Competition and Strategy Cases

Consolidated Quanta from Prof. Prateek Raj

 Session 1 Café Coffee Day vs Starbucks

Thank you for a great session today.

We are off to a great start. Today we
discussed broadly “What is Strategy?”
and how we can extract useful
information from the cases. We also
discussed how strategy is about
analysing and making trade-offs,
between two or more distinct paths a
business can take. Clearly articulating
these trade-offs helps. We got
introduced to the idea of strategic
management process, and to develop
a sense of what strategy entails, and
what it does not.
Session 1 Contd.
• Tomorrow and next Monday we will discuss the
perennial cola wars between Pepsi and Coca
Cola. We will be focusing on the broader theme
of industry analysis. Broadly the theme relates
to industrial organisation in Economics. Here is
a synopsis of the case study, that you could
focus for tomorrow.
• Provided are two figures from Porter’s five
forces article (provided in the course pack) that
can help you approach the case better. I
encourage you to read the Porter’s five forces
article before the class.
Session 2.1: Cola Wars
• Thanks for an active discussion today. I am glad that the richness of an offline class participation is also present in our online sessions, and
in fact these sessions have also been more orderly (with chats, conversations, and polls).
• My main goal today was to focus on Porter’s five forces (the rationale for it) and we focused on understanding the barriers to entry in the
cola industry (remember industry analysis is about the industry not the firm). We also looked at the supply chain of the industry, and I hope
supply chains can will be helpful to you for understanding any industry structure.
• A note about entry barriers- Sometimes people mistakenly argue that even if firms can easily enter an industry, if the actual profits of these
new firms are low and many of them are forced to eventually exit the industry, then the entry barriers in the industry are actually high. Yes,
too many entrants can lead to low profits and many bankruptcies (like airlines industry). But nonetheless, the correct thing to say is that the
entry barriers are low in such an industry, and hence profits are low as well, and surviving competition often tends to be difficult for many
firms.
• A key take away for today’s class was - profitability of an industry is driven by more than one factor, and market actors (like bottlers,
vendors, suppliers etc.) that do not get the usual salience in the public imagination, can play a very important role in determining the
nature of an industry, and the level of profits the industry can sustain.
 Session 2.2: Cola Wars
• Thanks for an active class participation today. We discussed about rivalry in quiet some detail today, and I wanted to cover all the
relevant topics, hence this longer email. Last week we have already discussed about entry barriers. Now I discuss the other four forces.
• Rivalry: Rivalry or competition among incumbents is the central aspect of strategy. There are a few things you should check when you
are analysing rivalry in any industry. How many players? Look at the Herfindahl index and the market share of the largest 2-3 players.
Following that, look for nature of competition. Are the firms trying of co-exist with each other (long term repeated game) or drive each
other out (short term one-shot game). If they are attempting to drive each other out then they can do so either by a price war, or a very
intense product innovation (a significant innovation in features). Do you see instances of price war, or rapid innovation? If no then rivalry
is likely to be low or firms may be trying to horizontally or vertically differentiate, which may at times be tough (Hotelling’s law).
Furthermore rivalry can change over time, and they often showcase cyclical dynamics. Another factor affecting rivalry is the growth
prospects of the industry. A paper draft “Is what’s good for business also good for the market?” I co-wrote, that covers some of these
aspects of competition and rivalry in greater detail.
• Buyers and suppliers: The number of buyers and suppliers and the cost of switching affect the bargaining power of suppliers. Managing
these buyers and suppliers can be a major task for any business, and relationships, contracts and direct ownership (and spin offs incl.
Yum Brands), all can be very important components in this.
• Substitutes: We focus on substitutes which can substitute the industry. Remember industry analysis is at the industry level! This
substitution doesn’t always have to be in terms of attractiveness of the substitute product for customers. A different distribution
channel (e.g. health-conscious retail chains, direct to customer e-commerce) can also threaten industries.
• An important topic that I couldn’t cover in much detail was how do we define the industry? Why is production of Maggi noodles part of
the industry, while the bottling of cola drinks is not? Industry definition in itself requires a detailed look and here the supply chain view
of the industry can be very useful. All these five factors TOGETHER can influence the profitability of an industry. I hope we learnt from
the sessions that analysing an industry requires us to identify and analyse every player of the industry (suppliers, buyers, rivals, entrants,
and potential substitutes), and not just the firms of the industry alone.
• We talked about stock market valuations briefly today, when discussing spin outs. Historical stock market prices are useful tools for
understanding industry trends (but only when relative to an Index stock like Sensex or Dow Jones). I hope you make use of such data (if
available) to analyse industry profitability in your reports.
Bonanza 1.1
I have been mentioning this equation regularly in our classes, and I thought it will be good to talk a little bit
more about it. In business strategy that aim is maximization of long-term profits, where the term profit can be
represented by this central equation in business:

Π = ∑t=1 to ∞ πt / (1+d)t where πt = Nt X (pt – ct)

• Π : Valuation of a business i.e. long-term profit

• πt : Profit in year t
• Nt : Number of units sold or of customers in year t
• pt : Price per unit or revenue per customer in year t
• ct : Cost per unit or cost per customer in year t
• t : Year
• d : Annual discount (interest) rate
Bonanza 1.2
• This valuation (Π) is central to the study of strategy. In this course we will understand the different factors
that influence a business’ long-term profits (Π, πt) and its components (N, c, p):
• What influences the number of units sold (N):
• Demand: If there exists no demand for a product, then there will be no sales.
• What influences cost (c) and price (p) per unit: Competitive Advantage
• Organization: Better organized businesses with aligned activities, can have lower cost
• Differentiation: Businesses with better differentiated products, can charge a higher price
• What influences competitive advantage:
• Industry structure: Not all industries are the same – some can sustain greater profits
• Resources and capabilities: Sustained competitive advantage requires a business to have inimitable
resources and capabilities
• Stakeholders: Business is influenced by stakeholders beyond the market
• I hope this helps to give you some more structure about this course. We cover industry structure from
sessions 2 to 4, followed by 3 sessions on Resources and Capabilities. We talk about stakeholder throughout
the course, but especially in session 19. We discuss different aspects of competitive advantage from sessions
8 to 11, and different aspects of the dynamics of creating long term demand from sessions 12 to 15. We
bring it all together in session 20.
Pre-Session 3:
Music Industry
• For the class on the Music industry
we will play this video. From
phonographs to Spotify: A brief
history of the music industry
(WSJ): https://www.youtube.com/
watch?v=-bVketPj5to
• These updated revenue figures for
the music industry can be a good
exhibit to look at as well to
understand the changing industry.
 • I would like you to think about the supply chain of the music distribution industry
(what the firm, buyer, supplier, customer, entrant, rival), and what is the product being
produced?
Pre-Session 3
• how has the product changed? how has the industry changed?
Contd. Music
• why is there a dispute about free vs. premium tier in streaming? what is Apple Music
Industry doing? why does it not offer a free tier? how does it differ from YouTube?
• Is the newspaper industry different from the music industry? How do you think about
the future of music and news? Will news also have a streaming service one day, like
Apple News+?
Session 3: Spotify
• Thanks for a great class today. We discussed industry structure change and its relationship to
technology change. Not all technological changes inevitably mean industry structure changes. If
technology just expands the size of the market, it is still not industry structure change. One way to
understand the industry structure is to look at the five forces in the industry, by understanding
their buyers, suppliers, potential entrants, incumbents, and final customers. If there exists a major
change in the power of any of the players, which changes the profitability of the industry; then it
is a potential case of industry structure change. Technology may or may not play a role in such an
industry structure change.
• We talked about bundling and the economics of bundling in class. Firstly, bundling allows
creators, news producers, artists, etc. to offer a variety of creative products, as the success of one
pays for the cost of the others. When creators lose control over these bundles it affects their
profitability. With the rise of digital platforms with algorithms that curate content, the power of
bundling is increasingly in the hands of these digital giants. This means that the bargaining power
of these content distributors (like Spotify, Apple, Facebook, and Google) has increased
significantly, to the detriment of content producers. This, along with the issues of piracy, has hurt
industries like the newspaper and the music industry.
 Session 3 Contd.: Spotify
• At the end of the class, we discussed if music and news are similar.
Both are media products, one artistic, other journalistic, but
compared to music, journalism has an additional aspect of trust and
credibility. Some types of journalism, like investigative journalism,
are very costly to produce (cost of collection of evidence, the
hazard of potential lawsuits), and unlike the music industry, the
credit for a particular investigative news report is difficult to
monetize by the journalist. In the past, the cost of producing
investigative news was paid by the more popular and less costly
articles (page 3, political scandals, etc.) of the news bundle. But
today due to the unbundling of media it is difficult to do such
investigative journalism which has led to a decline in the overall
quality of journalism worldwide. Due to this public good aspect of
journalism, streaming may not be a viable option for the news
industry, which has been favoring a digital subscription model
instead. However, while a subscription model may help superstar
firms like the New York Times, smaller media firms may still be
facing many difficulties. Here is a report I contributed to about the
future of the newspaper industry, that covers many relevant
aspects we discussed today. "Protecting journalism in the age of
digital platforms", Stigler Center. 1st Jul, 2019. I want to leave you
with this figure on the media industry, which compares the
traditional news business (bottom) to the digital era news (top).
 Session 4: Bajaj
• Thanks for a more case focused discussion today. After the module on Industry Analysis – which looks at heterogeneity in
performance across industries – we today moved to the module on Resource-Based View of the firm– which looks at heterogeneity in
performance within industries.
• We used the Bajaj Auto case to understand why some firms outperform others, based on the unique strategically valuable resources they
have developed or have access to. You should read the article Competing for Resources (by Collis and Montgomery) for some background
reading (given in the course handbook). Here is a snippet from this article for you: "Strategically valuable resources have five
characteristics: (1) They’re difficult to copy. (2) They depreciate slowly. (3) Your company – not employees, suppliers, or customers – controls
their value. (4) They can’t be easily substituted. (5) They’re superior to similar resources your competitors own."
• Our first half went in identifying the differences in the strategies of Hero Honda and Bajaj Auto, and in understanding the proximate and
ultimate factors of why they choose different factors. For example, brand management is a very important aspect of any business, but what
brands and products a firm curates and promotes is dependent on the resources and capabilities the firm possesses, which is often path-
dependent on history. We discussed in the second half how the DTS-i engine - that has powered Bajaj’s growth since the introduction of
Pulsar – is a unique resource that Bajaj has developed and it is reaping the benefits by deploying this resource. Additionally, Bajaj acquired
the capabilities in design engineering in the process of developing the DTS-i engine in-house. Here is a Business Today article on Bajaj's DTS-i
