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Competitive Advantage in Mature Industries. Key success factors in mature industries Strategic Implementation: Structure, Systems, Style Strategies for declining industries. OUTLINE. Competitive Advantage in Retailing : Retailers with the High est and Lowest Valuation Ratios.

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Competitive advantage in mature industries
Competitive Advantage in Mature Industries

  • Key success factors in mature industries

  • Strategic Implementation: Structure, Systems, Style

  • Strategies for declining industries

OUTLINE


Competitive advantage in retailing retailers with the high est and lowest valuation ratios
Competitive Advantage in Retailing: Retailers with the Highest and Lowest Valuation Ratios

Toys-R-Us 0.6 11.3

J.C. Penny (US) 0.732.3

Federated Dept.Stores (US) 1.1 15.4

J. Sainsbury (UK) 1.129.8

Ito-Yokado (Japan) 1.128.0

Ahold 1.2 78.3

Safeway plc (UK) 1.3 29.8

Pinault-Printemps

-Redoute (France) 1.4 32.2

Sears Roebuck (US) 1.441.4

DixonsGroup (UK) 1.4 8.0

Albertson’s (US) 1.5 35.6

May Department Stores (US) 1.7 11.9

Office Depot (US) 1.7 11.4

CVS 1.9 24.2

Kingfisher (UK) 2.0 17.6

TOP 15ValuationSales

Ratio ($,bil.)

Amazon.com (US) n.a. 3.9

Caremark Rx (US) 18.0 6.8

Expedia 16.6 0.6

Autozone (US) 13.1 5.3

Hennes & Mauritz (Swe.) 10.5 5.9

Next (UK) 10.1 3.6

Bed, Bath & Beyond (US) 8.5 3.7

Woolworth (Australia) 8.0 16.0

Gap (US) 4.1 14.5

TJX (US) 6.9 12.0

Inditex (Spain) 6.8 4.7

Wal-Mart (US) 5.7 244.5

Radio Shack 5.6 4.6

Family Dollar Stores 5.1 4.2

Best Buy (US) 5.0 20.9

BOTTOM 15ValuationSales

Ratio($, bil.)


Key success factors in mature industries
Key Success Factors in Mature Industries

  • Opportunities for sustainable -- limited potential for differentiation

    competitive advantage are -- technology stable and well diffused

    limited -- ease of entry due to well developed industry infrastructure and powerful distributors

    -- international competition : domestic cost advantage vulnerable

  • Sources of -- Economies of scale

    cost advantage -- Low-cost inputs

    -- Low overheads

  • Segment and customer -- As general industry environment selection deteriorates, important to locate attractive segments and woo good

    customers.

  • Sources of differentiation -- Emphasis on image differentiation and advantage differentiation through complementary

    services.

  • Sources of innovation -- Limited opportunity for product and

    process innovation but considerable

    opportunity for strategic innovation


Sources of strategic innovation in mature industries
Sources of Strategic Innovation in Mature Industries

  • Reconfiguring the value chain: - Benetton and Zara in clothing

  • - Southwest & Ryanair in airlines

    • - Dell in PCs

  • Redefining markets and products - Swatch in watches - Starbucks in coffee shops

  • - Barnes & Noble in book retailing

  • Innovative approaches to - Virgin Atlantic in air travel

  • differentiation - Sephora in cosmetics retailing

  • Who are the strategic innovators?

  • New entrants -CNN in news broadcasting

    • - Nucor in the U.S. steel industry

  • Existing firms on the periphery -Sun Records in rock ‘n roll music

  • Firms from adjacent industries - Apple in consumer electronics

  • Why not leading incumbents?

  • They are constrained by “industry recipes,” relationships with existing

  • customers, investments in resources & capabilities linked to past

  • strategies.


Product process and strategic innovation over the life cycle
Product, Process, and Strategic Innovation over the Life Cycle

Product

innovation

Strategic

innovation

RATE OF INNOVATION

Process

innovation

TIME


Strategy implementation in mature industries the traditional model
Strategy Implementation in Mature Industries:The Traditional Model

STRATEGY - Pursuit of cost efficiency through mass production

STRUCTURE - Functional departments

- Line and staff distinction

- Job specialization

CONTROLS - Quantitative, short-term performance targets

- Hierarchical monitoring and control

- Standard, formalized operating procedures,

reporting, and management by exception.

