Competitive Intelligence

1. Competitive Intelligence Vertical Boundaries of the Firm: Make or Buy and Outsourcing Diversification

2. Horizontal and Vertical Boundary Strategies • Reduce costs • Profitability • Aggressive pricing • Growth • Market share • Shareholders • …

3. Let’s Talk Strategy • Strategic Thrusts • Generic Strategies

4. Business Strategic Thrust =f (Attractiveness + Position)

5. Business Strategic Thrust =f (Attractiveness + Position) Protect Build Selective Earnings Harvest Divest

6. Growth Strategies(Functions, Segments, Added Value)

8. Value Added:What are you offering? VALUE Price, Service, Quality, Reliability, Safety, Prestige, No problems Convenience, And More

9. Make-or-Buy Continuum(Upstream or Downstream)

10. Using the market • Benefits • Economies of scales • Market efficiency and innovations • Costs • Coordination of flows • Information leaks • Transaction costs

11. 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?

12. Avoiding higher prices (3.2)(Fallacy 5)

13. What if? Avoiding higher prices

14. Vertical Functions • Backward or Upstream integration

15. 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

16. Reasons to buy:Economies of Scale MES

17. Backward Integration (Minus) • Flexibility and Capital structure • ROI • Bureaucracy: Agency Costs • Slacking • Cost center Vs Profit center • Internal Customers Vs Competition • Silos and Internal transaction charges

18. Vertical Functions • Forward or Downstream integration

19. M A D W R C M W R C M C Distribution Channels and Channel Captains M W R C C M R

20. Increased Sales Value (?) • Manufacturing price $0.48 • Wholesale Price (MU 20%) $0.60 • Retail Price (MU 40%) $1.00

21. 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

22. 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

23. Examples: Dow ChemicalUnion CarbideKyocera Examples:IntelSeagateMicron Examples:AppleCompaqDell Best Buy(?) Examples:Apple Dell Computer WorldOffice Max Best Buy Staples Distribution Assembly Intermediatemanufacturer Raw materials End user Value Chain in the Personal Computer Industry

24. Outsourcing or Unbundling • Outside specialists can perform the activity better or cheaper • Activity is not crucial to achieving competitive advantage • Reduces risk exposure to changing technology and/or changing buyer preferences • Streamlines operations to • Cut cycle time • Speed decision-making • Reduce coordination costs • Allows firm to concentrate on its core business

25. Strategic Alliances(Relational Vs Transactional) • To collaborate on technology development or new product development • To improve supply chain efficiency • To gain economies of scale in production and/or marketing • To fill gaps in technical or manufacturing expertise • To speed new products to market • To acquire or improve market access

26. Japanese KeiretsuKorean Chaebol Mitsubishi Sumitomo Mitsui Samsung Hyundai LG

27. Mitsubishi

28. Sumitomo Sumitomo Bank (until 2001)Sumitomo Mitsui Bank (2001– ), Sumitomo Trust and Banking Food: Asahi BreweriesRail: Hanshin Railway, Keihan Railway, Nankai RailwayCars: MazdaElectronics: NECIron and Steel: Sumitomo MetalsFinancial: Sumitomo Real EstateInfrastructure: Nippon Koei

29. Dai-Ichi Kangyo Group • Asahi Mutual Life Insurance (DKB) • The Dai-ichi Mutual Life Insurance Company (DKB) • Daiichi Sankyo • Dentsu (DKB) • Fujitsu (Furukawa) • Hitachi (Hitachi) • Ishikawajima-Harima Heavy Industries (IHI) • Isuzu (IHI) • ITOCHU (DKB) • JFE Holdings (Kawasaki) • Kawasaki Heavy Industries (Kawasaki) • Kao (DKB) • K Line (Kawasaki) • Kobe Steel (Suzuki) • Meiji Seika (DKB) • Mizuho (Mizuho Financial Group) • Seibu Department Stores (DKB) • Sojitz (Suzuki) • Sompo Japan Insurance (DKB) • Taiheiyo Cement (Asano) • Tokyo Dome (DKB) • The Tokyo Electric Power Company (DKB) • Tokyo FM (DKB) • Yokohama Rubber Company(Furukawa)

30. Fuyo Group • Canon (Fuji Bank) • Hitachi (Shunkou), also part of Nissan Group. • JFE Holdings (Asano) • Keihin Kyuko Electric Railway (Fuji Bank) • Marubeni (Odate) • Matsuya (Nedsu) • Meiji Yasuda Life Insurance (Yasuda) • Mizuho Corporate Bank (Yasuda) • Mizuho Trust Bank (Yasuda) • Nissan (Shunkou) - no longer considered part of the keiretsu, part of Nissan Group. • Oki Electric Industry (Yasuda) • Ricoh (Riken) • Sapporo Beer (Nedsu) • Sompo Japan Insurance (Yasuda), also part of Nissan Group. • Tobu Railway (Netsu) • Yamaha (Fuji Bank)

31. Sumotomo • Sumitomo, Ltd., Chemicals • Sumitomo Heavy Industries, Ltd., Machinery, weaponry, and shipbuilding • Sumitomo Mitsui Banking Corporation, Finance • Sumitomo Metal Industries, Ltd., Steel • Sumitomo, Non-ferrous metals • Sumitomo Corporation, • The Sumitomo Trust & Banking Co., Ltd., Finance • Sumitomo Life Insurance Co., Insurance • Sumitomo, Mining • Sumitomo, Warehousing • Sumitomo, Electronics and electric products • Mitsui Sumitomo Insurance Co., Ltd., Insurance • Nippon Sheet Glass Co., Ltd., Glass • NEC, Electronics and electric products • Sumitomo, Real estate • Sumitomo, Cement • Sumitomo, Nonferrous metals • Sumitomo, Construction • , Chemicals • , Lumber and housing • Sumitomo Rubber Industries, Ltd., Tires and rubber under Dunlop brand • Mazda Motor Corporation

32. Concluding on Vertical Integration Market N N N Y Y Available suppliers: -Economies of Scale -Capabilities Relationship-specificasset? Coord. Problems? Info. Leakage? Complete contractsunfeasible and costly? Y Conflict resolutionproblems N N Vertical integration Arrangements? Alliances? Y Joint alliances

33. Wrap up • This week • Vertical integration • Forward • Backward • Alternatives • Next week • Part 2: Competitors and Competition • Market Structure (Chapter 5)