Strategic Management (3 & 4)

Analysing industry and competition (IOE/RBT

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Analysing the industrial environment

Last time design tools from Positioning School (Porter) Trying to Answer - IF: there are particular structural factors that are shaping profit potential in a given industry how attractive are they for a given firm? (i.e. this SCP/ IOE paradigm)

This means determining industry attractiveness (to help aid domain selection and corporate positioning) we are not neglecting the impact

Remember 2/17/13

We can extend our understanding of the industry dynamics by applying Simple PEST and Porters 5 forces analysis: This contributes to the FOUNDATION of your Analysis: The national/ international economy The natural environment

THE INDUSTRY ENVIRONMENT Suppliers Competitors Customers

Technology

Demographic structure

Government & Politics

Social structure Social structure

The Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on the Industry Environment.

Profitability of some US Industries

(selected industries only aiding corporate domain selection)
Median return on equity (%), 1999-2007 HIGH PROFITABILITY Household & Personal Products Pharmaceuticals Petroleum Tobacco Food Consumer Products Securities and Investment Banking Beverages Medical Products & Equipment Scientific & Photographic Equip. Commercial Banks Computer Software Aerospace & Defense 26.0 21.0 20.1 21.6 19.5 18.4 17.2 17.2 15.6 14.8 14.0 13.9 LOW PROFITABILITY Motor Vehicles & Parts Insurance Life & Health Forest & Paper Products Food Production Semiconductors & Electronic Components Network & Communications Equipment Telecommunications Entertainment Airlines 9.3 9.1 7.3 6.5 6.2 5.9 5.8 2.7 (12.6)

The Determinants of Industry Profitability?

3 key influences:
1.

The value of the product to customers (e.g.the consumer surplus) The intensity of competition (concentration, geographical concentration, scale, scope) Relative bargaining power at different levels within the value chain.

1.

1.

Recall: The Spectrum of Industry Structures

Perfect Competition Concentratio n Entry and Exit Barriers Product Differentiatio n Information Many firms No barriers Oligopoly Duopoly Monopoly

A few firms

Two firms

One firm High barriers

Significant barriers

Homogeneou s Product Perfect Information flow

Potential for product differentiation

Imperfect availability of information

Applying Five-Forces Analysis?

Forecasting Industry Profitability

Restaurant: Location If we can forecast changes in industry structure we can (increase) vs comp. predict likely impact on competition and profitability. Concentration(decre ase)

Strategic Positioning
Once we know which structural features of the industry support profitability and which depress profitability, we can choose a favorable position(ing) within the industry.

Strategies to Improve Industry Profitability?

Which of the structural variables that are depressing profitability can we change by individual or collective strategies? Example working with other buyers to increase purchasing power of a firm (typical of Italian SMEs)

Industries and markets

Organisations sell in markets (i.e. this is where they implement their business strategies) -not in industries- and they sell by different methods (or business strategies). We therefore need to understand how markets work:

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What is the Relevant What industry is Jaguar Ltd. In? Market?

The Motor Vehicle industry (SIC 371)

The Automobile industry (SIC 3712) DISCRETE VARIABLES luxury car industry? The

Is its industry global, regional (Europe) or national (UK)? Key criterion: PRODUCT SUBSTITUTABILITY

On the demand side : are buyers willing to substitute between types of cars and across countries On the supply side : are manufacturers able to switch production between types of cars and across countries

We may need to draw industry boundaries differently for different types of decision (see later example of tins)

DISCRETE Key product & customer segmentation variables

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Demand/Customer analysis

Demand/ Customer analysis (2) Stages in segmentation

1)

Customer type vs material need

Identify your key variables

These

need to be strategically significant correlated variables- AND discrete

2)

Construct a segmentation matrix

These are all distinct markets that comprise the TIN Industry in France/Germany 2/17/13

Demand analysis (3)

3) Analyse (market) segment attractiveness

Applying 5 forces analysis (i.e. it is used iteratively)

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Identifying Critical Success Factors (CSFs)?

Pre-requisites for success
What do customers want?

How does the firm survive competition

5 Forces

Analysis of demand

Who are our customers? What do they want?

Analysis of competition What drives competition? What drives competition? What are the main What are the main dimensions of competition? dimensions ofis competition? How intense competition? How intense is competition? How can we obtain a superior competitive position? How can we obtain a superior competitive position?

