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Media Management 2011-Strategy Module - Jan 21_2
 

Media Management 2011-Strategy Module - Jan 21_2

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Slides from my second lecture in the Strategy module in the 2011 Media Management Course at Stockholm School of Economics and the Royal Institute of Technology. here is more information on the course: ...

Slides from my second lecture in the Strategy module in the 2011 Media Management Course at Stockholm School of Economics and the Royal Institute of Technology. here is more information on the course: http://nordicworlds.net/2011/01/21/strategy-course-focuses-on-virtual-worlds-and-gaming-industries/

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  • W hat words would you highlight in the definition? Why?
  • Grant 2008: the nature of strategy in a turbulent direction – it’s about direction, not detailed planning. Madonna (like Virgin or Google) displays clear direction combined with the flexibility to adapt to and exploit unexpected change Collis & Rukstad: It is always easy to claim that maximizing shareholder value is the company’s objective. In some sense all strategies are designed to do this. However, the question to ask when creating an actionable strategic statement is, Which objective is most likely to maximize shareholder value over the next several years?What our competitive game plan will be BALANCED SCORECARD How we will monitor and implement that plan of a Strategy Statement OBJECTIVE = Ends SCOPE = Domain ADVANTAGE = Means MISSION Why we exist VALUES What we believe in and how we will behave VISION What we want to be STRATEGY What our competitive game plan will be BALANCED SCORECARD How we will monitor and implement that plan The BASIC ELEMENTS of a Strategy Statement OBJECTIVE = Ends SCOPE = Domain ADVANTAGE = Means Single goal – profitability vs market share – what matters more? Scope - 3 dimensions – customer or offering, geographic location, vertical integration, clearly defined areas Advantage –1) value proposition – why should people buy your product over others? 2) combination of activities to deliver value proposition
  • In which markets does Madonna compete? CORPORATE STRATEGY Recorded music Concerts, Music videos and other televised appearances Movies, Books Music and video production Publishing and promotion MULTIPLE MARKETS, RELATED DIVERSIFICATION - BUT DRIVE TOWARDS CORE MARKETS THOUGH?! For diversification to work there must be synergies And there must also be a highly consistent brand image across BUSINESS (OR COMPETETIVE) STRATEGY Early identification of key trends in .. Maximum use of controversy to maintain media and public interest. Periodic renewal of her “product life cycle”.. Outsourcing to access resources and capabilities of others.. Maintenance of close control over key elements of her intellectual property and creativity Astute use of interpersonal relationships as the basis for business alliance
  • Goals & values – long-term goals Resources & Capabilities – objective appraisals Implementation – structure and systes Industry envt – competitive envt SWOT – strengths can be weaknesses and vv, as well as threats can be opportunities Better to focus on internal and external factors – What is important is strategic fit
  • Making choices – Porter Corporate strategy – industries and markets that compete in, decisions include investment in diversification, vertical integration, acquisitions, new ventures, allocation of resources between different businesses, divestments Business strategy – how firm competes within the particular industry or market, competitive advantage over rivals, Focus on the difference btwn average returns and above ave returns. What would you want as an investor in the stock market? How would you know if you’ve achieved your goals? Let’s say the value of your stock increased 6% in the last year? Are you pleased? Risk An investor’s uncertainty about the economic gains or losses that will result from a particular investment Average Returns Returns equal to those an investor expects to earn from other investments with a similar amount of risk Above-average Returns Returns in excess of what an investor expects to earn from other investments with a similar amount of risk Strategic Competitiveness When a firm successfully formulates and implements a value-creating strategy Sustainable Competitive Advantage When competitors are unable to duplicate a company’s value-creating strategy Strategic Management Process The full set of commitments, decisions, and actions required for a firm to achieve strategic competitiveness and earn above-average returns
  • Industrial Organization Economics
  • Take a few minutes and place your own chosen industry. What are the implications.. Theory of monopoly and theory of perfect competition Us market for chewing tobacco close to being a monopoly Chicago grain markets close to being perfectly competitive Most manuf and service are oligopolies dominated by small number of firms Four structural variables that influence competition and profitability in an industry
  • For the high-profit and low-profit industry, it is possible to analyze every one of all five forces of competition. However, to speed up the analysis it is best to concentrate on those forces of competition that are critically important in the industry under consideration. Pharmaceuticals . Patent legislation means that the industry is fragmented by drug type and each firm has a statutory monopoly over its patented drug. For each condition there are typically several alternative drugs. However, price competition between them is limited since consumers have limited choice – it is their doctors who choose for them. Buyer power is primarily exercised by insurance companies (or, in countries where there is socialized medicine, by public authorities). For drugs where patents have expired, the competitive situation is very different due to the presence of multiple producers of “generic” drugs. Profit margins are much lower on these drugs.
