Strategy in Global Markets

1st Semester, 2013/2014

CEMS MIM Programme

Instructor: Prof. Luís Almeida Costa Short Biography: Luís Almeida Costa holds PhD and MSc degrees in Management from INSEAD. He is an Associate Professor at Nova School of Business and Economics, where he is the Academic Director of the CEMS - Master in International Management and of the MSc in Management. Luís Almeida Costa was an Associate Dean at Nova SBE and the Director of the MBA Program. Luís Almeida Costa also teaches in several other international business schools, such as INSEAD, in Fontainebleau, and IMD, in Lausanne. His research, teaching and consulting focus on Competitive Strategy and Negotiation Analysis. His research has been published in Strategic Management Journal, Journal of Economics and Management Strategy, Journal of Business, International Journal of Industrial Organization, etc. Luís Almeida Costa was responsible for consulting projects and conducted executive programs for numerous companies and governmental agencies in several countries, such as France, Germany, Great Britain, Hungary, Italy, the Netherlands, Norway, Portugal, Singapore, Switzerland, Turkey, and United Arab Emirates. Contacts: Tel. (351) 93 6592913

COURSE DESCRIPTION

This course offers an integrated perspective of the determinants of the value creating potential of a firm, paying attention to its unique characteristics and to the structure of the markets where it competes. Particular attention is paid to the dynamics of competition in global markets. We discuss the key concepts, models and frameworks in competitive strategy and introduce the practical tools students need to apply them.

The first part of the course (Creating and Sustaining Competitive Advantage) focuses on how to create value by creating and sustaining competitive advantage. We start by discussing how to approach the strategy formulation process when the objective is to maximize the value creating potential of a firm in increasingly competitive and

global markets. We then introduce the mechanisms that determine the sustainability of competitive advantage, and analyze the different types of strategies firms can use to create competitive advantages. We emphasize the role of both unique resources and privileged market positions as sources of sustainable advantages.

The value creating potential of a firm in a given industry is determined not only by its competitive advantage or disadvantage, but also by the intensity of competition in that industry. The second part of the course (Creating Powerful Market Positions) focuses on how firms create and exploit market power. We first discuss how to deal with the dynamics of price competition when the objective is to avoid price wars. We then analyze firms' strategic choices when facing situations of industry overcapacity, a common problem in global markets that often leads to intense competition and low profits. Finally, we analyze another important dimension of firms' pricing decisions: how to capture customer value.

The third part of the course (Competition in Markets with Network Externalities) focuses on global markets characterized by demand-side increasing returns or network externalities, i.e., markets where the benefit a consumer derives from the consumption of a product increases with the number of users of that product. We identify the different sources of network effects and discuss how they affect the nature of competition. Particular attention is paid to how to win the race for "critical mass", a key element of situations where network externalities are important.

TEACHING AND LEARNING METHODS

This course combines lectures, case discussions, reports, presentations and a strategy project.

The lectures develop the relevant concepts and models and introduce the practical tools students need to analyze strategy problems. The cases give students the opportunity to apply the different frameworks to the analysis of specific strategic issues and to gain a better understanding of how the different concepts and tools fit together.

Students will have to put together a team of three to five students. They have to register their team with Sílvia Simões (ssimoes@novasbe.pt), of the CEMS Office, until the beginning of Session 4. In Sessions 4, 7, 13 and 15 (sessions marked with an asterisk in the detailed "Course Overview" below) teams are required to hand in 3/5 page reports answering the questions corresponding to the case discussed and prepare ten/fifteen-minute presentations of the content of their reports. Given the limited number of pages, students have to summarize their arguments and go straight to the point. In these sessions, one group is chosen to make a presentation of its report and another group is chosen to present its critique of this presentation and give its own views. Thereafter, the discussion is open to all the groups. This combination of short reports and presentations ensures that some of the cases are subject of in-depth analysis by participants and fosters knowledge sharing among participants.

The object of the strategy project is the analysis of a specific strategic decision made by a company, applying the concepts, models and frameworks discussed in the course. Each group chooses its own topic, but has to validate it with the instructor. For example, participants may choose to analyze a company’s decision to enter a foreign market, to reposition a given product or service, to outsource a given activity, or to change its pricing policy in an attempt to avoid a price war. The team project should not exceed 15 pages and is due on the day of the final exam.

