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Global Enterprise and Competition66.511.202Fall 2007

Ashwin Mehta, Visiting Faculty

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Approach to Global Enterprise

Global Strategy

Business Strategy

International Strategy

Differences arise from Business to International strategy (market variations, cultures differences, etc.)

Global strategy must address these variations and create a strategy to eliminate/minimize differences

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International Strategy,Structure &Integration

Corporate/GlobalStrategy

CorporateStructure &Integration

Business Strategy

BusinessStructure &Integration

Strategy --- Global to Regional/Local

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EnvironmentalAssessment-Macro Trends-Industry Analysis-Completion

-Internal Analysis(Resource, Capabilities, etc.

Mission/Vision

Objectives/Goals

Strategy Options

Strategy Selection-Corporate-Business-International

Implementation-Structure-Leadership-Staffing-Incentives-Evaluation-Control

Strategy Process

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Strategy - Results from

Industry Analysis

Competitor Analysis

Development of resources and capabilities

Situation Analysis

External Analysis

Internal Analysis

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IndustryEnvironment

Competitive ForcesCompetitive Environment

Technological

Political/Legal

Demographic

Economic

Socio Cultural

Global

The External Environment

TheFirm

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KEY QUESTION TO ASK

•What macro environmental conditions will have a material effect on our ability to implement our strategy successfully?

•How stable are these characteristics?

•What is our firm’s industry?

•What are the characteristics of the industry?

•What is our strategic group?

•Who are key competitors?

•And, many more

These questions must be asked at national and Global levels

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UNDERSTANDING THE MACRO ENVIRONMENT

– How stable is the political environment?

– Tax policies

– Etc.

– Projected interest rates?

– Inflation?

– Etc.

– Lifestyle trends?

– Demographic changes?

– Etc.

– Level of government research funding?

– How mature is technology?

– Etc.

•Political

•Economic

•Socio-cultural

•Technological

– Is intellectual property protected?

– Relevant consumer laws?

– Etc.•Legal

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PRESSURES FAVORING INDUSTRY GLOBALIZATION

– Interdependent countries

– Homogeneous customer needs

– Favorable trade policies

– Large scale and scope economies

– Global competitors

– Global customer needs

– Common technological standards

– Learning and experience

– Global channels – Common manufacturing and marketing regulations

– Sourcing efficiencies

•Competition•Markets •Governments•Costs

– Favorable logistics

– Arbitrage opportunities

– High R&D costs

– Transferable marketing approaches

Source: Adapted from M.E. Porter, Competition in Global industries (Boston: Harvard Business School Press, 1986); G. Yip, “Global Strategy in a World of Nations, “ Sloan Management review 31:1 (1989), 29-40

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2. Major Environmental Trends Describe major (between 5 and 10) environmental trends affecting Your Company and its industry. These trends can be related to economic (such as GDP, interest rates, unemployment, taxes, etc.), governmental (e.g. regulation, trade laws, etc.), technological (e.g. new technologies, R&D spending, etc.), socio-cultural (e.g. demographics, Trend Assessment* 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. *: Scale: 1=very negative impact; 5=very positive impact

Group Project - Template

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Industry Analysis

Porter’s Model:Porter’s Model:

Assess the six forces --• Threat of new entrants• Rivalry among existing firms• Threat of substitute products • Bargaining power of buyers• Bargaining power of suppliers• Relative power of other stakeholders

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ANALYSIS OF COMPETITIVE FORCES

To identify

Main SOURCES of competitive forces and

STRENGTH of these pressures

ObjectiveCOMPETITIVE FORCES MATTER BECAUSE:

To be successful, strategy must be designed

to cope effectively with competitive pressures -

objective must be to build a strong, market

position based on competitive advantage!

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COMPETITIVE FORCE OF POTENTIAL ENTRY

New entrants boost competitive pressures

By bringing new production capacity into play

Through actions to build market share

Seriousness of threat of entry depends on

BARRIERS to entry

Expected REACTION of existing firms to entry

Barriers to entry exist WHEN

It is difficult for newcomers to enter market

A new entrant’s small sales volume puts it a price/cost

disadvantage

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Threat of New Entrants --Threat of New Entrants --

Barriers to entry:• Economies of Scale (Intel in microprocessors)• Product Differentiation (hi advertising in consumer

goods)• Capital Requirements (airplane mfg)• Switching Costs (Windows to Linux)• Access to Distribution Channels (store shelf space)• Cost Disadvantages Independent of Size (V high mkt

share)• Government Policy (oil drilling)

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Competitive threat of outsiders entering

a market is stronger when

Entry barriers are low

Incumbent firms do not vigorously fight newcomer

Newcomer can expect to earn attractive profits

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KEY SUCCESS FACTORS AS BARRIERS TO ENTRY

•Key asset or requisite skill that all firms in an industry must possess in order to be a viable competitor

•Key success factor (KSF)

Ability to meet competitive pricing

Extensive distribution

Ability to raise consumer awareness

Broad product mix

Global presence

Well positioned bottlers and bottling capacity

•KSFs:

•SOFT DRINK EXAMPLE

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Bargaining Power of Suppliers --Bargaining Power of Suppliers --

Supplier is powerful when:• Supplier industry is dominated by a few companies but

sells to many• Its product is unique and/or has high switching costs• Substitutes are not readily available• Suppliers are able to integrate forward and compete

directly with present customers• Purchasing industry buys only a small portion of the

supplier’s goods.