INCENTIVES - Emphasis on financial incentives linked to

individual performance

TOP - Primary functions are control and

MANAGEMENT strategic decision making

- Two main styles: politician and autocrat


The competitive environment of declining industries
The Competitive Environment of ModelDeclining Industries

  • Features - Excess capacity

    of declining - Lack of technological change

    industries - Consolidation (but some new entry as old firms exit)

    - Old machines and employees

  • Smooth adjustment - Predictability of decline

    of capacity Durable assets

    depends upon Costs of closure

    - Barriers to exitManagement

    commitment

    - Strategies of surviving firms

{


Strategy options in declining industries
Strategy Options in Declining Industries Model

LEADERSHIP Establish dominant market position -encourage exit of rivals

-buy market share through acquisition

-acquire capacity

-demonstrate commitment

-dispel optimism about the industry’s future

-raise the stakes

NICHE Identify an attractive segment and dominate it.

HARVEST Maximize cash flow from existing sources

DIVEST Get out while there is still a market for industry assets


Strategy alternatives for a declining industry
Strategy ModelAlternatives for a Declining Industry

COMPANY’S COMPETITIVE POSITION

Strengths in

remaining demand

pockets

Lacks strength in

remaining demand pockets

Favorable

to decline

INDUSTRY

STRUCTURE

Unfavorable

to decline


Vertical integration and the scope of the firm
Vertical Integration and The Scope of the Firm Model

  • Transactions Costs and the Scope of the Firm

    --Why does the firm exist?

    --The evolution of firms and markets

  • The Costs and Benefits of Vertical Integration

  • Designing Vertical Relationships

  • Recent Trends

OUTLINE


From business strategy to corporate strategy the scope of the firm
From Business Strategy to Corporate Strategy: The Scope of the Firm

  • Business Strategy is concerned with how a firm computes within a particular market

  • Corporate Strategy is concerned with where a firm competes, i.e. the scope of its activities

  • The dimensions of scope are

    • geographical scope

    • vertical scope

    • product scope


Transactions costs and the scope of the firm
Transactions Costs and the the Firm Scope of the Firm

Vertical Product Geographical

Scope Scope Scope

[A] Single Integrated

Firm

V1

V2

V3

P1

P2

P3

C1

C2

C3

[B] Several

Specialized

Firms linked

by Markets

V1

P1

P2

P3

C1

C2

C3

V2

V3

In situation [A] the business units are integrated within a single firm.

In situation [B] the business units are independent firms linked by markets.

Are the administrative costs of the integrated firm less than the transaction

costs of markets?


Transactions costs and the existence of the firm
Transactions Costs and The Existence of the Firm the Firm

  • Transaction cost theory explains not just the boundaries

    of firms, also the existence of firms.

  • In 18th century English woollen industry, no firms –

    independent spinners and weavers linked by merchants.

  • Residential remodeling industry -- mainly independent self-

    employed builders, plumbers, electricians, painters.

  • Key issue -- transaction costs of the market vs.

    administrative costs of firms.

  • Where transaction costs high—firm is more efficient means

    of organization

    Note: transaction costs comprise costs of search and contract negotiation and enforcement


Aggregate concentration in us manufacturing 1947 97
Aggregate Concentration in the FirmUS Manufacturing, 1947-97


Determinants of changes i n corporate scope
Determinants of Changes the Firm in Corporate Scope

  • 1800 – 1980Expanding scale and scope of industrial corporations due to

  • declining administrative costs of firms:

    • Advances in transportation, information and communication

    • technologies

    • Advances in management—accounting systems, decision sciences,

    • financial techniques, organizational innovations, scientific management

1980 – 1995Shrinking size and scope of biggest industrial corporations.

Increasingly Increased no. of managerial Admin.costs of

turbulent decisions. Need for fast firms rise relative

external responses to external to transaction

environment change costs of markets

1995 – 2007Rapid increase in global concentration (steel, aluminium,

oil, beer, banking, cement).

Key drivers: quest for market power and scale economies.