ASSESSMENT

The final grade (FG) is given by FG=0.5FE+0.25SP+0.25CP,

where FE, SP and CP correspond, respectively to the grade obtained in the final exam, in the strategy project and in class participation. Class participation is very important. All cases should be carefully prepared so that an effective class discussion is possible. For each case, we provide a set of questions (see Appendix 1 below). The answer to these questions should be carefully analyzed before class. It is also important to read the bibliography corresponding to each session before class. Furthermore, as mentioned above, in Sessions 4, 7, 13 and 15 (sessions marked with an asterisk in the detailed "Course Overview" below) teams are supposed (i) to hand in a 3/5 page report answering the questions corresponding to the case discussed and (ii) to prepare a ten/fifteen-minute presentation of the content of the report.

BIBLIOGRAPHY The bibliography corresponding to each session is mentioned in the detailed "Course Overview" (see below). A significant part of the content of the course is covered in the book Economics of Strategy, by D. Besanko, D. Dranove, M. Shanley and S. Schaefer, Wiley, 2013 (6th edition). This is the required textbook. Whenever we discuss topics that are not covered in this book, additional required readings are assigned. Other recommended Strategy books are: - Ghemawat, P., Strategy and the Business Landscape, Addison-Wesley, 2010 (3rd edition). - McAfee, R.P., Competitive Solutions, Princeton University Press, 2005. - Saloner, G., A. Shepard and J. Podolny, Strategic Management, Wiley, 2009.

COURSE OVERVIEW

I. Creating and Sustaining Competitive Advantage

Session 1. Strategy and Value Creation (September 23, 8:30-10:20) • Course introduction • Lecture: “Strategy and Value Creation” Textbook:

- “Economics Primer: Basic Principles”, Besanko D., et al., o.c., pp. 9-37, and “Competitors and Competition”, Besanko D., et al., o.c., Chapter 5, pp. 165-195.

Session 2. Unique Resources, Competitive Positioning and Strategy Formulation (September 23, 10:30-12:20) • Case: The Collapse of Swissair, IMD © 2003, IMD-1-0198

Required reading: - “Constructing Competitive Advantage”, Cool K., Almeida Costa L. and

Dierickx I., Chapter 3 in Handbook of Strategy and Management, A. Pettigrew, H. Thomas, and R. Whittington, eds., pp. 55-71, Sage, 2002.

Session 3. Sustainability of Competitive Advantage (1) (September 30, 8:30-10:20) • Lecture: "Sustainability of Competitive Advantage" Textbook:

- “The Horizontal Boundaries of the Firm”, Besanko D., et al., o.c., Chapter 2, pp. 61-97 and “Sustaining Competitive Advantage”, Besanko D., et al., o.c., Chapter 11, pp. 363-398.

Optional readings: - "Economies of Resource Accumulation", Cool, K., Dierickx, I. and Almeida

Costa, L., The Palgrave Encyclopedia of Strategic Management, forthcoming, 2013.

- "Diseconomies of Time Compression", Cool, K., Dierickx, I. and Almeida Costa, L., The Palgrave Encyclopedia of Strategic Management, forthcoming, 2013.

Session 4.* Sustainability of Competitive Advantage (2) (September 30, 10:30-12:20) • Case: Michelin in China in 2011, INSEAD © 2012. Textbook:

- “Industry Analysis”, Besanko D., et al., o.c., Chapter 8, pp. 258-289, and “Entry and Exit”, Besanko D., et al., o.c., Chapter 6, pp. 196-225.

Session 5. Strategies for Creating Competitive Advantage (October 7, 8:30-10:20) • Lecture: “Strategies for Creating Competitive Advantage” Textbook:

- “Strategic Positioning for Competitive Advantage”, Besanko D., et al., o.c., Chapter 9, pp. 293-332.

