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October 30, 2006
October 29, 2006
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October 28, 2006
Parry and Thrust
In one of my recent pay-to-read Five Forces analyses I wrote whether Wal-Mart's generics-for-$4 program will lead to increased rivalry in the retail pharmacy sector. In Note on the Structural Analysis of Industries Porter hypothesized that:
"In most industries competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation or efforts to counter the move…This pattern of action and reaction may or may not leave the initiating firm and the industry as a whole better off. If moves and countermoves escalate, then all the firms in the industry may suffer and be worse off than before." .
Two factors that influence the degree of rivalry experienced are the degree of product differentiation and switching costs. Concerning the first Porter said that “when a product or service is perceived as a commodity or a near-commodity”, then consumer choice is largely determined by two things- “price and service.” Product differentiation is, then, a way to “create layers of insulation against competitive warfare” because buyers are presented with clear choices and thus afforded the opportunity to develop preferences for and loyalties to particular producers.
Switching costs are the “one-time costs of switching brands, or switching from one competitors’ product to another.” When switching costs are low or non-existent we should expect that consumers can and will have little resistance to changing products and producers. It would seem almost axiomatic that switching costs for generic drugs are little or non-existent.
How it is that low product differentiation and low switching costs increase rivalry is made very clear in recent news reports about Wal-Mart’s generic drug program. In article entitled “Wal-Mart hurries $4 prescriptions into Michigan”, Mary Radigan of The Grand Rapids Press describes how Wal-Mart’s low-cost generic drug program was rapidly countered by Meijer with a free program and then how quickly Wal-Mart responded again.
Three days after Meijer stores announced free generic drugs to customers, Wal-Mart today launched its $4 prescription program in Michigan months earlier than expected. Company leaders said public demand, not Meijer, prompted them to roll out the program here and in 11 more states today instead of sometime after January, as first promised. "We were planning on rolling this out, and this is just our next step to add additional states," Wal-Mart spokesman David Tovar said. "This has nothing to do with Meijer."
Interstingly. Meijer officials have no problem stating that their moves were in response to Wal-Mart:
Meijer President Mark Murray said today that he "fully expected" Wal-Mart to move the drug program into Michigan. "They clearly have accelerated their rollout nationwide," Murray said. "This is a competitive business."
Here are some recent examples of countermoves by other national, regional, and local competitors. According to the Washington Business Journal:
Wegmans Food Markets of Rochester, N.Y., unveiled a cost-cutting plan for nearly 200 generic drugs and will make them available in a three-month supply. The supermarket chain says customers will be able to purchase the medicine in a 90-day supply for $11.99. The program will be implemented Oct. 26 in all of the company's stores in Maryland, Virginia, New York, Pennsylvania and New Jersey. Kmart has also announced plans to reduce the cost of some generic drug prescriptions.
Perceptions of an responses to Wal-Mart's moves seem to vary across by region and industry. For example, while pharmacies in Alabama remain unphased...
links for 2006-10-28
They Paved Paradise and Put a New Wal-Mart
If you seek a five forces analysis of Wal-Mart, please try this page.
In his Five Forces theory of industry analysis, Michael Porter identifies several “barriers to entry”, i.e. economic, technical, financial, and other “obstacles in the path of a firm which wants to enter a given market.” Among the “barriers” mentioned by Porter in “Note on the Structural Analysis of Industries” is “Government Policy.” About this force he says:
“Government can limit or even foreclose entry into industries with such controls as licensing requirements and limits on access to raw materials ( like coal mines or mountains on which to build ski areas). Regulated industries like trucking, railroads, liquor retailing, and freight forwarding are obvious examples.”
While retail is not included in Porter’s list of regulated industries, entry into foreign retail markets inevitably requires the approval of the host country’s government. As a result, firms like Wal-Mart, which does business in several foreign countries, may face higher and/or different barriers to entry abroad than they do at home. Point in case is Wal-Mart's attempt to build a store in Cabo San Lucas, Mexico.
The world's largest retailer won preliminary approval on Tuesday to build a Wal-Mart in Cabo San Lucas after an almost two-year battle, but opponents vow to continue fighting the project with demonstrations or by blocking roads.The Los Cabos city council voted unanimously to give conditional approval for the store, requiring it to be nonintrusive, pass environmental studies and not excessively affect traffic in this fishing and resort town of about 80,000 at the tip of the Baja California peninsula.
Residents and shopkeepers fear that the store — first proposed, and rejected, at a site near the middle of the city — could harm the town's laid-back atmosphere, where sports fishermen and tourists mingle with locals on the streets. Some also worry the store might replace the trademark stone sea arch as the first view people have when they drive into the city.
