SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
BA530 Class 4Competitive Advantage &
Medical Cases
John A. Hengeveld
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Agenda for Today• Finish Dell
• Grant 7-9
• Sunrise Medical
• Dana Farber
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Next week..
Grant 10-12,
Winning Through Innovation Ch 1,2,3,7
The SIMS Online Case
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
The Emergence of Competitive Advantage
The Emergence of Competitive Advantage
How does competitive advantage emerge?
External sources ofchange e.g.:•Changing customer demand•Changing prices•Technological change
Internal sources of change
Resource heterogeneity among firms means differential impact
Some firms faster and more effective
in exploiting change
Some firmshave greater creative
and innovativecapability
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Competitive Advantage from Internally-Generated Change: Strategic InnovationCompetitive Advantage from Internally-Generated Change: Strategic Innovation
Characteristics of innovation strategies:– Associated with new entrants to an industry (e.g. Nucor in
steel, IKEA in furniture, Enron in energy, Home Depot in DIY, Dell in PCs)
– Reconcile conflicting performance goals (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility. Richardson Sheffield in kitchen knives is low cost, innovative and customer responsive.)
– Reconfiguring the value chain e.g.---• Nike’s system for manufacturing and distributing shoes totally
different from traditional shoe manufacturer• Southwest Airlines simplification of the normal airline value chain• Zara’s system of design, manafacture, and distribution
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
TRADING MARKETS
•None (efficient markets)•Imperfect information availability•Transactions costs•Systematic behavioral trends
•Overshooting
NoneInsider tradingCost minimizationSuperior diagnosis(e.g.... chart analysis)Contrarianism
PRODUCTION MARKETS
•Barriers to imitation
•Barriers to innovation
Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility,barriers to resource replication) & base strategy upon them.Difficult to influence or exploit.
MARKET TYPE
SOURCE OF IMPERFECTION
OF COMPETITION
OPPORTUNITY FOR COMPETITIVE
ADVANTAGE
Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets
Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Sources of Competitive AdvantageSources of Competitive Advantage
COST ADVANTAGE
COST ADVANTAGE
DIFFERENTIATIONADVANTAGE
DIFFERENTIATIONADVANTAGE
COMPETITIVEADVANTAGE
COMPETITIVEADVANTAGE
Similar product
at lower cost
Price premium
from unique product
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Features of Cost Leadership and Differentiation Strategies
Features of Cost Leadership and Differentiation Strategies
Generic strategy Key strategy elements Resource & organizational
requirements
COST Scale-efficient plants. Access to capital. Process
LEADERSHIP Design for manufacture. engineering skills. Frequent
Control of overheads & reports. Tight cost control.
R&D. Avoidance of Specialization of jobs and
marginal customer functions. Incentives for
accounts. quantitative targets.
DIFFERENTIATION Emphasis on branding Marketing. Product
and brand advertising, engineering. Creativity.
design, service, and Product R&D
quality. Qualitative measurement and incentives.
Strong cross-functional
coordination.
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
The Experience CurveThe Experience Curve
The “Law of Experience”
The unit cost value added to a standard product declines by a constant % (typically 20-
30%) each time cumulative output doubles.
