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									    Welcome to BA495
Business Strategy and Policy
       John A. Hengeveld
        Mary Kay Chess


        SCHOOL OF BUSINESS ADMINISTRATION
        BA 495– John A. Hengeveld Spring 2004
Agenda for Today – short day…
• Chapter 1-4 of Grant
• Discussion of Simulation/Q&A




              SCHOOL OF BUSINESS ADMINISTRATION
              BA 495– John A. Hengeveld Spring 2004
         Strategy as a Quest for Profit
• The stakeholder approach : The firm as a coalition of
  interest groups: pursuit of multiple objectives.

• The shareholder approach : The firm exists to maximize
  the wealth of its owners.

• Why is profit maximization a reasonable goal?
  (1) Boards of directors legally obliged to pursue shareholder
     interests.
  (2) To replace assets, firm must earn return on capital > cost of
      capital (difficult when competition intense).
  (3) To survive acquisition, firm must achieve stock-market
      value > break-up value.
                       SCHOOL OF BUSINESS ADMINISTRATION
                       BA 495– John A. Hengeveld Spring 2004
                 What is Profit?


• Profit maximization an ambiguous goal
  – Total profit vs. Rate of profit
  – Over what time period?

• Accounting profit versus Economic profit

• Economic value added as a measure of
  economic profit:
  – Post-tax operating profit less cost of capital
                  SCHOOL OF BUSINESS ADMINISTRATION
                  BA 495– John A. Hengeveld Spring 2004
         How U.S. Companies Perform Under
         Different Profitability Measures, 1998

                 Net Inc. ROS      ROE         EVA       Market     Return to
                                                      Value Added Shareholders
                 ($m)     (%)        (%)       ($m)        ($m)        (%)
General Motors   2,956    1.8       19.7       -5,525     -17,943     21.4
General Electric 6,573    9.4       22.2        4,370    285,320      45.3
Exxon            6,370    6.3       14.6       -2,262    114,774      22.4
Philip Morris    5,450   10.3       39.0        5,180      98,657     64.8
IBM              6,328    7.7       32.6        2,541      -5,878     77.5
Coca-Cola        3,533   18.8       42.0        2,194    157,356        1.3
Wal-Mart         4,430    3.2       21.0        1,159    159,444     107.7
Procter & Gamble 3,780   10.2       12.2       61,661 102,379         15.9
Microsoft        4,490   31.0       27.0        3,776    328,257      37.5
Hewlett-Packard 2,945     6.3       17.4         -593      45,464     10.7




                           SCHOOL OF BUSINESS ADMINISTRATION
                           BA 495– John A. Hengeveld Spring 2004
               Value Maximization
Maximizing the value of the firm:

Max. net present value of        free cash flows :



                               Ct
max. V =                    (1 + re)t
                       t



                             Where:
                             V    market value of the firm.
                             Ct free cash flow in time t
                             re+d weighted average cost
                                     of capital
                     SCHOOL OF BUSINESS ADMINISTRATION
                     BA 495– John A. Hengeveld Spring 2004
Applying Shareholder Value Maximization
           to Strategy Choice


• Identify strategy alternatives

• Estimate cash flows associated with cash strategy

• Estimate cost of capital for each strategy

• Select the strategy which generates the highest NPV


                    SCHOOL OF BUSINESS ADMINISTRATION
                    BA 495– John A. Hengeveld Spring 2004
   Valuing Companies and Business Units

If net case flow growing at constant rate (g)

                V = C1
                   (r-g)

With varying cash flows which can be forecasted
for 4 years:

  V = C0 +     C1 +     C2 +       C3 + VH
             (1 + r ) (1 + r )2 (1 + r )3 (1 + r )3
                      SCHOOL OF BUSINESS ADMINISTRATION
  where: VH is the horizon value of the firm after 4 years
                      BA 495– John A. Hengeveld Spring 2004
 Problems of DCF Approaches to Strategy
               Approach
• Several technical and theoretical problems (e.g. option
  values)
• Estimating cash flows beyond 2-3 year horizon is
  hazardous---especially in dynamic markets

HENCE:- Some simple guidelines for maximizing
  shareholder value ---
      • On existing assets-- maximize after-tax rate of
        return
      • On new investment-- seek after-tax rate of return
        > cost of capital OF BUSINESS ADMINISTRATION
                    SCHOOL
                    BA 495– John A. Hengeveld Spring 2004
 The six levers of financial and real options
          Financial options          Real options          Comments