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Bargaining Power of Buyers --Bargaining Power of Buyers --

Buyer is powerful when:• Buyer purchases large proportion of seller’s products• Buyer has the potential to integrate backward• Alternative suppliers are plentiful• Changing suppliers costs very little• Purchased product represents a high percentage of a buyer’s costs• Buyer earns low profits• Purchased product is unimportant to the final quality or price of a

buyer’s products

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Threat of Substitute Products/ServicesThreat of Substitute Products/Services

Substitute Products:Those products that appear to be different but can satisfy the same need as another product. To the extent that switching costs are low, substitutes can have a strong effect on an industry.

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THREAT OF SUBSTITUTES Soft drinks

Coke Pepsi

Movie rentals

Block buster

Hollywood video

Bo

ttle

d w

ater

Cab

le T

V

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PRINCIPLE OF COMPETITIVE MARKETS

Competitive threat of substitute

products is strong when

Prices of substitutes are viewed attractive by buyers

Buyers’ costs of switching to substitutes are low

Buyers view substitutes as having equal or better performance features

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IMPACT OF COMPLEMENTORAny factor that makes it more attractive for suppliers to supply an industry on favorable terms or that makes it more attractive for buyers to purchase products or services from an industry at prices higher than it would pay absent the complementor

Complementor:

Hot dogs

+

Buns

More sales

Three Examples

Music

+

MP3 player

More attractive offering

Microsoft

+

Intel

Market dominance/standard

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Rivalry Among Existing Firms --Rivalry Among Existing Firms --

Intense rivalry related to:• Number of competitors• Rate of Industry Growth• Product or Service Characteristics• Amount of Fixed Costs• Capacity• Height of Exit Barriers• Diversity of Rivals

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Usually the MOST POWERFUL of the competitive forces

Weapons of COMPETITIVE RIVALRY

Price

Quality

Performance features offered

Customer service

Warranties and guarantees

Advertising & special promotions

Dealer networks

Product innovation

Rivalry Among Existing Firms --Rivalry Among Existing Firms --

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Relative Power of other Stakeholders

GovernmentCommunitiesCreditorsTrade AssociationsUnionsComplementors

(Intel and Microsoft)

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Competitive environment is unattractive when:

Rivalry is very strong

Entry barriers are low

Competition from substitutes is strong

Suppliers & customers have considerable bargaining power

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Competitive environment is ideal when:

Rivalry is only moderate

Entry barriers are relatively high

There are no good substitutes

Suppliers & customers are in a weak bargaining position

The weaker the competitive forces, the GREATER

an industry’s PROFITS!

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COPING WITH THE COMPETITIVE FORCES

Objective is to craft a strategy that will

Insulate company from competitive forces

Influence industry’s competitive rules in company’s favor

Provide a strong position from which “to play the game”

of competition

Help create sustainable competitive advantage

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INDUSTRY LIFE CYCLE

Source: Adapted from K. Rangan and G. Bowman, “Beating the Commodity Magnet,” Industrial Marketing Management 21 (1992), 215-224; P. Kotler, “Managing Products through their Product Life Cycle,” in Marketing Management: Planning, Implementation, and Control, 7th ed (Upper Saddle River, NJ: Prentice Hall, 1991)

Mar

ket

Siz

e

Time

Embryonic

Technological uncertainty

Niche market – selected products for selected markets

Participants emphasize problem solving – product as “solution”

Growing

Customers become better informed

Market expands beyond niche

More competitors enter

Mature

Aggressive customers

Proliferation of products and markets served

Market volatility and beginnings of industry consolidation

In Decline

Product/market contraction

Further consolidation and industry regeneration

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Strategic Groups

Attribute A (e.g. price)

Attribute B(Quality, Perf, etc.)

Strategic group 1

Competitor ACompetitor BCompetitor C .....

Strategic group 2

Competitor XCompetitor YCompetitor Z .....