  • Three horizontal forces and two vertical forces Picture from Grant 2008 All competing to get a share of the profits
  • Depends on purposes and context of analysis Which are the groups of firms that compete to supply a particular service or product? Market – defined by substitutability – Longer term the decisions, the more broadly the market should be considered since substitutability is higher in long term than in short term Precise boundaries are not greatly important
  • Threat of entry rather than actual entry may be sufficient to ensure that established firms constrain prices People express – american airlines Effectiveness of barriers to entry influence rate of profit - > industries protected by high entry barriers tend to earn above average rates of profit. Capital requirements and advertising appear to be particularly effective impediments to entry. Effectiveness depends on resources and capabilities that potential entrants possess But some entrants possess resources that allow them to surmount entry barriers – virgin with its brand name, google,
  • Concentration in the market – more concentrated –>less competition Diversity of competitors – more alike companies are in structures, strategies, and top mgt mindsets ->less competition Industries where strategic groups may be less competition pharmaceuticals, perfumes, restaurants, management consulting services High fixed costs to variable costs ratio – then more competition, airlines,
  • 38 L onger duration than product life cycle D emand growth – I ntroduction – sales small, early adapters, customers few G rowth stage – accelerating market penetration – product technology becomes more standardized, and prices fall, mass market M aturity – slowing growth - new demand gives way to replacement demand, market saturation D ecline – new industries challenge industry w ith technologically superior products Intro stage – not so much rivalry but profits not so high since heavy investments Growth phase that there is higher profitability Maturity – price competition but other forces degree of rivalry Creation and diffusion of knowledge – competition between alternative technologies and design Outcome of competition is dominant design KSFs differ dependingon phase in ILC
  • 42
  • Few buyers * Large buyers * Many companies sell the same product/service * Buyers are capable of backward vertical integration * It is possible to substitute the product/service * Buyer´s knowledge about the industry is great Can prices for bottlers vs auditing costs for company Buyer’s information – ability to compare prices across sellers or qualities of product
  • Few suppliers * Large suppliers * No substitutes for the supplier ´ s products/services * The supplier is capable of forward vertical integration * The supplier´s products are differentiated, which make it expensive for the company to change supplier More concentrated No substitutes Not important customer Important input Differentiated product and/or high switching costs Threat of forward integration
  • Pharmaceuticals - 17 year patents! Potatoes- substitutes rice, noodles.. Tobacco – addiction How sensitive are they to price increases – gasoline… Price elasticity! Higher prices make them change! Or technology, social changes, new needs! The following factors can make the threats of substitutes larger: * Existing products/services become obsolete * Non differentiated products/services What can a company do to avoid substitution? T ravel agencies, newspapers – internet has provided substitutes for these M ore complex the product, the more difficult to discern performance differences – think strategic management consulting
  • Process steps: Identify industry or segment boundaries. Identify players in each Force using case facts. Assess level of threat, power, intensity of each Force using case facts and course concepts. Make final assessment of whether it is an attractive industry in which to compete using results of 5 Forces analysis to support your view.
  • The Industry Environment lies at the core of the Macro Environment. The Macro Environment impacts the firm through its effect on Industry Environment. 1. What environmental factors are affecting the organization? 2. Which of these are the most important at the present time? 3. Which of these are the most important in the next few years? PESTEL-analysis is a tool – not a key. PESTEL stands for P olitical, E conomic, S ocial, T echnical, E nvironment and L egislative. It is a strategic planning technique that provides a useful framework for analysing the environmental pressures on a team or an organisation A PESTEL Analysis can be particularly useful for groups who have become too inward-looking. They may be in danger of forgetting the power and effect of external pressures for change because they are focused on internal pressures. Help people make their assumptions explicit Important to look forward and at future impact of envtal factors which may be different from past impact. Usually will be combined effect of some of these separate factors that will be important rather than any single factor Plays role in focusing organizations on choices open to them and the constraints and risks involved in these choices. Political – threat of terrorism, Economic – unemployment levels Social – demographic changes Tech – development of new/subst products Environmental – antipollution Legal - antitrust
  • PESTEL-analysis is a tool – not a key.
  • Strategic decisions today commit resources in the future What is affecting the industry’s structure? Number of players, products offered – differentiated vs commoditized?, capacity – players have plans to expand? Where is the industry in the ILC?
  • Position firm against existing forces Building defenses against the competitive forces Finding positions where forces are weakest Influence the forces through strategic moves Anticipate shifts in competitive forces and take advantage of new opportunities before competitors
  • The analysis will often make the companies consider their relations: * change the relationship to suppliers    * change the relationship to buyers * competitor´s activities
  • Process steps: Identify industry or segment boundaries. Identify players in each Force using case facts. Assess level of threat, power, intensity of each Force using case facts and course concepts. Make final assessment of whether it is an attractive industry in which to compete using results of 5 Forces analysis to support your view.
