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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 Porter’s 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

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:

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.



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 .

predict likely impact on competition and profitability. 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) • . Concentration(decre ase) Strategic Positioning • Once we know which structural features of the industry support profitability and which depress profitability.Applying Five-Forces Analysis? Forecasting Industry Profitability • Restaurant: Location If we can forecast changes in industry structure we can (increase) vs comp. we can choose a favorable position(ing) within the industry.

e. this is where they implement their business strategies) -not in industries. We therefore need to understand how markets work: 2/17/13 .Industries and markets • Organisations ‘sell’ in markets (i.and they sell by different methods (or business strategies).

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’) .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.

DISCRETE Key product & customer segmentation variables 2/17/13 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) 2/17/13 .

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 .

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

Prescho Mass Colle Type ol Books ol Market ge <1 8 Student> 18 18-35 (Non student) A 3654 >5 5 2/17/13 What are relevant resources and operational / dynamic capabilities? (i.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 ‘A’s attractiveness Product in the industry: type Customer Scho Prof.e. what are the elements .

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???? 2/17/13 Buyer power – quite high Small print runs – needs – growing? .• Analysis of Segment A for Tesco: Supplier power – weak Bespoke commissioned Texts typically.

Critical success factors (profitability drivers) in Market ‘A’ therefore are: • Market awareness (buyer price sensitivity) – KPI? Product Range – (buyer’s choice in substitutes) – KPI? Inventory – avoiding stock outs – KPI? Sales and Service Environment .What resources and capabilities are needed and/or can be leveraged into segment ‘A’ from other occupied markets? 2/17/13 .KPI? • • • •Q then ask.

consideration of their dynamic capabilities (or how can they change?) Signalling and credible threats – are used to hide this understanding! (remember the Power School?) • 2/17/13 .e.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.

Hence – it builds upon our competitor and demand analysis findings KEY – remember – your focus is to filter information to derive the important strategic insights • • 2/17/13 . 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.Extending our analysis further is to consider competitors • Our next step and their current business strategies.

• First • question – From the Positioning School . 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.What is a strategic group ? This is a group that includes organisations with similar strategic characteristics. 2/17/13 .

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 2/17/13 • firms that use the same technological approaches .Strategic Groups Analysis • Firms in strategic groups have one or more competitive characteristics in common.

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. OLI.Constructing a strategic group map • 1) Identify competitive characteristics that differentiate firms from one another in a market or industry– use your PESTLE . 5 Forces. • • • 4) Draw circles around each strategic group where the circles are proportional to the size of the group’s 2/17/13 .

Strategic group (UK Pharmaceutical 2002) ? Le as k( 2 0 0 2) ? 2/17/13 .

Strategic groups : (European Food industry – mid 1990s) ? ? 2/17/13 .

Strategic groups (Oil producers – 1980s) 2/17/13 .

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 Int’l 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 group’s 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?)) • .

– we need to focus on strategic evaluation and choices .THE FIRM • Corporate and business strategy is concerned with: • (from Positioning School/Design) MATCHING firm’s potential to opportunities in markets.and the internal environment of the firm (RBT – Culture) • Now 2/17/13 .

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 .

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 2/17/13 .The Links between Resources.

It’s 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 • .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 .

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 .

location. Customer loyalty. company Brand equity reputation (with suppliers. Customer retention customers. Land and buildings Raw materials Technology Intangible Resources Reputation Patent.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. Pay rates. R&D No. commitment and loyalty of employees Employee qualifications. technology flexibility. Of patents owned facilities Royalty income Technical and scientific employees R&D expenditure R&D staff Brands.adaptability. know how. experience. copyrights. turnover Als o re vie we d rel ati vel y Human Resources . government) Supplier loyalty Training. Scale of plants Alternative uses for fixed assets Physical Plant and equipment: Size.

socially complex.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. 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 • .