Cost per unit of
output (in real $)
Cumulative Output
1994
1995
1996
1997
19981999 2000
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Examples of Experience CurvesExamples of Experience Curves
100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units
(millions) (millions)
1960
Yen
15K
20K
30
K
Pri
ce In
dex
50
100
20
0 3
00
70% slope
75%
Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
The Importance of Market ShareThe Importance of Market Share
If all firms in an industry have the same experience curve, then:
relative costs = f (relative market share)
This supported by PIMS data:
BUT: - Association does not imply causation
- Costs of acquiring market share tend to offset the returns to market share
RO
S (
%)
-2
05
10
0-10 10-20 20-30 30-40 over 40Market Share (%)
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Drivers of Cost AdvantageDrivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
MANAGERIAL/ ORGANIZATIONALEFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• Organizational slack
• Ratio of fixed to variable costs• Costs of installing and closing capacity
• Location advantages• Ownership of low-cost inputs • Bargaining power• Supplier cooperation
• Design for automation• Designs to economize on materials
• Mechanization and automation• Efficient utilization of materials• Increased precision
• Increased dexterity• Improved coordination/ organization
• Indivisibli\ties• Specialization and division of labor
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Economies of Scale: The Long-Run Cost Curve for a Plant
Economies of Scale: The Long-Run Cost Curve for a Plant
Units of outputper periodMinimum
EfficientPlant Size
Cost perunit ofoutput
Sources of scale economies:- technical input/output relationships- indivisibilities- specialization
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Scale Economies in Advertising: U.S. Soft DrinksScale Economies in Advertising: U.S. Soft Drinks
Despite the massive advertising budgets of brand leaders Coke and Pepsi, smaller brands which incur the highest advertising costs per unit of sales
10 20 50 100 200 500 1,000
Annual sales volume (millions of cases)
Ad
vert
isin
g E
xpen
dit
ure
($
pe
r ca
se)
0.02
0.0
5
0
.10
0
.15
0.2
0
CokePepsi
Seven up
Dr. PepperSprite
Diet Pepsi
Tab
FrescaDiet Rite
Diet 7-Up
Schweppes
SF Dr. Pepper
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Cost Advantage in Short-Haul Passenger Air Transport
Cost Advantage in Short-Haul Passenger Air Transport
Costs per Available Seat-Mile (1993)
Southwest Airlines United Airlines (cents) (cents)
Wages and benefits 2.4 3.5
Fuel and oil 1.1 1.1
Aircraft ownership 0.7 0.8
Aircraft maintenance 0.6 0.3
Commisions on ticket sales 0.5 1.0
Advertising 0.2 0.2
Food and beverage 0.0 0.5
Other 1.7 3.1
Total 7.2 10.5
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Key Stages in Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture
Key Stages in Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES
STAGE 2. ALLOCATE TOTAL COSTS
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES &
MKITG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Applying the Value Chain to Cost Analysis (continued)
Applying the Value Chain to Cost Analysis (continued)
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES&
MKITG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
--Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer
-- Process technology -- Level of dealer -- Plant location support -- Run length -- Frequency of
defects -- Capaciity utilization under warrenty
Prices paid --Size of commitment -- Plant scale --Cyclicality &depend on: --Productivity of -- Flexibility of production predictability of sales-- Order size R&D/design -- No. of models per plant --Customers’--Putchases per --No. & frequency of new -- Degree of automation willingness to wait supplier models -- Sales / model -- Bargaining power -- Wage levels-- Supplier location -- Capacity utilization
STAGE 3. IDENTIFY COST DRIVERS
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Applying the Value Chain to Cost Analysis (continued)
Applying the Value Chain to Cost Analysis (continued)
PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR INVNTRS DESIGN MFR QUALITY INV MKTG CTMR
Consolidation of orders to increasediscounts, increases inventories
Designing different models aroundcommon components and platforms
reduces manufacturing costs
Higher quality parts and materialsreduces costs of defects
at later stages
Higher quality in manufacturingreduces warranty costs
STAGE 5. RECCOMENDATIONS FOR COST REDUCTION
STAGE 4. IDENTIFY LINKAGES
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Dynamic vs. Static Approaches to Manufacturing
Dynamic vs. Static Approaches to Manufacturing
Artisan mode: Scientific Management Mode:
- problem solving - quest for “one best way”
- employee knowledge creation - people matched to tasks- employee control over product - incentives and penalties to
- product and customer ensure conformity to objectives orientation - planning and control by
staff
- continuous incremental - science driven
improvement - focused around corporate R&D - market needs pull technology departments- product and process innovation- emphasis on product Innovation
- teamwork and cross-functional and big projects collaboration
PRODUCTIONSYSTEM
MANAGEMENTOF
TECHNOLOGY
DYNAMIC STATIC
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Recent Approaches to Cost ReductionRecent Approaches to Cost Reduction
Dramatic changes in strategy and structureto adjust to the business conditions of the 1990’sKey elements:• Plant closures• Outsourcing• Delayering and cuts in administrative staff
The fundamental rethinking and radicalredesign of business processes to achievedynamic improvements in performance. e.g.:-• Several jobs combined into one • Steps of a process combined in natural order• Minimizing steps, controls, and reconciliation• Use case managers as single points of contact• Hybrid centralization/ decentralization
CORPORATERESTRUCTURING
BUSINESSPROCESS
REENGINEERING
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
The Nature of DifferentiationThe Nature of Differentiation
TOTAL CUSTOMER RESPONSIVENESSdifferentiation not just about the product, it embraces the whole relationship between the supplier and the customer.
