Strategies for Competing in Industries & Markets PDF

lOMoARcPSD|41085193 Strategies for Competing in Industries & Markets Strategies for Competition (IE Universidad) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Mateo San Roman de...

lOMoARcPSD|41085193 Strategies for Competing in Industries & Markets Strategies for Competition (IE Universidad) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 SESSION 2: Value creation and capturing STRATEGY: 1. The firm: - Goals and values - Resources and capabilities - Structure and systemes 2. The industry environment: - Competitors - Customers - Suppliers Strategic fit => Refers to consistency of a firm's strategy with: - The external environment - The internal environment (goals & values) I. Value creation and distribution Two ways to create value: - Production (physical transformation of products) - Commerce (reposition product in space and time) Value added is distributed through stakeholders = (employees, lenders, landlord, government, owners, customers) ⇒ Firms should either maximise shareholders’ (profit) or stakeholders’ (value creation) interests Value Creation Value created = Consumer surplus + Producer surplus = (B-P) + (P-C) = B-C B= Max willingness to pay P=Price C= Costs Consumer surplus = Willingness to pay - Price Profit = Price - Costs From value creation to competitive advantage - B-C > 0: Product is economically viable (does not imply that profit > 0) - If several firms create the same economic value, they compete for consumers by bidding down pricest - Perfect competition→ firms make zero profit and consumers capture all economic value - For profit > 0 in a competitive industry: - B-C of firm 1 > B-C of firm 2 Competitive advantage: lead in B-C compared to other firms Sustainable competitive advantage: competitors cannot easily replicate the same B-C Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 Two ways to measure a firm's performance: - Backward looking performance measures → based on financials 1: Using shareholders capital to generate profit: ROE = 2: Using fixed assets and working capital to generate profits ROI= 3: Using total assets to generate profits ROA= 4: Ability to extract profit from its sales: Gross margin: Net profit margin: - Forward looking performance measures → based on the stock market values Market value of the firm = stock price * n of outstanding shares Tobin's Q = OR IF Q > 1 → firm’s value is higher than its tangible assets, the evaluation of its intangible assets is positive IF Q < 1, there is something wrong, the market values the firm less than its tangible assets For comparing firms, Tobin’s Q is most suitable. To maximise its value, a firm must maximise its future net cash flows while managing its risks to minimise cost of capital: - V = market value of the firm - Ct = free cash flow in time t - WACC = weighted average cost of capital If cash flows grow at a constant rate the net present value can also be calculated as: - V → value - NPt=1 → cash flow from net operating profits after taxes - g = yearly growth rate of net operating profits Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 - ROIC = return on invested capital (that is = P / cumulative invested capital r) Relevance of Corporate social responsibility Firms are embedded in an ecosystem: advantages - Sustainability (Firms have an interest to sustain their ecosystem) - Reputation (CSR fosters firms‘ reputation) - Licence-to-operate (Firms depend on other actors‘ legitimization) SESSION 4: Industry analysis The industry environment: competitors, suppliers, customers Relevant for: − Corporate strategy: Understand the attractiveness of industries − Business strategy: Identify key factors to establish a competitive advantage through differentiation or cost leadership External factors/ actors that influence a firm’s success: → Industry analysis: Economics, specifically Industrial Organization → Key paradigm: SCP paradigm The structure of the industry (competitors, suppliers, buyers) determines the conduct of the firms within the industry and, as a consequence, the industry’s performance in terms of profitability ▪ Industry structure is assumed to be fairly stable Understand the industry structure → identify best position for a firm → accrue profits Highest profitable company: Tobacco industry To go further, use Porter’s 5 forces: 1. Identification of the industry (e.g. luxury cars) Standard industrial classification (SIC) code classifies industries into progressively broader groups: industry (4 digit), industry group (3 digit), and major group (2 digit). SIC 73: Business Services SIC 737: Computer Programming SIC 7372: Software Packages Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 ▪ Key principle to define industries or markets: Substitutability ▪ Industry vs. Market (= segmentation of an industry: Geographic criteria, target criteria (age, tastes) 2. Identification of the players in the industry (e.g. Ferrari, Aston Martin) 3. Sequential analysis of the structural determinants of each force 4. Develop a strategy: Cost advantage vs. differentiation advantage Competitors: Firms can compete on both price and nonprice dimensions: Price competition Nonprice competition – Firms make price reductions in the hope of − Reduces profits by driving up fixed costs (e.g., gaining market share, while the success new product development) and marginal costs depends on price sensitivity of demand and (e.g. adding product feature) rivals’ reaction − However, firms can pass additional costs − Reduces industry profits more significantly along to consumers by charging higher prices (if − Difficulty to reduce costs to the necessary price elasticity