1 Strategic Management for the - PowerPoint Presentation

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Strategic Management for the Foundation Business Simulation®:

Analysis and Assessment

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Comparison of SIC and NAICSSIC code sequence for chewing gum, bubble gum manufacturers

SIC CodeType of CodeDescription20SectorFood and kindred products2063 digit sub-sectorSugar and confectionary product manufacturing20674 digit sub-sectorChewing gum, bubble gum, and chewing gum base

NAICS code sequence for chewing gum, bubble gum manufacturers

NAICS CodeType of CodeDescription1997 Value of Product Shipments ($000)3113 digit sub-sectorFood manufacturing423,262,22031134 digit sub-sectorSugar and confectionary product manufacturing24,301,957311340U.S. industry codeNon-chocolate confectionary manufacturing5,080,2633113404Product classChewing gum, bubble gum, and chewing gum base1,310,938

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Porter’s Model of Industry Competition

Potential EntrantsEconomies of scaleCost advantageBrand identityAccess to distributionGovernment policy

Degree of RivalryNumber of competitorsIndustry growthAsset intensityProduct differentiationExit barriers

SubstitutesFunctional similarityPrice performance trendBrand recognition

SuppliersSupplier concentrationNumber of buyersSwitching costsAvailability of substitute raw materialsThreat of forward integration

BuyersBuyer concentrationNumber of suppliersSwitching costsSubstitute productsThreat of backward integration

Threat of new entrants

Bargaining power

of buyers

Bargainingpower of suppliers

Threat of substitute products/services.

Potential Entrants

Economies of scale

Cost advantage

Brand identity

Access to distribution

Government policy

Suppliers

Supplier concentration

Number of buyers

Switching costs

Availability of substitute raw materials

Threat of forward integration

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Industry Analysis of the North American Railroad Industry

Potential EntrantsHigh barriers to entryEconomies of scaleNo brand identityLow switching costsDeregulated

Degree of Rivalry-Significant7 competitorsModest industry growthLittle product differentiationHigh exit barriersRigid assets

BuyersLow switching costsMany types of buyersBuyers are dispersed geographically

SuppliersSuppliers are concentratedUnionizedFew buyers

SubstitutesClose substitutesFirms compete primarily on price

Threat of new entrants – minimal

Threat of substitute products/services – significant

Bargaining power of suppliers – moderate

Bargaining power of buyers – significant

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Stages of Industry Evolution

Introduction Stage

Growth Stage

Maturity Stage

Decline Stage

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Industry Evolution and Firm Strategy

Firm Level StrategyIntroductionGrowthMaturityDeclineProductsMust be focused upon new products for new markets.Expansion of product linesCosts of production must be lowered to compete. Competitors and initial firm are viewed as providing similar products/services.Firms which remain are trying to compete on price rather than value. MarketsNiche markets.Expansion into new marketsFirms attempt to achieve market penetration of existing and new markets.Market needs have been met.Role of TechnologyFirm must begin to recover R&D investments.Use product R&D to offer added features to existing productsProcess R&D to achieve efficiencies (e.g. TQM)Use in other, higher growth industries.CompetitionFirst mover has developed new products for new markets.Firms enter to compete with first mover.Firms attempt to become low cost provider.Competitors have relocated to more attractive industries.DistributionFirst mover is providing products/services for a small number of customers.Development of infrastructure to increase service to existing and new markets.Long-term relationships are being developed with suppliers/customers.Minimal Expenses: Existing infrastructure is being utilized.PricingAttempt to recover product R&D costs by price skimming. Few, if any, competitors. Price is inelastic.Price becomes more elastic as competitors introduce similar products. Price is elastic. Pricing to achieve economies of scale. Price to attempt to maintain margins on smaller demand.AdvertisingFirm must communicate value of new products/services to target market.Because competitors have entered industry, first mover needs to advertise value added features.Focus is upon existing markets. Message is lower price than competitors.None: Invest in higher growth industries.

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Industry Growth and Firm Profitability

FirmProfitability

New product

development

Low

Moderate

High

Low

Do not invest

Moderate

Process R&D

Process R&D

High

Investment in distribution and advertising rather than products/ services

Industry Growth Rate

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An Industry Analysis as Firms Move Through the Industry Life Cycle

IntroductionGrowthMaturityDeclineBargaining Power of SuppliersSignificant: No prior relationships may existModerate: Distribution channels become larger and more extensiveModerate: Firms will attempt to lock suppliers into long term contracts to reduce costsMinimal: Firms use existing channels

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An Industry Analysis as Firms Move Through the Industry Life Cycle

IntroductionGrowthMaturityDeclineBargaining Power of SuppliersSignificant: No prior relationships may existModerate: Distribution channels become larger and more extensiveModerate: Firms will attempt to lock suppliers into long term contracts to reduce costsMinimal: Firms use existing channelsBargaining Power of BuyersSignificant: No revenues without customersSignificant: Customer acceptance is crucial to generate larger volume of revenueSignificant: Customers put pressure on manufacturers to add value and/or reduce priceSignificant: Customers purchase other goods/services