INTANGIBLE DIFFERENTATIONUnobservable and subjectivecharacteristics relating to image,status, exclusively, identity
TANGIBLE DIFFERENTATIONObservable product characteristics
• size, color, materials, etc.• performance• packaging• complementary services
DEFINITION: Providing something unique that is valuable to thebuyer beyond simply offering a low price. (M. Porter)
THE KEY IS CREATING VALUE FOR THE CUSTOMER
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Differentiation and SegmentationDifferentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm competes within
a market.
SEGMENTATION: is concerned with where a firm competes
within a market.
Does differentiation imply segmentation?
Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION: Appealing to what is in common between different customers
(McDonalds hamburgers, Honda cars, Sears)
FOCUSED DIFFERENTIATION: Appealing to what distinguishes different customer
groups (BMW, Doc Marten footwear)
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Differentiation and the Product Life CycleDifferentiation and the Product Life Cycle
New packages of hardware and software introduced
SYSTEMAugmentation: repackaging of hardware and
software
PRODUCTS & SERVICES
DecommoditizationCOMMODITY
PRODUCTS & SERVICES
Commoditization
Desystematization: some packages
unbundled
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Analyzing the Demand SideAnalyzing the Demand Side
Techniques for analyzing product attributes and
positioning:
• Multidimensional Scaling• Conjoint Analysis• Hedonic Price Analysis
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Differentiation in Pain Relievers: Multidimensional Scaling of
Competing Products in the U.S.
Differentiation in Pain Relievers: Multidimensional Scaling of
Competing Products in the U.S.
High
Low
Low High
EFFECTIVENESS
GENTLENESS
Tylenol
Bufferin
Excedrin
Bayer
Anacin
Private label aspirin
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Identifying Differentiation Potential: The Demand Side
Identifying Differentiation Potential: The Demand Side
THE PRODUCT
THE CUSTOMER
What needs does it satisfy?
By what criteria do
they choose?
What motivates
them?
What are key attributes?
Relate patterns of customer
preferences to product attributes
What price premiums do
product attributes command?
What are demographic, sociological,
psychological correlates of
customer behavior?
FORMULATE DIFFERENTIATION STRATEGY
• Select product positioning in relation to product attributes
• Select target customer group
• Ensure customer / product compatibility
• Evaluate costs and benefits of differentiation
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
SYSTEM PRODUCT
SERVICE COMMODITY
SUPPORT(SOFTWARE)
Differentiated Undifferentiated
Differentiated
MERCHANDISE(HARDWARE)
Undifferentiated
Differentiation of Hardware and SoftwareDifferentiation of Hardware and Software
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Consistency of Differentiation Strategy: Product Integrity
Consistency of Differentiation Strategy: Product Integrity
Key to successful differentiation is consistency of all aspects of the firm’s relationship with its customers.
Product Integrity: the total balance of product features• Internal integrity: consistency between
function and structure• External integrity:fit between the product
and the customers’ objectives, values, lifestyle etc..
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Producer’s strategiesHigh quality Low quality
High 7 10Consumer’s price 7 -5strategies
Low -5 3 price 10 3
Note: In each cell, the lower left number is the payoff to the consumer and the upper right number is
the payoff to the producer.
The problem of experience goods : quality can only be
ascertained after purchase. Hence: Prisoner’s Dilemma:-
Equilibrium reached with consumer paying a low price for a low quality item.If producer can signal quality--- both consumer and producer can move to preferred position: high quality product carrying a high price
Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”
Problem of Quality in Experience Goods: A “Prisoner’s Dilemma”
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Using the Value Chain to Identify Differentiation Potential on the Supply Side
Using the Value Chain to Identify Differentiation Potential on the Supply Side
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
MIS that supports fast response capabilities
Training to support customer service
excellence
Unique product features. Fast new product
development
Quality of components &
materials
Defect free products.