                                   Present value of       The greater the NPV, the
            Stock price       =     returns to the         higher the option value
                                     investment

                                                          The higher the cost, the
           Exercise price     =     Investment cost        lower the option value

                                                              Higher volatility
OPTION      Uncertainty       =        Uncertainty        increases option values
VALUE
                                                             Time = opportunity to
           Time to expiry      = Duration of option         learn about outcomes

                                    Value lost over   Loss of cash flow to fully
             Dividends         =
                                   duration of option -committed competitors
                                                             lowers option value

              Risk-free                  Risk-free           Higher interest rate
                              =                            increases option value
            Interest rate              interest rate
                                                           by increasing value of
                  SCHOOL OF BUSINESS ADMINISTRATION         deferring investment
                  BA 495– John A. Hengeveld Spring 2004
 Disaggregating Return on Capital Employed


                                          COGS/Sales

                                         Depreciation/
             Return on
                                            Sales
               Sales
                                         SGA expense/
                                            Sales

ROCE                                Fixed Asset Turnover
                                         Sales/PPE
                                      Inventory Turnover
                                       Sales/Inventories
            Sales/Capital
                                      Creditor Turnover
             Employed
                                         Sales/Acct
                                            Turnover of other
                                             items of working
               SCHOOL OF BUSINESS ADMINISTRATION
               BA 495– John A. Hengeveld Spring 2004
                                                     capital
         Linking Value Drivers to Performance Targets
                                                                          Order Size
                                                                        Customer Mix
                                                     Sales
                                                                        Sales/Account
                                                    Targets
                                                                       Customer Churn
                                                                             Rate
                                                     cogs/
                                Margin                                   Deficit Rates
                                                     sales
                                                                       Cost per Delivery
                                                 Development           Maintenance cost
Shareholder                                                              New product
                                                  Cost/Sales
  value       ROCE                                                     development time
 creation                                                               Indirect/Direct
                                                                             Labor
                                                   Inventory              Customer
       Economic                                    Turnover               Complaints
         Profit                                                           Downtime
                                Capital            Capacity
                               Turnover            Utilization         Accounts Payable
                                                                            Time
                                                      Cash                Accounts
                                                    Turnover            Receivable Time


      CEO                     SCHOOL OF BUSINESS ADMINISTRATION
                                                  Functional
                     Corporate/DivisionalA. Hengeveld Spring 2004
                              BA 495– John                          Departments & Teams
                Balanced Scorecard for Mobil N. American Marketing & Refining
                                     Strategic Objectives                                            Strategic Measures
                 F
                 I
  Financially    N
                      F1 Return on Capital Employed                               *   ROCE
                      F2 Cash Flow                                                *   Cash Flow
                 A
  Strong              F3 Profitability                                            *   Net Margin
                 N
                      F4 Lowest Cost                                              *   Full cost per gallon delivered to customer
                 C
                      F5 Profitable Growth                                        *   Volume growth rate Vs. industry
                 I
                      F6 Manage risk                                              *   Risk index
                 A
                 L


                CO                                                                * Share of segment in key markets
 Delight the    UM    C1 Continually delight the targeted consumer
                                                                                  * Mystery shopper rating
 Consumer       SE
                TR                                                                * Dealer/distributor margin on gasoline
  Win-Win             C2 Improve dealer/distributor profitability
                                                                                  * Dealer/distributor survey
 Relationship   -

                                                                                  * Non-gasoline revenue and margin per square foot
                      I1 Marketing
                                                                                  * Dealer/distributor acceptance rate of new programs
                          1. Innovative products and services
  Safe and                                                                        * Dealer/distributor quality ratings
                          2. Dealer/distributor quality
  Reliable       I                                                                *   ROCE on refinery
                      I2 Manufacturing
                 N                                                                *   Total expenses (per gallon) Vs. competition
                          1. Lower manufacturing costs
                 T                                                                *   Profitability index
                          2. Improve hardware and performance
                                                                                  *   Yield index
                 E
  Competitive    R    I3 Supply, Trading, Logistics
                                                                                  Delivered cost per gallon .Vs. competitors
   Supplier               1. Reducing delivered cost
                 N                                                                * Trading margin
                          2. Trading organization
                 A                                                                * Inventory level compared to plan & to output rate
                          3. Inventory management
Good Neighbor    L
                                                                                  * Number of incidents
                      I4 Improve health, safety, and environmental performance
                                                                                  * Days away from work
  On Spec
                      I5 Quality
  On time                                                                         * Quality index