Session 6. Creating a New Competitive Position (October 7, 10:30-12:20)

• Case: ABC and the Packaged Non-Carbonated Soft Drinks Industry in Kuwait and the GCC Region in 2009, INSEAD © 2011, 02/2010-5647.

Session 7.* Broadening the Scope of the Competitive Position (October 14, 8:30-10:20) • Case: Under Armour and the Sports Apparel and Footwear Industry in 2008, INSEAD © 2011, 03/2011-5576 Session 8. Vertical Integration (October 14, 10:30-12:20) • Lecture: “Vertical Integration” Textbook:

- “The Vertical Boundaries of the Firm”, Besanko D., et al., o.c., Chapter 3, pp. 98-131, and “Integration and its Alternatives”, Besanko D., et al., o.c., Chapter 4, pp. 132-161.

Session 9. Defining a Competitive Strategy (October 28, 8:30-10:20)

• Case: Sharp Corporation: Beyond Japan, Richard Ivey School of Business Foundation © 2011, W11039 (read also Sharp Corporation: Technology Strategy, Harvard Business School © 1993, 9-793-064)

II. Creating Powerful Market Positions

Session 10. The Dynamics of Price Competition (October 28, 10:30- 12:20)

• Lecture: “The Dynamics of Price Competition” • Case: Beauregard Textile Company, Harvard Business School © 1990, 9-191-058

Textbook:

- “Dynamics: Competing Across Time”, Besanko D., et al., o.c., Chapter 7, pp. 226-257.

Required reading: - “How to Fight a Price War”, Rao A.R., Bergen M.E. and Davis S., Harvard Business Review, pp. 107-116, March-April 2000.

Session 11. Managing Industry Overcapacity (November 4, 8:30-10:20) • Lecture: “Managing Industry Overcapacity” Required reading:

- “Maintaining Collective Assets, The Tragedy of the Commons, and Supply Chain Performance: The Case of the Champagne Industry”, Cool K. and Henderson J., Chapter 2 in Restructuring Strategy, K. Cool, J. Henderson and R. Abate, eds., pp. 17-43, Blackwell, 2005.

Session 12. Capturing Customer Value (1) (November 4, 10:30-12:20)

• Lecture: “Capturing Customer Value” Required readings:

- “Pricing”, McAfee R.P., Chapter 11 of Competitive Solutions, pp. 260-302, Princeton University Press, 2005.

- “Pricing with Market Power”, Pindyck, R.S. and Rubinfeld D.L., Chapter 11 of Microeconomics, Prentice Hall, 8th Edition, 2012.

Session 13.* Capturing Customer Value (2) (November 11, 8:30-10:20)

• Case: Pfizer and the Distribution of Pharmaceuticals in Europe in 2009, INSEAD © 2011, 02/2011-5679

III. Competition in Markets with Network Externalities

Session 14. Competition in Markets with Network Externalities (November 11, 10:30-10:20) • Lecture: “Competition in Markets with Network Externalities” Required readings:

- “Strategy in Markets with Demand-Side Increasing Returns”, Saloner G., Shepard A. and Podolny J., Chapter 12 of Strategic Management, pp. 305-328, Wiley, 2009.

- “The Art of Standards Wars”, Shapiro C. and Varian H, California Management Review, Vol. 41(2), pp. 8-32, Winter 1999.

Session 15.* Achieving Critical Mass (November 18, 8:30-10:20) • Case: iPad vs. Kindle: e-Books in the US in 2010, INSEAD © 2011, 02/2011-5775 Session 16. Network Externalities and Market Dynamics (November 18, 8:30-10:20)

• Case: Apple Inc. in 2010, Harvard Business School © 2010, 9-710-467 • Lecture: "Putting it all Together"

APPENDIX 1

Questions for Discussion CASE 1: “THE COLLAPSE OF SWISSAIR”

- How do you evaluate Swissair’s strategy during the period considered in the case?

- Discuss Swissair’s alliance strategy, paying attention to the evolution of the industry and to the specific characteristics of the company.

- What should the company have done differently?

CASE 2: “MICHELIN IN CHINA IN 2011” - What key factors have influenced the profitability of the tire industry in the

last decade? How? How will these factors evolve and what is the profitability outlook for the next five years?