  • Is the soft drink industry profitable? Use Porter’s five-forces analysis to analyze the concentrate business. Put the soft drink producers in the center of the model as the industry incumbent/rivals. What are the five forces and key underlying structural determinants of each of the five forces? What are the implications for the relative power of each force? Based on this analysis, how attractive is this industry? In other words, how high is the profit potential of the industry competitors? What are the elements of your analysis that lead you to this conclusion? Why is profitability so different between the concentrate business and the bottling business? Repeat the above five-force analysis for the bottlers. How do the economics of the concentrate business compare to the bottling business? Which industry is more attractive? What challenges face these companies today? How has competition between Coke and Pepsi affected industry profits? What factors are affecting industry profitability? How can the five-forces analysis help you to answer these questions? http://www.youtube.com/watch?v=4_EfniTmakQ
  • 3. Indra K. Nooyi, ordförande och vd för PepsiCo, USA. #3 on list of most powerful women http://www.thepittsburghchannel.com/news/14326479/detail.html Cola Wars Get Physical As Pepsi Worker Attacks Coke Employee The Pepsi MachineSales are soaring, margins are up, and investors are cheering. How Pepsi outmaneuvered Coke by looking beyond the cola wars January 30, 2006: 4:34 PM EST(FORTUNE Magazine) – One evening this past November, Pepsi CEO Steve Reinemund laid out a smorgasbord of snacks for his board of directors to munch on. This was not gentlemanly hospitality; it was pure business. These snacks represented Pepsi's future: a line of products aimed at cashing in on consumers' continuing obsession with healthy food. If all goes well, the line will bring in billions for the company. According to one board member, the treats were "delightful." But more than just the future of Pepsi, this spread in many ways represents everything the company has done right for nearly a decade: finding new ways into people's stomachs--and wallets--and pulling off one of the great turnarounds in American business.In October 1996, the cover of this magazine ridiculed Pepsi. The image: then-CEO Roger Enrico trapped inside a Coke bottle. The headline on the story: HOW COKE IS KICKING PEPSI'S CAN. Our theme was that PepsiCo had lost the cola wars, and the proof was everywhere. The company's profits trailed those of its rival in Atlanta by 47%. Its value in the stock market was less than half of Coca-Cola's. Coke's CEO at the time, Roberto Goizueta, was so sure of his company's dominance that he practically dismissed Pepsi, telling FORTUNE, "As they've become less relevant, I don't need to look at them very much anymore."How wrong we all were. In December, for the first time in this 108-year rivalry, Pepsi beat Coke, surpassing Warren Buffett's darling in market capitalization. Since our cover ran, Pepsi's operating margins have climbed from 16% to 23%, its net margins from 6% to 14%. Profits, effectively flat through the late 1990s, have climbed more than 100% since 2000, on track to reach $4.5 billion on $32 billion in sales this year. "Pepsi's been on fire," notes Robert van Brugge, beverage analyst with Sanford Bernstein. Over the past five years its stock has risen more than a third to a recent $57 a share, while Coke's has sunk 30%.So what did FORTUNE miss? Everything--and nothing. The great irony of Pepsi's rise is this: It has never sold more soda than Coke, even today. What we failed to appreciate in 1996 was the power of its plan for resurgence, which was already beginning to take root. PepsiCo turned its cola Waterloo into an opportunity to retrench, regroup, and ultimately outflank its old foe.Pepsi today is one of best-run companies in the country. In the food and beverage business, there are no game-changing innovations--no iPods or Xboxes. It is a detail-driven industry, a long hard slog where gains are measured in fractions of a percent and a single percentage point in market share or margins is a big deal. This is a game Pepsi has mastered--thanks in part to the rigor and competitiveness of CEO Reinemund. "Steve's an ex-Marine, and everything you would associate with that pertains," says Ken Harris, a consultant with Cannondale Associates who has worked with Reinemund at PepsiCo. "You'll leave a meeting knowing exactly what's expected of you and the time frame in which it should be done." Reinemund has put together one of the strongest management teams around, including president and CFO Indra Nooyi, and is a hands-on manager who's been known to personally make sales calls to help Pepsi win a contract. One Christmas Eve a few years back, while on vacation with his family, he found himself at a convenience store just as a Frito-Lay delivery arrived to replenish the shelves; he put aside his purchases and helped pack chips. A devout Presbyterian, he told Theology Today in 2003 that his primary goal is "to glorify God and to serve him in the way I am called to do. I think in the business world the manifestation of that is in actions, not in preaching." (Reinemund declined to be interviewed for this article.)Reinemund certainly owes some of his company's success to stumbles by Coke, which has been plagued by CEO turnover (four in nine years) and management snafus (epitomized by a bungled attempt to buy Quaker Oats in late 2000 that allowed Pepsi to swoop in and make the deal). But Pepsi's resurgence is no accident. A decade ago Coke offered investors a compelling story: a recession-resistant product inexpensive enough that consumers would buy it in good times and bad, but valued enough that they would willingly pay an extra nickel or so above what no-name brands charged. What Coke investors didn't envision was that an emerging preference for other soft beverages--water, sports drinks--would fracture demand. Nor did they (or FORTUNE) see that the business strengths that once applied to cola would take hold across a broadened soft-drink and snack-food market--a market that Pepsi, and not Coke, dominated.Losing the cola wars, it turns out, was the best thing that ever happened to Pepsi. It prompted Pepsi's leaders to look outside the confines of their battle with Coke. "They were the first to recognize that the consumer was moving to noncarbonated products, and they innovated aggressively," observes Gary Hemphill of Beverage Marketing. PepsiCo embraced bottled water and sports drinks much earlier than its rival. Pepsi's Aquafina is the No. 1 water brand, with Coke's Dasani trailing; in sports drinks, Pepsi's Gatorade owns 80% of the market while Coke's Powerade has 15%. Throughout the past five years under Reinemund, the company has deftly moved with every shift in consumer tastes. "He's thinking about what the products should look like in the future," says Victor Dzau, a director of PepsiCo. For example, as COO in 2000, Reinemund had a hand in Pepsi's acquisition of Sobe, buying the company a critical foothold in an emerging category of New Age drinks--the business now pulls in an estimated $200 million