Also, large corporations better at reconciling size with agility


The costs and benefits of vertical integration benefits
The Costs and Benefits of Vertical Integration: BENEFITS the Firm

  • Technical economies from integrating processes e.g. iron and steel production

    —but doesn’t necessarily require common ownership

  • Superior coordination

  • Avoids transactions costs of market contracts in situations where there are:

    -- small numbers of firms

    -- transaction-specific investments

    -- opportunism and strategic misrepresentation

    -- taxes and regulations on market transactions


Williamson 1975
Williamson (1975) the Firm

  • Complete vs incomplete contracts

    • Bounded rationality

    • Measurement problems

    • Information asymmetry Ensure all contracts are incomplete

  • Asset specificity creates quasi-rents

    • the difference in value of an asset in its best and next best use (fundamental transformation to small N bargaining or bilateral monopoly)

      • Site specificity – assets located side by side to save costs

      • Physical asset specificity – customized to a particular transaction

      • Human asset specificity – workers have specialized skills


Holdup
Holdup the Firm

  • The existence of quasi-rents creates the incentive for opportunism in the form of hold-up

    • E.g. If I make you the exclusive supplier of a critical part then I expose myself to your demands

  • Firms integrate to avoid the threat of hold-up or the costs of avoiding it (e.g. litigation, distrust)

  • Integration is efficient if the transaction costs of hold-up exceed governance costs

  • In theory, hold-up should be very rare because potential victims will integrate before being held up.


The costs and benefits of vertical integration costs
The Costs and Benefits of Vertical Integration: COSTS the Firm

  • Differences in optimal scale of operation between different stages prevents balanced VI

  • Strategic differences between different vertical stages creates management difficulties (dominant logic)

  • Inhibits development of and exploitation of core competencies

  • Limits flexibility -- in responding to demand cycles

    -- in responding to changes in technology,

    customer preferences, etc.

    (But, VI may be conducive to system-wide flexibility)

  • Compounding of risk

  • Also lack of market prices increases inefficiency (may result in tapered integration –part internal, part market)


When is vertical integration more attractiv e than outsourcing
When is Vertical Integration More Attractiv the Firme than Outsourcing?

How many firms are available The fewer the companies

to undertake the activities? the more attractive is VI

Is transaction-specific investment If yes, VI more attractive

needed?

Does limited information permit VI can limit opportunism

cheating?

Are taxes or regulation imposed VI can avoid them

on transactions?

Do the different stages have similar Greater the similarity, the

optimal scales of operation? more attractive is VI

Are the two stages strategically Greater the strategic

similar? similarity ---the more attractive is VI

How great the need for entrepreneurship Greater the need, the greater

& continual upgrading of capabilities the disadvantages of VI

How uncertain is market demand? Greater the unpredictability

----the more costly is VI

Are risks compounded byVI increases risk.

linkages between vertical stages


Competitive advantage in mature industries

The value chain for steel cans the Firm

Canning of

food, drink, oil, etc.

Iron ore

mining

Steel

production

Steel strip

production

Can

making

VERTICAL

INTEGRATION,

ANDMARKET

CONTRACTS

VERTICAL

INTEGRATION

MARKET

CONTRACTS

MARKET

CONTRACTS

What factors explain why some stages are vertically integrated,

while others are linked by market transactions?


More brainteasers
More brainteasers the Firm

  • Why do car manufacturers not own dealerships anymore?

  • Why don’t Hollywood studios produce or exhibit films anymore? Why were they completely integrated before WWII?


Designing vertical relationships long term contracts and quasi vertical integration
Designing Vertical Relationships: Long-Term Contracts and Quasi-Vertical Integration

  • Intermediate between spot transactions and vertical integration are several types of vertical relationships

    ---such relationships may combine benefits of both market transactions and internalization

  • Key issues in designing vertical relationships

    -- How is risk allocated between the parties?

    -- Are the incentives appropriate?


Recent trends in vertical relationships
Recent Trends in Vertical Relationships Quasi-Vertical Integration

  • From competitive contracting to supplier partnerships, e.g. in autos

  • From vertical integration to outsourcing (not just components, also IT, distribution, and administrative services).

  • Diffusion of franchising

  • Technology partnerships (e.g. IBM- Apple; Canon- HP)

  • Inter-firm networks

    General conclusion:- boundaries between firms and markets becoming increasingly blurred.


Different types of vertical relationship
Different Types of Vertical Relationship Quasi-Vertical Integration

Low

Long-term contracts

Franchises

Joint ventures

Agency agreements

Spot sales/ purchases

Low Formalization High

Supplier/ customer partnerships

Informal supplier/ customer relationships

Vertical integration

Low Degree of Commitment High


Birdseye case
Birdseye Case Quasi-Vertical Integration

  • Why did Birds Eye develop as a vertically integrated producer the way it did?

  • Did a vertically integrated producer have a competitive advantage over more vertically specialized suppliers of frozen foods during the early 1980s?

  • What should Birds Eye have done in 1979?