Competition and Business Strategy: The Quest for Competitive Advantage

Presentation by C. Nagapavan nagapavanc@gmail.com

Outline
Identifying Competition Business Environment & Impact on Competition What is Strategy? The Purpose of strategy Gaining Competitive Advantage Competitive Forces Generic Strategies for Competitive Advantage Analyzing Value from Business Activities Value Chain Fatal Flaws in Company Thinking on Competitive Advantage

Competition
The effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms.

Levels of Competition
Direct competition Substitute Competition Similar value Budget competition Money spent
Similar products Two Wheelers Price of Petrol and Impact on Demand for two wheelers / diesel cars

Onion Prices Vs Entertainment

Business Environment & Impact on Competition

Singur & Tata Motors, Growth of Telecom companies, 2G, POSCO Floods, Rainfall, Forests, Mines Cloud Computing, ATMs, Mobile Banking
Natural Political

Environmental Clearance and Lavasa / Adarsh Projects

Legal and Regulatory

Company

Availability of Capital for business

Economic

Technology

Working wife; Travelling Women

Social & Cultural

What is Strategy?
A strategy is a commitment to undertake one set of actions rather than another Managements game plan for growing the business A companys strategy consists of the competitive moves and business approaches that managers employ to attract and please customers, compete successfully, grow the business, conduct operations and achieve targeted objectives

The Purpose of Strategy Gaining Competitive Advantage

Business strategy is about taking defensive or offensive action to create a defendable position in the industry, in order to cope successfully with competitive forces and generate a superior return on investment.

The Purpose of Strategy Gaining Competitive Advantage

Business strategy is about taking defensive or offensive action to create a defendable position in the industry, in order to cope successfully with competitive forces and generate a superior return on investment.

Competitive Forces
New Entrants

Suppliers

Existing Firms in the Industry

Buyers

Substitute Products

Porters Model

Industry

Analysis:

Analyzing the Business Environment

Five

Forces

Threat of new entrants

New entrants to an industry
Brings new capacity Capture market share from existing players More competition Price wars Falling returns - decline in profitability Acquisition - the preferred way to enter into a new market

Barriers to entry into a new market

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Analyzing the Business Environment

Five Forces Model - Threat of New Entrants

Barriers of entry into new market
Economies of scale Product differentiation Capital requirements Cost disadvantages independent of size Access to distribution channels Government policy

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Analyzing the Business Environment

Five Forces Model

Intensity of competitors rivalry among existing
Lead to Price wars, Advertising battles, Launches of new products and increased services and Warranties. Intensity of rivalry depends on
Number of competitors Slowdown in industrial growth Lack of differentiation among products Absence of switching cost Under-pricing to avoid spoilage of goods Price-cut to disrupt the supply-demand balance

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Analyzing the Business Environment

Five Forces Model

The Bargaining Power of Buyers
Buyers are powerful when
The suppliers are many and the buyers are a few and large The buyers purchase in large quantities The suppliers industry depends on the buyers for a large percentage of its total orders The buyers can switch orders between supply companies at a low cost Its is economically feasible for the buyers to purchase the input from several companies at a time The buyers can use the threat to provide for their own needs through vertical integration as a device for forcing down price

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Analyzing the Business Environment

Five Forces Model

The Bargaining Power of Suppliers
Suppliers are powerful when
The product as few substitute and is important to the purchasing company No single industry is a major customer Products are too much differentiated and switching cost is higher for a buyer Supplier can use the threat of vertically integrating forward into the industry and competing directly with the buying company Buyers cannot use the threat of vertically integrating backward and supplying their own needs

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Analyzing the Business Environment

Five Forces Model

Threat of Substitute Products
Substitute products can match the needs of the customer in the same way as the original product A close substitute is a potential threat to the companys product It limits the price charged by a company

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Analyzing the Business Environment

Internal Analysis of the Firm

Analyzing Departments and Functions
Production/Operations/Technical Strategies for Small Business Unit Strategies for Large Business Unit Finance and Accounting Marketing Research and Development