                L
                E &
   Motivated          L1 Organization Involvement                                 * Employee survey
                A G
     and
                R R
   Prepared           L2 Core competencies and skills                             * Strategic competing (?) availability
                N O
                I W                                   SCHOOL
                      L3 Access to strategic information       OF BUSINESS *ADMINISTRATION
                                                                             Strategic information availability
                N T                                    BA 495– John A. Hengeveld Spring 2004
                G H
           A Comprehensive Value Metrics Framework



 Shareholder              Intrinsic                  Financial               Value
   Value                    Value                    Indicators              Drivers
Measures:                                                                 Sources:
                        Measures:                Measures:
• Market value of the                                                     • Market share
                        • Discounted cash        • Return on Capital
  firm                                                                    • Scale economies
                          flows                  • Growth (of
•Market value added                                                       • Innovation
                        •Real option values        revenues & operating
 (MVA)                                                                    • Brands
                                                   profits
•Return to
                                                 •Economic profit (EVA)
  shareholders




                                 SCHOOL OF BUSINESS ADMINISTRATION
                                 BA 495– John A. Hengeveld Spring 2004
                  Values and Mission


The role of values :
       • Place constraints on the means by which the firm will
         pursue shareholder value max.
       • Increase the effectiveness with which the firm builds
         competitive advantage though reinforcing strategic intent
         and building internal consensus and commitment.

The role of mission:
       • Foundation for strategy         Statement of what the firm
         seeks to achieve and what it intends to become.


                       SCHOOL OF BUSINESS ADMINISTRATION
                       BA 495– John A. Hengeveld Spring 2004
                    Industry Structure
                        Perfect
                                         Oligopoly        Duopoly    Monopoly
                      Competition

 Concentration        Many Firms             Few           2 Firms   One Firm

  Entry/Exit              No                     Significant          High
   Barriers             Barriers                  Barriers           Barriers

    Product          Homogeneous
                                           Potential for Product Differentiation
 Differentiation       Product

                         Perfect
  Information                              Imperfect Availability of Information
                    Information Flow


                           SCHOOL OF BUSINESS ADMINISTRATION
Grant: Figure 3.2          BA 495– John A. Hengeveld Spring 2004
           Porter’s Five Forces of
           Competition Framework

                           SUPPLIERS
              Bargaining power of suppliers

                            INDUSTRY
                          COMPETITORS

POTENTIAL Threat of                                Threat of
                                                             SUBSTITUTES
ENTRANTS
            new            Rivalry among          substitutes
          entrants         existing firms


             Bargaining power of buyers
                             BUYERS
                      SCHOOL OF BUSINESS ADMINISTRATION
                      BA 495– John A. Hengeveld Spring 2004
            Threat of Substitutes


Extent of competitive pressure from producers of
substitutes depends upon:

      • Buyers’ propensity to substitute

      • The price-performance characteristics of
        substitutes.


                 SCHOOL OF BUSINESS ADMINISTRATION
                 BA 495– John A. Hengeveld Spring 2004
         The Threat of Entry

Entrants’ threat to industry profitability depends
upon the height of barriers to entry. The principal
sources of barriers to entry are:

    • Capital requirements
    • Economies of scale
    • Absolute cost advantage
    • Product differentiation
    • Access to channels of distribution
    • Legal and regulatory barriers
    • Retaliation
              SCHOOL OF BUSINESS ADMINISTRATION
              BA 495– John A. Hengeveld Spring 2004
           Bargaining Power of Buyers



Buyer’s price sensitivity                   Relative bargaining power

• Cost of purchases as %                   • Size and concentration of
  of buyer’s total costs.                    buyers relative to
• How differentiated is the                  sellers.
  purchased item?                          • Buyer’s information .
• How intense is                           • Ability to backward
  competition between                        integrate.
  buyers?
• How important is the
  item to quality of the                        Note: analysis of supplier
  buyers’ own output? SCHOOL OF BUSINESS ADMINISTRATION
                                                    power is symmetric
                         BA 495– John A. Hengeveld Spring 2004
     Rivalry Between Established
             Competitors

