Strategic Management (3 & 4)

Analysing industry and competition (IOE/RBT

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) Remember we are not neglecting the impact of SCP and the influence of different competitive market structures by asking this question

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

Demographic structure

Technology

Government & Politics

Social Socialstructure 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 26.0

LOW PROFITABILITY
Motor Vehicles & Parts 9.3

Pharmaceuticals
Petroleum

21.0
20.1

Insurance Life & Health

Forest & Paper Products

9.1
7.3

Tobacco
Food Consumer Products Securities and Investment Banking Beverages Medical Products & Equipment Scientific & Photographic Equip. Commercial Banks Computer Software Aerospace & Defense

21.6
19.5 18.4 17.2 17.2 15.6 14.8 14.0 13.9

Food Production
Semiconductors & Electronic Components Network & Communications Equipment Telecommunications Entertainment Airlines

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)

2.

The intensity of competition (concentration, geographical concentration, scale, scope)

3.

Relative bargaining power at different levels within the value chain.

Recall: The Spectrum of Industry Structures

Perfect Competition Concentration Many firms No barriers Oligopoly Duopoly Monopoly

A few firms

Two firms

One firm

Entry and Exit Barriers

Product Differentiation

Significant barriers

High barriers

Homogeneous Product Perfect Information flow

Potential for product differentiation

Information

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(decrease)

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:

What is the Relevant Market?

What industry is Jaguar Ltd. In?

The Motor Vehicle industry (SIC 371) The Automobile industry (SIC 3712) The luxury car industry? Is its industry global, regional (Europe) or national (UK)? DISCRETE VARIABLES
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

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

Demand analysis (3)

3) Analyse (market) segment attractiveness

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

4) Identify key segment (critical) success factors (CSF) 5) Select segment scope (is this broad or narrow?)

Identifying Critical Success Factors (CSFs)?

Pre-requisites for success
What do customers want? How does the firm survive competition Analysis of demand Who are our customers? What do they want?

5 Forces

Analysis of competition What What drives drivescompetition? competition? What are the main dimensions What are theof main competition? dimensions of is competition? How intense competition? How Howintense can we is obtain a competition? 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 & 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 in the industry:

Product type
Customer Type <18 Student>18 A

School

Prof. Books Mass Market Preschool

College

18-35
(Non student)

36-54 >55 What are relevant resources and operational / dynamic capabilities? (i.e. what are the elements of CSFs?)

 Analysis

of Segment A for Tesco:

Supplier power weak Bespoke commissioned Texts typically.

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

High Substitutes Competitive Offerings similar themes

Entry barriers customer Orientation and awareness Low

Medium growing?
Buyer power quite high Small print runs needs Endorsing and recom.

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? (NB Stretch and Leverage)

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?)

Extending our analysis further

Our next step is to consider competitors 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

 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.

Strategic Groups Analysis

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

that sell in same price / quality range firms which cover same geographic area firms which have vertical integration to the same degree firms which have similar product line breadth firms which emphasize the same types of distribution channel firms which offer buyers similar services 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 respective share of total industry sales (dont forget this!)

Strategic group (UK Pharmaceutical 2002)

?
Leask(2002)

Strategic groups : (European Food industry mid 1990s)

?

Strategic groups (Oil producers 1980s)

Strategic Maps of the United States Airline Industry

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

The Early 1990s

International United American

Non viable Group area

TWA

Geographic Scope

Eastern United Delta National American National

Conti- Northwest nental

Delta

USAir

Continental Western Southwest

Republic Ozark Piedmont AirCal

USAir Southwest

America West

Frontier

Kiwi
Reno Air

Regional

Texas Intl

PSA

Others

Regional Full Service

No Frills

No Frills

Full Service

Quality of Service

Quality of Service

Analysis of strategic groups (1)

NOW

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? Evaluate the degree of rivalry between groups what is the INTENSITY of COMPETITION? You can then further undertake 5 forces analysis of groups to determine relative competitive position within those groups.