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Analyzing the Business Environment

Learning Curve
A graphical representation of the "average" rate of learning for an activity or tool It can represent at a glance the initial difficulty of learning something and, to an extent, how much there is to learn after initial familiarity More times a task has been performed, the less time will be required on each subsequent iteration It encompasses only time factor

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Analyzing the Business Environment

Learning Curve

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Analyzing the Business Environment

Experience Curve
More often a task is performed the lower will be the cost of doing it, the task can be the production of any good or service Each time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant and predictable percentage Under ideal conditions, the profitability of each firm should be a function of its accumulated experience in producing a particular product Experience effect = Volume effect + Learning effect Volume effect
When a firm increases production, its fixed costs do not change but an increase in production brings down the cost per

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Analyzing the Business Environment

Experience Curve

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Analyzing the Business Environment

Experience Curve Experience effect depends

other than time factor

on following factors
methods

Labor efficiency Standardization, specialization, and improvements Technology-driven learning Better use of equipment Changes in the resource mix Product redesign Value chain effects Network-building and use-cost reductions Shared experience effects

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Analyzing the Business Environment

Vulnerability Analysis A process that defines, identifies,

and classifies the security holes (vulnerabilities) in a system In addition, vulnerability analysis can forecast the effectiveness of proposed counter measures and evaluate their actual effectiveness after they are put into use It assumes that every business is based on some Pillars
Needs or Use function Uses, Habits, Values Technology stability Inputs and resources Niche or market segment Existent constraints, sanctions, incentives Complementary products and services Alternative products or services cost stability - are pillars

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Vulnerability Analysis

Analyzing the Business Environment

Identify pillars and take action against the events which might destroy the pillars
Impact of Threat High

Defenseless
Vulnerable
Low

Endangered
Prepared
High

Low

Companys Ability to React

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Analyzing the Business Environment

Vulnerability Analysis
Vulnerability analysis consists of several steps
Identification of business pillars Identification of events which may destroy these pillars Analyzing the probability of the occurrence of the event and its impact Identification of the actions to be taken when the event occurs

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Analyzing the Business Environment

Strategic Analysis
Analysis of strategies can be done at
Company (Corporate) Level Product Level Industry (Business) Level

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Analyzing the Business Environment

Strategic Analysis
Tools for strategic analysis
Company Capability Profile SWOT Analysis Environmental Threat and Opportunity Profile (ETOP) Profit Impact of Market Strategies (PIMS) Vulnerability Analysis BCG Growth-Share Matrix GE Nine Cell Planning Grid

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Analyzing the Business Environment

BCG Growth-Share Matrix

Objectives
Analyze generators and optimum users of corporate users Allocate resources between competing SBUs

Criterion
The growth rate of the market The relative market share of the SBUs

Categories of SBUs
Cash Cows Stars Question Mark Dogs

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Analyzing the Business Environment

BCG Growth-Share Matrix

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Analyzing the Business Environment

BCG Growth-Share Matrix

Cash Cows
Large market share in a mature and slow-growing industry. A strong business position and negligible investment requirements The returns from these businesses are often more than their investment requirements Net cash generators Organizations often tap their cash cows in order to draw out resources required elsewhere in the organization

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Analyzing the Business Environment

BCG Growth-Share Matrix

Stars
Large market share in fast growing markets or industries Firms need to invest in stars as the industry is still emerging and the market share is also growing Stars often generate as much revenues as they use But once the industry reaches the stage of maturity, the stars hardly need any investment

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Analyzing the Business Environment

BCG Growth-Share Matrix

Question Marks ?
Low market share and high growth rate Demand significant investment because their cash needs are high the norm in a growing industry These organizations have to make a huge investment in advertising and promotion With the market growing rapidly, it is easier to gain a market share Only a few question marks move to stars

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Analyzing the Business Environment