a year. Through a partnership with Starbucks, PepsiCo now dominates the bottled-coffee market; this year it will sell over $300 million of Frappuccinos.But Pepsi's strongest business lies outside drinks altogether. Over the past ten years, the Frito-Lay division--which seems like it sells practically every chip in every store in the country--has become a powerhouse, controlling 60% of the U.S. snack-food market. So strong is Pepsi in this arena, in fact, that many investors no longer judge it by how it stacks up against Coke. "Most people think of Pepsi and Coke fighting it out," observes Eric Schoenstein, an analyst at Jensen Investment Management, which owns shares of both. "But we don't see it that way. Pepsi isn't really a beverage company anymore: It's a food company that also sells beverages." John Carey, manager of the Pioneer fund, which has 1.6 million PepsiCo shares, says he bought the stock because of Frito-Lay: "There's no Coca-Cola in that business."That's a step up in the corporate pecking order for Pepsi's food di- vision. For most of the 40 years it has been a part of the company, Frito-Lay has taken a back seat to the high-profile cola business. "It was the unsung hero," says Mark Dollins, a company spokesman. Now the food brands dominate Pepsi's financial results: Selling Tostitos, Ruffles, and the like--as well as innovative product extensions like Wavy Lays, Limon Cheetos, and 3-D Doritos--now brings in more revenue in North America than beverages do. The news is the same when it comes to operating profit: Frito-Lay North America and Quaker Oats combined deliver 47% of PepsiCo's total, compared with 31% for North American beverages. The rest of the pie--some $1.3 billion in operating profit this year--comes from overseas, where PepsiCo's reach is huge and growing. The company operates across the globe, from Europe (where PepsiCo recently acquired Sara Lee's nuts business in Belgium, the Netherlands, and France, and a Polish snack-foods company) to China (where it owns several potato fields to help keep the chips flowing locally).The company's big push now is getting all its different fiefdoms to work together, especially in sales and marketing campaigns. As this year's Super Bowl looms, supermarket shoppers will see in-store displays that tout watching the game while munching Lays chips and slurping on a Diet Pepsi. This is part of an initiative dubbed the "Power of One," designed to push the company's businesses to approach the marketplace more cohesively. "Our Power of One really speaks to our ability to use all of PepsiCo's products, services, and talents," Reinemund explained in last year's annual report. "We view this as a key strategic growth driver."Right now PepsiCo needs that growth as it faces a toughening economic climate. The high price of energy is putting pressure on the company's margins, and nearly every aspect of its business--its suppliers, its fleet of delivery trucks, its manufactur- ing plants--is feeling the cost squeeze. The result: PepsiCo announced that this quarter it will be taking a restructuring charge of $65 million to $85 million. And barring a miraculous drop in energy prices, the coming year will bring continuing cost pressures.Nonetheless, over the past five years Pepsi has demonstrated an ability to ride out business cycles and sustain its results: Net profits have climbed 50%, sales are up 33%. Since 2002, sales and earnings per share have grown every quarter year-on-year. The company now boasts 16 brands that bring in more than $1 billion each a year in revenue. Over the next five years, operating profits are expected to rise by 7.5% per year, compared with 5% for the rest of the industry and 6.5% for Coke, according to Sanford Bernstein.The irony of Pepsi's success is that despite how far it has come out of the cola trenches, inside the company the primary competitive driver is still Coke. Ask any employee who the enemy is and the answer comes quick: "Every one of them will say Coke," says consultant Ken Harris, who's worked closely with Pepsi. Coke may no longer be the real competition, but for the soldiers of Pepsi, it's still a very useful enemy.
  • Process steps: Identify industry or segment boundaries. Identify players in each Force using case facts. Assess level of threat, power, intensity of each Force using case facts and course concepts. Make final assessment of whether it is an attractive industry in which to compete using results of 5 Forces analysis to support your view.
  • Position firm against existing forces Building defenses against the competitive forces Finding positions where forces are weakest Influence the forces through strategic moves Anticipate shifts in competitive forces and take advantage of new opportunities before competitors
  • 17 Need to understand what motivates customers and how competition works. These aspects prereqs to effective business strategy
  • What are KSFs? Resources and capabilities a company must have to be able to compete successfully within a given industry Are general for the industry and represent means by which competitors can differentiate from each other
  • 19 7
  • Strategies: M&As, capacity exchanges & product divisions, alliances & market divisions, certification KSF: What do customers want? How does the firm fullfill that want?

Media Management 2011-Strategy Module - Jan 21_2 Media Management 2011-Strategy Module - Jan 21_2 Presentation Transcript

  • Strategy January 21 - Afternoon Media Management – Module 1 Robin Teigland [email_address] www.knowledgenetworking.org January 2011
  • Module Overview – 1/3
    • Jan 21 – What is Strategy?
      • Individual Assignment: Readings
      • Group Assignment: Choose your Live Case Strategic Issue
    • Jan 21 – External Analysis: Industry Structure and Competition
      • Individual Assignment: Readings
      • Group Assignment: Cola Wars Continue
    • Jan 24 –Internal Analysis: Analyzing Resources and Capabilities
      • Individual Assignment: Readings
      • Group Assignment: Wumart Stores
    • Jan 25 –An Entrepreneur’s View of Strategy in 3D
      • Individual Assignment: Readings & Questions
      • Guest: Steve Mahaley, PeaceTrain
  • Module Overview – 2/3
    • Jan 26 – Recent Developments in Strategy
      • Group Assignment: Article summary ppt for slideshare
    • Jan 31 – Executing Strategy
      • Individual Assignment – Readings & Questions
      • Guest: Christian Björkman, MindArk
      • Guest: Fredrik Nilsson, IC You
    • Jan 31 – Exploring Business Models and role of IT
      • Individual Assignment – Readings & Questions
      • Guest: Paul DiGangi, Western Carolina University
    • Feb 2 - External Drivers of Change: Exploring the Future of the Gaming Industry
      • Individual Assignment: Readings
      • Group Assignment: STEEP
      • Guest: Stefan Lampinen, Speltjänst
  • Module Overview – 3/3
    • Feb 2 – Creating Value Networks
      • Individual Assignment: Readings & Questions
      • Guest: Malin Ströman, Independent Consultant
    • Feb 7 - Live Case Day: Integrating Theory with Practice
      • Group Assignment: Virtual Worlds and Gaming
    • Feb 9 – Module 1 “Exam”
  • What is strategy?