cash) Intellectual (e. structure) Financial (e. plant) Reputation (e.g IPR) Technological (e. (BRAND) appropriate range of texts.g brand) YE S YE S Limit ed With difficulty YE S YE S Organizational (e.Resource / Capability Valuable? Rare? N O YE S Imperfectly Imitable? Implementable by Organisation? Physical (e.g. innovation) From Tesco’s Segment ‘A’ – key structural success factors were: Being price sensitive.g. being prompt in delivery and working with 2/17/13 suppliers for recommendations (marketing knowledge) .g. accessibility (PLANT).g.

the achievement of a relevant market task) as a functional chain or a value chain (using Porter’s 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. • .e.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.

com Singapore Airlines. Capital One. Dell Computer Amazon. 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. integrated MIS network linked to Wal-Mart. Apple Canon. L. YKK Toyota. Banco Santander CORPORATE FUNCTIONS Financial control Management development Strategic innovation Multidivisional coordination Acquisition management International management MANAGEMENT INFORMATION R&D Comprehensive. Pfizer L. Shell Cisco Systems. Merk 3M. Harley-Davidson Four Season Hotels Nokia. L’Oreal PepsiCo. Inditex (Zara) Briggs & Stratton. PepsiCo General Electric. Caterpillar OPERATIONS PRODUCT DESIGN MARKETING SALES AND DISTRIBUTIONEffective sales promotion and execution Efficiency and speed of order processing Speed of distribution Customer service 38 . Altria Johnson & Johnson MTV. Haier Unilever.Identifying Organizational Capabilities: A Functional Classification FUNCTION CAPABILITY EXEMPLARS Exxon Mobil. bean. Luxottica Shell. Shell Google. Apple Procter & Gamble.

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 .


• 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 firm’s 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) 2/17/13 .

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 2/17/13 Developing Organizational .

csus. http://web. (2001).com/articles/ http://www.sveiby. A Knowledge based theory of the firm to guide strategy formulation. E. • • Oct 2004 Grant R (2004).nilf.Helpful references: • Forsman S (2000).pdf Oct Stanley Han (2004).htm Accessed April 2003 • • • Penrose E(1959). ‘ sourced at http://www. • . Sveiby Knowledge Associates.hhs.’Resource Based Strategy Analysis.’The theory of growth of the firm’.westminstercollege. Chapter 5 L Hellstrom and L Bennet (2000). K. 2/17/13 Oxford.pdf Oct 2004 Sveiby. http://www.

4.Which of the following is not an economic market type? 3 0 10 1. Duopoly Monopsony Monopoly Oligopoly Dirigiste 20% 20% 20% 20% 20% 0 2/17/13 1 2 3 4 5 . 2. 5. 3.

Price.3 0 Which of the following defines a ‘continuous variable’ for which strategic tool? 10 20% 20% 20% 20% 20% 1. Strategic Groups 2. 3. 2/17/13 1 2 3 4 5 . Market 0 Segmentation 4. Price. Strategic Groups Quality. FAR Geographical market served.

3 0 What is the difference between idiosyncratic and contestable markets/resources 20% 20% 20% 20% 1. They are the same 2. They . 10 20% They categorise the ease to which competitors can imitate products/servic es 0 categorise 1 2 3 4 5 2/17/13 3.

To 1 2 3 4 5 . 2/17/13 3.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.

The identify market opportunities They identify key competitors 20% 20% 20% 20% 2. They identify key external and internal 0 competitive 2/17/13 factors 1 2 3 4 5 .Key success factors are useful as: 3 0 10 20% 1. 3.

The competitive 0 market 2/17/13 relevance of 1 2 3 4 5 .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 20% 20% 20% 20% 2. 3.

To identify the viability of a corporate 0 ‘vision’ 2/17/13 1 2 3 4 5 . Entrepreneurial. To identify the appropriate business strategy 20% 20% 20% 20% 2.Which SoT originated the Value Chain and what is its purpose? 3 0 10 20% 1. Positioning.

2/17/13 2 3 4 5 . 20% 20% 20% 20% 20% 4. 5. 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 3.3 0 Now – we enjoyed this lecture… 1. 2.