The extent to which industry profitability is depressed by
aggressive price competition depends upon:

    • Concentration (number and size distribution of firms)
    • Diversity of competitors (differences in goals, cost
      structure, etc.)
    • Product differentiation
    • Excess capacity and exit barriers
    • Cost conditions
        – Extent of scale economies
        – Ratio of fixed to variable costs
                  SCHOOL OF BUSINESS ADMINISTRATION
                  BA 495– John A. Hengeveld Spring 2004
        Figure 3.5. The Impact of Growth on Profitability


30




25




20




15




10




5




0

      Return on sales                     Return on                         Cash
-5
                                         investment                   flow/Investment
     Market
     Growth   Less than -5%   -5% to 0    0 to 5%     5% to 10%       Over 10%
                              SCHOOL OF BUSINESS ADMINISTRATION
                              BA 495– John A. Hengeveld Spring 2004
      Profitability and Market Growth

30




25




20




15




10




 5




 0
        R e t u r n o n s a le s                 R e t u r n o n in v e s t m e n t                           C a s h f lo w / I n v e s t m e n t
     Return on sales                         Return on investment                                        Cash flow/ Investment
-5

                                   < -5 %      -5 % to 0           0 to 5 %           5 % to 1 0 %   > 10%
                   Less than -5%         -5% to 0     0 to 5%     5% to 10%
                                        SCHOOL OF BUSINESS ADMINISTRATION                                    Over 10%
                                        BA 495– John A. Hengeveld Spring 2004
The Impact of Unionization on Profitability



                     Percentage of employees unionized
          None       1%-35%    35%-60% 60-75% >75%

ROI (%)   25             24            23                18    19


ROS (%)   10.8           9.0           9.0               7.9   7.9

                                             [ROI = Return on Investment
                                              ROS = Return on sales]

                 SCHOOL OF BUSINESS ADMINISTRATION
                 BA 495– John A. Hengeveld Spring 2004
     Applying Five - Forces Analysis

Forecasting Industry Profitability
      • Past profitability a poor indicator of future
        profitability.
      • If we can forecast changes in industry structure
        we can predict likely impact on competition
        and profitability.


Strategies to Improve Industry Profitability
       • What structural variables are depressing
         profitability
       • Which can be changed by individual or
         collective strategies? ADMINISTRATION
                     SCHOOL OF BUSINESS
                  BA 495– John A. Hengeveld Spring 2004
Drawing Industry Boundaries : Identifying
          the Relevant Market
 • What industry is BMW in:
    – World Auto industry
    – European Auto industry
    – World luxury car industry?


 • Key criterion: SUBSTITUTABILITY
    – On the demand side : are buyers willing to substitute between
      types of cars and across countries
    – On the supply side : are manufacturers able to switch
      production between types of cars and across countries


 • May need to analyze industry at different levels for different
   types of decision
                       SCHOOL OF BUSINESS ADMINISTRATION
                       BA 495– John A. Hengeveld Spring 2004
              The Value Net

                  CUSTOMERS




COMPETITORS          COMPANY                           COMPLEMENTORS




                    SUPPLIERS


               SCHOOL OF BUSINESS ADMINISTRATION
               BA 495– John A. Hengeveld Spring 2004
Five Forces or Six? Introducing Complements

                                                                   The suppliers of
                                                                 complements create
                                                                 value for the industry
                                                                   and can exercise
                              SUPPLIERS                            bargaining power
                  Bargaining power of suppliers


                               INDUSTRY
                             COMPETITORS                           COMPLEMENTS

POTENTIAL    Threat of
ENTRANTS                                              Threat of
            new entrants                                             SUBSTITUTES
                              Rivalry among
                              existing firms          substitutes



                  Bargaining power of buyers

                                BUYERS
                         SCHOOL OF BUSINESS ADMINISTRATION
                         BA 495– John A. Hengeveld Spring 2004
             Dynamic Competition
Porter framework assumes
(a) industry structure drives competitive behavior
(b) Industry structure is stable.

But---competition also changes industry structure
            Schumpeterian Competition: A “perennial
            gale of creative destruction” where innovation
              overthrows established market leaders

             Hypercompetition: “intense and rapid competitive
             moves….creating disequilibrium through
             continuously creating new competitive
             advantages and destroying, obsoleting or
             neutralizing opponents’ competitive advantages

                     SCHOOL OF BUSINESS ADMINISTRATION
                     BA 495– John A. Hengeveld Spring 2004
    Applying Five Forces to Emerging
          E-commerce Markets

• The more unstable is industry structure—the less
 helpful is analysis based upon industry structure.