CRITICAL SUCCESS FACTORS

CSFs (planning school)

CSFs a label/expression that communicates the areas of activity, which have/could have corresponding metric(s) Early (1980) strategic use of CSFs from an MIS perspective (Munro 2/17/13 & Wheeler,1980)

Thought example: Market Segmentation and new product development for Tesco (UK) Assume a corporate goal Market Development in A

From your structural analysis you determine As attractiveness Product in the industry: type Customer Scho Prof. Prescho Mass Colle Type ol Books ol Market ge
<1 8 Student> 18 18-35
(Non student)

3654 >5 5 2/17/13 What are relevant resources and operational / dynamic capabilities? (i.e. what are the elements

 Analysis

of Segment A for Tesco:

Supplier power weak Bespoke commissioned Texts typically. Weak

Hig h Substitutes Competitive Offerings similar themes

Entry barriers customer Orientation and awareness Low

Internal Rivalry HIGH Growth in online provision market saturation? Cost competition? Key Profitable Medium segment????

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Buyer power quite high Small print runs needs

growing?

Critical success factors (profitability drivers) in Market A therefore are:

Market awareness (buyer price sensitivity) KPI? Product Range (buyers choice in substitutes) KPI? Inventory avoiding stock outs KPI? Sales and Service Environment - KPI?

then ask- What resources and capabilities are needed and/or can be leveraged into segment A from other occupied markets? 2/17/13

Applying competitor analysis

1) Acquiring knowledge 2) Behaviour - The key purpose of this information and its analysis is to try to forecast the direction of strategic change what is the competitors likely intent? (i.e. consideration of their dynamic capabilities (or how can they change?) Signalling and credible threats are used to hide this understanding! (remember the Power School?)

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Extending our analysis further is to consider competitors Our next step

and their current business strategies, through a strategic groups analysis (again the school of IOE/Positioning)

This allows us a greater understanding of the positioning of an organisation in relation to the corporate and business strategies of other organisations. Hence it builds upon our competitor and demand analysis findings KEY remember your focus is to filter information to derive the important strategic insights

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 First

question From the Positioning School - What is a strategic group ?

This is a group that includes organisations with similar strategic characteristics, that follow similar business strategies for them to compete on similar bases. Usually identified by two or three key characteristics (these must be continuous variables) The purpose of defining a group in this way is that it allows us to display different competitive positions that rival firms occupy in an industry and / or market.

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Strategic Groups Analysis

Firms in strategic groups have one or more competitive characteristics in common. For example:
firms firms firms

that sell in same price / quality range which cover same geographic area

which have vertical integration to the same degree which have similar product line breadth

firms firms

which emphasize the same types of distribution channel which offer buyers similar services

firms

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firms

that use the same technological approaches

Constructing a strategic group map

1) Identify competitive characteristics that differentiate firms from one another in a market or industry use your PESTLE , OLI, 5 Forces, Impact Wheels etc (CSFs) 2) Plot these firms on a two variable graph using pairs of these differentiating characteristics 3) Assign firms that fall in/around the same strategy space the same strategic group.

4) Draw circles around each strategic group where the circles are proportional to the size of the groups 2/17/13

Strategic group (UK Pharmaceutical 2002)

?
Le as k( 2 0 0 2)

?
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Strategic groups : (European Food industry mid 1990s)

?

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Strategic groups (Oil producers 1980s)

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Strategic Maps of the United States Airline Industry

The Late 1970s
International
Laker World Braniff North west TW A Pan Am

The Early 1990s

International United American

Eastern United

Non viable Group area

Conti- Northwest nental TWA USAir

Delta

Geographic Scope

Nationa l

Delta American Nationa l

Continental Western Republic Ozark Piedmont AirCal PSA Southwest America West

USAir Southwest

Frontier

Kiwi Regional Full Service

Reno Air

Regional

Texas Intl

Others

No Frills

No Frills

Quality of

Quality of

Full Service

 NOW

Analysis of strategic groups (1)

INTERPRET your analysis
Can you identify factors that prevent firms in one groups from competing with companies in other groups are there MOBILITY issues, CAPABILITY issues? Can you assess the strength of bargaining power between groups and industry buyers/suppliers are there POWER issues? Can you determine the threat of substitutes between groups are there SUBSTITUTE issues? the degree of rivalry between

2/17/13 Evaluate

Analysis of strategic groups (2)

You can recognize groups strengths and weaknesses You can identify the strategic group that represents the greatest opportunity and / or threat

Next step? Your strategic analysis could recommend for your organisation that it:

Seeks to create a new group (with new product/market combinations?) Seeks to move to a better group (and what is better? / changes in corporate and /or business strategies)

Seeks to strengthen the existing group (increase the entry barriers? (mergers? 2/17/13 Acquisitions? JVs?))

