Growth Strategies: Rivalry

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This is the 3rd part of the undergraduate course in Growth Strategies: Rivalry in the External Environment. Read by Pavel Luksha

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Growth Strategies: Rivalry

  1. 1. GROWTH STRATEGIES External Environment: Rivalry Pavel Olegovich Luksha [email_address]
  2. 2. Competitiveness <ul><li>Innovative actions are intended to gain strategic competitiveness and earn above-average returns </li></ul><ul><li>Strategic competitiveness is achieved when a firm successfully formulates and implements a value-creating strategy </li></ul><ul><li>When other companies are unable to copy such a strategy or find it too costly to imitate, the firm has a sustainable competitive advantage </li></ul>
  3. 3. Virgin Cola: heads-on attack <ul><li>Highly attractive beverage market in US / Europe ( one of the highest on ROIC) </li></ul><ul><li>Three top players: Coca-Cola, Pepsico, Cadbury Schweppes </li></ul><ul><li>Barriers to entry : (1) brand , (2) bottling capacity , (3) shelf space </li></ul><ul><li>Heads-on attack by Virgin Cola – similar brand , massive advertisement campaign , negotiations with major retailers re shelf space </li></ul><ul><li>Market failure: occupies no more than 1% of the market </li></ul>
  4. 4. The current competitive landscape <ul><li>New sources of competitive advantage: flexibility, speed, innovation, outsourcing and integration </li></ul><ul><li>Hypercompetition: rapidly escalating and aggressive struggle to protect or invade established product or geographic markets </li></ul><ul><li>Competition among global combatants based on price-quality positioning and the creation of new knowledge </li></ul>
  5. 5. Intensity of rivalry: driving factors Intensity of Rivalry Numerous or Equally Balanced Competitors (Airbus vs. Boeing) Slow Industry Growth (Airline Industry) High Fixed Costs or High Storage Costs (Automobile Manufacturing) Lack of Differentiation or Low Switching Costs (Personal Computers) High Strategic Stakes (Consumer Electronics) High Exit Barriers (Specialized Assets, Labor Agreements, Government Restrictions)
  6. 6. Porter’s ‘Five forces of competition’
  7. 7. Porter’s types of ‘generic competitive strategies’ differentiation focus cost focus Narrow competitive scope differentiation cost leadership Broad competitive scope Quality as competitive tool Cost as competitive tool
  8. 8. Cost leadership strategy in automotive <ul><li>Cost cutting is the major focus of automotive companies: </li></ul><ul><ul><li>outsourcing component production to China and India to keep prices low </li></ul></ul><ul><li>Rush to reduce cost while keeping functionality: </li></ul><ul><ul><li>Renault Logan: cheapest version 6K Euro </li></ul></ul><ul><ul><li>Tata Nano (launched in 2009): 1.8K Euro </li></ul></ul>Renault Logan Tata Nano
  9. 9. Threat from low cost rivals: DuPont <ul><li>Growth rate decreasing in all major business lines (polyester, Lycra, nylon, Teflon, resins etc.): clients unwilling to pay DuPont’s price premium </li></ul><ul><li>Business lines independently focused on products with higher margin </li></ul><ul><li>Rivals entered lower price segments and expanded at DuPont’s expense </li></ul><ul><li>DuPont lost some of its previously dominant segments: e.g. sold resin and fabric businesses to Koch Industries in 2004 </li></ul>
  10. 10. The pitfalls of low cost strategy: Dell <ul><li>Efficient supply chain and direct link to customers to offer unbeatable prices </li></ul><ul><li>Rivals have caught up with Dell's low-price model - changes in computer market no longer favor Dell's strategy </li></ul><ul><li>Growth rate dropped in 2000s, Dell losing leadership to its competitors (HP, Mac) that stress new features: computer as part of the personal image / interior design </li></ul><ul><li>Strategy announced in 2008: actively expand in designer / superthin notebook market </li></ul>
  11. 11. Cost leadership strategy: IKEA IKEA store in Moscow <ul><li>In 2008, sales were 29 Bil USD (+7% to 2007) </li></ul><ul><li>Young working parents desiring style at a low cost are IKEA’s primary market segment </li></ul><ul><li>IKEA’s engineers design low-cost, modular furniture ready for assembly by customers </li></ul>
