Competitive and Corporate Strategy

Transcription

1 Competitive and Corporate Strategy Value Chain Professor Nicolaj Siggelkow

2 Value Chain What creates a certain cost position? How is a product created for which customers are willing to pay a high price? Value Chain Introduced by Michael Porter. Analytically break down the firm into different activity buckets, or into different types of activities

3 Generic Value Chain Firm Infrastructure Support Activities Human Resource Management Technology Development Procurement M a r g Inbound Logistics Operations Outbound Logistics Marketing & Sales After-Sales Service i n Primary Activities This figure illustrates: A strategists needs to know (at least a bit) about everything. A strategist is an integrator. Source: Porter 1985

4 Inbound Logistics Cost Leadership: Highly efficient systems to link supplier s products with the firm s production processes Efficient processing of incoming preference information from customers (click data) JIT (Just in time) Differentiation: Superior handling of incoming raw materials to guarantee high quality of final product Sufficiency of supply

5 Operations Cost leadership: Consolidate production to exploit economies of scale Choice of production technologies Differentiation: Rapid responses to customer demands Smaller lot sizes; more customization; wide variety Defect-free 100% of the time

6 Outbound Logistics Cost leadership: Selection of low cost transportation carriers Delivery schedule that reduces costs Coordination with other units of the firm Focus on regionally clustered customers Differentiation: Accurate fulfillment Rapid and timely product delivery to customers

7 Marketing and Sales Cost leadership: Smaller sales force; less personal touch Scale is important Buyer density for sales force utilization Standardization of processes and products Differentiation: Personal relationships with customers High sales force coverage and quality Building of brand that stands for more than the product (life style; high quality) Broad range of financing options available

8 After-sale Service Cost leadership: Proper product installation in order to reduce frequency of recalls Encourage peer-to-peer help Differentiation: Fast responses to customer requests Guarantee uptime Extensive back-up plans Extensive training for customers

9 Procurement Cost leadership: Focus on finding lowest cost suppliers Frequent evaluation of each supplier s cost performance Try to keep our switching cost low Timing of capital purchases when demand for them is soft Differentiation: Systems in place to find highest-quality raw materials and components Frequent evaluation of supplier s quality and consistency

10 Technology Development Cost leadership: Investments in technologies primarily to reduce production costs Develop easy-to-manufacture products (standardized parts) Fast follower rather than innovator Scale is important (R&D is a fixed cost) Differentiation: Strong capabilities in research and development Sourcing from ideas from outside the organization (JV and alliances) Rapid product introductions; unique products

11 Human Resource Management Cost leadership: Focus of worker training on efficiency Balance wages and benefits with costs of turnover Differentiation: Big investments in screening and hiring to attract the most qualified personnel Incentives in place to reward creativity Broader set of performance criteria (beyond productivity) Extensive and continuous training

12 Firm Infrastructure Cost leadership: Few management layers Culture of low cost Few perks at the top (WalMart, Vanguard, AB InBev) Differentiation: Highly developed information systems to understand customer demands Legal capabilities to protect intellectual property Culture of high quality and service (Nordstrom, FedEx) More perks (Google)

13 Competitive and Corporate Strategy Vanguard Example of Value Chain Professor Nicolaj Siggelkow

14 Vanguard Example of Value Chain Mutual Fund Provider, >$3trillion in investments Founded in 1975; unique organizational structure Positioning: Vanguard is a low cost provider Industry average expense ratio: 1.02% Vanguard average expense ratio (2014): 0.18%

15 Generic Value Chain Firm Infrastructure Support Activities Inbound Logistics Human Resource Management Operations Technology Development Procurement Outbound Logistics Marketing & Sales After-Sales Service M a r g i n Primary Activities Source: Porter 1985

16 Value Chain of Typical Mutual Fund Provider Organizational Structure Human Resource Practices Asset Management Account Management Selling & Marketing Information & Customer Service Product Portfolio

17 Vanguard s Asset Management Activities Internal management of index and fixed-income funds Limited research Reduced fees for outside investment companies Incentive fee for outside managers General: We will focus on activities that are different from those of competitors

18 Vanguard s Account Management Activities High quality (yet limited) service Internalized shareholder accounting Internalized institutional shareholder accounting Vanguard Quality Program Bogle Barometers

19 Vanguard s Selling and Marketing Activities Direct distribution, number No-load Very few retail branches Little advertising (relative to assets) No telephone exchange for Index 500 Decline assets if considered hot money