THE FIRM

Corporate and business strategy is concerned with:

(from

Positioning School/Design) MATCHING firms potential to opportunities in markets. we need to focus on strategic evaluation and choices - and the internal environment of the firm (RBT Culture)

Now

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Canon: Products and Core Technical Capabilities

Precisio n Mechani cs 35mm SLR camera

Fine Optics
Plain-paper copier Color copier Color laser copier Laser copier Binoculars

MicroElectron ics

Compact fashion camera EOS autofocus camera Digital camera Video still camera Video security systems Basic fax Camcorders Laser fax Mask aligners Excimer laser Scanners aligners Stepper alignersCalculator Notebook computer

Inkjet printer Laser printer Color video printer Digital commercial printer Possessing and deploying relevant

(customer valued) Capabilities in the market supports

The Links between Resources, Capabilities and Competitive Advantage

COMPETITIVE ADVANTAGE INDUSTRY CRITICAL SUCCESS FACTORS

STRATEGY ORGANIZATIONAL CAPABILITIES

Previously discussed!

RESOURCES
TANGIBLE

INTANGIBLE Technology Reputation Culture

HUMAN Skills/know-how Capacity for communication & collaboration Motivation

Financial Physical

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Absolute and relative capabilities

There There

are tangible and intangible resources

are organisational capabilities which are resource combinations (and of course this can bring rigidities (KODAK!))

BUT - Its important to consider what are the relative capabilities that can aid sustainable advantage (i.e. consider them wrt competitors (so you need your competitor analysis!)) at both a static and dynamic level

Seek to identify those particular capabilities as they are likely to offer a 2/17/13 better foundation for a business strategy

Capability requirements for competitive advantage Scar

ce Dema nd

Collis and Montgomery(1996)

Appropria te

Rival firm

RELATIVELY STATIC+

RELATIVELY DYNAMIC+

Your firm

STATIC+

DYNAMIC+

VRI O

Pa st 2/17/13

Competitive Time

Futur e

Appraising Resources
RESOURCE Financial Tangible Resources CHARACTERISTICS
Borrowing capacity Internal funds generation

INDICATORS
Debt/Equity ratio Credit rating Net cash flow Market value of fixed assets. Scale of plants Alternative uses for fixed assets

Physical

Plant and equipment: Size, location, technology flexibility. Land and buildings Raw materials

Technology Intangible Resources Reputation

Patent, copyrights, know how, R&D No. Of patents owned facilities Royalty income Technical and scientific employees R&D expenditure R&D staff Brands. Customer loyalty, company Brand equity reputation (with suppliers, Customer retention customers, government) Supplier loyalty Training, experience,adaptability, commitment and loyalty of employees Employee qualifications, Pay rates, turnover

Als o re vie we d rel ati vel y

Human Resources

The VRIO framework

(from Barney 1991)

(V)Resources and capabilities need to be valuable (R)Resources and capabilities need to be rare (I)Resources and capabilities need to be imperfectly non-imitable

history, causal ambiguity, socially complex, substitutability

(O)Resources and capabilities need to be Implementable by the Organisation

Resources & Capabilities owned/accessible to an organisation that have these 2/17/13 attributes are MORE likely to be able to

Resource / Capability

Valuable?

Rare?
N O YE S

Imperfectly Imitable?

Implementable by Organisation?

Physical
(e.g. plant) Reputation (e.g brand)

YE S YE S

Limit ed With difficulty

YE S YE S

Organizational
(e.g. structure)

Financial
(e.g. cash)

Intellectual
(e.g IPR)

Technological
(e.g. innovation) From Tescos Segment A key structural success factors were: Being price sensitive, (BRAND) appropriate range of texts, accessibility (PLANT), being prompt in delivery and working with 2/17/13 suppliers for recommendations (marketing knowledge)

How do we tie all this together?

Resources and their effective use (singular / combined/ relative /static/dynamic) results in a market relevant and profitable task being completed

Hopefully for at least a CA (if not SCA)

We can view this (i.e. the achievement of a relevant market task) as a functional chain or a value chain (using Porters terminology) as the resources are LINKED together This allows the identification of areas of strength / weakness within the organisation relative to the competition 2/17/13 and market needs.

Identifying Organizational Capabilities: A Functional Classification

FUNCTION CAPABILITY EXEMPLARS Exxon Mobil, PepsiCo General Electric, Shell Google, Haier Unilever, Shell Cisco Systems, Luxottica Shell, Banco Santander CORPORATE FUNCTIONS Financial control Management development Strategic innovation Multidivisional coordination Acquisition management International management MANAGEMENT INFORMATION R&D

Comprehensive, integrated MIS network linked to Wal-Mart, Capital One, Dell Computer managerial decision making Research Innovative new product development Fast-cycle new product development Efficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response Design capability Brand management Building reputation for quality Responsiveness to market trends IBM, Merk 3M, Apple Canon, Inditex (Zara) Briggs & Stratton, YKK Toyota, Harley-Davidson Four Season Hotels Nokia, Apple Procter & Gamble, Altria Johnson & Johnson MTV, LOreal PepsiCo, Pfizer L. L. bean, Dell Computer Amazon.com Singapore Airlines, Caterpillar

OPERATIONS

PRODUCT DESIGN MARKETING

SALES AND DISTRIBUTIONEffective sales promotion and execution Efficiency and speed of order processing Speed of distribution Customer service