Wide variety
Fast delivery. Efficient order
processing
Building brand reputation
Customer technical support. Consumer credit. Availability of
spares
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
The Industry Life Cycle The Industry Life Cycle
Drivers of industry evolution :• demand growth• creation and diffusion of knowledge
Introduction Growth Maturity Decline
Ind
us
try
Sa
les
Time
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Types of Innovation andInnovation Streams
T&O, Winning Through Innovation, figure 7.3
InexpensiveMechanical Watch
Smaller, ThinnerMechanicalWatches
Swatch
ContinuousAim gunfire
First Watch
Quartz Watch
New
Existing
Mar
kets
IncrementalSmall Extensionsof ExistingTechnology
ArchitecturalReconfiguresExistingTechnology
DiscontinuousNew operating principles inCore Subsystems&/or DiscontinuousProcess innovation
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Organizational CyclesThe success syndrome
FIT SUCCESS
Size and AgeInertia:StructuralCultural
Successin StableMarkets
Failurein MarketShifts
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Ambidextrous Organizationsfrom WTI, figure 7.6
Executive Team•Provide Clear, Simple Vision•Balance Multiple Architectures•Makes Bets on Shifting Innovation•Manage Ambidextrously
•Today/Tomorrow•Large/Small – Incremental/Discontinuous
Inc•Culture Promoting
Continuous Improvement•Incremental Change•Eliminate Variability
•Reward Volume & Cost
Arch•Culture Promoting
Linkage Across Units•Adding and Linking
Subsystems•Reward Integration
Disc•Culture Promoting
Breakthroughs•Many Small Failures
•Learn by Doing•Reward Experimentation
and Innovation
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Technology CyclesR
ate
of I
nnov
atio
n
Time
Product innovation Process Innovation
Substitution EventDD DD
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Examples of Technology Cycles
• VCR
• Audio Recording and Distribution
• Computers?
• Telecommunication?
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Standardization of Product Features in AutosStandardization of Product Features in Autos
FEATURE INTRODUCTION GENERAL ADOPTIONSpeedometer 1901 by Oldsmobile Circa 1915Automatic transmission 1st installed 1904 Introduced by Packard as an
option, 1938. Standard on Cadillacs early 1950s
Electric headlamps GM introduces, 1908 Standard equipment by 1916All-steel body GM adoptes 1912 Standard by early 1920sAll-steel enclosed body Dodge, 1923 Becomes standard late 1920sRadio Optional extra 1923 Standard equipment, 1946Four-wheel drive Appeared 1924 Only limited availability by 1994Hydraulic brakes Introduced 1924 Became standard 1939Shatterproof glass 1st used 1927 Standard features in Fords 1938Power steering Introduced 1952 Standard equipment by 1969Antilock brakes Introduced 1972 Standard on GM cars in 1991Air bags GM introduces, 1974 By 1994 most new cars equipped
with air bags
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
How Typical is the Life Cycle Pattern?How Typical is the Life Cycle Pattern?
• Technology-intensive industries (e.g. pharmaceuticals, semiconductors, computers) may retain features of emerging industries.
• Other industries (especially those providing basic necessities, e.g. food processing, construction, apparel) reach maturity, but not decline.
• Industries may experience life cycle regeneration.
Sales Sales
1900 ‘50 ‘60 ‘90 1930 50 60 90 MOTORCYCLES TV’s
• Life cycle model can help us to anticipate industry evolution—but dangerous to assume any common, pre-determined pattern of industy development.
ColorB&W Portable
HDTV ?
