
o Unused capacity increases competition.
Exit barriers:
o When you have durable and specialized resources the cost of exit is high because
you can’ transition those resouces into another efficient use.
Cost conditions:
o Ratio of fixed to variable costs
Where fixed costs are high relative to variable costs, firms will take on
marginal business at any price that covers variable costs.
o Extent of scale economies
Encourage companies to compete aggressively on price in order to gain
the cost benefits of greater volume.
Porter’s five forces uses:
We can use porter’s five forces to forecast the industry profitability
o Can perform this analysis to understand why the industry’s current level
profitability is what it is. We can identify the changes in industry structure that
are likely to occur over the next few years like is new entry likely or will
innovation create new substitutes. We can also use five forces to predict the
impact of these structural changes on competition and profitability