- What factors will shape the tire industry in China in the next five years? What will be their impact on profitability?

- How do you evaluate Michelin's strategy and competitive position in the past ten years? What are the key challenges that the company is facing? What strategic recommendations would you make?

CASE 3: “ABC AND THE PACKAGED NON-CARBONATED SOFT DRINKS INDUSTRY IN KUWAIT AND THE GCC REGION IN 2009”

- What has been the competitive strategy of ABC and how has it changed? How successful has the company been with its strategy?

- What are the key challenges that ABC is facing? Why? - What strategic recommendations would you make?

CASE 4: “UNDER ARMOUR AND THE SPORTS APPAREL AND FOOTWEAR INDUSTRY IN 2008”

- How do you characterize the sports apparel and footwear industry? How do you expect it to evolve?

- How do you evaluate Under Armour's strategy and competitive position? What are the key strategic issues that the company is facing?

- What strategic recommendations would you make?

CASE 5: “SHARP CORPORATION: BEYOND JAPAN” (AND “SHARP CORPORATION: TECHNOLOGY STRATEGY”)

- Discuss Sharp's history. How successful has Sharp been? Why? - How do you evaluate Sharp's competitive situation in 2009? What key

challenges was the company facing? - What strategic recommendations would you make?

CASE 6: “BEAUREGARD TEXTILE COMPANY” - What price should Beauregard charge next period, $3 or $4? Why? - What pricing policy would you recommend to Beauregard in the future,

assuming that, at any time, the company can only charge a price of $3 or $4? CASE 7: “PFIZER AND THE DISTRIBUTION OF PHARMACEUTICALS IN EUROPE IN 2009”

- How do you evaluate Pfizer's distribution strategy? What are the key strategic distribution issues that the company is facing?

- How should Pfizer manage its supply chain in Europe? How do competitors, governments and other stakeholders influence this activity?

CASE 8: “iPAD VS. KINDLE: e-BOOKS IN THE US IN 2010”

- How do you characterize the evolution of the US book publishing industry? In particular, how do you characterize the dynamics of competition in e-books?

- How do you evaluate Amazon's strategy in e-books? What key challenges is the company facing?

- What strategic recommendations would you make to Amazon? How should Kindle be positioned?

CASE 9: “APPLE INC. IN 2010”

- How do you evaluate Apple’s competitive position in the personal computer industry?

- How sustainable is Apple’s competitive position in its other products? - What would you recommend to Apple to strengthen its competitive

situation?

APPENDIX 2

Contents In this appendix, we present a brief description of the contents of each session. Session 1 - Strategy and Value Creation

In the first part of the session, we explain the purpose and the contents of the course and provide a general overview of the program. We also explain how the course is organized, focusing on the teaching methods employed and on the different components of the evaluation system. In the second part of the session, we discuss how to deal with the process of strategy formulation when the objective is to maximize the value creating potential of a firm in increasingly competitive and global markets. In particular, we argue that to maximize their value creating potential, firms have to think beyond product market positioning and address the broader issue of where and how to fully appropriate the rent potential of their unique resources.

Readings: “Economics Primer: Basic Principles”, Besanko D., et al., o.c., pp. 9-37, and “Competitors and Competition”, Besanko D., et al., o.c., Chapter 5, pp. 165-195 cover basic concepts in economics, game-theory and strategy that are used in the course. Session 2 - Unique Resources, Competitive Positioning and Strategy Formulation Case: "The Collapse of Swissair"

In this session, we use the Swissair case to illustrate the implications and implementation problems associated with the ideas introduced in Session 1. This discussion introduces some of the strategies that determine the boundaries of the organization: strategic alliances, mergers and acquisitions.

Readings: “Constructing Competitive Advantage”, Cool K., Almeida Costa L. and Dierickx I., Chapter 3 in Handbook of Strategy and Management, pp. 55-71, Sage, 2002 presents not only an analysis of how to sustain competitive advantage (this issue will be considered in Sessions 3 and 4), but also a discussion of the strategic problems that may result from not identifying the firm's unique resources.