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Group Project - Template

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6. Industry Evolution

6.1 Industry life cycle stage: (check one) Emerging ___

Growth ___ Consolidation ___ Mature ___ Declining ___

6.2 Industry Globalization Stage (Check one) Domestic _____ Multi-Domestic _____ Global _____

Group Project - Template

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7. Industry Profitability* 0 – 5% ___ 5.1-10% ___ 10.1-15% ___ 15.1-20% ___ Over 20% ___ (*: take top 5 to 10 companies to calculate average profitability) 8. Industry driving forces:

List key 5 to 7 forces that impact the company’s industry most (example: foreign competition, change in technology, consolidation, shifting user demands, etc.). Briefly describe each force and its impact on the company

Industry Driving Force

Description Assessment*

1. 2. 3. 4. 5. 6. 7. *: use a scale of 1 (=highly negative impact) to 10 (=very positive impact)

Group Project - Template

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9. Industry Attractiveness Matrix Factor Weight

(W) Rating (R)

WxR

Industry Size Industry Growth Industry profitability Competitiveness Entry barriers Regulations

Total 100

Group Project - Template

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10. Industry Critical Success factors List and briefly describe 5 to 8 industry success factors, such as distribution channels, price, supply chain management, information technology, etc.

Critical Success Factors

Description

Group Project - Template

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11. Company’s competitive position: Critical success factors Weight Rating WxR

Total 100

Group Project - Template

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Group Project - Template

12. Market Share

Competitors Home Country Market Share%

Comments

Your Company Competitor 1 Competitor 2 Competitor 3 Competitor 4 Competitor 5 Competitor 6

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13. Competitive Analysis

CSF Your Company

Competitor1 Competitor2 Competitor3

1.

2.

3.

4.

5.

6.

Provide weighting of each CSF for your company’s competitors.

Group Project - Template

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Group Project - Template

14. Additional Competitive Data and Analysis You can add any other information that you may have collected, such as competitors’ strategies, differentiators, anticipated strategic moves in future, etc.

Competitor Additional Comments

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COMPARATIVE INDUSTRY REFORMANCE

How dosuch differences in profitability materialize?

ROAROS

Grocery Store

Global Auto•Semiconductor

Session 3

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TWO THEORIES FOR HOW AND WHY SOME FIRMS PERFORM BETTER THAN OTHERS

•A firm’s resources and capabilities determine performance

•Success issues from fundamental differences in what firms own and what they can do

•A firm’s activities determine performance

•Success is driven by a firm’svalue chain activities:How it configures these activities to add more valuethan competitors

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RESOURCES AND CAPABILITIES:BUILDING BLOCKS OF STRATEGY

•The inputs that firms use to create goods and services

• Undifferentiated or firms-specific

• Tangible or intangible

• Easy to acquire or difficult

A firm’s skill in using its resources to create goods and services. The combination of procedures and expertise that the firm relies

on to engage in distinct activities in the process of producing goods and services

Capabilities

(competencie

s)

Resources

Strategy

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TYPES OF CORE COMPETENCIES

Superior skills in producing high quality product

Superior system for delivering customer orders accurately & swiftly

Better after-sale service capability

More skill in achieving low operating costs

Unique formula for selecting good retail locations

Unusual innovativeness in developing new products

Better merchandising & product display skills

Superior mastery of an important technology

Unusually effective sales force

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What made Wal-Mart a BIG Success?*

Why is Wal-Mart able to justify bigger stores?

Why Wal-Mart alone have cost structure low?

Capabilities-based competitorCross dockingInvestments in interlocking support systemsTransportation systemManagerial controlsHuman resources system

*: Competing on Capabilities, Stalk, Evans; Shulman

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Value Chain – another strategy development factor

Linked set of value-creating activities

THE VALUE CHAIN CONCEPT

A VALUE CHAIN identifies:

Activities, functions, & business processes that have to be performed in -

Designing, producing, marketing, delivering, & supporting a product or service

Industry Value Chain and Firm Value Chain

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Industry Value Chain

UpstreamValue Chain

Company’sValue Chain

DownstreamValue Chain

Buyer/UserValue Chain

Activities, Costs, Margins

Suppliers

Internally Performed Functions

Distributors, retailetc.

