HBR-Strategies-Beyond-the-Market

DoNotCopyorPostThisdocumentisauthorizedforuseonlybyJEFFREYFURMANuntilSepte[e-mail]617.783.7860.9-707-469REV:MARCH26,2007________________________________________________________________________________________________________________ProfessorsFelixOberholzer-GeeandDennisYaopreparedthisnoteasthebasisforclassdiscussion.Copyright©2006PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.FELIXOBERHOLZER-GEEDENNISYAOStrategiesBeyondtheMarketThestrategist’sjobdescriptionissimpleenough:deviseandimplementstrategiesthatallowyourcompanytoachieveandsustainsuperiorperformance.Attainingthesegoals,however,hasprovendifficultbecausestrategistsplayagainstapowerfulopponent—well-functioningmarkets.Whereproductmarketsworkwell,competitiondrivespricestowardcompanies’marginalcostofoutput,leavingreturnsthatoftenbarelycoverthecostofcapital.Rulenumberoneinthestrategist’splaybookisthustoseekoutandevencreatesituationsinwhichmarketscannotdeploytheirfullforce.SourcesofSuperiorReturnsResearchinstrategicmanagementemphasizesthreebuildingblocksonwhichmanagersrelytoattainsuperiorreturns.MichaelPorterstressestheimportanceofanattractiveindustrystructureandafavorablecompetitiveposition.1Analyzingthefiveforces—buyerpower,supplierpower,barrierstoentry,thethreatofsubstitutes,andrivalry—allowsstrategiststoidentifyattractiveindustries.Eachforceisassociatedwithreasonswhymarketsfail.2Forinstance,inindustrieswithhighbarrierstoentry,oligopolisticcompetitionoftenresultsinhigherpricesandabove-averageperformance.Asimilarargumentcanbemadewithrespecttoattractivecompetitivepositions.Costleadersanddifferentiatorsoftenexploitmarketimperfectionstoattainsuperiorperformance.Forexample,Wal-Martbuiltitsearlystoresinrurallocationsthatwerejustlargeenoughtosupportasinglediscountretailer.Thesignificantfixedcostindiscountretailingpreventedthecompany’scompetitorsfromenteringthesemarketsandallowedWal-Marttoearnsuperiorreturns.Asecondschoolofthoughtinstrategicmanagementfocusesoncompanies’resources.BirgerWernerfeltarguesthatuniquecompetitivepositions—Wal-Mart’scostleadershiporZara’spricepremium—ultimatelyrestonfirms’uniquebundleofresourcesandcapabilities.3Tobevaluable,resourcesneedtobescarceanddifficulttoreplicate.Inotherwords,therecannotbeawell-functioningmarketfortheseresources.Wal-Mart’scross-dockingsystemandNike’smarketingcapability,forexample,qualifyasvaluableresourcesbecausetheyareimpossibletobuyonthemarket,hardtobuildinternally,andhencedifficulttoimitate.PerhapsyoucannotpurchaseNike’smarketingcapability,butcouldn’tyoulureawayitsmarketerswithlucrativejoboffers?Athirdresearchtraditioninstrategicmanagement,evolutionaryeconomics,emphasizesthedifficultiesofacquiringandtransmittingknowledgewithinandacrossDoNotCopyorPostThisdocumentisauthorizedforuseonlybyJEFFREYFURMANuntilSepte[e-mail]rstresshowchallengingitistoapplythelessonslearnedinonecontexttootherbusinesssituations.4Soevenifyouboughtanentiremarketingdepartment,chancesarethesemarketerswouldnotbenearlyassuccessfulintheirnewenvironment.Becauselearninganddiscoveryaredifficult,companiescansometimesbuyvaluableresourcesonthecheap,beforecompetitorsrealizethestrategicvalueoftheseresources.Wal-Mart’sinvestmentsinruralmarketsandSouthwestAirlines’useofsecondaryairportsareexamplesofcompaniesspottingstrategicopportunitiesthatcompetitorsfailedtosee.Thesethreesourcesofsuperiorperformance—industrystructureandcompetitivepositions,companies’resources,andlimitedrationality—ultimatelyreflectthefailureofmarkets.Asasavvystrategist,youareconstantlyonthelookoutforinstancesofmarketfailurethatallowyourcompanytoearnabove-marketreturns.StrategiesBeyondtheMarket—CourseGoalsStrategistsarenotaloneinfindingfailingmarketsirresistible.GovernmentsandsocialgroupsrangingfromunionstotheWorldWildlifeFundalsorespondtomarketfailures.Governmentstypicallyseektofixfailingmarkets,oftenwithprescriptionsofwhatcompaniescanandcannotdo.Activistgroupsarealsoouttochangecorporatebehavior,buttheyrelyonsocialpressuretoreachtheirgoals.Manycompaniesthatcompetesuccessfullyinthemarketenvironmentstumblewhenitcomestodealingwithgovernmentsandsocialgroups.Microsoft’snearbreakupbytheU.S.DepartmentofJusticeandWal-Mart’sless-than-stellarperformanceagainstgroupsthatopposetheretailer’sstoresarejusttwoofmanyexamples.Inthiscourse,wewillstudy“StrategiesBeyondtheMarket”(SBM),anadditionalsetoftoolsthatstrategistscanusetocontendwithandexploitforcesinacompany’sgovernment,legal,andsocialenvironment.Theseforcescanbeasi