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Competitive Industry Analysis

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Competitive Industry Analysis Powered By Docstoc
					Competitive Intelligence
 Vertical Boundaries of the Firm:
              Make or Buy and Outsourcing



                    Diversification
Horizontal and Vertical
Boundaries
   Reduce costs
      • Profitability
      • Aggressive pricing
   Growth
      • Market share
      • Shareholders
      •…
Let’s Talk Strategy
 Strategic Thrusts
 Generic Strategies
Business Strategic Thrust =
f (Attractiveness + Position)
Business Strategic Thrust =
f (Attractiveness + Position)
      Protect

      Build

                Selective


                       Earnings

                                  Harvest


                                            Divest
Growth Strategies
(Functions, Segments, Added Value)
Value Added:
What are you offering?

                         VALUE
                         Price,
                         Service,
                         Quality,
                         Reliability,
                         Safety,
                         Prestige,
                         No problems
                         Convenience,
                         And More
Fallacies about make or buy
   Make asset as a source of competitive advantage
       Is it cheaper? Agency cost?
   Buy to avoid the costs of making
       Does not eliminate costs
   Make to avoid paying profit margins to vendors
       ROI? Can you do it cheaper?
   Make (downstream) to tie up distribution
    channel
       Pepsi example. Refusal to sell. Anti-trust regulations
   Make to avoid high prices
       See Rustic Homes Example. What about hedging?
Avoiding higher prices?
Rustic Log Homes (5.2)
                                          Price of Lumber /u
                 V. Integrated       $3,000       $5,000         $7,000
Revenue            $1,000,000    $1,000,000   $1,000,000    $1,000,000
Costs
    Lumber          *$150,000     $300,000      $500,000       $700,000
 Assembly            $400,000     $400,000      $400,000       $400,000
         Total       $550,000     $700,000      $900,000    $1,000,000
Financing          **$350,000            $0            $0           $0
Profit               $100,000     $300,000      $100,000    ($100,000)


Sales 100u @ $10,000              * Effective cost of lumber = $1,500/u
                                                  **Financing= $3,500/u
Vertical Functions
   Backward or Upstream integration
Reasons to buy:
Economies of Scale




                     MES
Backward Integration (Plus)
   Generates cost savings only if volume needed is big
    enough to capture efficiencies of suppliers

   Potential to reduce costs exists when
      Suppliers have sizable profit margins
      Item supplied is a major cost component
      Resource requirements are easily met


   Can produce a differentiation-based competitive advantage
    when it results in a better quality part or customer value

   Reduces risk of depending on suppliers of crucial raw
    materials / parts / components
Vertical Functions
   Forward or Downstream integration
Distribution Channels and
Channel Captains
 M    A       D   W       R   C


 M        W           R       C


 M        W           R       C


 M                    R       C


 M                            C
Increased Sales Value (?)
 Manufacturing price        $0.48
 Wholesale Price (MU 20%)   $0.60
 Retail Price (MU 40%)      $1.00
Forward Integration (Plus)
   Undependable distribution channels undermine steady
    production operations

   May be cheaper (?) than going through independent
    distributors

   May help achieve stronger product differentiation, allowing
    escape from price competition

   May provide better access to users (Cultivation/Loyalty,
    Cross-sell, Up-sell)

   Logistics Technology
Vertical Integration (Minus)
   Boosts resource requirements
   Locks firm deeper into same industry
   Fixed sources of supply and less flexibility in
    accommodating buyer demands for product variety
   Poses problems of balancing capacity at each stage of
    value chain
   May require radically different skills / capabilities
   Reduces manufacturing flexibility, lengthening design time
    and ability to introduce new products
   Internal inefficacity (agency costs) > Transaction costs
Make-or-Buy Continuum
Value Chain in the Personal
Computer Industry

                 Intermediate
 Raw materials                    Assembly     Distribution    End user
                 manufacturer


Examples:        Examples:      Examples:     Examples:
Dow Chemical     Intel          Apple         Apple
Union Carbide    Seagate        Compaq        Dell
Kyocera          Micron         Dell          Computer World
                                Best Buy(?)   Office Max
                                              Best Buy
                                              Staples
Japanese Keiretsu
Korean Chaebol
                                                 Mitsubishi
                                                 Sumitomo
                         Banks
                                                 Mitsui
                                                 Samsung
                                                 Hyundai
                                                 LG



