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“If everyone can do it, it’s difficult to create and capture value from it.”
or, alternatively

“In a perfectly competitive market, no In firm realizes economic profits (rents).”

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(Industrial Organization View)

Monopoly Rents

(Resource Based View)

Ricardian Rents

Schumpeterian Rents
( y (Dynamic Capabilities View) p )

S P S’ MC 1MC2 P AC 1 q1 q2 AC 2

D Q

-Barriers to entry -Industry structure matters

-Barriers to imitation -Firm structure matters

-Markets are dynamic -Innovation matters

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The Industrial Organization Perspective: Premise that industry structure matters most Economic rents due to barriers to competition (i.e. (i monopoly rents) l ) Some industries are more profitable than others
P S S’D Q

Source: Fortune 500 2009, money.cnn.com m

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Threat of Entry Bargaining Power of Suppliers Bargaining Power of Buyers

Intensity of y Rivalry

Threat of Substitutes

Threat of Entry Bargaining Power of Suppliers Bargaining Power of Buyers

Intensity of y Rivalry

Threat of Substitutes

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Entry is less likely when ...
1. Entrant faces high sunk costs
sunk costsare investments that cannot be recovered

2. Incumbents have a competitive advantage
potential entrants are at a competitive disadvantage compared to existing players, simply not profitable to enter

3. Entrant faces retaliation
potential entrants are likely to be forced out of business by strategic (pricing) behavior of incumbents

Point: For sunk costs, emphasize non-recoverability (vs.large recoverable capital investment) Ex: R&D, hotel vs. big box Counter Example:Leasing airplanes Slide: Potential Barriers Ex: Patents, etc: Taxis, Doctors, Lawyers Ex: Pioneering Brands: Quicken, Coke & Pepsi, Nike Ex: Pre-commitment: SWA in Detroit

Foundations of Strategy

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Entry is less likely when ...
1. Entrant faces high sunk costs
sunk costs are investments that cannot berecovered

2. Incumbents have a competitive advantage
potential entrants are at a competitive disadvantage compared to existing players, simply not profitable to enter

3. Entrant faces retaliation
potential entrants are likely to be forced out of business by strategic (pricing) behavior of incumbents

Patents & licenses Pioneering brands Pre-commitment contracts (e.g., distribution) Largeeconomies of scale (relative to demand) Steep learning (experience) curves Others

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Slide: Economies of scale Point: C = αqβ : calculate using regression ln C = ln α + β ln q Point: Talk about slope Slide: MES Point: Expressed as market share, could change as market grows Slide: Learning curves Point: Similar to EOS, could be quality Ex: Far better at working with team by Term 2!

Foundationsof Strategy

$

AC

MES

Output

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Minimum efficient firm size (% of Industry Capacity - 1979)
Canning (fruit) Oil Refining Meat Packing Fountain Pens Copper Typewriters Flour Milling Steel S l Gypsum Products 0.5 20.0 33.0 0.5 1.75 0.20 10.0 10.0 30.0 Metal Containers Rayon Farm Machinery Automobiles Tractors Shoes Cement Liquor Distilling Tires 1.75 3.0 2.5 10.0 3.0 6.0 6.0 10.015.0

Source: K. Lancaster and R. Dulaney, Modern Economics: Principles and Policy (1979)

Patents & licenses Pioneering brands Pre-commitment contracts (e.g., distribution) Large economies of scale (relative to demand) Steep learning (experience) curves Others

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Unit cost

Cumulative output over time

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Entry is less likely when ...
1. Entrant faces high sunk costs
sunk costsare investments that cannot be recovered

2. Incumbents have a competitive advantage
potential entrants are at a competitive disadvantage compared to existing players, simply not profitable to enter

3. Entrant faces retaliation
potential entrants are likely to be forced out of business by strategic (pricing) behavior of incumbents

Excess capacity of incumbents p y Economies of scale...
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