• Taking account of time—willingness to endure losses
  today in order to reap profit tomorrow

• General structural features of digital, networked
  industries:
      Low entry barriers + Extreme scale economies +
      Network externalities = Winner-take-all markets
      = Intense competition
                  SCHOOL OF BUSINESS ADMINISTRATION
                  BA 495– John A. Hengeveld Spring 2004
  Identifying Key Success Factors

                  Pre-requisites for success
                Pre-requisites for success

     What do                                            How does the firm
 customers want?                                       survive competition


                                            Analysis of competition
Analysis of demand
                                            • What drives competition?
• Who are our                               • What drives main
                                            • What are the competition?
  customers?                                • What are the competition?
                                            dimensions of main
                                              dimensions of competition?
• What do they want?                        •How intense is competition?
                                            • How intense is competition?
                                            • How can we obtain a
                                            •How can we obtain a superior
                                              superior competitive
                                            competitive position? position?

                  KEY SUCCESS FACTORS
                   SCHOOL OF BUSINESS ADMINISTRATION
                   BA 495– John A. Hengeveld Spring 2004
        Identifying Key Success Factors
       Through Modeling Profitability: The
                 Airline Industry
Profitability    =        Yield          x Load factor - Unit Cost
   Income                  Revenue            RPMs                    Expenses
    ASMs
                 =          RPMs
                                         x    ASMs               -     ASMs

     • Strength of                 • Price                           • Wage rates.
     competition on routes.          competitiveness.                • Fuel
     • Responsiveness to cha-      • Efficiency of route               efficiency of
     anging market conditions        planning.                         planes.
                                   • Flexibility and                 • Employee
     • % business travelers.         responsiveness.                   productivity.
     • Achieving differentia-      • Customer loyalty.               • Load factors.
     tion advantage                • Meeting customer                • Administrative
                                     requirements.                     overhead.
                             SCHOOL OF BUSINESS ADMINISTRATION
                                                       RPM =
                        ASM = Available Seat Miles Spring 2004 Revenue Passenger Miles
                            BA 495– John A. Hengeveld
    Identifying Key Success Factors
  by Analyzing Profit Drivers: Retailing

                                                       Sales mix of products


                                               Avoiding markdowns through
            Return on Sales
                                                  tight inventory control

                                               Max. buying power to minimize
                                                 cost of goods purchased
ROCE
                                           Max. sales/sq. foot through:
                                           *location          *product mix
                                           *customer service *quality control

             Sales/Capital                  Max. inventory turnover through
              Employed                     electronic data interchange, close
                                           vendor relationships, fast delivery

                                                Minimize capital deployment
                                               through outsourcing & leasing
               SCHOOL OF BUSINESS ADMINISTRATION
               BA 495– John A. Hengeveld Spring 2004
       The Contribution of Game Theory
            to Competitive Analysis
Main value:
1. Framing strategic decisions as interactions between competitors
2. Predicting outcomes of compeittive situations involving a few
    players

Some key concepts:
1. Competition and Cooperation—Game theory can show conditions
   where cooperation more advantagfeeous than comeptition
2. Deterrence—changing the payoffs in the game in order to deter
   a comeptitor from certain actions
3. Commitment—irrevokable demployments of resoruces that
   give criditability to threats
4. Signaling—communication to influnece a comeptior’s decision

Problems of game theory:
Useful in explaining past competitive behavior—weak in prediucting
future competive behaoir.
What’s the problem? — Multitude of models, outcomes highly sensitive
                     SCHOOL OF BUSINESS ADMINISTRATION
 to small changes in assumptions
                     BA 495– John A. Hengeveld Spring 2004
     A Framework for Competitor Analysis

OBJECTIVES
What are competitor’s current goals?
Is performance meeting there goals?
How are its goals likely to change?

