Welcome back to our course on protecting business innovations via strategy. Today, we're going to talk about resource-based strategy and define that term and explain what we mean by that, it's a particular view of strategy. And so, we're going to look at traditional views of strategy and ways to think about strategy. When we think about strategy, we talk about how can we sustain profitability or increase profitability. And one of the first things we might want to look at is how profitable is an industry or market likely to be, how well-positioned are we just as an industry overall, and then how well-positioned within that industry. A useful framework for thinking about a position of an industry or attractiveness of an industry is Porter's five forces model, introduced by Michael Porter in about 1980. This is a framework that became very popular to think about in terms of strategy, where we start to look at things like the threat of new entrants and you've often heard about barriers to entry as a way to try and help a company be more profitable. And Porter sort of flips that in his head and said, "What are the threat of new entrants? How easy is it for them to overcome any barriers we have to entry?" But he says, "That's just one of the forces driving the industry's profitability." Another force is the threat of substitutes. Substitutes are different from new entrants. We're not talking about new technologies that substitute for what we do. So a new entrant might threaten us in the same business but a substitute is a way of doing the same thing with a different, or new product, or an alternative approach outside our industry that may substitute for the product or service that we're providing. Then, we have to think about bargaining power suppliers. If our suppliers have a lot of power over us and a lot of negotiating leverage. They may be keeping most of the profit. We may be under profit pressure because our suppliers are powerful. We see that, for example, in the US auto industry with negotiating power of labor unions increasing and getting more money for workers at the expense of the competitiveness of US car manufacturers versus overseas suppliers. And so, that's the power of suppliers or major airlines having to pay higher wages to pilots than startups. That's good for the pilots. That's not so good for the major airlines who find themselves in a competitive disadvantage versus a younger startup, which has more bargaining power over their suppliers. And similarly, bargaining power over customers. If your customers are acting collectively or are very strong and powerful, that weakens your ability to raise price. That weakens your ability to strike value if you can position yourself for a bargaining power of customers is low, you may be able to push prices higher and push margins higher. Finally, rivalry within an industry can be so intense that it destroys profitability even if other forces are low. So, if any of these five forces are high, the threat of new entrants or substitutes, the bargaining power of customers or suppliers, or the degree of tensity of rivalry amongst competitors in the industry, if any of these are high, you tend to have a low profitability industry. A very industry pushing price towards cost and margins towards zero. Some industries are very profitable, like if we look at the competitive positioning of Apple and its industry. We look at the high end cell phone industry and we can say that the bargaining power of suppliers is relatively low. Apple has done a good job of keeping its processor internally, owning its operating system, its employees don't have strong unionized labor force that are going to push up wages higher than market wages. Their customers don't have a lot of bargaining power. Even if you think of their customers as being cell phone companies, not just end users, the cell phone companies may find if they negotiate too hard with Apple and push too hard, customers may prefer to have an iPhone with a different supplier rather than not be able to buy the iPhone, so you may find that your bargaining power is limited with carriers even. Threat of substitutes. There are not a lot of great substitutes for a smartphone, you might be able to use a dumb phone, or a low end phone, and a laptop or something else, or you may be able to just use a landline phone instead of your cellphone as a substitute but it's isn't a very good substitute. So it's not like these are big threats to Apple's high end business. New entrants, maybe. There are some competitors, there are some rivals, certain Android operating system to create some competitiveness. Samsung in the high end is a threat. There are a few others that are threats. But there are nto great threats and it's not like there's a lot of players waiting on the margin to get in. And most of these are not new entrants anymore they're part of the rivalry. And if you look at rivalry on the high end of cell phones, when Apple raises price, Samsung raises price. It doesn't feel like it's a super intensely competitive industry. So, all of that combines to say, "Hmm, this looks like a pretty attractive industry. This looks like a place you could make some pretty good margins.", and that's in fact the case. Now, that's not just the only thing we look out in strategy and one of the things we look at in a resource base strategy is how can I create barriers to entry or how can I build fortresses against competitors? How can I gain an advantage, gain bargaining power over customers, gain power over suppliers? How can I leverage these five forces to my advantage using something that I can control alone? And there's primarily three kinds of resources that I can bring to bear as a company to help me to gain an advantage and help me gain bargaining power or to help me to reduce threats. One is size. Economies of scale being bigger. Another is access. I have access to something others don't and that gives me a preferred ability to gain an advantage. The third is knowledge or skills. I know things other people don't. I can do things other people can't and that gives me an advantage. So these are my primary types of resources. Now, there are much more details that we'll go into for each of these resources to give you examples and help you understand what we mean by these resources; size, access, and knowledge. When we think about size, for example, we think about two aspects of size. One is economies of scale, that's kind of a traditional view of size. If you're bigger, you may have lower cost because of some efficiencies, there maybe some just advantages of size on the supply side. Network externalities is an advantage of size on the demand side. For example, people like to use Microsoft Office because other people use Microsoft Office. People might like a musician because other people like that musician, and you want to be able to talk about them. And so, you like what other people like because other people like it. You like a TV show because other people like that TV show, and you can talk about it and share ideas and thoughts, and so things become more popular or positive feedback for Facebook or for other services online or for technologies. That's a network externality. The more people use it, the more valuable it is. In addition to size, there's access, access to raw materials, access to land, access to customers, access to real estate, access to markets, access to decision makers and a country, access to buyers and a large corporation. These are access to resources or markets that can create an advantage over other companies. Finally, knowledge. Trade secrets, new technology, you know something, you can do something that other companies can't. That's valuable. That can give you an advantage in the marketplace. Sometimes, it's fleeting. Sometimes, it's hard to sustain. But if you can sustain it, if you can build that barrier, it can become a significant hurdle for other people to overcome. That's it. Thank you very much. We look forward to seeing you in our individual videos where we talk about each of these resource based strategies and capabilities. Thank you.