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An Industry Analysis as Firms Move Through the Industry Life Cycle

Introduction

Growth

Maturity

Decline

Bargaining Power of Suppliers

Significant: No prior relationships may exist

Moderate: Distribution channels become larger and more extensive

Moderate: Firms will attempt to lock suppliers into long term contracts to reduce costs

Minimal: Firms use existing channels

Bargaining Power of Buyers

Significant: No revenues without customers

Significant: Customer acceptance is crucial to generate larger volume of revenue

Significant: Customers put pressure on manufacturers to add value and/or reduce price

Significant: Customers purchase other goods/services

Threat of Substitute Products/

Services

None: Substitutes do not exist

Significant: Firms are expanding in coverage: Initial firms may begin to add additional product/service benefits

Significant: Products/

services are perceived to be homogeneous. Customers search for lowest priced provider

Minimal: Competitors utilize funds and resources to grow within other industries

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An Industry Analysis as Firms Move Through the Industry Life Cycle

IntroductionGrowthMaturityDeclineBargaining Power of SuppliersSignificant: No prior relationships may existModerate: Distribution channels become larger and more extensiveModerate: Firms will attempt to lock suppliers into long term contracts to reduce costsMinimal: Firms use existing channelsBargaining Power of BuyersSignificant: No revenues without customersSignificant: Customer acceptance is crucial to generate larger volume of revenueSignificant: Customers put pressure on manufacturers to add value and/or reduce priceSignificant: Customers purchase other goods/servicesThreat of Substitute Products/ServicesNone: Substitutes do not existSignificant: Firms are expanding in coverage: Initial firms may begin to add additional product/service benefitsSignificant: Products/services are perceived to be homogeneous. Customers search for lowest priced provider Minimal: Competitors utilize funds and resources to grow within other industriesThreat of New EntrantsMinimal: Firm with the innovation dominatesSignificant: Firms enter the industry with similar products/servicesMinimal: Price becomes a significant buying factor for customers. Potential entrants look for more attractive industriesMinimal: Industry profitability and industry growth are declining

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An Industry Analysis as Firms Move Through the Industry Life Cycle

IntroductionGrowthMaturityDeclineBargaining Power of SuppliersSignificant: No prior relationships may existModerate: Distribution channels become larger and more extensiveModerate: Firms will attempt to lock suppliers into long term contracts to reduce costsMinimal: Firms use existing channelsBargaining Power of BuyersSignificant: No revenues without customersSignificant: Customer acceptance is crucial to generate larger volume of revenueSignificant: Customers put pressure on manufacturers to add value and/or reduce priceSignificant: Customers purchase other goods/servicesThreat of Substitute Products/ServicesNone: Substitutes do not existSignificant: Firms are expanding in coverage: Initial firms may begin to add additional product/service benefitsSignificant: Products/services are perceived to be homogeneous. Customers search for lowest priced provider Minimal: Competitors utilize funds and resources to grow within other industriesThreat of New EntrantsMinimal: Firm with the innovation dominatesSignificant: Firms enter the industry with similar products/ServicesMinimal: Price becomes a significant buying criteria for customers. Potential entrants look for more attractive industriesMinimal: Industry growth is declining as is industry profitabilityDegree of RivalryMinimal: One firm dominates the industryModerate: Firms enter industry with similar products/services. Incumbent firms attempt to grow by expanding into new markets or adding value to existing products/ servicesSignificant: Because price is a key buying criteria. Firms must expand to generate greater revenues to offset shrinking marginsMinimal: Firms are exiting the industry

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Using Internal Analysis to

Build Competitive Advantage

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Core CapabilitiesIntegration of resources and capabilities that serve as a competitive advantage over rivalsIntel’s chip manufacturing technologyExploitation of Coke’s brand name

Capabilities The productive services by which firms deploy resources over time.Transformation of technology into new productsProcesses which generate economies of scale and/or scope

ResourcesStock of assets that are controlled by the firm:EquipmentPlantTrucksManagersCulture

From Resources to Capabilities to Core Capabilities

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Criteria for Sustainable Advantage

CriteriaDefinitionExamples RareCapabilities that few, if any, competitors possess.Dell direct to customer distributionPatented technology ValuableCapabilities that allow the firm to exploit opportunities or neutralize threats in its external environment.Sophisticated external scanning processesFlexible manufacturing systemsCostly to imitateCapabilities that other firms cannot easily develop.Development of strong brand nameAir/ground hub and spoke operating system (e.g. FedEx)Non-substitutableCapabilities that do not have strategic equivalents.Relationships with international governmentsManagerial decision-making

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Value Chain Elements

Primary Activities

Definition

Examples

Inbound Logistics

Activities used to receive, store, and disseminate inputs to a production process.

Material handling

Warehousing

Inventory control

Operations

Activities needed to convert inputs into finished goods.

Flexible manufacturing

Robotics

Automation

Outbound Logistics

Activities to move finished goods to final consumers.