of demand allows this) extent → margins decrease − Examples: haute couture fashion, pharma, coke… 3 Measures for rivalry’s intensity: ▪ Market/industry concentration = number of firms competing in a market/industry ▪ Concentration rate: CR = Sum of market share of the ‘x’ largest firms (e.g., CR7 = market share of the 7 largest firms) ▪ Herfindahl index: HHI = Sum of squares of all market shares, between 0-1 (the higher the index, the lower competition) → better when there are many large firms Negative correlation between the level of competition and profitability: − Few firms = high profitability (Price increase due to tacit collusion = coordination of prices) − Many firms = low profitability (Collusion and coordination more difficult) − However, it also depends on the Elasticity of Demand and other factors … Threat of entry: Forms of Entry: new firm, established firm that is diversifying in a new Market or entering a new geographical market Forms of Exit: Firm folds up (e.g., Air Berlin), discontinues a particular product or product group (e.g., Sega left the video game hardware market), leaves a particular geographic market segment (e.g., Peugeot left the U.S. market) Barriers to entry: Strength determined by: − Capital requirements − Economies of scale Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 − Absolute cost advantages (e.g. access to inputs) − Product differentiation − Access to distribution channels − Legal barriers (e.g. patents) − Retaliation risk (e.g. post-entry price wars of incumbents) Ex-ante: Costs of entry (Investments in R&D or marketing) Ex-post: Incumbents’ behaviours in response to new entrants (aggressive pricing) Exogenous/structural barriers: Natural advantages (High set-up costs, economies of scale) Endogenous/strategic barriers: Incumbents’ actions to deter entry (Product differentiation, R&D and marketing expenses) Buyer Power: Price sensitivity and relative bargaining power of buyers (B2B and B2C) Determinants: − Importance of an item − Product differentiation − Competition among buyers − Size and concentration of buyers − Buyers’ information − Possibilities for backward integration =Price sensitivity =Bargaining power Supplier power: Price sensitivity and relative bargaining power of suppliers → Same as buyer’s, but “side” changes Industry analysis limitations: 1. Static perspective 2. No interaction among competitors 3. Reverse causality Industry structure influences competition, But competition also influences industry structure 4. Difficulty of defining industry boundaries 5. Excessive emphasis on industry structure Firms’ success also depends on firm-level factors (e.g. resources and capabilities) SESSION 5: US AIRLINE Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 How did the industry perform in recent years? - Industry has not been very profitable in the last decade - Revenues have increased for each player, while all of them struggled to cover their costs. - Continuously falling prices → Increased competition due to deregulation, LCC airlines, change in the structure of the airlines’ value chain (i.e. cutting out the middle men) - Passenger load factor = Ratio of revenue passenger miles to available seat miles of a particular transportation operation (e.g. a flight) (= measures how efficiently a company is filling its available seating capacity) Strong Rivalry: WHY? High number of players Low level of differentiation Excess capacity High exit barriers: Why? - Long lived assets + too big to fail High fixed/variable cost ratio which drives price competition Medium to high buyer power: WHY? Price sensitivity and access to information have increased enormously since tickets are sold online Low switching costs Airlines try to escape the commodity trap by: - Price discrimination and yield management, i.e. segmenting their offering by flexibility (early birds, costs for ticket changes, etc.) - Customer loyalty programs High supplier power: WHY? Very few airplane producers (Boeing + Airbus) Strong unions Airports (Hubs) have a local monopoly Few fuel providers Medium threat from substitutes: WHY? Other means of transportation BUT they only substitute for short-range routes Videoconferencing may be considered a strong substitute, and technology has improved and will develop further No strong dependency on complements: WHY? Alliances with hotels, limousine services etc. are possible Attractive for high-end travellers, but not really for average customer Medium threat of entry: WHY? Barriers to entry have become lower, especially because capital requirements have decreased Is the industry attractive? Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 - Besides the low barriers to entry, it is unclear why entrepreneurs keep on entering the industry? - Behavioural explanations… SESSION 6: Segmentation and positioning Segmentation is a more detailed analysis of competition, focused on a market. A market is a niche of an industry. Segmentation: process of disaggregating industries into specific markets Why is it useful? → Identify attractive segments for profit and/or growth → Adapt different strategies for each segment → Decide how many segments to serve The Steps of Segmentation Analysis: 1: Identify key segmentation variables (select the most relevant 2 or 3) What do you want to offer? (Product characteristics) Who do you want to target? (Buyer characteristics) 2: Construct a segmentation matrix using 2-3 dimensions 3: Analyse segments’ attractiveness (e.g. Porter’s 5 forces) 4: Identify KSFs (i.e., Key Success Factors) in each segment 5: Analyse benefits of broad vs. narrow scope - Potential for economies of scope across segments - Similarity of