  12. 12. Lowcosters: cost + quality? <ul><li>cheap DIY furniture: IKEA, Home Depot and Lowe </li></ul><ul><li>no-frills airlines: Ryanair, easyJet, Germanwings … </li></ul><ul><li>low-cost PCs from Dell </li></ul><ul><li>discounter supermarkets: Aldi, Lidl, Wal-Mart, … </li></ul>
  13. 13. Becoming lowcoster : Ryanair <ul><li>Early 1990-s: traditional airline company in near-bankruptcy situation . </li></ul><ul><li>Since 1992, imitated Southwest Airlines solution in major cost cuts : </li></ul><ul><ul><li>fleet unification </li></ul></ul><ul><ul><li>secondary airports in small cities </li></ul></ul><ul><ul><li>direct online booking (eliminate tourist agencies) </li></ul></ul><ul><ul><li>remove business class and in-flight service </li></ul></ul><ul><li>2008: </li></ul><ul><ul><li>181 aircrafts, 729 routes in Europe and North Africa </li></ul></ul><ul><ul><li>explosive growth to 59 Mil passengers in 2008 (+18% to 2007) </li></ul></ul>Ryanair Boeing 737 aircraft
  14. 14. Differentiation strategy <ul><li>Through the differentiation strategy , the firm produces nonstandardized products for customers who value differentiated features more than they value low cost </li></ul><ul><li>Because a differentiated product satisfies customers’ unique needs, firms following the differentiation strategy are able to charge premium prices and earn above-average returns (L’Oreal, Lexus, Bose) </li></ul>
  15. 15. Differentiation: how Bratz might kill Barbie <ul><li>Barbie doll by Mattel dominated doll market for girls aged 3 to 14 since 1960- s </li></ul><ul><li>MGA Entertainment launched Bratz in 2001 for girls aged 7 to 14 (MTV-gen, shifting tastes) </li></ul><ul><li>By 2005, Mattel lost over 30% in the US , over 50% in the UK, over 20% globally </li></ul>
  16. 16. Differentiation Strategy: Toyota’s Hybrid Cars <ul><li>After 2010, Toyota is expected to be selling one million hybrids a year </li></ul><ul><li>Buyers focus on the improved fuel economy and advanced technology </li></ul><ul><li>Toyota is adapting hybrid technology to Camry, Lexus and other models </li></ul>Toyota Prius 2 nd gen hybrid
  17. 17. Jakks Pacific: differentiation as ‘niche picking’ <ul><li>Niche segments in the videogaming market taken by majors (Sony, Nintendo and Microsoft) </li></ul><ul><ul><li>inexpensive game consoles for pre-teen kids </li></ul></ul><ul><ul><li>game consoles for adult gamblers </li></ul></ul><ul><li>Dolls: licensed production of popular anime heroes </li></ul>Jeopardy! game Dragon Ball Z toys
  18. 18. Segments that proved to be HUGE business women kidults new retired riches generation Y
  19. 19. Focus Strategies <ul><li>Focus strategy: using the firm’s core competencies to serve the needs of a particular industry segment or niche (to the exclusion of others) more effectively than can industry-wide competitors </li></ul><ul><li>Firms can create value for customers in specific market segments by using the focused cost leadership strategy or the focused differentiation strategy </li></ul>
  20. 20. Niche solutions can give local market dominance <ul><li>Focused differentiation : Fulla doll – alternative to Barbie for Muslim countries ( produced by Syrian NewBoy Toys) </li></ul><ul><li>Focused cost : FutureCola beverage – the most successful beverage in rural China and small cities ( produced by Chinese Wahaha) </li></ul><ul><li>Focused differentiation & cost : 1С:Предприятие – dominate Russian ERP solution market for small and medium enterprises </li></ul>
  21. 21. RedBull: differentiation focus <ul><li>Niche product (energy drink) </li></ul><ul><ul><li>untypical package (compared to standard tins) </li></ul></ul><ul><ul><li>untypical distribution ( bars etc ) and promo </li></ul></ul><ul><ul><li>target ‘night-lifers’ </li></ul></ul><ul><li>Taken 50 % to 80% market share in energy drinks in different countries, sold over 3 bln cans in 2006 </li></ul>RedBull can
  22. 22. Focused strategy: Moleskine <ul><li>‘ Legendary notepad of Hemingway and Chagall’ from Modo&Modo </li></ul><ul><li>Prototypes are traditional ‘moleskins’ </li></ul><ul><li>Original fashion design of notepads and notebooks of various sizes </li></ul><ul><li>Focus on artistic youth </li></ul><ul><li>Expanding around the core product: e.g. Moleskine World ( mix of travel guide and personal travel diary ) </li></ul><ul><li>Went from 30K to 1 Mil unit sales in 8 years (1999 to 2007) </li></ul>Moleskine notepads