    • Strategy
      • An integrated and coordinated set of commitments and actions designed to gain a competitive advantage
    • Competitive advantage
      • When two or more firms compete within the same market, one firm possesses a competitive advantage over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit
    Hitt, Ireland & Hoskisson 2006
    • Long-term goal (objective)
    • Scope of the firm
    • Competitive advantage
    Components of strategy Collis & Rukstad 2008
  • Making choices
    • Strategy is about choosing what NOT to do:
      • Which customers not to serve
      • What products or services not to offer
      • Which activities not to perform
    Strategy is about NOT being all things to all people Porter
  • Assignment for today
      • What is strategy? (1 -2 slides)
        • Based on the course readings, your previous experience, and potentially other sources, develop your own definition of strategy.
        • What are the relationships between the concepts of vision, mission, strategy, and business model?
      • What is your organization’s strategy? (2-3 slides)
        • Pick an organization in the Virtual World or Gaming industries and answer the following questions based on information you find on the internet:
          • What is your organization’s mission?
          • What is your organization’s business model?
          • What is your organization’s strategy?
          • Can you summarize the organization’s strategy in a “strategy statement” (see Collis & Rukstad article)?
  • The basic framework INDUSTRY ENVIRONMENT • Competitors • Customers • Suppliers STRATEGY STRATEGY FIRM • Goals & Values • Resources & Capabilities • Structure & Systems Adapted from Grant 2008 The LINK between the FIRM & its ENVIRONMENT
  • Where does superior profitability come from? RATE OF RETURN ABOVE THE COST OF CAPITAL How do we make money? INDUSTRY ATTRACTIVENESS Where should we compete? COMPETITIVE ADVANTAGE How should we compete? CORPORATE STRATEGY BUSINESS STRATEGY Grant 2008
  • Focus on two models in this course
    • Industrial Organization (I/O)
      • Focuses on the environment outside the firm
      • Opportunities and threats
      • By studying the external environment, firms identify what they might choose to do .
    • Resource-based View (RBV)
      • Focuses on the inside of the firm
      • Unique resources, capabilities, and competencies ( required for sustainable competitive advantage )
      • By studying the internal environment, firms identify what they can do.
    Successful strategy formulation and implementation actions result only when the firm properly uses both models.
  • Objectives of Industry Analysis (I/O)
    • To understand how industry structure drives competition, which determines the level of industry profitability
    • To assess industry attractiveness
    • To use evidence of changes in industry structure to forecast future profitability
    • To formulate strategies to change industry structure to improve industry profitability
    • To identify “Key Success Factors” (KSFs) for the industry
    Grant 2008
  • How big is the profit and who is after it? vs Profit Profit
  • The spectrum of industry structures Concentration Entry and Exit Barriers Product Differentiation Information Perfect Competition Oligopoly Duopoly Monopoly Many firms A few firms Two firms One firm No barriers Significant barriers High barriers Homogeneous product Potential for product differentiation Perfect information flow Imperfect availability of information Grant 2008
  • Why does industry profitability differ? Avg 24.2% Avg 10.4% Average ROE 1982-1993 Porter
  • Porter’s five forces of competition ENTRANTS SUPPLIERS BUYERS SUBSTITUTES INDUSTRY COMPETITORS Rivalry among existing firms Threat of new entrants Threat of substitutes Bargaining power of suppliers Bargaining power of buyers http://www.youtube.com/watch?v=mYF2_FBCvXw&feature=channel
  • Industry definition
    • Technology (GSM)
    • Buyer (Needs driven)
    • Geography (US, Sweden)
    “ A group of firms producing products that are close substitutes for each other” Porter
  • How to draw the industry boundaries?
    • What industry is BMW in?
      • World auto industry
      • European auto industry
      • World luxury car industry?
    • Key criterion is 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?
    • The industry may need to be analyzed at different levels of aggregation for different types of decisions
    Grant 2008
    • Unit of analysis within industry is business unit, not the company (although the two may coincide)
    • Industry competitors are actors (BUs) that have core business within the industry
    • Define ‘the middle’, industry competitors, as narrowly as possible
    • It may be practical to subdivide the industry competitors into strategic groups
    Theory-in-practice/rules of thumb
  • Threat of new entrants
    • High capital requirements
    • High economies of scale
    • Strong customer loyalties
    • High switching costs
    • High product differentiation
    • Limited access to distribution channels
    • High legal/regulatory barriers
    • Large cost disadvantages independent of scale
      • Ex. Proprietary technology, raw materials, location, learning curve, government subsidies
    • Strong retaliation by industry participants
    What keeps new competitors out - barriers to entry? Porter
  • Rivalry between established competitors
    • Numerous or equally balanced competitors
    • Slow industry growth
    • High fixed costs
    • Lack of differentiation or switching costs
    • Capacity augmented in large increments
    • High strategic stakes
    • High exit barriers
    What makes competitors “fight” harder? Porter
  • The Industry Life Cycle Introduction Growth Maturity Decline Industry Sales Time Grant 2008
  • Number of firms over i ndustry life cycle Klepper, Industrial & Corporate Change, 2002 US Auto Industry 1885-1961
  • How typical is the life cycle pattern?
    • Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries.
    • Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but do not decline.
    • Industries may experience life cycle regeneration.
    • Sales Sales
    • 1900 50 90 07 1930 50 70 90 07
    • MOTORCYCLES TV’s
    • Life cycle model can help us to anticipate industry evolution — but dangerous to assume any common, pre-determined pattern of industry development
    Color B&W Portable HDTV ? Grant 2008
  • Bargaining power of buyers Buyer’s price sensitivity Relative bargaining power
    • What is cost of product as %
    • of buyer’s total costs?