STRATEGY                                                PREDICTIONS
How is the firm competing?
                                                • What strategy changes
ASSUMPTIONS                                       will the competitor
What assumptions does the competitor              initiate?
hold about the industry and itself?
                                                • How will the competitor
                                                  respond to our strategic
RESOURCES & CAPABILITIES
What are the competitors’ key
                                                  initiatives?
strengths and weaknesses?
                         SCHOOL OF BUSINESS ADMINISTRATION
                         BA 495– John A. Hengeveld Spring 2004
                 Segmentation Analysis: The
                     Principal Stages

                                          Identify segmentation variables
• Identify key variables                  Reduce to 2 or 3 variables
  and categories.                         Identify discrete categories for
                                          each variable
• Construct a segmentation matrix

• Analyze segment attractiveness

• Identify KSFs in each segment                   Potential for economies
                                                  of scope across segments
• Analyze benefits of                             Similarity of KSFs
                                                  Product
  broad vs. narrow scope. SCHOOL OF BUSINESS ADMINISTRATIONdifferentiation benefits
                                                  of segment focus
                          BA 495– John A. Hengeveld Spring 2004
     The Basis for Segmentation: Customer and Product Characteristics
                                                                  *Size
                                                                  *Technical
                                        Industrial buyers          sophistication
                                                                  *OEM/replacement

                                                                 *Demographics
              Characteristics           Household buyers         *Lifestyle
               of the Buyers
                                                                 *Purchase occasion

                                                                  *Size
                                       Distribution channel       *Distributor/broker
                                                                  *Exclusive/
Opportunities for                                                  nonexclusive
 Differentiation                          Geographical            *General/special
                                            location               list
                                             *Physical size
                                             *Price level
                                             *Product features
              Characteristics                *Technology design
               of the Product                *Inputs used (e.g. raw materials)
                                             *Performance characteristics
                            SCHOOL OF BUSINESS ADMINISTRATION
                            BA 495– John A. Hengeveld Spring 2004
                                             *Pre-sales & post-sales services
       Segmenting the European Metal Can Industry


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                                                                                                              F ra
                               F ood   F ru i t J u i c e   P et f o o d   S o f t d r in k   B ee r   O il                    an y
                                                                                                                        rm
                                                                                                                  Ge                           .
                                                                                                                                        o rt
                                                                                                                      ai      n /P
                                                                                                                   Sp
    S te e l 3 - p i e c e                                                                                                         ly
                                                                                                                            It a

    S te e l 2 - p i e c e



A l u m i n u m 2 -p i e c e



     G e n e ra l c a n s



  C o m p o s ite ca n s


       A e ro s o l c a n s




                                                       SCHOOL OF BUSINESS ADMINISTRATION
                                                       BA 495– John A. Hengeveld Spring 2004
           Segmenting the World Automobile Market



                                        REGION
                   US& Canada   W.Europe    E.Europe     Asia    Lat America   Australia   Africa

Luxury Cars
Full-size sedans
Mid-size sedans
Small sedans
Station wagons
Passenger minivans
Sports cars
Sport-utility

Pick-up trucks

                                 SCHOOL OF BUSINESS ADMINISTRATION
                                 BA 495– John A. Hengeveld Spring 2004
         Vertical Segmentation & Industry Profit Pools
                    —The US Auto Industry
25
%

20


                                 Leasing                     Service & repair
15

                                                   Warranty           Aftermarket
          Auto                                                        parts
10                                                                          Auto
          manufacturing
                               Auto                  Auto                   rental
                New car                              insurance
                dealers        loans
 5                        Used car dealers




0                                               Gasoline
     0                                                                          100%
                      Share of industry revenue
                          SCHOOL OF BUSINESS ADMINISTRATION
                             BA 495– John A. Hengeveld Spring 2004
              Segmentation and Key Success Factors in the U.S. Bicycle Industry

               SEGMENT                                                  KEY SUCCESS FACTORS
                                                      * Low-costs through global sourcing of components
Low price bicycles sold primarily                       & low-wage assembly.
through department and discount                       * Supply contract with major retailer.
stores, mainly under the retailer’s
own brand (e.g. Sears’ “Free Spirit”);                Leading competitors: Taiwanese & Chinese assemblers,
                                                      some U.S manufacturers, e.g. Murray Ohio, Huffy


                                                      *Cost effieciency through large scale operation and
                                                         either low wages or automated manufacturing.
Medium-priced bicycles sold
                                                      *Reputation for quality (durability, reliability) through
primarily under manufacturer’s brand
                                                        effective marketing to dealers and/or consumers.
name and distributed mainly through
                                                      * International marketing & distribution.
specialist bicycles stores;
                                                      Leading competitors: Raleigh, Giant, Peugeot, Fuji



                                                      *Quality of components and assembly, Innovation in
                                                       design (e.g. minimizing weight and wind resistence).
High-priced bicycles for enthusiasts.                 *Reputation (e.g. through success in racing, through
                                                       effective brand management).
                                                      *Strong dealer relations.