20 Vanguard s Information and Customer Service Activities Candid communication Warning letters Plain talk brochures Clearly written annual reports Invest in on-line technology (first to web) Website for financial advisors, including analysis tools and economic analysis Low cost Personal Advisor Services (0.3% of assets)

21 Vanguard s Human Resource Practices Moderate wages Bonuses based on cost savings No perks for management Swiss Army- Everyone is trained to deal with customer requests Hiring Do not hire from Wall Street Hire primarily college graduates

22 Vanguard s Product Portfolio Focus on conservatively managed funds Balanced funds, index funds, fixed income funds Servicing of defined benefit plans Client services for retirement plan sponsors Personal Advisor Services

23 Firm Infrastructure Culture of low cost ( we always fly coach ) Mutual structure Owned by fund shareholders not by outside shareholders

24 highquality service high retention finances more assets scale effects Focus on low cost candid communication scale effects particularly large educate customers to look at the long-term focus on long-term performance higher long-term returns mutual structure low costs particularly effective Product focus: - fixed income - money market - index funds - balanced organizational structure ensures that savings are fully passed through to customers

25 Exercise Think about your own organization Construct a value chain What are the relevant activity buckets Identify activities within each stage of the value chain Which activities are most different from those of your competitors?

26 Competitive and Corporate Strategy Industry Analysis Professor Nicolaj Siggelkow

27 Average Industry Returns Selected industries Tobacco Household Products Pharmaceuticals Specialty Retail IT Services Software Aerospace & Defense Technology Hardware, Storage & Peripherals Beverages Food & Staples Retailing Food Products Oil, Gas & Consumable Fuels Health Care Providers & Services Health Care Equipment & Supplies Chemicals Machinery Metals & Mining Energy Equipment & Services Commercial Services & Supplies Road & Rail Hotels, Restaurants & Leisure Diversified Telecommunication Services Semiconductors & Semiconductor Equipment Multi-Utilities Wireless Telecommunication Services Industrial Conglomerates Electric Utilities Media Communications Equipment Independent Power and Renewable Electricity Producers Electronic Equipment, Instruments & Components Trading Companies & Distributors Household Durables Internet Software & Services Biotechnology Automobiles Airlines Average pre-tax ROIC

28 Industry Analysis Porter s 5 Forces: 1. Rivalry 2. Buyer Power 3. Supplier Power 4. Threat of Substitutes 5. Threat of New Entrants

29 Rivalry Concentration can affect the degree of competition: Perfect competition (many firms; commodity product; fish market) Oligopoly (a few firms; product differentiation) [cell phones] Duopoly (two firms) [Boeing and Airbus] Monopoly [firms with patents; Intel; Microsoft] Few firms => can be high or low competition Market growth rate can affect the degree of rivalry Cost structure/scale economies: Excess capacity Product differentiation Buyers switching costs Importance of Brand Buyers information about alternative offers/features Exit barriers (strategic stakes)

30 Buyer Power Price sensitivity: Cost of product relative to total cost/purchases Meaningful perceived product differences (if it is an input) Impact on quality/performance of buyer s output Competition between buyers [PC manufacturers vis a vis Intel] Buyer s profits Decision maker s incentives [cost center?] Bargaining Power: Size and concentration of buyers relative to producers Buyers switching cost (search costs; transition costs; learning costs) Buyers information Buyers ability to backward integrate (Walmart and trucking)

31 Supplier Power Importance of volume to supplier Supplier concentration Differentiation of inputs Switching costs for firms to use a different supplier (search costs; transition costs; learning costs) Pull-through from end customers [Pepsi and supermarkets] Credible threat of forward integration (Intel and PCs) Availability of substitutes

32 Threat of Substitutes Buyers propensity to substitute Buyer switching costs Relative prices and performance of substitutes Barriers to entry for substitutes

33 Threat of New Entrants Capital requirements Economies of scale; or steep learning curves Importance of brand, reputation, trust Difficulty of imitation: Property rights (trademarks and patents) Tying up distributors or suppliers Causal ambiguity: what needs to be copied? Time-compression diseconomies Legal barriers (certifications; licenses) Threat of retaliation First-mover advantages

34 Industry Analysis SWOT framework Strengths Weaknesses Opportunities Threats The same resource can have multiple features; e.g., specialized production facility may create entry barrier through economies of scale but also raise supplier power by raising switching costs