    • How differentiated is the
    • purchased item?
    • How intense is competition between buyers?
    • How important is the item to the quality of the buyer’s own output?
    • What is the size and concentration of buyers relative to sellers?
    • What are buyer’s switching costs?
    • What is buyer’s information?
    • What is buyer’s ability to backward integrate?
    Porter Who decides the price?
  • Bargaining power of suppliers Supplier’s price sensitivity Relative bargaining power
    • What is cost of supplies as % of supplier’s total sales?
    • How differentiated is the supplied item?
    • How intense is competition between suppliers?
    • What is size and concentration of sellers relative to buyers?
    • What is supplier’s information?
    • What is supplier’s ability to forward integrate?
    Porter Who decides the price?
  • Threat of substitutes
    • Existence of substitutes puts ceiling on prices that can be charged
    • Same function
      • Train/plane/car/ICT
    • Better price-performance
      • Books/videos
      • Record-players/CD-players
      • Security guards / electronic alarm systems
    Point A ? Porter How “easy” is it to switch? Point B
  • Industry Level Analysis: Porter’s Five Forces Threat of Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitutes
    • Rivalry Between Competitors
    • Identify Competitors and intensity of Rivalry amongst competitors.
    • Briefly explain.
    • Identify Buyers and Bargaining Power of each.
    • Briefly explain.
    What business segment or industry is being considered: ___________________________________________
    • Identify Suppliers and Bargaining Power of each.
    • Briefly explain.
    • Identify Substitutes and the threat level of each.
    • Briefly explain
    • Identify Potential Entrants and the threat level of each.
    • Briefly explain.
    Is this an attractive industry? Briefly explain, why or why not? ___________________________________________
    • Process steps:
    • Identify industry or segment boundaries.
    • Identify players in each Force using case facts.
    • Assess level of threat, power, intensity of each Force using case facts and course concepts.
    • Make final assessment of whether it is an attractive industry in which to compete using results of 5 Forces analysis to support your view.
  • How does the environment (PESTEL) affect the five forces (now and in future)? Johnson & Scholes 1997 Politics and government Environment Technology Legal structure Social and Demographic structure International/ national economy Industry (Five Forces)
  • 1. What factors are affecting the industry? 2. Which of these are the most important at the present time? 3. Which of these are the most important in the next few years?
    • Political
      • Global, regional, and national political development (administration, political parties)
      • Taxation policy
      • Foreign trade regulations
      • Labour market politics
      • Government stability
    • Socio-cultural
      • Population demographics
      • Income distribution
      • Social mobility
      • Lifestyle changes
      • Attitudes to work and leisure
      • Attitudes to consumerism
      • Levels of education
      • Changes in values/attitudes
      • Education conditions
      • Work environment conditions
      • Health conditions
    • Environmental
      • Ecology
      • Pollution conditions
      • ” Green” energy
      • Energy conservation
      • Waste handling
    • Economic
      • Business cycles
      • GNP trends
      • Interest rates & Exchange rates
      • Money supply
      • Inflation
      • Unemployment
      • Wage level
      • Private consumption and disposable income
      • Public finances
      • Energy availability and cost
    • Technological
      • Government spending on research
      • Government and industry focus of technological effort
      • New discoveries/development
      • Speed of technology transfer
      • Rates of obsolescence
      • New patents and products
    • Legal
      • Development in price and competitive legislation
      • Labour market legislation
      • Product safety and approvals
  • Applying five-forces and PESTEL analyses
    • 1) Forecasting industry profitability
      • Past profitability is a poor indicator of future profitability.
      • If we can forecast changes in industry structure, we can predict the likely impact on competition and profitability .
        • What are trends that are changing industry structure?
        • How will these effect industry profitability?
    • 2) Developing strategies to improve industry profitability
      • What forces are depressing profitability?
      • Which of these forces can be changed by individual or collective strategies?
    Grant 2008
  • Improving profitability
    • Building defenses
      • Increase expected retaliation (signaling)
      • Lower inducement for attack (making industry not so profitable to enter)
    • Influencing the balance - Offensive
      • Innovations in marketing to raise brand identification or otherwise differentiate the product
      • Capital investments in large-scale facilities or vertical integration to affect entry barriers
    • Exploiting industry change
      • What trends/industry changes affect the sources of competition?
      • What is the long-run profitability of the industry?
    Porter
  • How can we improve industry profitability?
    • THREAT OF ENTRY
    • Capital requirements
    • Economies of scale
    • Customer loyalties
    • Switching costs
    • Product differentiation
    • Access to distribution
    • channels
    • Legal/ regulatory barriers
    • Cost disadvantages independent of scale
    • Retaliation
    • SUBSTITUTE
    • COMPETITION
    • Buyers’ propensity
    • to substitute
    • Relative prices &
    • performance of
    • substitutes
    • BUYER POWER
    • Buyers’ price sensitivity
    • Relative bargaining power
    • INDUSTRY RIVALRY
    • Concentration
    • Diversity of
    • competitors
    • Product differentiation
    • Excess capacity &
    • exit barriers
    • Cost conditions
    • SUPPLIER POWER
    • Suppliers’ price sensitivity
    • Relative bargaining power
    Porter
  • Industry Level Analysis: Porter’s Five Forces Threat of Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitutes
    • Rivalry Between Competitors
    • Identify Competitors and intensity of Rivalry amongst competitors.
    • Briefly explain.
    • Identify Buyers and Bargaining Power of each.
    • Briefly explain.
    What business segment or industry is being considered: ___________________________________________
    • Identify Suppliers and Bargaining Power of each.
    • Briefly explain.
    • Identify Substitutes and the threat level of each.