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A Hierarchy of Capabilities: A Telecom Manufacturer

CROSS FUNCTIONAL CAPABILITIES

New product development capability

Customer Support capability

Quality management capability

BROAD FUNCTIONAL CAPABILITIES

Operations Capability

R&D and design capability

MIS capability

Marketing and sales capability

HR management capability

ACTIVITY RELATED CAPABILITIES (Operations related only) SPECIALIZED CAPABILITIES (Manufacturing related only) SINGLE-TASK CAPABILITIES (Only those related to PCB assembly)

Manufacturing capability

Materials management capability

Process engineering capability

Product engineering capability

Test engineering capability

Printed circuitboard assembly

Telset assembly

System assembly

Automated through-hole component insertion

Manual insertion of components

Wave soldering

Surface mounting of components

INDIVIDUALS SPECIALIZED KNOWLEDGE

The Porter Value Chain

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT

SUPPOR T ACTIVITI ES

INBOUND LOGISTICS

OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS & SALES

E.g. What capabilities? What resources? What 2/17/13 routines?

PRIMARY ACTIVITI ES

Having identified a potential basis for matching competitive advantage can the organisation SUSTAIN this? Hence extracting the profit potential of resources and capabilities means:

establish a competitive advantage

For Porter and IOE this means identifying an attractive market (and profitability drivers)

sustain a competitive advantage

From RBT a focus on VRIO idiosyncratic advantage(s))

AND Appropriating returns from that advantage 2/17/13

Developing the resource base of the firm

We

can gap analysis to determine the fit of a firms resources and capabilities in light of industrial / market development and corporate goals
This We In

results in identifying resource gaps

can produce capability plots

other words we are seeking to develop a Dynamic Resource fit (sometimes called GAP analysis)

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Vision Mission Goals

Extern al Analys is Intern

Corpora te Strategy
Strateg ic 'Plan'

ID Capability requiremen ts of strategy

al Analys is

G ap

Assess capabiliti es available

Busines s Strategi es

Devel op (HR)

Acqui re

Al ly

Incub ate

Sequen Function ce al (NPD) Strategi es

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Developing Organizational

Helpful references:

Forsman S (2000),Resource Based Strategy Analysis, sourced at http://www.nilf.no/Seminarer/Njf2000/forsman.pdf Oct 2004.

http://people.westminstercollege.edu/faculty/bray/webpage

Stanley Han (2004), http://www.csus.edu/indiv/h/hany/Teaching/Slides/Resources Oct 2004 Grant R (2004), Chapter 5 L Hellstrom and L Bennet (2000), http://web.hhs.se/cic/courses/underthebridge/portal.pdf Oct 2004 Sveiby, K. E. (2001). A Knowledge based theory of the firm to guide strategy formulation. Sveiby Knowledge Associates, http://www.sveiby.com/articles/Knowledgetheoryoffirm.htm Accessed April 2003

Penrose E(1959),The theory of growth of the firm, 2/17/13 Oxford.

Which of the following is not an economic market type?

3 0

10
1. 2. 3. 4. 5.

Duopoly Monopsony Monopoly Oligopoly Dirigiste

20%

20%

20%

20%

20%

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3 0

Which of the following defines a continuous variable for which strategic tool? 10 20% 20% 20% 20% 20% 1. Price, Strategic Groups
2. 3.

Price, FAR Geographical market served, Strategic Groups Quality, Market 0 Segmentation

4.

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3 0

What is the difference between idiosyncratic and contestable markets/resources 20% 20% 20% 20% 1. They are the same
2.

10
20%

They categorise the ease to which competitors can imitate products/servic es 0 categorise
1 2 3 4 5

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The aim of a strategic group map is:

3 0

10
1.

To identify attractive market segments To identify clusters of similarly competitive organisations 0 identify new /

20%

20%

20%

20%

20%

2.

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Key success factors are useful as:

3 0

10
20%

1.

The identify market opportunities They identify key competitors

20%

20%

20%

20%

2.

3.

They identify key external and internal 0 competitive 2/17/13 factors

The VRIO (S) framework seeks to describe:

3 0

10
20%

1.

The competitive structure of the organisation The competitive structure of the market environment

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20%

20%

20%

2.

3.

The competitive 0 market 2/17/13 relevance of

Which SoT originated the Value Chain and what is its purpose?
3 0

10
20%

1.

Positioning, To identify the appropriate business strategy

20%

20%

20%

20%

2.

Entrepreneurial, To identify the viability of a corporate 0 vision 2/17/13

3 0

Now we enjoyed this lecture

1. 2.

10

Fully (100%) Most of it (7599%) A majority of it (50-74%) Some of it (2549%) Almost none of it (0-24% 0
1

3.

20% 20% 20%

20% 20%

4.

5.

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