    Trading Companies
                                 Manufacturers
     (Exp, Imp, Dist.)
 Mitsubishi
Name         Bank                            Major group companies
                                             Financial: Mitsubishi Corporation, Tokio
                                             Marine and Fire Insurance, Mitsubishi
                                             Estate
                                             Construction: Pacific Consultants
                                             International
                                             Food: Kirin Brewery
                                             Electronics: Mitsubishi Electric,
                                             Mitsubishi Precision
             Mitsubishi Bank (until 1996)    Cars: Mitsubishi Motors, Mitsubishi
             Bank of Tokyo-Mitsubishi (1996– Heavy Industries, Mitsubishi Fuso
             2005)                           Petroleum: Nippon Oil, Mitsubishi Oil,
Mitsubishi
             Bank of Tokyo-Mitsubishi UFJ    Mitsubishi Nuclear Fuel
             (2006– )                        Precision Machinery: Nikon
             Mitsubishi Trust and Banking    Chemicals: Mitsubishi Chemical,
                                             Mitsubishi Gas Chemical, Mitsubishi
                                             Rayon Co., Ltd., Mitsubishi Materials
                                             Corp., Mitsubishi Plastics Industries,
                                             Asahi Glass, Nippon Synthetic Chemical
                                             Industries (Nippon Gosei)
                                             Paper: Mitsubishi Paper Mills Ltd.
                                             Iron and Steel: Mitsubishi Steel
                                             Shipping: Nippon Yusen
  Sumitomo

Sumitomo Bank (until 2001)
Sumitomo Mitsui Bank (2001– ), Sumitomo Trust and
Banking Food: Asahi Breweries
Rail: Hanshin Railway, Keihan Railway, Nankai Railway
Cars: Mazda
Electronics: NEC
Iron and Steel: Sumitomo Metals
Financial: Sumitomo Real Estate
Infrastructure: Nippon Koei
DIVERSIFICATION
General Electric (GE)
General Electric (GE)




                   ?
   Multi Business Corporation
   or Business Portfolio
Priorities                  Feedback                    Corporate Level
                                                                                                          Allocation


                SBU 1                                       SBU 2                                         SBU 3




    Market 1a           Market 1b           Market 2a                     Market 2b           Market 3a           Market 3b/




                Brand               Brand                   Brand                     Brand               Brand                Brand




                Brand               Brand                   Brand                     Brand               Brand                Brand
  BCG Portfolio Matrix

                  High
                            STAR                        ?
Market Growth
(Requires Cash)


                          CASH COW                 DOG



                  Low
                         High                               Low
                                Relative Market Share
                                  (Generate Cash)
Specialization
/Diversification
   Specialization (i.e. GM, IBM)
     Volume, Differentiation
     Geographic, Marketing



   Diversification (i.e. GE)
       Vertical (Benetton, Michelin),
        Horizontal, Geographic (Perrier)
Measuring “Relatedness”
   Economies of scale/scope in multi
    business  “relatedness” (Richard
    Rumelt)

   Sharing of technology, production
    and/or distribution channels
Classification by
Relatedness
Entropy
 Physics (thermo-dynamics): lost of
  energy, system disorder
 Communications: message
  uncertainty (noise)
 Diversification
     Based on 4-digit SIC code
     1 line (ln 1) = 0

     20 lines (ln 20) = 3
Fiat
   Automobiles (Fiat, Alpha Romeo, Lancia, Abarth,
    Maserati and Ferrari)
   Agricultural and Construction (CNH, Case New
    Holland, Kobelco, Stevr)
   Trucks and Commercial Vehicles (Iveco, Astra,
    Magirus)
   Components and Productions Systems( FPT
    Powertrain, Magneti, Marelli, Teksid, Comau
   Publishing and Communications (Itedi, La
    Stampa, Publikompas)
Labatt Breweries

   Bronfman                Bronfman
       Brascan                 Brascan
        • Labatt Group           • Labatt Group
           • Brewery                • Brewery
           • Cereal                 • Sports
           • Milk                   • Entertainment

                            Ambev
                                AB_Inbev
                                  • Labatt Breweries
Reasons for Diversification
 Economies of scale, scope, synergies
 Financial reasons
 Managerial reasons
Conglomerate Growth After
WW II
   From 1949 to 1969, % of single &
    dominant firms dropped from 70
    percent to 36%

   % conglomerates increased from 3.4
    to 19.4%
Entropy Decline in the
1980s
   1980s, average entropy of Fortune 500
    dropped from 1.0 (2.7 lines) to 0.67
    (1.95 lines)
   % of U.S. businesses in single business
    segments increased from 36.2 in 1978 to
    63.9% in 1989
   Firms have become more focused in their
    core businesses
Merger Waves in U.S.
History
 1st wave of monopolies like standard
  oil and U.S. Steel (1880s to early
  1900s)
 2nd wave of the 1920s that created
  oligopolies and vertically integrated
  firms
 3rd wave of the 1960s that created
  diversified conglomerates
Merger Waves in U.S.
History
 4th wave of the 1980s when
  undervalued firms were bought up
  (hostile and LBO)
 5th wave, mid 1990s, in which firms
  increased market share and
  increased global presence by
  merging with “related” businesses
Wrap up

   This week
       Vertical integration
         • Forward
         • Backward
         • Alternatives
       Diversification


   Next week
       Competitive industry analysis process
        (Chapter 12)

				
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