BCG Growth-Share Matrix

Dogs
A low market share in an intensely competitive, mature industry characterized by low profits. Not much need of an investment, but it ties up capital that could be invested in industries with better returns Concentrate on recovering as much as possible from these units in terms of returns on investment and often undertake ruthless cost cutting Unless there is a larger purpose in keeping such units, an organization should divest itself of dogs at the earliest

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Analyzing the Business Environment

GE Nine-Cell Planning Grid The idea behind the matrix is to

evaluate businesses along two composite dimensions: industry attractiveness and industry strength To overcome the limitations of BCG Matrix, this grid deploys multiple factors Each SBU can be portrayed as a circle plotted on the matrix, with the information conveyed as follows
Market size is represented by the size of the circle Market share is shown by using the circle as a pie chart The expected future position of the circles is indicated by an arrow

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Analyzing the Business Environment

GE Nine-Cell Planning Grid

The industry attractiveness is based on following factors
Market growth, Fluctuations in demand Market size Industry potential Competitive environment in the industry Opportunities in the world market, Macro environmental factors

The industry strength is based on following factors

Relative market share Price Competitiveness Product quality Customer and market knowledge Sales effectiveness, and Geographic advantages

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Analyzing the Business Environment

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Analyzing the Business Environment

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Analyzing the Business Environment

GE Nine-Cell Planning Grid

Both axes are divided into three segments, yielding nine cells. The nine cells are grouped into three zones The Green Zone
The Green Zone consists of the three cells in the upper left corner If the SBU falls in this zone, its in a favorable position with relatively attractive growth opportunities This position indicates a "green light" to invest and grow this SBU

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Analyzing the Business Environment

GE Nine-Cell Planning Grid

The Grey/Yellow Zone
The Grey Zone consists of the three diagonal cells from the lower left to the upper right A position in the yellow zone is viewed as having medium attractiveness Management must therefore exercise caution when making additional investments in this SBU The suggested strategy is to protect or allocate resources on a selective basis rather than growing or reducing share. The Red Zone consists of the three cells in the lower right corner A harvest strategy should be used in the two cells just below the threecell diagonal These SBUs shouldnt receive substantial new resources The SBUs in the lower right cell shouldnt receive any resources and should probably be divested or eliminated from a firms portfolio

The Red Zone

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Analyzing the Business Environment

Arthur D Little Life Cycle Approach

Arthur D. Little (ADL), a consulting firm, methodology draws directly upon the concept of industry life cycles to develop a structural approach The approach uses the dimensions of environmental assessment and business strength assessment The environmental measure is an identification of the industry's life cycle The business strengths measure is a categorization of the corporation's SBU's into one of six competitive positions Dominant, strong, favorable, tenable, weak, and nonviable. This yields a 6 (competitive positions) by 4 (life cycle stages) matrix

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Analyzing the Business Environment

Arthur D Little Life Cycle Approach

Step 1. Identify each line of business. In the ADL approach, the line of business or SBU is not especially defined by a product or organizational unit. The strategist must identify discrete businesses by finding commonalties among products and business lines using the following criteria as guidelines Common rivals Customers Substitutability Prices Quality/Style Divestment or liquidation

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Analyzing the Business Environment

Arthur D Little Life Cycle Approach

Step 2. For each business, assess the life cycle stage. This assessment is made on the basis of business market share, investment, and profitability or cash flow. The three matrices - Market Share, Investment Required, and Profitability and Cash Flow - are used as guides in this process. Step 3. Identify the competitive position of a firm. This is a subjective assessment, based on the following criteria Dominant: These are rare. Dominance often results from a near monopoly or protected leadership Strong: A strong SBU can usually follow a strategy without consideration of rival counter moves Favorable: The industry is fragmented. There is no clear leader among stronger rivals Tenable: Typically the SBU has a niche, either geographical or defined by the product Weak: Typically too small to be profitable or survive over the long term. May be a large firm, but suffers from prior mistakes or a critical weakness

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Analyzing the Business Environment

Arthur D Little Life Cycle Step 4. Assess what is the natural strategy for the SBU, based on its life cycle stage Approach and competitive position. This is determined by the table below

Natural Development strategies are appropriate when the SBU is in a mature industry and is competitive. The SBU deserves strong support. Selective Development refers to strategies that concentrate on industries that are attractive or on SBU's that have competitive competencies. Prove Viability is transitional strategy that cannot be sustained. The situation must be changed. Out is a strategy for withdrawal.