  23. 23. Focused strategy: Dyson <ul><li>15+ vacuum types within $400-500 range are sold in 40+ countries </li></ul><ul><li>Sales up to 10 Bil USD (2007), earned 20% US market share with its product (sales 4x between 2002 and 2004) </li></ul><ul><li>Lately expanded to washing machines and hand dryers using the same ‘cyclonic’ principle </li></ul>Dyson Cyclone vacuum cleaners
  24. 24. Differentiation at the higher end: Tiffany & Co. <ul><li>Robust international sales and higher gross margins </li></ul><ul><li>Sales growth occurred across engagement jewelry, fashion gold jewelry, higher-end fine jewelry and watches </li></ul><ul><li>Gross margin in 2008 increased to 58.6%, sales decreased by 3% y-o-y due to 4Q08 drop </li></ul>A. Hepburn in Breakfast at Tiffany's Tiffany Novo ring, $27,000
  25. 25. Jim Collins : focused strategies as the path ‘from good to great’ <ul><li>‘ Hedgehog strategy’ vs ‘fox strategy’ : focus on one thing ( your best skill ; the thing you like ; the thing that pays ) </li></ul><ul><li>Sources of success : </li></ul><ul><ul><li>qualified leadership </li></ul></ul><ul><ul><li>culture of discipline and commitment </li></ul></ul><ul><ul><li>technologies as growth accelerators </li></ul></ul>
  26. 26. Time for the group project ‘ Good to great’: is the focused strategy a key to success?
  27. 27. Positive feedback loops lower vendors’ cost in software development increasing availability of software and solutions unified standards of working file formats and user networks increased attractiveness for PC distributors and system integrators increased attractiveness for PC manufacturers Cycle of growth for Windows: benefiting from increasing returns effect
  28. 28. Growth in ‘increasing returns’ markets (1) <ul><li>1. Building business networks ( or ‘ecosystems’ ): </li></ul><ul><ul><li>a . content for the product : software for smartphones </li></ul></ul><ul><ul><li>b . complimentary products : sound systems for home cinema systems </li></ul></ul><ul><ul><li>c . sales and service </li></ul></ul><ul><ul><li>d . infrastructure : gas stations for cars </li></ul></ul><ul><ul><li>e . network effects : social networks </li></ul></ul><ul><ul><li>f . user switching costs </li></ul></ul>
  29. 29. Growth in ‘increasing returns’ markets (2) <ul><li>2. Building competitive advantage : </li></ul><ul><ul><li>a . lower fixed costs </li></ul></ul><ul><ul><li>b . strengthening brand / image </li></ul></ul><ul><ul><li>c . power over partners (suppliers, distributors etc.) </li></ul></ul><ul><ul><li>d . attracting best talent </li></ul></ul><ul><li>3. Organizational learning : </li></ul><ul><ul><li>a . learning from consumers </li></ul></ul><ul><ul><li>b . learning curve </li></ul></ul><ul><ul><li>c . networking </li></ul></ul><ul><ul><li>d . leveraging solution in new markets </li></ul></ul>
  30. 30. Magic: The Gathering <ul><li>Launched in 1994 by Wizards of the Coast </li></ul><ul><li>6 Mil players in 70 countries </li></ul><ul><li>Collecting card game ( over 9000 cards ) </li></ul><ul><li>An average player owns a ‘set’ of 400-600 cards , each card in a set prices from 1 to 50 USD ( rarest up to 1 ,000 USD ) </li></ul><ul><li>600-1,000 new cards published every year </li></ul><ul><li>Wizards of the Coast patent allows to get royalty from all collectable card producers that use principles similar to MTG (100+ games ) </li></ul>
  31. 31. Network effect : clients as promoters <ul><li>Client loyalty: measured not by ‘how much clients buy’, but by ‘how much business clients bring’ </li></ul><ul><li>Company growth rate correlates with the share of clients that would recommend the company and its products </li></ul><ul><li>The main variable that should be managed to grow is the share of ‘promoter clients’ </li></ul>
  32. 32. Skype and ‘death of telephone’ <ul><li>Estonian IT startup launching free P2P telephony in 2003 </li></ul><ul><li>Bought by eBay in 2005 for 2.6 Bln USD </li></ul><ul><li>Constantly expanding functionality : </li></ul><ul><ul><li>phone , chatting , instant messaging </li></ul></ul><ul><ul><li>integrated with regular lines ( phone , sms) </li></ul></ul><ul><ul><li>can be installed to phones / smartphones </li></ul></ul><ul><ul><li>videophone and videoconferencing </li></ul></ul><ul><li>300 Mil users in 2008 </li></ul>
  33. 33. Rivalry and growth strategies: the automotive market

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