A chapter summery of Porter's great book : "Competitive Strategy" with a simple game of patent wars ( Prisoners Dilemma ) applied on the case of Samsung and Apple .

1. Competitive
Strategy
-­‐
Chapter
2
-­‐
Porter
@WissamSaleh

2. Outline
●Three
Generic
Strategies
:
● Overall
Cost
Leadership
● Differentiation
● Focus
● Comparison
●Requirements
of
the
Generic
Strategies
.
●Firms
that
are
“Stuck
in
the
Middle”.
●Relationship
between
Market
share
and
Profitability.
●Risks
of
the
Generic
Strategies
.
●The
Game
,
Players,
Strategies
,
Assumptions
,
Solution
.
●Variations
of
the
game
.
●Mapping
with
real
market
figures
.

3. The
Three
Generic
Strategies
-­‐ Cost
Leadership
-­‐ Differentiation
-­‐ Focus

4. Overall
Cost
Leadership
● Requires
aggressive
construction
of
efficient-­‐scale
facilities
with
vigorous
pursuit
of
cost
reductions
from
experience
.
● Low
cost
firms
yield
above-­‐average
returns
in
its
industry
despite
the
presence
of
strong
competitive
forces
.
● The
low
cost
position
provides
a
defense
against
rivalry
competitors
.
● The
factors
providing
cost
leadership
often
provides
substantial
barriers
to
entry
in
terms
of
scale
economies
or
cost
advantage
.
● A
low
cost
position
usually
places
the
firm
in
a
favorable
position
vs.
substitutes
relative
to
its
competitors
in
the
industry
.

5. Overall
Cost
Leadership
●May
require
heavy
up-­‐front
costs
:
state-­‐of-­‐the
are
equipment
●May
require
startup
losses
for
the
initial
period.
●May
require
aggressive
pricing
.
●Can
revolutionize
the
industry
.

6. Differentiation
● Creating
something
that
is
perceived
industrywide
as
being
unique
.
● Can
be
a
design
or
a
brand
image,
technology,
loyalty
…
etc
● It
does
not
allow
the
firm
to
ignore
the
cost,
but
it
doesn’t
constitute
a
strategy
.
● If
achieved
,
a
viable
strategy
to
gain
above-­‐average
returns
● Provides
insulation
against
rivalry
because
of
brand
loyalty
●DOES
IT
?

7. Differentiation
●Increases
margins
.
●Provides
entry
barrier
of
uniqueness.
●Better
positioned
vs.
substitutes.
●Tradeoff
with
cost
position
that
is
offset
by
R&D,
patenting,
product
design
and
high
quality
materials

8. Focus
●Focusing
on
a
particular
buyer
group,
segment
of
the
product
line,
or
a
geographic
market.
●The
entire
focus
strategy
is
built
around
serving
a
particular
target
very
well
.
●May
potentially
earn
above
average
returns.
●It
means
either
to
strike
a
cost
position
with
a
focused
target
,
or
a
differentiation
with
a
focused
target
,
or
both
.

9. Focus
●The
firms
might
select
venerable
target
group
with
few
substitutes
and
serve
them.
●Maybe
most
of
the
buyers
are
not
interested,
but
some
of
them
are
.
●Example
in
the
fast
food
industry.

10. Comparison

11. Requirements
of
Generic
Strategies
Strategy Required
Skills
and
Resources Organization
Requirements
Cost
Leadership
-­‐
Substantial
Capital
Investment
-­‐
Process
Engineering
Skills.
-­‐ Intense
Supervision
of
Labour.
-­‐ Product
Designed
to
be
cost
effective.
-­‐
Tight
Cost
Control
-­‐ Frequent,
Controlled
Reports
-­‐ Structured
organization
Differentiati
on
-­‐
Strong
Marketing
Abilities.
-­‐
Product
Engineering
-­‐ Creative
Flair.
-­‐ Corporate
Reputation
-­‐ Long
tradition
or
unique
resources.
-­‐
Strong
Coordination
between
functions.
-­‐ Subjective
measurement
instead
of
quantitative
.
Focus Combination
of
the
above Combination
of
the
above

12. Stuck
in
the
Middle
●Extremely
poor
strategic
situation
.
●He
firm
lacks
the
market
share
,
Capital
Investment
and
resolve
to
play
the
low
cost
game
.
●The
firm
stuck
in
the
middle
is
almost
guaranteed
low
profitability
●It
either
loses
high-­‐volume
customers
that
require
low
cost
or
bids
away
its
profits.