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? Acquisitions? JVs?)) Seeks to strengthen the companys position within existing group (co-operation with other organisations?/ M & A?/ standards?)

THE FIRM Corporate and business strategy is concerned with:

(from

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

Canon: Products and Core Technical Capabilities

Precision Mechanics Fine Optics

MicroElectronics

35mm SLR camera Compact fashion camera Plain-paper copier EOS autofocus camera Color copier Digital camera Color laser copier Video still camera Laser copier Video security systems Camcorders Basic fax Binoculars Mask aligners Laser fax Excimer laser aligners Scanners Inkjet printer Laser printer Stepper aligners Color video printer Calculator Digital commercial Notebook computer printer

Possessing and deploying relevant (customer valued) Capabilities in the market supports competitiveness

The Links between Resources, Capabilities and Competitive Advantage

COMPETITIVE ADVANTAGE INDUSTRY CRITICAL SUCCESS FACTORS

STRATEGY ORGANIZATIONAL CAPABILITIES

Previously discussed!

RESOURCES
TANGIBLE Financial Physical INTANGIBLE Technology Reputation Culture HUMAN

Skills/know-how Capacity for communication & collaboration Motivation

Absolute and relative capabilities

There

are tangible and intangible resources There 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 better foundation for a business strategy

Capability requirements for competitive advantage

Scarce

Collis and Montgomery(1996

Appropriate

Demand

Rival firm

RELATIVELY STATIC+

RELATIVELY DYNAMIC+

Your firm

STATIC+

DYNAMIC+

VRIO

Past

Future Competitive Time

Appraising Resources
RESOURCE CHARACTERISTICS INDICATORS
Debt/Equity ratio Credit rating Net cash flow

Financial
Tangible Resources

Borrowing capacity Internal funds generation

Also reviewed relatively

Physical

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

Market value of fixed assets. Scale of plants Alternative uses for fixed assets

Technology
Intangible Resources Reputation

Patent, copyrights, know how, R&D facilities Technical and scientific employees
Brands. Customer loyalty, company reputation (with suppliers, customers, government) Training, experience,adaptability, commitment and loyalty of employees

No. Of patents owned Royalty income R&D expenditure R&D staff

Brand equity Customer retention Supplier loyalty Employee qualifications, Pay rates, turnover

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 nonimitable
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 attributes are MORE likely to be able to underpin SUSTAINED Competitive Advantage (SCA)

Resource / Capability

Valuable?

Rare?
NO

Imperfectly Imitable?

Implementable by Organisation?

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

YES
YES

Limited With difficulty

YES YES

YES

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 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 and market needs. There are different approaches

Identifying Organizational Capabilities: A Functional Classification

FUNCTION CORPORATE FUNCTIONS CAPABILITY Financial control Management development Strategic innovation Multidivisional coordination Acquisition management International management Comprehensive, integrated MIS network linked to managerial decision making EXEMPLARS Exxon Mobil, PepsiCo General Electric, Shell Google, Haier Unilever, Shell Cisco Systems, Luxottica Shell, Banco Santander Wal-Mart, Capital One, Dell Computer

MANAGEMENT INFORMATION

R&D

Research Innovative new product development Fast-cycle new product development

Efficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response

IBM, Merk 3M, Apple Canon, Inditex (Zara)

Briggs & Stratton, YKK Toyota, Harley-Davidson Four Season Hotels

OPERATIONS

PRODUCT DESIGN
MARKETING

Design capability
Brand management Building reputation for quality Responsiveness to market trends Effective sales promotion and execution Efficiency and speed of order processing Speed of distribution Customer service

Nokia, Apple
Procter & Gamble, Altria Johnson & Johnson MTV, LOreal PepsiCo, Pfizer L. L. bean, Dell Computer Amazon.com Singapore Airlines, Caterpillar

SALES AND DISTRIBUTION

38

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 SUPPORT ACTIVITIES

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT PROCUREMENT

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING & SALES

SERVICE

E.g. What capabilities? What resources? What routines?

