Business StrategyGROWTH OF BUSINESS UNIT -II

BuyersSuppliers

Substitute

products

Potential

entrants

Industry competitors

Rivalry among

existing firms

Threat of

new entrants

Bargaining power

of suppliersBargaining power

of buyers

Threat of

substitutes

Porter's Five Forces Model

Source: Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and Competitors, (The Free Press, 1980)

2

STRUCTURAL ANALYSIS AND

COMPETITIVE STRATEGY

ESSENCE OF COMPETITIVE STRATEGY IS RELATING A COMPANY TO ITS ENVIRONMENT

INDUSTRY STRUCTURE DETERMINES LEVEL OF COMPETITION AND HENCE INDUSTRY PROFITABILITY

UNDERSTANDING THE STRUCTURE IS CRITICAL IN FORMULATING STRATEGY

POSITIONING THE FIRM TO COMPETE

INFLUENCING THE BALANCE OF FORCES THROUGH STRATEGIC MOVES

EXPLOITING CHANGE

3

THREAT TO ENTRYBARRIERS TO ENTRY

THERE ARE SEVEN MAJOR SOURCES OF BARRIERS OF ENTRY

ECONOMIES OF SCALE

PRODUCT DIFFERENTIATION

CAPITAL REQUIREMENTS

SWITCHING COSTS

ACCESS TO DISTRIBUTION CHANNELS

COST DISADVANTAGE INDEPENDENT OF SCALE

GOVERNMENT POLICY

4

INTENSITY OF RIVALRY AMONG EXISTING

COMPETITORS

NUMEROUS OR EQUALLY BALANCED COMPETITORS

SLOW INDUSTRY GROWTH

HIGH FIXED OR STORAGE COSTS

LACK OF DIFFERENTIATION OR SWITCHING COSTS

CAPACITY AUGMENTED IN LARGE INCREMENTS

DIVERSE COMPETITORS

HIGH STRATEGIC STAKES

HIGH EXIT BARRIERS

5

BARGAINING POWER OF SUPPLIERS

IT IS DOMINATED BY A FEW COMPANIES AND IS MORE CONCENTRATED THAN THE INDUSTRY IT SELLS TO.

IT IS NOT OBLIGED TO CONTEND WITH OTHER SUBSTITUTE PRODUCTS FOR SALE TO THE INDUSTRY.

THE INDUSTRY IS NOT AN IMPORTANT CUSTOMER OF THE SUPPLIER GROUP.

THE SUPPLIERS’ PRODUCT IS AN IMPORTANT INPUT TO THE BUYER’S BUSINESS.

THE SUPPLIER GROUP’S PRODUCTS ARE DIFFERENTIATED OR IT HAS BUILT UP SWITHING COSTS.

THE SUPPLIER GROUP POSES A CREDIBLE THREAT OF FORWARD INTEGRATION.

6

BARGAINING POWER OF BUYERS

IT IS CONCENTRATED OR PURCHASES LARGE VOLUMES RELATIVE TO SELLER SALES

THE PRODUCTS IT PURCHASES FROM THE INDUSTRY REPRESENT A SIGNIFICANT FRACTION OF THE BUYER’S COSTS OR PURCHASES.

THE PRODUCTS IT PURCHASES FROM THE INDUSTRY ARE STANDARD OR UNDIFFERENTIATED.

IT FACES FEW SWITCHING COSTS.

IT EARNS LOW PROFITS.

BUYERS POSE A CREDIBLE THREAT OF BACKWARD INTEGRATION

THE INDUSTRY’S PRODUCT IS UNIMPORTANT TO THE QUALITY OF THE BUYERS’ PRODUCTS OR SERVICES.

THE BUYER HAS FULL INFORMATION.