13. Stuck
in
the
Middle
●Probably
has
a
blurred
culture
and
conflicting
organization
arrangements.
●Must
take
a
strategic
decision
.
●The
choice
is
based
on
the
firm
resources
and
limitations.
●Firms
that
flip
back
and
forth
between
strategies
are
doomed
to
failure
.

14. Relationship
between
Market
Share
and
Profitability
. ●Does
not
hold
in
every
industry
.
●There
is
no
single
relationship
between
profitability
and
market
share
.

15. Risks
of
Generic
Strategies
●Two
fundamental
risks
:
● Failing
to
attain
or
sustain
the
strategy
.
● The
value
of
strategic
advantage
provided
by
the
strategy
to
erode
with
the
industry
evolution
(
Creative
Destruction
)
.
!
!
!

16. Risks
of
Generic
Strategies
Strategy Risks
Cost
Leadership -­‐ Technological
change
the
nullifies
past
investments.
-­‐ Low
cost
learning
by
new
comers.
-­‐ In
ability
to
see
required
product
or
marketing
change
because
of
attention
placed
on
cost.
-­‐ Inflation
in
costs
.
Differentiation -­‐ Cost
Differential
between
low
cost
competitors
and
the
differentiated
firm
.
-­‐ Buyers
need
for
the
differentiating
factor
falls
,
occurs
when
buyers
become
more
sophisticated.
-­‐ Imitations
narrows
perceived
differentiation
.
Focus -­‐
Cost
differential
between
broad
range
competitors
and
focused
firms
widens
to
eliminate
the
cost
advantage
of
focus
on
a
certain
group
.

17. The
Game
:
Patent
Wars
●Player
1
:
Apple
● Innovated
the
smartphone
industries
and
the
tablet
industry,
targets
premium
users
with
high
prices
to
fund
R&D
and
innovation.
!
●Player
2
:
Samsung
● A
tech
giant
producing
a
range
of
electronics
including
TV’s,
Stereo
Systems,
nano-­‐technology
electronics
,
laptops
and
computers,
phones
and
tables
.
!
Vs.
THE
PLAYERS

18. The
Game
:
Patent
Wars
●File
a
patent
lawsuit.
!
!
●Do
not
file
a
patent
lawsuit
.
!
Vs.
The
Strategies

19. The
Game
:
Patent
Wars
Vs.
The
Payoffs
Samsung
Apple
File
a
Lawsuit Do
not
File
a
Lawsuit
File
a
Lawsuit 26,26 31,24
Do
not
File
a
Lawsuit
22,31 28,28
The
payoffs
are
in
Billions
of
US
Dollars.

20. The
Game
:
Patent
Wars
●The
game
is
constructed
using
the
2011
figures
of
revenues
for
Apple
phones
revenues
and
Samsung
benchmarked
to
apple’s
revenues
for
the
purpose
of
analysis
and
justified
by
the
very
close
figures.
●If
both
the
firms
file
a
lawsuit,
they
will
both
lose
profits
in
forms
of
penalties,
expenses
on
law
suits,
extra
costs
on
R&D,
patenting
and
licensing.
●If
one
of
the
firms
files
a
lawsuit
without
the
other
responding
,
the
other
firm
will
lose
reputation,
market
share
and
profits
,
however,
the
losses
are
not
symmetric
because
apple
uses
a
differentiation
strategy
and
by
having
a
patent
lawsuit
it
will
jeopardize
its
differentiation
and
its
first
mover
advantage
,
thus,
the
losses
are
more
in
case
of
apple
.
●If
both
firms
do
nothing,
their
profits
will
be
the
benchmarked
profits
given
in
the
payoff
matrix.
Vs.
The
Assumptions