KSFs (economies of scale) Broad strategy: the company seeks to serve all (or many) customer groups in the industry with a portfolio of related products Focus strategy: focus on → Customer group (Customer Specialization Focus), Product (Product Specialization Focus) , Geographic area (Geographic Specialization Focus) Segmentation = Choice of customers, needs, and geographical areas targeted by a firm (i.e. Where does the firm compete?) Positioning = Choice of a favorable position in an industry or market (i.e. cost vs. benefit leadership) Differentiation = Choice how a firm distinguishes its offerings from those of its competitors - Broad Scope Differentiation: Appealing to what is common between different customers (McDonalds, Honda) - Focused Differentiation: Appealing to what distinguishes different customer groups (MTV, Harley-Davison, Armani) Strategic group analysis: Segmentation analysis: Disaggregate industry based on market characteristics Strategic group analysis: Disaggregate industry based on firms’ strategies - Purpose: Identify strategic competitors Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 Strategic group = Group of firms in an industry following the same or a similar strategy along the strategic dimensions 1: How to identify strategic groups: - Identify principal strategic variables that distinguish firms - Include at least two variables that define a strategy - Product range (diversification) - Geographical breadth - Marketing Expenditure - Choice of technology, R&D expenditure - Extent of Vertical Integration - Ownership structure - Pricing policy - The strategic variables should not be strongly correlated and they must show high variance across firms in the sector 2: Build a map and position each firm in relation to these variable 3. Identify clusters A focal firm may belong to more than one strategic group depending on the variables selected Red Oceans: - All industries in existence today - Competitors fight for market share - The more crowded these industries the less prospects for profits and growth Blue Oceans: - All industries not in existence today (unknown market space) - Demand is created rather than fought for - Ample opportunities for profits and growth Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 SESSION 7: Resources and capabilities Firm-Strategy Interface: Matching Firms Strengths (Core Resources & Capabilities) with opportunities that arise in the external market. Environment-Strategy Interface: Relationship between a firm’s strategy and its environment. Understanding this interface helps a company develop strategies that align with or respond to environmental factors, ensuring better positioning within its industry. Ressources = Productive assets owned by the firm Tangible - Financial (borrowing capacity, internal fund generation) - Physical (plant, land, etc.) Intangible - Technology (patents, copyrights, etc.) - Reputation (brands, relationships) - Culture Human - Skills/Know-how, Training - Capacity for communication and collaboration - Motivation How can we identify a firm’s resources? What are potential indicators? Tangible → Financial: Debt/equity ratio, Net cash flow → Physical: Market value of fixed assets, Scale of plants Intangible → Technology: Patents & Trademarks, R&D expenditure, R&D staff → Reputation: Brand equity, Customer retention, Supplier loyalty Human: → Employee qualification, Pay rates, Turnover Organisational capability = a “firm’s capacity to deploy resources for a desired end result” Routines and processes Routines and processes integrate individual actions to create organizational capabilities Routines = Regular and repetitive patterns of activity Processes = Coordinated sequences of actions through which specific activities are performed to create value for the company and for the customer Core capabilities = What a firm can do best - Organizational capabilities can be viewed as a hierarchical system: - Lower level (ordinary) capabilities are integrated to form higher level capabilities - Higher level capabilities constitute core capabilities Downloaded by Mateo San Roman de Dios ([email protected])  lOMoARcPSD|41085193 Dynamic capabilities = refer to a firm's ability to adapt, reconfigure, and leverage its core resources and competencies in response to changing environments or new opportunities. What makes it hard to imitate a resource or capability? Legal restrictions : - Patents, copyrights, and trademarks - Governmental control over licensing, certification, or quotas on operating right Superior access to inputs or customers - E.g. long-term exclusive contracts Market size and scale economies Intangible barriers to imitating a firm’s distinctive capabilities: causal ambiguity, dependence on historical circumstances, and social complexity SESSION 8: Harley Davison Performance of Harley Davison over the last decades: - Remarkable long-term growth - Until the sales dip in 2008-2009, Harley rapidly and sustainably expanded since the mid-1980s + their ROE averaged 27% during 2003-2011 Strategies can be described in terms of: 1. WHERE is the firm competing (corporate) - The industry in which it competes - The market segment it serves - The geographical scope 2. HOW is the firm competing (competitive) - How does it try to establish a competitive advantage 1. Where is HD competing ? - SIC Code: 3751 - Motorcycles, Bicycles, and Parts - Market segments: cruiser and touring - Geography: North America 2. How is it competing: - Differentiation strategy - Focus on Design, Customer support, HOG (Harley Owners Group) activities - Selling an experience (lifestyle, sense of community and authenticity) HD Vs Honda: R&D Budget