    • Briefly explain
    • Identify Potential Entrants and the threat level of each.
    • Briefly explain.
    Is this an attractive industry? Briefly explain, why or why not? ___________________________________________
    • Process steps:
    • Identify industry or segment boundaries.
    • Identify players in each Force using case facts.
    • Assess level of threat, power, intensity of each Force using case facts and course concepts.
    • Make final assessment of whether it is an attractive industry in which to compete using results of 5 Forces analysis to support your view.
  • Coca-Cola vs Pepsi Case (max 15 min)
    • Q1. Is the concentrate industry profitable? Use Porter’s five-forces analysis to analyze the concentrate business. Put the concentrate producers in the center of the model as the industry incumbent/rivals. What are the five forces and key underlying structural determinants of each of the five forces? What are the implications for the relative power of each force? Based on this analysis, how attractive is this industry? In other words, how high is the profit potential of the industry competitors? What are the elements of your analysis that lead you to this conclusion?
    • Q2. Why is profitability so different between the concentrate business and the bottling business? Repeat the above five-force analysis for the bottlers. How do the economics of the concentrate business compare to the bottling business? Which industry is more attractive?
    • Q3. What challenges face these companies today? How has competition between Coke and Pepsi affected industry profits? What factors are affecting industry profitability? How can the five-forces analysis help you to answer these questions?
    Upload to www.slideshare.net and elearning platform by 15:00.
  • Videos
    • Bottling company
    • http://se.youtube.com/watch?v=s5LFBW8zxqw&feature=PlayList&p=4C07105BE049A539&playnext=1&index=4
    • Coke vs Pepsi
    • http://www.youtube.com/watch?v=EMo6o0BtFG8&feature=related
  • The world’s most valuable brands, 2006
    • Rank Company Brand Rank Company Brand
    • v alue value
    • ($bn.) ($bn.)
    • 1 Coca-Cola 67.5 11 Mercedes Benz 20.0
    • 2 Microsoft 59.9 12 Citi 20.0
    • 3 IBM 53.4 13 Hewlett-Packard 18.9
    • 4 GE 47.0 14 American Express 18.6
    • 5 Intel 35.6 15 Gillette 17.5
    • 6 Nokia 26.5 16 BMW 17.1
    • 7 Disney 26.4 17 Cisco 16.6
    • 8 McDonald’s 26.0 18 Louis Vuitton 16.1
    • 9 Toyota 24.8 19 Honda 15.8
    • 10 Marlboro 21.2 20 Samsung 15.0
    Interbrand
  • http://money.cnn.com/2006/02/01/news/companies/pepsi_fortune/
      • http://www.youtube.com/watch?v=4_EfniTmakQ
  • Industry Level Analysis: Porter’s Five Forces Threat of Potential Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitutes
    • Rivalry Between Competitors
    • Identify Competitors and intensity of Rivalry amongst competitors.
    • Briefly explain.
    • Identify Buyers and Bargaining Power of each.
    • Briefly explain.
    What business segment or industry is being considered: ___________________________________________
    • Identify Suppliers and Bargaining Power of each.
    • Briefly explain.
    • Identify Substitutes and the threat level of each.
    • Briefly explain
    • Identify Potential Entrants and the threat level of each.
    • Briefly explain.
    Is this an attractive industry? Briefly explain, why or why not? ___________________________________________
    • Process steps:
    • Identify industry or segment boundaries.
    • Identify players in each Force using case facts.
    • Assess level of threat, power, intensity of each Force using case facts and course concepts.
    • Make final assessment of whether it is an attractive industry in which to compete using results of 5 Forces analysis to support your view.
    • Lessons … managers must:
      • Understand the structure of the industries in which they compete (& why the structure is what it is).
      • Direct attention to the most significant force .
      • Be aware of how their industry might change .
      • Develop the power to shape the structure of the industry.
      • Make sure that strategic moves do not undermine the attractiveness of the industry.
    Industry Level Analysis: Porter’s Five Forces Hitt, Ireland & Hoskisson 2006
  • Improving profitability
    • Building defenses
      • Increase expected retaliation (signaling)
      • Lower inducement for attack (making industry not so profitable to enter)
    • Influencing the balance - Offensive
      • Innovations in marketing to raise brand identification or otherwise differentiate the product
      • Capital investments in large-scale facilities or vertical integration to affect entry barriers
    • Exploiting industry change
      • What trends/industry changes affect the sources of competition?
      • What is the long-run profitability of the industry?
    Porter
  • What are the Key Success Factors (KSFs) in the industry? KEY SUCCESS FACTORS
    • Analysis of demand
    • Who are our customers?
    • What do they want?
    • Analysis of competition
    • What drives competition?
    • What are the main dimensions of competition?
    • How intense is competition?
    • How can we obtain a superior competitive position?
    What do customers want? How does the firm survive competition? Pre-requisites for success Grant 2008
  • Steel industry – Key Success Factors
    • What do customers want?
      • Customers include auto, engineering, and container industries
      • Customers acutely price sensitive and require product consistency and reliability of supply
      • Specific technical specs required for specialty steels
    • How does a firm survive competition?
      • Compete primarily on price
      • Intense due to high fixed costs, low cost imports, high exit barriers, and entrance of minimills due to new technology
      • Logistics due to high transport costs and scale economies important
    • What are the Key Success Factors?