technology. https://www.businesstoday.in/magazine/cover-story/biggest-indian-innovation-bajaj-dtsi/story/205820.html
• Broadly I want to highlight a central question in strategy – what resources and capabilities should the firm develop in-house, and what it
should out-source. This is a major strategic decision that cannot be changed overnight, and a company like Hero Honda and Bajaj took
distinctly different decisions that influenced their strategy and performance. Beyond competition in the product market, there is also
competition for resources and capabilities, and when you think about competition think of competition at both these levels. We discussed
how firms can at times do mergers and acquisitions (e.g. Walmart and Flipkart), and at other times do partnerships (e.g. Microsoft and
Nokia) or joint ventures (e.g. Starbucks and Tata), to learn new capabilities or to acquire new resources. Some of them work, and at other
times they do not.
Session 5: Zara
• Thanks for the class today. Today we discussed a nuanced question: all companies have supply chains,
and Porter in his classic article What is Strategy? states: operational effectiveness is not Strategy. If this is
so, what makes the value chain of a firm like Zara its key strategic capability? Zara is a peculiar company,
where it has characteristics that may not seem like an efficient firm: it has a very high number of
employees in retail, and the costs of its manufacturing are high. However, as we calculated, we found
that Zara makes a trade-off: It is willing to have higher manufacturing cost, and large store operations, iff
it enables the company to do "fast fashion" i.e. where customer’s tastes are quickly communicated to
the designers (with historical investments in IT), who then through an efficient supply chain are able to
manufacture and distribute their products in short lead times. This supply chain is centralized in some
portions, and decentralized and localized in others, to provide a balance between short lead times,
standardization, and variety.
• I would suggest you conduct a thought experiment: if the company lets go of even one of its key aspects
in the supply chain (retailers informing designers, designers quickly manufacturing the designs, and
manufactured goods quickly being delivered to the stores), will the company be able to sustain its
strategic advantage? The key idea of today’s case was that the agile supply chain of Zara is more than
operationally effective – each activity (or routine/process) is intertwined with carefully calibrated costs
that enable Zara to produce “fast fashion”. You take even one of these activities out, and the business
model does not make sense. Such an interrelatedness turns this ability of Zara to do “fast fashion” into a
unique inimitable capability (you can conduct a VRINE analysis).
Session 5 Contd.: Zara
• As a corollary, if a firm (like Gap) wants to imitate Zara’s capabilities in fast fashion, it has to bring together all
these components together, which is costly. As a Gap executive says in the Economist article: “I would love to
organise our business like Inditex, but I would have to knock the company down and rebuild it from scratch.”
• More broadly, I would suggest you link this case with what you have been learning in operations. But beyond
operations, what we learn from the case is that operations need to fit the strategy of the firm, and hence even
high costs of manufacturing need not create strategic disadvantage if the more critical aspect for the business is
shorter lead times. But the fit can also come at a cost. As the value chain of Zara is so difficult to imitate, Zara
itself may struggle to internationalize and scale its value chain without new innovations. This means that Zara
will need to study any new market carefully; to understand if its value chain can deliver fast fashion in the same
way as in Europe.
• I wanted to leave you with an important concept. We discussed the VRINE (or VRIO) analysis of the resources
held by a firm.
• If a firm holds an exploitable resource that is valuable, then it has competitive parity with other
competitors.
• If a firm holds a resource that is both valuable and rare, the firm holds a short-term competitive
advantage over its competitors.
• If a firm holds a resource that is valuable, rare, and inimitable (and non-substitutable) then it is
holding sustained competitive advantage over its competitors - and these resources and capabilities are
the most strategically valuable.
Session 6: McKinsey
• We discussed the concept of causal ambiguity, and how McKinsey excels in a complex set of
interrelated activities, which together create an inimitable resource for the firm – hinged around their
famous brand. A useful follow-up HBR article on the topic that you can read is Can you Say What your
Strategy Is?.
• We also discussed the notion of “fit” (Siggelkow 2002), where a firm’s capabilities and resources are
highly tuned to the firm’s industry’s context.
• We also talked about social complexity, how at its core McKinsey is a socially complex organization
(clients, employees, alumni etc.) and its network may be difficult to imitate by others.
• An important concept that emerged in today’s discussion was that incentives of a firm, and that of the
individuals in a firm, may vary. Creating synergy between the two is important for a knowledge-based
organization like McKinsey to succeed. Two important issues that emerge in complex social systems,
is moral hazard and information asymmetry, both of which were issues for a firm like McKinsey.
Knowledge sharing is filled with dilemmas of moral hazard (what if I alone share my ideas?), and
information asymmetry (do I know enough about the client or their industry?). These two frictions are
very central in economics and strategy. Going forward these concepts will play an increasingly important
role in our discussions. A key strategic dilemma for McKinsey is: how can it create an organization which
minimizes the attrition of top talent and maximizes the sharing of their expertise internally.
Session 6 Contd.: McKinsey
• With the Bajaj, Zara, and McKinsey cases we complete our module on the Resource Based View of
the Firm. If you are interested, along with Prof. Haritha Saranga, I recently wrote a paper on how
some unique resources and capabilities of firms can help resolve national crises like COVID-19.
The paper can be found here: https://www.iimb.ac.in/node/8357
Session 7: Walmart
• Thanks for today’s class discussion on Walmart. We moved to the Competitive Positioning and
Dynamics module of the course and discussed one of the most influential (and controversial) firms in the
world – Walmart. We discussed how Walmart has been able to maintain frugal operations and cost
leadership. This discussion is relevant within the context that Porter’s article "What is Strategy?", says,
"Operational effectiveness is not Strategy”. Specific strategic decisions about location and rural
monopolisation, and early investments in IT and inventory management, gave the firm
both scale and agility, with which it was able to achieve superior low-cost operations uniquely. So, with
these decisions, Walmart made its operational effectiveness an inimitable strategic resource which was
highly valuable for its cost leadership, and easy to deploy and exploit.