Transportation infrastructure

Distributor network

Marketing and Sales

Meeting unmet consumer needs.

Communicating with consumers concerning new goods/services or improved goods/services.

New products

Re-designed products

Marketing communications network

Service

Activities which enhance or maintain product value.

Warranty

Reliable customer service

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Value Chain Elements

Secondary ActivitiesDefinitionExamplesProcurementActivities which address purchasing the inputs to produce a firm’s products.Raw material sourcing Investment in plant and equipment to improve production/manufacturing.Technological developmentProcesses by which new or improved products are developed.Improvements in manufacturing processes.Product R&DProcess R&D Human resource managementInvestments in human capital.Hiring, training, developing, and compensating employees.Firm infrastructureSupport activities to improve primary or other secondary activitiesStrategic planningGovernment relations Financial analysis.

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Value Chain Primary Activities and Capstone Simulation

Primary Activity

Simulation Component

Inbound Logistics

Process R&D

Operations

Automation

TQM (Total Quality Management)

Outbound Logistics

Distributor network

Marketing & Sales

Sales forecasting

Promotion budget

Sales budget

Price adjustments

Service

Mean time before failure (MTBF)

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Value Chain Secondary Activities and Capstone Simulation

Support ActivitySimulation ComponentTechnology DevelopmentCreating new products (product R&D)Revising established products (product R&D)Reducing R&D cycle timeHuman Resource ManagementRecruiting, training, and compensating employeesLabor negotiationsFirm InfrastructureFinancial analysisSources and uses of fundsProcurementInvestment in plant and equipmentSelling of plant and equipment

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Business Level Strategy

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Business Level Strategy

Definition

: Actions necessary to gain and maintain competitive advantage over time within a given product market.

Gaining Advantage

: Meeting key success factors superior to competition

Maintaining Advantage

: Responding to changing consumer needs more successfully than competition

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Key Success FactorsDefinition: That set of criteria, defined by the customer base, which dictate buying decisions. Key success factors change over time

Air Freight Industry

Key

Success

Factors

Evolution

1980’s

Point-to-point service

On-time reliability

Competitive rates

Market coverage

2000 – 2007

Multi-modal services

Global coverage

On-line real-time tracking

Logistics services

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Cost Leadership

Differentiation

Focused

Low Cost

Focused Differentiation

Broad Target

Competitive

Scope

Narrow Target

Porter’s Generic Business Strategies

Competitive Advantage

Cost

Uniqueness

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Cost Leadership

Actions necessary to gain and maintain position:

1. Economies of scale through the utilization of excess capacity.

2. Automation and utilization of robotics in manufacturing processes.

3. Development of efficient distribution networks.

4. Implementation of TQM (Total Quality Management) initiatives.

Example: Dell

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Differentiation

Actions necessary to gain and maintain position:

1. Developing innovative products/services to broad range of customers.

2. Significant investments in R&D.

3. Capability to generate a series of successful new products over time.

4. Development of flexible manufacturing systems.

Example: Toyota

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Focused Low Cost

Actions necessary to gain and maintain position:

1. Specific, very well defined target market, that is oriented toward products/services where price is an important key success factor.

2. A market that larger scale firms may ignore because these firms may generate greater efficiencies in other markets.

3. Customer may be willing to absorb certain costs (e.g. transportation) in return for lower prices.

Example: Ikea Furniture

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Focused Differentiation

Actions necessary to gain and maintain position:

1. Customers are willing to pay more for real or perceived superior quality.

2. Brand name is important to customers.

3. Profit margins are such that firms do not need to generate significant economies of scale.

Promotion directed toward identification of real or perceived superior quality features.

5. Customers are brand loyal.

Example: Rolls Royce

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Decision Making Utilizing SWOT Analysis

Firm A Firm B

: Utilize strengths of one firm (A) to capitalize upon weakness of competitor (Firm B).

(Example: Dell’s direct selling model)

: Transform opportunities to strengths.

(Example: Pharmaceutical firms R&D capability develops new drugs: Pfizer-Lipitor)

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Competitive DynamicsCompetitive advantage may result from responding successfully to competitor’s mistakes

Firm 1

Firm 2

Firm 1

Firm 2

Firm 1

Firm 2

+

-

ROI

: Firm 2 initially responds to firm 1’s successful launch

: Firm 1’s second venture is not profitable

: Firm 2 learns from firm’s 1’s error and launches its own successful product

: Firm 1’s responses to firm 2’s new actions

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Southwest SWOT Analysis

Strengths Lowest cost carrier within U.S. industryReputation as successful carrierSuccessful business modelProfitableWeaknessesNo trans-oceanic capabilitiesLabor unionsAge of aircraftThreatsEntry of low cost carriersUS Congress recently increased the ownership position from 25 percent to 49 percent for international companies investing in U.S. transportation firmsOpportunitiesAbility to take share from existing and new entrantsSignificant potential to increase market share if America West/U.S. Airways, United, Delta or Northwest are liquidated