Children’s bicycles (and tricycles) sold
primarily through toy retailers (discount
                                                       Similar to low-price bicycle segment.
                                         SCHOOL OF BUSINESS ADMINISTRATION
toy stores, department stores, and       BA 495– John A. Hengeveld Spring 2004
specialist toy stores).
          Strategic Group Analysis



A strategic group is a group of firms in an
  industry following the same or similar strategy.
         Identifying strategic groups:
            • Identify principal strategic
              variables which distinguish
              firms.
            • Position each firm in relation
              to these variables.
            • Identify clusters.
                 SCHOOL OF BUSINESS ADMINISTRATION
                 BA 495– John A. Hengeveld Spring 2004
         Strategic Groups in the World Automobile Industry



                                                                                       GLOBAL, BROAD-LINE
 Broad                                                                                       PRODUCERS
                                   REGIONALLY-FOCUSED                                   e.g., GM, Ford, Toyota,
                                         BROAD-LINE                                  Nissan, Honda, VW, Daimler
                                         PRODUCERS                                             Chrysler
                                    e.g. Fiat, PSA, Renault,

                                                                                      GLOBAL SUPPLIERS OF
                                                                                      NARROW MODEL RANGE
                  NATIONALLY FOCUSED,                                                 e.g., Volvo, Subaru, Isuzu,
                   INTERMEDIATE LINE                                                    Suzuki, Saab, Hyundai
PRODUCT               PRODUCERS
 RANGE           e.g. Tofas, Kia, Proton, Maruti
                                                                          LUXURY CAR
                                                                        MANUFACTURERS
                                                                     e.g., Jaguar, Rolls Royce,
                NATIONALLY- FOCUSED,                                           BMW
                   SMALL, SPECIALIST
                PRODUCERS e.g., Bristol
                 (U.K.), Classic Roadsters
                   (U.S.), Morgan (U.K.)                        PERFORMANCE
                                                               CAR PRODUCERS
                                                                 e.g., Porsche,
Narrow                                                           Maserati, Lotus


                                       SCHOOL OF BUSINESS ADMINISTRATION
               National                      GEOGRAPHICAL SCOPE
                                       BA 495– John A. Hengeveld Spring 2004
                                                                                                      Global
                      Strategic Groups Within the World Petroleum Industry

                                                                   INTERNATIONAL
                                                                                                INTEGRATED OIL
                                                             Premier UPSTREAM
                                                                                                MAJORS
                       2.0



                                                             Oil     COMPANIES
                                                                                                INTERNATIONAL
                                                                    Enterprise
                                      Kuwait Petroleum                                          UPSTREAM,
                                                                                                REGIONALLY
                                 PDVSA                          INTEGRATED                      FOCUSED
                       1.5




                                         NATIONAL
                                                                DOMESTIC                        DOWNSTREAM
   Vertical Balance




                                  Iran PRODUCTION               OIL COMPANIES
                                  NOC    COMPANIES

                                     Statoil                                            BP-Amoco      Exxon
                       1.0




                                                                                         INTEGRATED -Mobil
                                             Pemex     Petronas             Chevron
                                                                                       INTERNATIONAL Royal Dutch
                                                        YPF        Phillips                MAJORS      -Shell Gp.
                             Indian Oil                            Phillips
                                          Petrobras                  ENI            Texaco
                       0.5




                                                                Elf-Fina-Total
                                                                     ENI
                                                                    Repsol
                                                                    Repsol                      INTERNATIONAL
                                 Nippon                                                         DOWNSTREAM
                                     Tosco                                     E.g. Neste
                                                                                                OIL COMPANIES
                       0




                             0            10          20      30        40       50        60        70          80
NATIONALLY-FOCUSED
                                                                   Geographical Scope
DOWNSTREAM COMPANIES
                                                       SCHOOL OF BUSINESS ADMINISTRATION
                                                       BA 495– John A. Hengeveld Spring 2004
SCHOOL OF BUSINESS ADMINISTRATION
BA 495– John A. Hengeveld Spring 2004

								
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