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Analyzing the Business Environment

Arthur D Little Life Cycle Approach

Step 5. Assign a strategic thrust to the natural strategy This is a set of specific actions that support the general direction in Step 4 For example, within a Natural Development strategy, a SBU can pursue

Start-Up: the embryonic stage for business with strong competitive potential Growth with Industry: a strong or dominant business in a mature industry seeks to maintain position Gain Position Gradually: to attain a stronger position, market share is increased incrementally Defend: in early stages of industry maturity, a strong or dominant business needs to combat rivals Harvest: in the aging stage, the resources of the business are reallocated to strong SBU's and exit is planned

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Arthur D Little Life Cycle Approach

Backward Integration Develop Business Overseas Develop Overseas Facilities Distribution Rationalization Excess Capacity Export/Same Product Forward Integration Hesitation Initial Market Development Licensing abroad Complete Rationalism Market Penetration Market Rationalization Method/Function Efficiency New Products/New Markets New Products/Same Market Production Rationalism Product Line Rationalization

Analyzing the Business Environment

Step 6. Using the strategic thrust identified in Step 5, one of twenty four generic strategies is selected
Pure Survival Same Products/New Market Same Products/Same Market Technological Efficiency Traditional Cost Cutting Unit Abandonment

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Analyzing the Business Environment

SWOT Analysis
The process of analyzing the company and the environment in which it is operating SWOT stands for strengths, weaknesses, opportunities and threats. Internal Environment

Strengths Infrastructure, Employees, Marketing team, Latest product innovation, International quality standards, or even its closeness to the market The strength can be anything that adds value to its business Weaknesses Incompetent management, Untrained employees, Unevenly trained sales force, Poor marketing strategies, Low quality products, or Lack of proper financial capabilities

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Analyzing the Business Environment

SWOT Analysis
External Environment
Opportunity
A new potential market with ample scope for growth, A collaborative advantage (advantages through strategic alliances and partnerships), or opportunities to fulfill the demand of a latent market Any such activity in the environment that helps the organization to grow, is an opportunity for it

Threats
A new competitor in the market, Price reduction in the competitors product or A new product introduced in the market that will eat into the companys market share

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Analyzing the Business Environment

Profit Impact of Market Strategies Yields solid evidence in support of both common sense and counter(PIMS) intuitive principles for gaining and sustaining competitive
advantage PIMS seeks to address three basic questions
What is the typical profit rate for each type of business? Given current strategies in a company, what are the future operating results likely to be? What strategies are likely to help improve future operating results?

The original PIMS data survey led the PIMS project to identify 37 variables which account for the majority of business success. The most important variable are
A strong market position High quality of product Lower costs Lower requirement for capital investment

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Analyzing the Business Environment

Product Market Matrix of Ansoff Planning New Businesses and Downsizing Existing
Businesses A tremendous gap between actual and projected sales The firm then has to devise strategies to fill this gap or rather increase the sales Intensive growth
Integrative growth

The organization can focus on identifying opportunities to increase the market share of existing businesses it can focus on identifying business opportunities in the related business areas it can identify opportunities that have a vast potential but are unrelated to the present business activity

Diversification growth

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Analyzing the Business Environment

Product Market Matrix of Ansoff

Intensive Growth

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Analyzing the Business Environment

Product Market Matrix of Ansoff

Integrative growth
Forward integration
If Britannia start its own distribution network

Backward integration
It produce its own raw materials by starting a dairy farm for milk and producing wheat etc.