      • Cost efficiency through scale-efficient plants, low cost location, rapid adjustment of capacity of output, efficient use of labor
      • Possibility for differentiation through quality, service , and technical factors
    Grant 2008
  • Identifying KSFs by analyzing profit drivers ROCE Return on Sales Sales/Capital Employed Sales mix of products Avoiding markdowns through tight inventory control Max. buying power to minimize cost of goods purchased Max. sales/sq. foot through: * location *product mix *customer service *quality control Max. inventory turnover through electronic data interchange, close vendor relationships, fast delivery Minimize capital deployment through outsourcing & leasing Retailing Grant 2008
  • Strategic groups Strategic group: A group of firms in an industry that follow the same or similar strategies
    • Identifying strategic groups:
      • Identify principal strategic variables which
    • distinguish firms
      • Position each firm in relation to these
    • variables
      • Identify clusters
    Grant 2008
  • Industry competition: Strategic groups Strategic Dimension Strategic dimension Low High Low High
    • Some dimensions
    • specialization
    • quality
    • vertical integration
    • service
    • tech. leadership
    • distribution channels
    • geography
    Porter
  • Strategic groups in the world auto industry Broad PRODUCT RANGE Narrow National GEOGRAPHICAL SCOPE Global NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.) NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g. Tofas, Proton, Maruti First Auto Works (China) REGIONALLY-FOCUSED BROAD-LINE PRODUCERS e.g. Fiat, PSA, Renault, Kia, PERFORMANCE CAR PRODUCERS e.g., Porsche, Ferrari (owned by Fiat) Maserati, Lotus LUXURY CAR MANUFACTURERS e.g., Aston Martin, BMW, Rolls Royce (owned by VW) GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Subaru, Isuzu, Suzuki, Saab, Hyundai, Daihatsu GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW, DaimlerChrysler Grant 2008
  • Objectives of Industry Analysis (in summary)
    • To assess industry attractiveness
      • To understand how industry structure drives competition, which determines the level of industry profitability
    • To forecast industry profitability
      • Past profitability is a poor indicator of future profitability
      • But if we can forecast changes in industry structure, we can predict likely impact on competition and profitability
    • To devise strategies to change industry structure to improve industry profitability
      • Which forces are depressing profitability?
      • Which of these can be changed by individual or collective strategies?
    • To determine key success factors
      • What are the starting points for the analysis of competitive advantage?
    Grant 2008
  • Module Overview – 1/3
    • Jan 21 – What is Strategy?
      • Individual Assignment: Readings
      • Group Assignment: Choose your Live Case Strategic Issue
    • Jan 21 – External Analysis: Industry Structure and Competition
      • Individual Assignment: Readings
      • Group Assignment: Cola Wars Continue
    • Jan 24 –Internal Analysis: Analyzing Resources and Capabilities
      • Individual Assignment: Readings
      • Group Assignment: Wumart Stores
    • Jan 25 –An Entrepreneur’s View of Strategy in 3D
      • Individual Assignment: Readings & Questions
      • Guest: Steve Mahaley, PeaceTrain
  • Wu Mart
    • What are the sources of Wu Mart’s competitive advantage?
      • Identify the principal resources and capabilities that form the basis of Wu Mart’s competitive advantage.
      • Are Wu Mart’s resources “competitively superior” to other competitors at the time of the case?
    • How sustainable is Wu Mart’s competitive advantage domestically?
      • Is its position sustainable when challenged by international entrants?
      • To what extent is Wu Mart’s competitive advantage sustainable?
    • Will Wu Mart be able to transfer its competitive advantage it has in China to other countries?
      • Will it be able to leverage the same resources and capabilities that it has in China in other markets?
      • Are Wu Mart’s resources and capabilities specific to China or emerging markets?
    • Looking into the future, what should Wu Mart do to sustain its performance?
      • What challenges does it face?
      • How can it defend against competitive (and other) threats?
  • Wu Mart Case Assignment
    • Questions 1& 2
      • You are a consulting company asked by Wal-Mart’s top management to conduct a competitor analysis of Wu Mart. Prepare a presentation for Wal-Mart’s top management.
    • Questions 3 & 4
      • You are Wu Mart internal consultants asked by top management to look into an international expansion strategy. Prepare a presentation for Wu Mart’s top management.
    http://www.flickr.com/search/?q=wumart
  • Sources
    • Collins, JC & Porras, JL, Built to Last , Harper-Business, 1998.
    • Collis, DJ & Rukstad, MG, Can You Say What Your Strategy Is? , HBR, April 2008
    • Grant, R. Contemporary Strategy Analysis , Blackwell, 2008.
    • Harreld, JB, O’Reilly, CA, & Tushman, M., Dynamic Capabilities at IBM: Driving Strategy into Action , California Management Review , 2007.
    • Hay, D., Scheving, H., Berlin, U., Ekelöf, P., Kristenson, J., Ohrling, M., Live Case –eZ Sweden, 2009.
    • Holde, S. Strategic Innovation and Business Creation , Århus School of Business, 2002.
    • Magretta, J, Why Business Models Matter , HBR , 2002.
    • Mannerheim, F., Postoaca, A, Åresund, L., Live Case – eZ Poland, 2008.
    • McGee, J., Thomas, H. & Wilson, D. Strategy: Analysis and Practice , McGraw-Hill, 2005.
    • Norman, R. & Ramírez, R. From Value Chain to Value Constellation: Designing Interactive Strategy, HBR, 71,4, 1993.
    • Organizational Strategy , Thomson Learning, 2005.
    • Pfeffer, J. Managing with Power , HBS, 1992.
    • Porter, ME. Competitive Strategy , Free Press, 1980.
    • Porter, ME. What is Strategy? HBR, Nov-Dec, 1996.
    • Woodruff, RB. Customer Value: The Next Source of Competition , Academy of Marketing Science, 1997.