35 Competitive and Corporate Strategy Industry Analysis Example Professor Nicolaj Siggelkow

36 Example: US Mutual Fund Industry ~$16 trillion More than 9000 funds Hundreds of fund families Biggest players include Vanguard, Fidelity, State Street

37 Rivalry Red is problematic; blue is neutral; green is beneficial for firms in the industry Perfect competition (many firms; commodity product = index fund) Oligopoly (a few firms; product differentiation) Duopoly (two firms) Monopoly Few firms => can be high or low competition Market growth rate Cost structure/scale economies: Excess capacity Product differentiation for some fund types Importance of Brand Buyers switching costs Buyers information about alternative offers/features (depends on customer) Exit barriers (strategic stakes)

38 Buyer Power Individuals vs institutional buyers (employers buying pension plans) Price sensitivity: Cost of product relative to total cost/purchases Meaningful product differences (if it is an input) Impact on quality/performance Competition between buyers Buyer s profits Decision maker s incentives (maybe more service than price) Bargaining Power: Size and concentration of buyers relative to producers Buyer s volume Buyers switching cost (search costs; transition costs; learning costs) Buyers information (depends on customer) Buyers ability to backward integrate

39 Supplier Power Who are the suppliers: IT, real estate (Wall Street, Boston, SF, London), fund managers, call centers, sales agents, advertising agencies Supplier concentration Importance of volume to supplier Differentiation of inputs (fund managers) Switching costs for firms to use a different supplier (search costs; transition costs; learning costs) Pull-through from end customers (only exception: star manager) Credible threat of forward integration Availability of substitutes

40 Threat of Substitutes Any other investment opportunity: Own brokerage account to trade stocks and bonds CD s Hedge funds ETFs Buyers propensity to substitute Buyer switching costs Relative prices and performance of substitutes Barriers to entry for substitutes

41 Threat of New Entrants Capital requirements Economies of scale, learning Importance of brand, reputation, trust Difficulty of imitation: Property rights (trademarks and patents) Tying up distributors or suppliers Causal ambiguity: what needs to be copied? Time-compression diseconomies Legal barriers (certifications; licenses) Threat of retaliation

42 Firm and Industry Analysis Vanguard (with its low cost positioning) Rivalry: Higher since lower product differentiation; but built up reputation, and their low prices have made their segments less attractive for others Buyer power: Brand has increased switching costs; perhaps even pull through by individuals who want it as an option for their pension plans Supplier power: No active management; reduces power of fund managers; also allows facilities in less expensive location Substitutes: At the low price point fewer options; but if lower cost option comes in (like ETF) then potential threat; (they are selling them now as well) Barriers to Entry: Fairly high given scale economies (Vanguard manages about $3 trillion; about 17% of all money in mutual funds)

43 Exercise Conduct an industry analysis for your own industry Then ask yourself, How do we address each force? Given our positioning and choices we have made along the value chain, are we affected more or less by each of these forces than the average firm in our industry?

44 Competitive and Corporate Strategy Competitor Dynamics Professor Nicolaj Siggelkow

45 Example: Entrant Entrant Very low price Low price High price 300 / / 100 Incumbent Reduce price 350 / / 80 Match price 320 / / 70

46 Prisoner s Dilemma Firms can get themselves into tricky situations. Clyde Firm B Confess Don t Sale Don t Bonnie Confess -3, -3 0, -5 Don t -5, 0-1, -1 Firm A Sale -2, -2 2, -4 Don t -4, 2 0, 0

47 Game Theory/Competitor response analysis in practice 1. Will the competitor react at all? a) Will the competitor see your action? Action in small markets? Action in non-central distribution channels b) Will the competitor feel threatened by your action? Will your action cause your competitor miss their mark? Firms announce earning goals; security analysts make earnings forecasts Source: Coyne et al. HBR 2009

48 Will the Competitor React at all? c) Will a response be a priority? What other items are on the competitor s agenda? (product launches, marketing campaigns, reorganizations, mergers, plant openings etc.) Which of these are set by the corporate parent? d) Can the competitor overcome inertia? How large a change would be required for the competitor to react? Reorg? Change of prior, successful strategy? Reconceptualization of business? Third- parties involved? (e.g., franchisees?) Source: Coyne et al. HBR 2009