Continue reading "They Paved Paradise and Put a New Wal-Mart" »
October 26, 2006
"Cocaine" Seizures
Last month, in a post entitled "She don't lie, She don't lie, She don't lie", I wrote about the launch by Redux Beverages of an energy drink called "Cocaine." I intimated that Ms. Jamie Kirby, the drink's putative inventor, was lying, or at least cynically yanking our collective chain, when she dismissed parents' concerns about "Cocaine" with these words:
"It's an energy drink, and it's a fun name. As soon as people look at the can, they smile."
Today, David Koenig of the AP reports that parents didn't smile. Instead, they continued to complain loud and long until someone listened. That someone turned out to be 7-11, the nation's largest convenience store chain:
Convenience-store operator 7-Eleven Inc. is telling franchises to pull a high-caffeine drink from its shelves because of the product's name: Cocaine. The company acted after getting complaints from parents of teens, who are a big part of the drink's target audience. "Our merchandising team believes the product's name promotes an image which we didn't want to be associated with," said Margaret Chabris, a spokeswoman for 7-Eleven. Cocaine comes in red cans, with the name spelled out in what are meant to resemble lines of white powder.
links for 2006-10-26
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This paper examines whether overconfident CEOs are more likely to issue management earnings forecasts that are overly optimistic. Using a press-based measure for CEO overconfidence developed by Malmendier and Tate (2005), we provide evidence that overconf
October 25, 2006
Snacks on a Plane
Today Forbes reports on the debut of a new kind of budget airline, Hong-Kong based Oasis. Billing itself as "the world's first long-haul budget airline", Oasis made it inaugural flight today from Hong Kong to London. And at only 1000 HKD ($128) each way for an economy-class ticket and 6600 HKD ($848) for business-class, Oasis clearly sees low fares as a key selling point.
'Our vision is to give Hong Kong high-quality, low-fare and direct flight services,' said Oasis chairman Raymond Lee ahead of the launch.
But that's not the only way it is differentiating itself from competitors like Virgin or EasyJet. According to Forbes, they also plan to feed the passengers. "Oasis promises full-value service at budget prices -- serving full meals and free drinks during its flights." But it doesn't end there. According to the Oasis Airline Wikipedia page, both better meals and in-flight entertainment will be available for a price.
One unique selling point for Oasis is that it will offer options, at extra charge, allowing passengers to personalise their trip. Seatback entertainment and hot meals will be included in tickets, but passengers can order better food (Gourmet Meal Service) or even cosmetic kits.However, at launch, this was not available on their website. Mention is made, however, of the ability to purchase 'noise cancelling' headsets on board the aircraft.
There is no word, however, on whether snacks on a (Oasis) plane will be accompanied by a screening of Snakes on a Plane, but noise-cancelling headsets or not, I very much doubt it.
tags: snakes on a plane | Air Travel | airfares
Update:
October 24, 2006
Open TrackBack Policy
If you scan the front page of this blog you will see many posts that are entitled "Links for" followed by a date, e.g. "links for 2006-11-22". If you look at the articles and posts that comprise these link posts, you'll notice that they are all business-related. In other words, they all concern something about business, management, entrepreneurship, marketing, strategy, economics, organizations, etc.
The surest way to get a business-related post of yours included in a "links" post on this blog is to include a link and trackback to it from your post. When I see that you have linked to a "links" post on this site I will either include your post in the current list or add it to the next day's list. I accept business-related open trackbacks any day of the week, but only one post per day.
If it sounds confusing, I apologize. But just try anyway and let me know if you have questions. You can reach me at starlingdavidhunter at gmail dot com or starling at mit dot edu.
October 19, 2006
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October 18, 2006
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ET
October 17, 2006
Google, YouTube, and the Questions of Value
In his formulation of the resource-based view (RBV) of the firm, Jay Barney lays out four conditions by which a firm can achieve strategy's Holy Grail - sustained competitive advantage. He frames the conditions as questions.
- The first is the question of value: do a firm’s resources and capabilities enable the firm to respond to environmental threats or opportunities?
- The second is the question of rareness: how many competing firms already possess particular valuable resources and capabilities?
- Next is the question of imitation: do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?
- And finally there is the question of organization: is a firm organized to exploit the full competitive potential of its resources and capabilities?
According to Barney, the answer to all four questions must be "Yes" in order for a firm to have a basis for sustained competitive advantage, i.e. to significantly outperform its competitors over some extended time period.