7

BARRIERS AND PROFITABILITY

ENTRY BARRIERS // EXIT BARRIERS

8

L O W H I G H

L O W L O W S T A B L E L O W , R I S K Y

R E T U R N R E T U R N

H I G H H I G H , S T A B L E H I G H , R I S K Y

R E T U R N S R E T U R N

PRESSURE FROM SUBSTITUTE PRODUCTS

SUBSTITUTE PRODUCTS THAT DESERVE THE MOST

ATTENTION ARE THOSE THAT

ARE SUBJECT TO TRENDS IMPROVING THEIR PRICE-

PERFORMANCE TRADEOFF WITH THE INDUSTRY’S

PRODUCT,

OR

ARE PRODUCED BY INDUSTRIES EARNING HIGH PROFITS.

9

Breadth of

Competitive

Scope

Source of Competitive Advantage

Broad

Target

Market

NarrowTarget

Market

Cost

Focused

Differen-

tiation

Cost

Leadership

Differen-

tiation

Focused

Low Cost

Generic Business Level Strategies

Uniqueness

10

Gaining competitive advantage out of Generic strategy

Example

11

SWOT Analysis

STRENGTH WEAKNESS

OPPORTUNITY THREAT

12

Strategy

Internal Environment

External Environment

Strategy

13

Resources, Capabilities, and Competitive

Advantage: The Basic Relationships14

COMPETITIVE

ADVANTAGE STRATEGY

INDUSTRY

KEY

SUCCESS

FACTORS -

EXTERNAL

ORGANIZATIONAL

CAPABILITIES

RESOURCES

Tangible Intangible Human

Outcomes from External and

Internal Environmental Analyses

15

Examine opportunities

and threats

Examine unique

resources, capabilities,

and competencies

Firm and Environment

Organization

Competitors

Strategic Groups

Industry

General Environment

16

Distinctive Competencies and

Role of Resources and Capabilities17

Resources• Tangible (physical) and intangible (non-physical)

• Allow a company to create value for its customers

• Must have skills to take advantage of the resources

• Firm-specific and difficult-to-imitate resources

as well as valuable resources that create strong

demand for a company’s products lead to

distinctive competencies

Capabilities• Coordinating resources & putting to productive use

• Skills reside in the organization’s rules, routines

and procedures

• Product of its organization, processes & controls

• Firm-specific capabilities to manage its resources

lead to distinctive competencies

We would study three trools

Core-Competence

Value Chain

VRIN

18

Core Compt. and Tree

Leaves-

End

Products

Branches- Businesses

Stem- Core Products Roots- Core

Competence

What core competence is Core competencies are the collective learning in an

organization, on how to coordinate & integrate

diverse streams of technological ability

Competencies are the glue that bind existing

businesses

They guide patterns of diversification and market

entry

Core products/businesses contribute to a wide

range of end products, thus it is vital to protect them

from being acquired by a rival

20

Core competence have following

characteristics….

Core Competence

Different Markets

Difficult to

imitate

Valuable

21

The Value Chain

Supportactivities

Primary activitiesInbound logistics Materials receiving, storing, and distribution to manufacturing premisesOperations Transforming inputs into finished products.Outbound logistics Storing and distributing productsMarketing and Sales Promotions and sales forceService Service to maintain or enhance product valueCorporate infrastructure Support of entire value chain, e.g. general management planning,

financing, accounting, legal services, government affairs, and QMHuman resources management Recruiting, hiring, training, and developmentTechnology Development Improving product and manufacturing processProcurement Purchasing input

22

Inbound Logistics

Inbound

LogisticsOperations

Outbound

Logistics

Marketing and Sales

Service

Inbound logistics

Activities used to receive, store,

and disseminate inputs to a

product (materials handling,

warehousing, inventory control,

vehicle scheduling, return to

suppliers, etc.)

Walmart’s Logistics, Fed Ex: sorting

of Packages

GE’s investment in bar coding,

sorting and inventory checking

system

Honda and Toyota’s inventory less

ordering, JIT

23

Operations

Inbound

LogisticsOperations

Outbound

Logistics

Marketing and Sales

Service

Operation

Activities necessary to convert the inputs

provided by inbound logistics into final

product form (machining, packaging,

assembly, testing, printing facility operations,

etc.)