Session 3 - Sustainability of Competitive Advantage (1)

In this session, we discuss the mechanisms that determine the sustainability of competitive advantage, paying attention both to unique resources and privileged market positions. A strategy may lead to a sustainable competitive advantage either because it results from the deployment of unique (scarce) resources or because its

implementation by a limited number of firms makes replication unprofitable for other firms.

Readings: “Sustaining Competitive Advantage”, Besanko D., et al., o.c., Chapter 11, pp. 363-398 discusses the sustainability of competitive advantage. More specifically, this chapter addresses the following issue: Why do some firms persistently outperform their competitors, in spite of other firms' efforts to neutralize their advantage? “The Horizontal Boundaries of the Firm”, Besanko D., et al., o.c., Chapter 2, pp. 61-97 covers economies of scale and scope, two important size advantages. "Economies of Resource Accumulation", Cool, K., Dierickx, I. and Almeida Costa, L., The Palgrave Encyclopedia of Strategic Management, forthcoming, 2013 describes situations in which the accumulation of a resource benefits from a “success breeds success” dynamics that creates an exponentially growing gap between resource levels of early movers and imitators. "Diseconomies of Time Compression", Cool, K., Dierickx, I. and Almeida Costa, L., The Palgrave Encyclopedia of Strategic Management, forthcoming, 2013 discusses the time-cost tradeoffs in the accumulation and imitation of resources. Session 4 - Sustainability of Competitive Advantage (2) Case: "Michelin in China in 2011"

The Michelin case is used to illustrate how to analyze the determinants of the value creating potential of a firm and how to conduct a sustainability analysis. We also discuss different approaches to deal with the strategic challenges posed by the globalization of competition.

Readings: “Industry Analysis”, Besanko D., et al., o.c., Chapter 8, pp. 258-289, and “Entry and Exit”, Besanko D., et al, o.c., Chapter 6, pp. 196-225 provide an overview of how industry structure affects profitability. Session 5 - Strategies for Creating Competitive Advantage

In this session, we discuss different types of strategies firms can use to create competitive advantages. We also discuss how to evaluate a firm's competitive advantage (or disadvantage) in an industry both from a qualitative and quantitative point of view.

Readings: “Strategic Positioning for Competitive Advantage”, Besanko D., et al., o.c., Chapter 9, pp. 293-332 provides a framework to analyze the competitive situation of a firm and to define its competitive positioning. Session 6 - Creating a New Competitive Position Case: "ABC and the Packaged Non-Carbonated Soft Drinks Industry in Kuwait and the GCC Region in 2009"

The purpose of this session is twofold. First, we use the ABC case to illustrate the application of the framework proposed in the previous session. Second, we discuss some of the problems associated with creating a new competitive position.

Session 7 - Broadening the Scope of the Competitive Position Case: "Under Armour and the Sports Apparel and Footwear Industry in 2008"

The Under Armour case provides an additional illustration of the application of the concepts and ideas presented in Session 5. This case is also used to discuss key strategic issues firms typically face when trying to broaden the scope of their competitive position. Session 8 - Vertical Integration

In this session, we address the “make-or-buy” decision, i.e., which activities in the vertical chain a firm should perform itself and which should be performed by other firms. We first discuss a number of fallacious arguments for firms to vertically integrate upstream or downstream activities. We then introduce the different incentives firms may have to follow a vertical integration strategy - to deploy unique resources, to avoid the double marginalization problem, to minimize transaction costs, etc. - and contrast these incentives with the potential advantages of using the market. Readings: “The Vertical Boundaries of the Firm”, Besanko D., et al., o.c., Chapter 3, pp. 98-131, and “Integration and its Alternatives”, Besanko D., et al., o.c., Chapter 4, pp. 132-161 provide a very complete and in-depth discussion of firms’ incentives to follow a vertical integration strategy. Session 9 - Defining a Competitive Strategy Case: "Sharp Corporation: Beyond Japan" (and "Sharp Corporation: Technology Strategy)

The Sharp Corporation case is used to summarize and integrate the concepts and methodologies discussed in the first part of the course. We propose a general framework (i) to evaluate the value creating potential of a company in a given industry and (ii) to formulate a coherent competitive strategy. We also use this case to illustrate how vertical integration may contribute to the creation of sustainable competitive advantages, as well as firms' incentives to engage in product or geographic diversification.