PRIMARY ACTIVITIES

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

sustain a competitive advantage

From

AND Appropriating returns from that advantage

Implementation (Value

chain) and structuring of the

organisation

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

results in identifying resource gaps We can produce capability plots In other words we are seeking to develop a Dynamic Resource fit (sometimes called GAP analysis)

Corporate Strategy
Vision Mission Goals

Business Strategies

Functional Strategies

Developing Organizational Capabilities

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/FAllchptr5slides.ppt Stanley Han (2004), http://www.csus.edu/indiv/h/hany/Teaching/Slides/Resources%20and%20Capabiliti es.ppt 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, Oxford. Winter S(2003),Understanding dynamic capabilities, Strategic Management Journal, 24,991-995 Rahmeyer F (2006),From a routine based to a knowledge based view: Towards an evolutionary theory of the firm, Volkwirtschaftliche Diskussionsreihe, No. 283 Munro M C & Wheeler B R (1980),Planning, critical success factors and managements information requirements, MIQ Quarterly, December. Zwikael O and Globerson S (2006),From critical success factors to critical success processes, International Journal of Production Research, 44,7,1,pp.3433-3449 Kulatunga U, Amaratunga D and Haigh R (2009),Critical Success Factors of construction research and development, 27,9,pp.891-900. Rudrajeet Pal and Hkan Torstensson. (2011), Aligning critical success factors to organizational design: A study of Swedish textile and clothing firms, Business Process Management Journal, Jun2011, Vol. 17 Issue 3, p403-436, 34p Leask G (2002),Use of Strategy frameworks to analyse competitive dynamics in the pharmaceutical industry, Journal of Medical Marketing, 5,3,pp.209-218

Which of the following is not an economic market type?

30

10

1.

2.
3. 4. 5.

Duopoly Monopsony Monopoly Oligopoly Dirigiste

20%

20%

20%

20%

20%

0
1 2 3 4 5

Which of the following defines a continuous variable for which strategic tool?
30

1. 2. 3.

4.

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

10
20% 20% 20% 20% 20%

What is the difference between idiosyncratic and contestable markets/resources

30

1. 2.

3.

4.

5.

They are the same They categorise the ease to which competitors can imitate products/services They categorise what is similar or different in offered products/services They categorise attractive (potentially profitable) market segments They categorise unattractive (potentially unprofitable) market segments

10
20% 20% 20% 20% 20%

0
1 2 3 4 5

The aim of a strategic group map is:

30

1. 2.

3. 4. 5.

6.

To identify attractive market segments To identify clusters of similarly competitive organisations To identify new / better market opportunities To identify the scope for related diversification Answers 1,2,3 Answers 2,3,4

10
20% 20% 20% 20% 20%

0
1 2 3 4 5

Key success factors are useful as:

30

1. 2. 3.

4.

The identify market opportunities They identify key competitors They identify key external and internal competitive factors They identify markets with high profit potential
0

10
20% 20% 20% 20% 20%

The VRIO (S) framework seeks to describe:

30

1. 2. 3.

4. 5.

The competitive structure of the organisation The competitive structure of the market environment The competitive market relevance of organisational resources The lifecycle of organisational resources The lifecycle of organisational products

10
20% 20% 20% 20% 20%

0
1 2 3 4 5

Which SoT originated the Value Chain and what is its purpose?
30

1.

2.
3.

4.

5.

Positioning, To identify the appropriate business strategy Entrepreneurial, To identify the viability of a corporate vision Entrepreneurial, To identify the price to set for a product/service Power, To identify the sources of micro power opportunities in an organisation Positioning, To identify the source of competitive added value

10
20% 20% 20% 20% 20%

0
1 2 3 4 5

Now we enjoyed this lecture

30

10

1.

2.
3.

4.
5.

Fully (100%) Most of it (75-99%) A majority of it (5074%) Some of it (25-49%) Almost none of it (024%

20% 20% 20%

20% 20%

0
1 2 3 4 5