The economics of substitution

One product substitutes for another if it offers buyers an induce­ ment to switch that  exceeds the cost or  overcomes the resistance to doing so. A substitute offers an inducement to switch if the substitute provides the buyer with more value relative to its price than the product currently being used. There is always

Changes in the substitution threat for firm’s product-service

The threat of a substitute often changes over time, with a corre­ sponding impact on the pattern  of substitution.  Many  of the sources of change in the substitution threat are predictable and can often be influenced through a firm’s offensive or defensive substitution strategy. Changes in the threat of substitution occur in five broadly

The path of substitution of firm’s product-service

The path of substitution  in an industry  is a function of how RVP, the perception of  RVP,  switching costs, and   the propensity  of buyers to switch evolve over time. The rate of penetration of substitutes differs widely from industry to industry. Some substitutes  gain quick accep­ tance, while others penetrate  slowly or not at

Substitution and competitive strategy of the firm

The economics of substitution carry a variety of strategic implica­ tions for firms attempting to promote substitution, as well as for firms attempting to   defend against it.   Defenses against substitution  are, by and large,   the   reverse of offensive strategies that  promote  substitution. I will first describe   some   principles   of promoting  substitution  and then turn

The growing importance of horizontal strategy of the firm

Horizontal  strategy is something  that few firms today can afford to ignore. Interrelationships among business units and the ability to exploit them have been   increasing   in   the   last decade,   and   powerful and interconnected  forces are likely to accelerate the   trend   in the 1980s and 1990s. Diversification philosophy is changing. The  philosophy  guiding many firm

Interrelationships among business units of the firm

There are three broad types of possible interrelationships among business units: tangible interrelationships,  intangible interrelationships, and competitor interrelationships. All three types can have important, but different, impacts on competitive advantage and are not mutually exclusive: Tangible   Interrelationships.   Tangible   interrelationships   arise from opportunities to share activities in the value chain among related business units, due

Tangible interrelationships among business units

The value chain provides the starting  point  for the analysis of tangible interrelationships.  A business unit can potentially share any value activity with another business unit in the firm, including both primary and supporting activities. For  example, Procter  & Gamble enjoys interrelationships between its disposable diaper and paper towel businesses. Certain raw materials can

Intangible interrelationships among business units

Intangible interrelationships  lead   to   competitive   advantage through the transfer of skills among separate value chains. Through operating one business unit, a firm gains know-how that  allows it to improve the way another  generically   similar business   unit competes. The transference of skills can go in either direction— e.g., from existing business units   to   a new  

Competitor interrelationships among business units

Competitor  interrelationships  are   present  when   a firm actually or potentially competes with diversified rivals in more than one business unit. Any action taken against multipoint  competitors  must consider the entire range of jointly contested businesses. In addition, a firm’s competitive advantage vis-a-vis a m ultipoint  competitor  depends  in part on the interrelationships that both

The need for explicit horizontal strategy of the firm

Organizational structure in most firms works against achieving interrelationships. However, organizational impediments alone do not explain why related business units, proceeding  independently,  will rarely optimize the competitive position of the firm as a whole. Without a horizontal strategy, business units may well act in ways that reduce rather than enhance their ability to exploit

Formulating horizontal strategy of the firm

Formulating horizontal strategy involves a number  of analytical steps that flow from the framework described in Chapter 9: Identify all tangible The starting point in formulating horizontal  strategy is   to   identify   systematically   all   the tangible   interrelationships   that   are    actually    or   potentially    present among a firm’s business units. The first step in doing so is

Interrelationships and diversification strategy of the firm

Diversification based on interrelationships is the form of diversifi­ cation with the greatest  likelihood   of increasing competitive advantage in existing   industries   or   leading   to   sustainable  competitive   advan­ tage in new industries. Both tangible and intangible interrelationships have an im portant role in diversification strategy. Tangible interrela­ tionships should be the starting point for formulating 

Pitfalls in horizontal strategy of the firm

Although substantial competitive advantages can be gained from harnessing interrelationships, pitfalls exist in implementing horizontal strategy. The most serious pitfall is to ignore interrelationships  alto­ gether. Strategic planning  solely done by business units is not enough. At the same time, however, it can be an equally big mistake to assume that every relationship should

Impediments to achieving interrelationships among Firms

Achieving tangible interrelationships  requires a business unit to share activities in its value chain with other units while remaining  a separate entity that acts independently in other value activities and maintains profit responsibility. Similarly, achieving intangible interrela­ tionships requires the   transfer  of  know-how  among  business   units. The pursuit of interrelationships may  well lead to

Organizational mechanisms for achieving interrelationships among Firms

A purely vertical corporate  organizational  structure is insufficient to assure that beneficial interrelationships  will be recognized and achieved. The  impediments  to achieving interrelationships  not  only get in the way of interrelationships  at the working  level, but  also provide business unit  managers  with   a set of arguments  with   which to counter efforts by group or

Managing horizontal organization

Achieving interrelationships  is a function  of instituting   an   array of horizontal practices. As many companies have discovered, organiza­ tional structure alone is not sufficient. Merely grouping related busi-nesses together will not guarantee the exploitation of interrelationships. Structure must be reinforced by group and sector executives who un­ derstand their roles as horizontal strategists, as

Control over complementary products of the firm

In nearly every industry, products are used by the buyer in con­ junction with other  complementary  products.  Computers  are used with software packages  and programmers,  for example, and mobile homes are often used in mobile home parks— plots of land specially designed as permanent sites for mobile homes, complete with streets, electricity, and sewer

Bundling complementary products of the firm

Bundling is selling separable products  or services to buyers only as a package, or “bundle.” For example, IBM bundled computer hard­ ware, software, and service support for many years, while the manufac­ turers of antiknock additives for gasoline have traditionally  provided various technical services along with their product all at a single price. Bundling

Cross subsidization over products of the firm

When a firm offers products  that  either  are complementary  in the strict sense of being used together  or are purchased  at the same time, pricing can potentially exploit the relatedness among  them. The idea is to deliberately sell one product  (which  I term   the base good) at a low profit or even a loss

Complements and competitive strategy of the firm

Complements are pervasive in industries. A firm must know what complementary products it depends on, and how they affect its com­ petitive advantage  and  the structure  of the industry  as a whole. A firm must  decide which complements  it should  produce  itself, and how to package and price them.  Bundling  and unbundling of comple­