Session 10 - The Dynamics of Price Competition

Case: “Beauregard Textile Company”

The intensity of competition in an industry is determined, not only by industry structure, but also by the dynamics of price competition. In this session, we discuss how to deal with the dynamics of price competition when the objective is to avoid price wars. More specifically, we discuss the characteristics of pricing strategies that tend to be successful in inducing tacit price coordination. The Beauregard Textile Company case is used to motivate the discussion and to illustrate the advantages and limitations of different approaches.

Readings: “Dynamics: Competing Across Time”, Besanko D., et al., o.c., Chapter 7, pp. 226-257 presents a detailed discussion of the basic mechanisms that affect the dynamics of price competition and of several strategies firms may use to sustain tacit price coordination. "How to Fight a Price War", Rao A.R., Bergen M.E. and Davis S., Harvard Business Review, pp. 107-116, March-April 2000 offers a very intuitive and insightful discussion of how to avoid a price war. Session 11 - Managing Industry Overcapacity

In this session, we discuss firms' strategic choices when facing situations of industry overcapacity, which often lead to intense competition and low profits. We discuss the causes and implications of excess capacity, as well as the possibility and nature of industry level actions to mitigate the problem.

Readings: "Maintaining Collective Assets, The Tragedy of the Commons, and Supply Chain Performance: The Case of the Champagne Industry”, Cool K. and Henderson J., Chapter 2 in Restructuring Strategy, pp. 17-43, Blackwell, 2005 provides an insightful illustration and discussion of the problems associated with industry overcapacity and of the possible solutions. Session 12 - Capturing Customer Value (1) While Session 10 discusses how to define a pricing strategy when the firm’s objective is to create market power, this session focuses on how to exploit market power. The objective is to capture value by charging each customer (or customer group) the price that maximizes the firm’s profit for that particular customer. Readings: "Pricing”, McAfee R.P., Chapter 11 of Competitive Solutions, pp. 260-302, Princeton University Press, 2005 discusses the different strategies firms can implement to capture customer value, as well as the advantages and potential problems associated with the different approaches. "Pricing with Market Power”, Pindyck, R.S. and Rubinfeld D.L., Chapter 11 of Microeconomics, Prentice Hall, 8th Edition, 2012 provides a careful discussion of some of the basic mechanisms underlying price discrimination. Session 13 - Capturing Customer Value (2)

Case: “Pfizer and the Distribution of Pharmaceuticals in Europe in 2009”

We use the Pfizer case to illustrate different strategies firms can implement to capture customer value and the potential problems associated with price discrimination. Session 14 - Competition in Markets with Network Externalities

Many global markets are characterized by demand-side increasing returns or network externalities, meaning that the benefit a consumer derives from the consumption of a product increases with the number of users of that product. In this session, we identify

the different sources of network effects and discuss how they affect the nature of competition. We introduce the concept of "critical mass" - a key element in markets with network externalities - and discuss the strategies firms may implement to try to win the race for critical mass.

Reading: “Strategy in Markets with Demand-Side Increasing Returns”, Saloner G., Shepard A. and Podolny J., Chapter 12 of Strategic Management, pp. 305-328, Wiley, 2009 presents a general overview of the sources and competitive implications of network externalities. "The Art of Standards Wars”, Shapiro C. and Varian H, California Management Review, Vol. 41(2), pp. 8-32, Winter 1999 discusses different types of strategies to create (or reinforce) an advantage in markets with network externalities. Session 15 - Achieving Critical Mass Case: iPad vs. Kindle: e-Books in the US in 2010

We use the iPad vs. Kindle case to illustrate different types of strategies in markets characterized by network externalities. Particular attention is paid to the strategies late entrants may implement to try to win the race for critical mass. Session 16 - Network Externalities and Market Dynamics Case: Apple Inc. in 2010

The Apple case is used to further analyze the dynamics of markets with network externalities. In this session, we also summarize and integrate the different subjects discussed in the course.