Type of technology used, size of plant, degree

of automation, productivity gains, wage rates

E.g. Toyota’s and Samsung’s

Flexible Manufacturing System , check

clearing for brokerage houses, TQM, Mini-mills

in steel, Intel standardized machinery and

processes, stoppages of flow in chemical

industry

24

Outbound Logistics

Inbound

LogisticsOperations

Outbound

Logistics

Marketing and Sales

Service

Outbound logistics

Activities involved with collecting,

storing, and physically distributing

the product to customers (finished

goods warehousing, order

processing, scheduling, delivery

vehicle operations, etc.)

E.g. HUL’s distribution, Asian Paints,

Cemex’s , P and G’s linkages with

wholesalers and retailers(bar

coding, RFID), Walmart, ordering

and tracking systems

25

Marketing and Sales

Inbound

LogisticsOperations

Outbound

Logistics

Marketing and Sales

Service

Marketing and sales

Activities completed to provide means through which customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, sales force, quoting, channel selection, channel relations, product design, pricing etc.)

E.g. Virgin, Coca Cola vs. Rest, Invst. Banking

26

Service

Inbound

LogisticsOperations

Outbound

Logistics

Marketing and Sales

Service

Service

Activities designed to enhance or

maintain a product’s value (repair,

training, adjustment, parts supply,

product adjustment, installation,

etc.)

E.g. Maruti, Tata, UPS allows

customer to track their packages

so does Fedex, Using Internet for

feedback E.g. Intel, Dell, GE,

Amazon customers order to

distribution centre, factories and

suppliers

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Support Activities-Procurement

HR •HR

Pro

cu

rem

en

t •Procurement

Tec

hn

olo

gy •Technology

Procurement

Activities completed to

purchase the inputs

needed to produce a

firm’s products

(documentation and

ordering

processsystems for raw

materials and supplies,

machines, laboratory

equipment, etc.)

E.g. Walmart, Future

Group, Reliance, Nirma

28

HR

•HR

Pro

cu

rem

en

t

•Procurement

Tec

hn

olo

gy

•Technology

Primary Activities

Su

pp

ort

Act

ivit

ies

Cost Effective

MIS Systems

Relatively Few

Management Layers to

Reduce Overhead

Simplified Planning

Practices to Reduce

Planning Costs

Consistent Policies to

Reduce Turnover Costs

Effective Training Programs

to Improve Worker

Efficiency and Effectiveness

Highly Efficient

Systems to Link

Suppliers’

Products with the

Firm’s Production

Processes Timing of Asset

Purchases

Efficient Plant

Scale to Minimize

Manufacturing

CostsSelection of Low

Cost Transport

Carriers

Delivery Schedule

that Reduces

Costs

National Scale

Advertising

Products Priced to

Generate Sales

Volume

Small, Highly

Trained Sales

Force

Effective Product

Installations to

Reduce Frequency

and Severity

of Recalls

Easy-to-Use Manufacturing

Technologies

Investments in Technology in order

to Reduce Costs Associated with

Manufacturing Processes

Systems and Procedures to find the

Lowest Cost Products to Purchase

Raw Materials

Frequent Evaluation Processes to

Monitor Suppliers’ Performances

Located in Close

Proximity with

Suppliers

Policy Choice of

Plant Technology

Organizational

Learning

Efficient Order

Sizes

Interrelationships

with Sister Units

Value Creating Activities common

to a

Cost Leadership Business Level

Strategy

29

A company wide

emphasis on producing

high quality products

Highly Developed Information

Systems to better understand

customers’ purchasing preferences

Compensation programs

intended to encourage worker

creativity and productivity

Extensive use of subjective

rather than objective

performance measures

Superior

handling of

incoming raw

materials to

minimize

damage and

improve the

quality of the

final product

Rapid responses

to customers

unique

manufacturing

specifications

Consistent

manufacturing of

attractive

products

Accurate and

responsive order

processing

procedures

Complete field

stocking of

replacement parts

Strong

capability in

basic research

Investments in technologies that will

allow the firm to consistently produce

highly differentiated products

Systems and procedures used to find

the highest quality raw materials

Purchase of highest quality

replacement parts

Rapid and timely

product deliveries

to customers

Superior

personnel

training

Coordination among R&D,

product development and

marketing

Extensive

personal

relationships

with buyers

Strong Coordin-

ation among

functions in R&D,

Marketing and

Product

Development

Premium

Pricing

Value Creating Activities common

to a

Differentiation Business Level Strategy

Primary Activities

Su

pp

ort

Act

ivit

ies

30

The Product Manager’s Interactions

Product

Manager

Advertising

agencyManufacturing

and

distribution

Research

and

development

Legal

Fiscal

Market

research

Sales

Publicity

Purchasing

Packaging

Promotion

services

Media

Agency media dept.