Horizontal integration
It may acquire the business of one of its competitors

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Analyzing the Business Environment

Product Market Matrix of Ansoff

Diversification Growth Concentric Diversification Strategy
When there are vast growth opportunities in a specific industry and the company has the necessary resources to tap that potential A company tries to diversify by serving a new customer base with products that are related to the existing product category If Britannia is trying to diversify into producing wheat flour If the company tries to attract current customers with new products even if the company has to acquire a new manufacturing capability If Britannia wants to enter the ice-cream industry The company tries to perform unrelated business activities If Britannia ventures into the manufacturing of bicycles or wristwatches

Horizontal Diversification Strategy

Conglomerate Diversification Strategy

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Analyzing the Business Environment

Product Market Matrix of Ansoff

Failure of Diversification
Diversification in terms of related areas of business, which are normally saturated and do not offer any business potential Everyone in the industry take advantage of a potential opportunity - Reduction of market share of each player in the industry

At the same time, diversification is imminent for companies trying to overcome saturated markets and product obsolescence Therefore, companies should devise customized strategies for diversification

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Analyzing the Business Environment

Product Market Matrix of Ansoff

Downsizing Older Businesses
Removing old and sick businesses that are not adding any value to the company. It clears the way for the management to allocate the resources employed in these older businesses to new and lucrative business activities. Layoffs
Laying off the employees - cost cutting measure Repeated layoffs are an indication of poor management of the organization Inefficiency in the form of decreased loyalty, insecurity and decline in employee morale, decreased employee motivation

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Analyzing the Business Environment

Formulating Long-term Strategies

Concentration Market Development Product Development Horizontal Integration Vertical Integration Tapered Integration Quasi Integration Diversification

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Analyzing the Business Environment

Behavioral Considerations Strategic Choice

Role of Past Strategy Attitude Towards Risk Competitive Reaction Degree of Firms Dependence Values and Preferences

Affecting

Approaches for Competitive Advantage

1. Cost Leadership 2. Differentiation 3. Focus Termed as Generic Strategies by Michael Porter

Adaptation of Porters Generic Strategy

Broad Target Market

Overall Low-Cost Provider Strategy

Broad Differentiation Strategy

Best-Cost Provider Strategy

Narrow Target Market

Focused Low-Cost Strategy

Focused Differentiation Strategy

Cost

Differentiation

Cost Leadership
Become a low cost producer in its industry Assumed that cost leader has achieved parity or at least proximity in the bases of differentiation Economies of scale Not more than one company in the industry can aspire this approach to competitive advantage Eg: Maruti 800, Bajaj CT 100, Tata Nano, Reliance CDMA, Satyam, etc

Differentiation
A firm seeks to be unique in its industry along some dimensions that are valued by the buyers Cannot ignore costs completely. Areas of Differentiation
Product (Eg: Harley Davidson) Distribution Channels (ATM, Online Banking) Marketing ( Service (IBM, Image (What is the best Bank, TV, Bike?)

Focus
Application of cost leadership or focus in a specific segment is known as Focus

Characteristics of Competitive Advantage

Should be clear to the customers Should be acceptable to customers Should be unique to the company

Should provide distinct advantage to customers

Analyzing Value from Business Activities Value Chain

Infrastructure Human Resource Management

Support Activities

Technology development Procurement

Primary Activities

Marketing

Inbound
logistics Operations

Outbound
logistics

& Sales

Service

Infrastructure

Support Activities

Human Resource Management Technology development Procurement

Primary Activities

Marketing Inbound logistics Outbound

Operations

& Sales

logistics

Service

Fatal Flaws in Company Thinking on Competitive Advantage

They don't have a competitive advantage but think they do They have a competitive advantage but don't know what it is - so they lower prices instead They know what their competitive advantage is but neglect to tell clients about it They mistake "strengths" for competitive advantages They don't concentrate on competitive advantages when making strategic and operational decisions.

ANY QUESTIONS?