21. The
Game
:
Patent
Wars
●The
Nash
Equilibrium
of
the
game
is
for
both
firms
to
file
lawsuits
against
each
other,
in
this
case,
they
have
no
incentive
to
deviate
from
the
stable
outcome.
●The
Pareto
efficient
outcome
is
for
both
the
firms
to
do
nothing.
Vs.
Game
Solution
Samsung
Apple
File
a
Lawsuit Do
not
File
a
Lawsuit
File
a
Lawsuit 26,26
** 31,24
Do
not
File
a
Lawsuit
22,31 28,28
*

22. The
Game
:
Patent
Wars
●For
the
sake
of
better
understanding
the
game
,
a
variation
in
the
payoffs
could
be
introduced
as
the
following
:
Vs.
Variations
Samsung
Apple
File
a
Lawsuit Do
not
File
a
Lawsuit
File
a
Lawsuit 28-­‐M
,
28-­‐Q 31,24
Do
not
File
a
Lawsuit
22,31 28,28

23. The
Game
:
Patent
Wars
While:
●M:
The
profit
loss
for
apple
if
they
file
a
lawsuit
against
Samsung
in
forms
of
extra
legal
fees,
extra
patenting
and
licensing
costs
for
future
products
and
other
expenses
.
M
incorporates
the
penalties
applied
on
Samsung
in
the
analysis,
but
it
would
be
fair
to
assume
that
the
value
of
future
expenses
for
five
years
might
offset
the
gain
in
the
penalties
acquired.
●Q:
The
profit
loss
for
Samsung
if
they
file
a
lawsuit
in
the
same
forms
as
apple
.
Vs.
Variations
Samsung
Apple
File
a
Lawsuit Do
not
File
a
Lawsuit
File
a
Lawsuit 28-­‐M
,
28-­‐Q 31,24
Do
not
File
a
Lawsuit 22,31 28,28

24. The
Game
:
Patent
Wars
●
Vs.
Variations

25. The
Game
:
Patent
Wars
●Thus
,
apple
will
file
a
lawsuit
as
long
as
the
losses
of
doing
so
is
less
than
6B
Dollars.
●Similarly,
Samsung
will
respond
back
as
long
as
the
losses
of
doing
so
is
less
than
4B
Dollars
.
●Therefore,
reflecting
the
first
mover
advantage
of
Apple
as
it
has
more
room
to
file
a
lawsuit
against
Samsung
.
Vs.
Variations

26. The
Game
:
Patent
Wars
●Apple
filed
a
patent
again
and
the
war
kept
on
going
,
while
apple
protecting
its
differentiation
and
Samsung
pushing
them
to
the
edge
.
●Apple
finally
gave
up
and
introduced
a
plastic
iPhone,
just
after
that
happening
,
we
expect
the
market
shares
to
get
close
again
.
Vs.
What
Actually
Happened
?
Samsung
Vs.
Apple
Marketshare
0
10
20
30
40
2010 2011 2012 2013 2014
Samsung Apple Apple
Projected
Samsung
Projected

27. Resources
● http://www.gartner.com/newsroom/id/2665715
● http://www.forbes.com/sites/chuckjones/2013/01/25/samsung-­‐increasing-­‐its-­‐smartphone-­‐market-­‐
share-­‐vs-­‐apple-­‐and-­‐the-­‐rest-­‐of-­‐the-­‐pack/
● http://blogs.cornell.edu/info2040/2011/10/05/biggest-­‐mobile-­‐device-­‐makers’-­‐game-­‐theory-­‐–-­‐
samsung-­‐vs-­‐apple/
● http://www.marketoracle.co.uk/Article36240.html
● Class
notes
● Competitive
Strategy
Textbook
.

28. Thank
you
.