• Why did Walmart not prioritize the online retail industry back in 2000? Walmart, despite its highly successful
supply chain, was not the best fit for entering online retail industry. Online retail relies on very large
fulfilment centers and had a “pull” type supply chain, and not “push” type supply chain of traditional grocery
stores. However, as the competition heats up with Amazon and consumers buy online, Walmart is now being
forced to prioritize the move to online. We discussed Walmart’s $16 billion acquisition of Flipkart in 2018,
and how it must be more than just a strategy to enter India, as Flipkart brings with it capabilities for last mile
delivery. This is in contrast to Amazon’s acquisition of Whole Foods for $13.7 billion in 2017, which will help
it enter grocery shopping and quicker delivery (which often has a different type of logistics of delivery).
Shorter delivery time is the next frontier in retail (firms like Big Basket and Jio Mart also trying to enter the
fray in India), and both Amazon and Walmart need offline and online presence to do well at this frontier.
Session 7 Contd.: Walmart
• We also discussed the labor and wage related issues of Walmart (and the broader politics). It is worth
wondering if this frugal attitude towards business (which comes at the cost of lower wages)
is sustainable, and ethical. Walmart’s rise coincided with a unique American era of deregulation (in
1980s until the 2008 financial crisis) where power of labor unions went down, and where
profit maximisation was considered to be the most important aspect of running a business. Here
are two interesting articles on this topic that may interest you. "Who Is Responsible for a Declining
Labor Share of Output? Michael Porter” and “When Friedman was Wrong?"