49 Competitor Response Analysis 2. What options will your competitor consider? Common thought processes within firms: Most commonly considered option is: match (the price, the new feature, the new product, etc.) (esp. for price) What did we do last time this happened? What did other business units of our firm do last time this happened to them? What do our board members advise us to do? What did we do the time before last? Source: Coyne et al. HBR 2009

50 Competitor Response Analysis 3. Which option will your competitor most likely choose? What metrics does the competitor use? This is not necessarily your metric! What measure would have led my competitor to chose the actions s/he has previously chosen? 15% use NPV 17% short-term market share 17% short-term earnings 20% long-term market share (2-4 years) 21% long-term earnings or instinct of decision makers (How have they reacted previously? How have they fared?) Source: Coyne et al. HBR 2009

51 Competitor Profiling What are the stated financial goals of the competitor? What are the stated growth objectives of the competitor? What is the competitor s attitude towards risk? Does the competitor hold beliefs that affect its goals? What is the organizational structure? What is the background of top management? What kinds of managers get promoted? Who is on the board of directors? What does the competitor believe about its relative positioning (Cost? Value? Quality?) Is this accurate? The same set of questions for the corporate parent. What is the strategic importance of this division? Emotional importance? Source: Porter, 1980

52 Competitive and Corporate Strategy Industry, Firm and Product Life Cycles Professor Nicolaj Siggelkow

53 Industry, Firm, and Product Life Cycles Sales Introduction Growth Maturity Decline Time

54 Product/Technology Lifecycle Early in the lifecycle: Importance of R&D Lead customers; or sell to another firm Struggle to establish the standard; dominant design Middle in the lifecycle: Product adoption speeds up; how to reach the mass market Firms trying to create and exploit possible network effects Importance of sales, marketing, access to distribution Differentiation possible; different segment emerge Late in the lifecycle: Commoditization of the product Less differentiation possible within each segment (but niche segments can remain) Importance of operational excellence; lower cost

55 Three Horizons Horizon 1 Horizon 2 Horizon 3 sales Horizon 1: The company s current core business; incremental innovations; efficiency improvements Horizon 2: The rising stars that may become the core businesses in the future Horizon 3: Nascent businesses that might become future growth engines time

56 Industry Lifecycle Early Few firms; all try to find a different way to address a need Middle Many firms enter as market has been proven to be profitable; market grows rapidly overall Eventual shakeout (more leave than enter) Mature Consolidation as scale economies become ever more important But new technologies might create turmoil again (e.g., automobile industry)

57 Process innovation Rate of innovation Product innovation time

58 Firm Lifecycle Young firm: Entrepreneurial Importance of imprinting; blue print of founders Relatively informal CEO and founders very involved in day-to-day details Possible re-shifting, pivoting of strategy/positioning (e.g., Lycos) Growing firm: Quite different skill set necessary to grow Firm becomes more managed as number of employees increases Possibly some global experience is necessary Starting to create cross-firm alliances and bridges

59 Firm Lifecycle Mature firm: Control of large firm difficult Issues of corporate scope M&A, JV, alliances How to keep an entrepreneurial mindset while being good at exploiting existing capabilities and resources; e.g. advantage of having good relationships with current customers vs being blind of new customer segments and demands

60 Firm Life Cycle Sales Introduction Growth Maturity Decline Time

61 World s Largest Companies in Terms of Market Capitalization US Steel 2. Standard Oil NJ (Exxon) 3. J&P Coates 4. Pullman 5. Royal Dutch Shell 6. Anaconda 7. General Electric 8. Singer 9. American Brands 10. Navistar Apple 2. Alphabet 3. Microsoft 4. Exxon Mobile 5. Berkshire Hathaway 6. Amazon 7. General Electric 8. Facebook 9. Johnson & Johnson 10. Wells Fargo L. Hannah (1999) in Grant, p. 221)

62 List of Fortune 500 (revenue based) Top 10: 1955 Top 10: General Motors 2. Exxon 3. US Steel 4. General Electric 5. Esmark (Swift) 6. Chrysler 7. Armour (meat; Dial) 8. Gulf Oil 9. Mobil 10. DuPont 1. Walmart 2. Exxon Mobil 3. Chevron 4. Berkshire Hathaway 5. Apple 6. General Motors 7. Phillips General Electric 9. Ford 10. CVS Health Full list: 2015 vs 1955: only 12% overlap

63