Company media dept.

Media sales reps

Premium suppliers

Premium screening

Store testing

Sampling

Couponing

Designers

Researchers

Suppliers

Trade

Research

Suppliers

Suppliers

Trade

Suppliers

SIX CATEGORIES OF NEW PRODUCTS

New-to-the-world product. New products that create an entirely new market.

New-product line. New products that allow a company to enter an established market for the first time.

Additions to existing product lines. New products that supplement a company’s established product lines.

Improvements in/revisions to existing products. New products that provide improved performance or greater perceived value and replace existing products.

Repositioning. Existing products that are targeted to new markets or market segments.

Cost reductions. New products that provide similar performance at lower cost.

PROBLEMS IN NEW PRODUCT

DEVELOPMENT IN FUTURE Shortage of important new-product ideas in certain areas. Some

scientists think there are too few feasible new technologies with the investment potential that was provided by automobiles, television, computers, xerography, and wonder drugs in times past.

Fragmented markets. Keen competition is leading to increasingly fragmented markets. Companies have to aim new products at smaller market segments rather than the mass market, and this means lower sales and profits for each product.

Social and governmental constraints. New products have to satisfy public-interest criteria such as consumer safety and ecological compatibility. Government requirements have slowed down innovation in the drug industry and have complicated product-design and advertising decisions in such industries as industrial equipments, chemicals, automobiles, and toys.

Costliness of the new-product-development process. A company typically has to generate many new-product ideas in order to finish with a few good ones. Furthermore, the company has to face rising R&D, manufacturing, and marketing costs.

contd…

PROBLEMS IN NEW PRODUCT

DEVELOPMENT IN FUTURE

Capital shortage. Some companies with good ideas cannot raise the funds needed to research them. Venture capital has, in recent years, become much more cautious.

Shortened time span to completion. Many competitors are likely to get the same idea at the same time, and the victory often goes to the swiftest. Alert companies have to compress development time by using computer-aided design and manufacturing techniques, joint partners, early concept tests, and advanced marketing planning. Japanese companies see the challenge as “achieving better quality at a cheaper price at a faster speed than competitors.”

Shorter life spans for successful products. When a new product is successful, rivals are to quick to imitate it that the new product’s life cycle is considerably shortened. Thus IBM finds dozens of imitators offering IBM-compatible personal computers; and Apple finds foreign “knockoffs” of its computers being sold in the Far East.

Three Levels of Product

Core

benefit

or

service

Packaging

Brand Features

name

Quality Shape Styling

Brand Name Warranty

After

Sale

serviceDelivery

and

credit

InstallationAugmented

Product

The Secondary

level product

Tangible Product

Core

Product

Design Texture / color

PRODUCT HIERARCHY

Need family. The core need that underlies the product family. Example : security.

Product family All the product classes that can satisfy a core need with more or less effectiveness. Example : savings and income

Product class. A group of products within the product family that are recognized as having a certain functional coherence. Example : financial instruments.

Product line.. A group of products within a product class that are closely related because they function in a similar manner, or are sold to the same customer groups, or are marketed through the same types of outlets, or fall within given price ranges. Example : life insurance.

Product type. Those items within a product line that share one of several possible forms of the product. Example : term life.

Brand. The name associated with one or more items in the product line that is used to identify the source or character of the item(s). Example : Prudential.

Item. A distinct unit within a brand or product line that is distinguishable by size, price appearance, or some other attribute. The item is called a stockkeeping unit, or product variant. Example : Prudential renewable term insurance.