• The retail industry, more broadly, has been undergoing an “apocalypse”. After Kmart went bankrupt, its
acquirer Sears also went bankrupt in 2018, being yet another causality of the “retail apocalypse" that
has been going on over the last decade in North America. Retail apocalypse is a good example of how
broad macroeconomic (dwindling middle class), technological (internet), and cultural (preference for
“experiences) factors can influence an industry, and with it influence the number of firms the industry
can support.
Session 8: Apple
• We discussed the differentiation strategy of Apple today. We discussed that Apple always had some
unique capabilities in hardware and software integration. Yet, the firm struggled in the PC industry,
despite a good and innovative product. We analysed the PC industry and learnt that it is a commodified
industry which is easy to enter and has powerful suppliers and customers that care for the
price. The closed ecosystem approach that Apple adhered to was not suitable in the PC industry, which
had become dominated by Windows and Intel.
• We then discussed how Apple differentiated itself, from other software/hardware producers, by
deploying its superior product design and hardware integration skills in the Music industry and then
the phone industry to produce two highly successful products – iPod and iPhone. However, this time,
the firm also opened up its ecosystem (iTunes and App Store) and had closer relationships with other
stakeholders (music producers, telephone networks) in the industry. At the same time, Apple also
improved its supply chain capabilities, and could provide these premium products at large
volumes. Apple’s hardware and software integration capabilities, its iOS ecosystem, and its resourceful
supply chain, together is able to produce a brand that can uniquely produce premium products at
scale.
• The broad point that we learnt from Apple was that resources/capabilities and industry structure go-
hand-in hand, and firms need to focus on both to succeed. Strategic resources are difficult to
appropriate and can continue to be in the firm in good and bad times, and both the development and
deployment of these resources appropriately are important. Resources need to be deployed in an
appropriate industry, and developed according to the needs of industry.