While Barney's theory can be and often is used to analyze a firm's entire portfolio of resources and capabilities, it can also be used to analyze subsets of them. Point in case is Google's recent acquisition of YouTube.
Continue reading "Google, YouTube, and the Questions of Value" »
links for 2006-10-17
October 16, 2006
Search Engine Switching Costs
Porter's five (5) forces model for industry analysis posits that, all else equal, the bargaining power of buyers is higher when they face fewer switching costs. That is to say, to the degree that "costs" are low for buyers to switch from using one comapny's product or service to using another's, the better position buyers are in relative to the seller.
In a recent article about the Google's acquisition of YouTube, one entitled "Million-Dollar-a-Month Headache: YouTube's a Losing Proposition", ABC News' Mike Cudgell argues low switching costs in the search engine market are inherently low. That fact, as Cudgell sees it, combined with the ever-present prospect of an "out of nowhere" disruptive innovation, is part of what motivated Google to buy YouTube:
Analyst Josh Bernoff of Forrester Research said Google gets something it doesn't have -- a community of viewers, the young and growing users of YouTube. "Google is a utility," he said. Google processes requests for information. There have been other Web search engines, like Infoseek, that were killed by the next best thing. There's always concern that somewhere there's a 20-something kid in a garage who could slay the Google giant. People don't have any emotional connection to a search engine, but according to Bernoff, it's far tougher to leave a company that creates social connections. "You'd be leaving your friends," he said. YouTube users post their own videos, pictures and music to share with their friends and family. They've built a community. That's what Google is buying.
I am not so sure I agree with Cudgell's assessment. Theoretically it is true that there is little cost in switching search engines, at least little economic cost. Yahoo and MSN and Dogpile are just a click away. And yet, I almost never use them. The main reason being is that for me at least, Google has become the de facto standard. It is not only the market leader, it is widely perceived as performing searches extremely well. For me, and perhaps other web searchers, even if I use another service, I'd probably still do a Google search as well unless -and here's the important part- I was very certain that the other search was far, far superior. So in some sense switching does have costs: the time associated with performing two searches or the cognitive cost of worrying that my one non-Google search was inferior and the possible economic or performance costs associated with an actually inferior search.
Another reason why search engine switching costs are not zero is that the larger search enginess provide a variety of services beyond the search utility. As a colleague of mine Kathleen Carley pointed out back in 2001, older search engines typically have "more features to lock users in." That combined with the fact that "most users rarely use more than two sites in a single search session" would suggest to me that low switching costs were not a driving factor in this move by Google. Building a community may very well be, as might a levelling off in growth of profits and sales in the search market. Time will tell. And by "Time" I don't mean Time magazine.
For a different viepoint see Nicholas Carr's piece from last November entitled "Search is a Commodity, again" The discussion in the comment thread is very interesting.
And for a strategic analysis of the search engine space, see The Economist's article from June of this year entitled "The un-google."
Keeping Up Appearances
The CBC today has a piece of news that really isn't. The article, entitled "Talk radio network files for bankruptcy" reports that the Air America talk radio network has filed for Chapter 11 bankruptcy protection.
A U.S. liberal talk radio network featuring comedian Al Franken has filed for Chapter 11 bankruptcy protection. Air America Radio had denied the rumours it was in financial trouble just a month ago. But on Friday a spokesperson said the filing became necessary after negotiations with a creditor broke down. ... Air America Radio has long fought rumours of bankruptcy and has been in financial trouble since its inception. According to papers filed with the U.S. Bankruptcy Court for the Southern District of New York, it lost $9.1 million US in its inaugural year, $19.2 million last year and $13.1 million so far in 2006.
Why is this story not news, you ask? Because anyone who has followed Air America since it's inception knows that they had three fatal flaws at birth: a poor business model, a very uncompelling product, and no competitive strategy. And no one who knew that then, and there were plenty that did, could be surprised by this news. Air America has been losing money hand-over-fist since its launch and this announcement is only confirmation of the obvious.
There is one newsworthy thing about the story, however. It's the part about negotiations with the creditor breaking down as the reason for the filing. That may, in some manner of speaking, be true. If creditors are unwilling to extend more credit or they call in their loans or they make other demands the firm can't or won't meet, there is little recourse but to seek shelter as AA has done. That its creditors may be losing confidence in AA's long-term viability is surely the real news here. And that is news that AA probably doesn't want to see broadcast on the 6 o'clock news.
Tags: Air America | talk radio | al franken I
See also: The Radio Equalizer | Truthdig | Assorted Babble | Random Citations | Webloggin
October 13, 2006
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October 12, 2006
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October 7, 2006
links for 2006-10-07
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