ForwardChannels

Company

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Value Chain System

Cost competitiveness depends on

Costs of internally performed activities

Costs of value chains of suppliers and forward channel allies

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The Value Chain System

SUPPLIERS value chain matter- suppliers incur costs in creating and delivering inputs used in Firms’ value chain

- cost and quality of inputs influence Firm’s cost &/or differentiation capabilities

FORWARD CHANNEL value chain matter- costs and margins of downstream firms are part of price paid by ultimate end user

- activities Channel allies perform affect satisfaction of end user

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Firm Value Chain

Inbound shipment of top titles

Warehousing

Server operations

Billing

Collections

Picking and shipment of top titles from warehouse

Shipment of other titles from third- party distributors

Pricing

Promotions

Advertising

Product information and reviews

Affiliations with other websites

Returned items

Customer feedback

CDsShipping

ComputersTelecom lines

Shipping services

Media

Inventory system

Site software

Pick & pack procedures

Site look & feelCustomer research

Return procedures

Financing, legal support, accounting

Recruiting, training, incentive system, employee feedback

Procurement

TechnologyDevelopment

HumanResources

FirmInfrastructure

SupportActivities

InboundLogistics

Operations OutboundLogistics

Marketing& Sales

After-Sales Service

Primary Activities

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USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE

Identical DifferentiatedFind a different way to perform activities

Find a better way to perform the same activities

Longer-lasting advantage

Shorter-term advantage (competitors catch up)

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TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU

Selected difference between Southwest and large Airlines

Southwest made choices so that competitors did not copy - because copying would require them to abandon activities essential to their strategies

Technologyand design

Operations

Marketing

Southwest

• Single aircraft

• Short segment flights

• Smaller markets and secondaryairports in major markets

• No baggage transfers to others airlines

• No meals

• Single class of service

• No seat assignments

• Limited use of travel agents • Word of mouth

Major Airlines

• Multiple types of aircrafts

• Hub and spoke system

• Meals

• Seat assignments

• Multiple classes of service

• Baggage transfer to other airlines

• Extensive use of travel agents

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INNOVATION AND INTEGRATION OF THE VALUE CHAIN

  

Transferred assembly and delivery to the consumer

Choose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing

IKEA

Dell

Source

Assemble

Deliver

Area of innovation

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STRATEGIC LEADERSHIP

“Companies that overlook the role of leadership in the early phases of strategic planning often find themselves scrambling when it’s time to execute. No matter how thorough the plan, with-out the right leaders it is unlikely to succeed”

– McKinsey & Company

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SENIOR VS. MIDDLE MANAGERS

Senior

Middle

Decide how to use other resources and capabilities, configure their firm’s value-chain activities, and set the context which determines how front-line and middle managers can add value

Are better positioned than senior managers to contribute to competitive advantage and firm success in four areas• Entrepreneurship• Communications• Psychoanalyst• Tightrope walker

Source: Quy Nguyen Huy

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SWOT Analysis OpportunitiesThreats

StrengthsWeaknesses

Situation AnalysisExternal factors

Internal factors

Widely used tool

Detailed analysis of the environment

Manageable list

Prioritized list

Inclusive of ALL factors

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Situational Analysis:

Process of finding a strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses.

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External Analysis

Environmental (Macro) TrendsEconomicTechnologicalPoliticalSocio-Cultural

Industry TrendsIndustry EvolutionCompetitive Forces

Opportunities---

Threats---

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Internal Analysis

Resources

Value Chain

FinancialPhysicalHumanManagementOrganizationCultureTangiblesIntangibles

In-house activitiesSuppliersPartnersDistributorsCustomers

Strengths---

Weaknesses---

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Business Acumen*

linking insightful assessment of external environment with keen awareness of how money can be made … most important management skill

Changes: complex; linear/continuous or exponential/abruptInformation Technology industry…mainframe/mini to PC and

Internet

Qualitative Vs Quantitative assessment

Questions:What is happening in the World today?What does it mean to others?What does it mean to us?What would have to happen first (for the results we want to occur)?What do we have to do to play a role?What do we do next?

*: Sharpening Your Business Acumen, Ram Charan

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Competitive Forces --- Exercises and Questions

1: Discuss Porter’s Competitive Forces in the Budget Airline Industry (Budget Airline industry consists of players such as SouthWest, JetBlue, etc.)

2: Discuss Porter’s Competitive Forces in the PC Industry

3: Discuss different Strategic Groups in the PC industry and name a few players in each group

4: What competitive conditions will create an ideal industry scenario?

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Push for Cosmopolitanism: The Gillette Case*

*: Global Cosmopolitans, Rosabeth Moss Kanter, Strategy+Business

World class company – cosmopolitan mindset that demands global culture of management

Cosmopolitans Globalization

Gillette

Markets in 200 countries and Territories58 facilities in 28 countries75% of employees outside the US70% of revenues from outside the USClassic International/Global company

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Push for Cosmopolitanism: The Gillette Case*

Pre 1980’s – “Stone Age” Theory of marketingslow spread from home to hinterlands

Sophisticated and more informed consumers required a global approach

Retail trade getting more advanced --- retails chains (e.g. Wal-Mart) and Internet

Evolved from International to global

Global strategy --- 50 states to 500 states

ImperativesInnovationOrganizationsStandardizationWorld SourcingLeadershipCoordination

*: Global Cosmopolitans, Rosabeth Moss Kanter, Strategy+Business