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Evolution of Industry Structure over the Life CycleEvolution of Industry Structure over the Life Cycle
INTRODUCTION GROWTH MATURITY DECLINE DEMAND Affluent buyers Increasing Mass market Knowledgeable,
penetration replacement customers, resi- demand dual segments
TECHNOLOGY Rapid product Product and Incremental Well-diffused innovation process innovation innovation technology
PRODUCTS Wide variety, Standardization Commoditiz- Continued rapid design change ation commoditization
MANUFACT- Short-runs, skill Capacity shortage, Deskilling Overcapacity URING intensive mass-production
TRADE -----Production shifts from advanced to developing countries-----
COMPETITION Technology- Entry & exit Shakeout & Price wars, consolidation exit
KSFs Product innovation Process techno- Cost efficiency Overhead red- logy. Design for uction, ration- alization, low
cost sourcing
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
The Driving Forces of Industry EvolutionThe Driving Forces of Industry Evolution
Customers become more knowledgeable
& experienced
Diffusion of
technology
Demand growthslows as market
saturation approaches
Customers become more price conscious
Products become more standardized
Distribution channels consolidate
Production shifts to low-wage countries
Price competition intensifies
Bargaining power of distributors
increases
BASIC CONDITIONS INDUSTRY STRUCTURE COMPETITION
Excess capacity increases
Production becomes less R&D & skill-intensive
Quest for new sources of differentiation
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
0
5
10
15
20
25
ROI (%)
Growth Maturity Decline
Real annualgrowth rate <3%
Real annualgrowth rate 3-6%
Real annualgrowth rate >6%
ROI at Different Stages of the Industry Life CycleROI at Different Stages of the Industry Life Cycle
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
0
2
4
6
8
10
12
RO
I
Va
lue
Ad
de
d/R
eve
nu
e
Te
ch
nic
al
Ch
an
ge
Ne
w P
rod
uc
ts
% S
ale
s f
rom
Ne
w P
rod
uc
ts
Pro
du
ct
R&
D/S
ale
s
Ag
e o
f P
lan
t &
Eq
uip
.
Inve
stm
en
t/S
ale
s
Ad
vert
isin
g/S
ale
s
GrowthMaturityDecline
Note: The figure shows standardized means for each variable for businesses at each stage of the life cycle.
Strategy and Performance at across the Industry Life CycleStrategy and Performance at across the Industry Life Cycle
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
Preparing for the Future : The Role of Scenario Analysis in Adapting to Industry Change
Stages in undertaking multiple Scenario Analysis:• Identify major forces driving industry change• Predict possible impacts of each force on the industry
environment• Identify interactions between different external forces• Among range of outcomes, identify 2-4 most likely/ most
interesting scenarios: configurations of changeforces and outcomes
• Consider implications of each scenario for the company• Identify key signposts pointing toward the emergence of
each scenario• Prepare contingency plan
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
1880s 1920s 1960s 2000
Mail order, catalogueretailinge.g. Sears Roebuck
ChainStores
e.g. A&P
DiscountStores
e.g. K-MartWal-Mart
“CategoryKillers”
e.g. Toys-R-Us,Home Depot
InternetRetailers
e.g. Amazon;Webvan
WarehouseClubs
e.g. Price ClubSam’s Club
Innovation & Renewal over the Industry Life Cycle: Retailing
Innovation & Renewal over the Industry Life Cycle: Retailing
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Medical Cases
• See Insert posted tomorrow
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
The SIMS Case• What accounts for The Sims being the best selling PC
game? Why has enthusiasm lasted so long?• What marketing plan should the Sims pursue?• EA is the worlds largest game publisher. It supports a
wide variety of games across many platforms. Is such a diversified strategy risky? What are the long term consequences?
• Does it make sense for such a large investment in EA.com?
• Who poses the greatest competitive threat to EA? What do we expect from this market over time?
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
What I expect from THE SIMS
• Develop a marketing strategy from 5C-4P’s– Don’t miss the segmentation step!!
• Analyze EA’s strategy and organizational structure. How is the game industry different from… say … Dell or Sunrise?
• Use methods from Grant to analyze competition, assess resources and capabilities esp wrt EA.com and TSO
• Figure out what to do with the key strategic decisions on TSO
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Marketing Analysis (The 5Cs)
Customers Company Competitors Collaborators Context
MarketSegmentation
Target MarketSelection
Product/ServicePositioning
Marketing Mix (The 4P’s)Product
& ServicePlace/
ChannelPromotion
Pricing
CustomerAcquisition
CustomerRetention
CreatingValue
CapturingValue
SustainingValue
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Tool walk through – IKEA• Porter 5 Forces and Competitive Analysis in Europe prior to
IKEA entry• “Industry Value Chain” prior to IKEA entering• 5Cs and 4P’s for how IKEA including Market Segmentation
Analysis in Europe• Resources/Capabilities Analysis for IKEA to enter in the US
with its Europe Concept• Congruence Analysis for Store Startup and for Geographic
Management• As a group we will derive: 5Cs and 4Ps for how IKEA might
operate in US (including Market Segmentation Analysis)
SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 530 – John A. Hengeveld Winter 2004BA 530 – John A. Hengeveld Winter 2004
Tool walk through – Matching Dell
• For each company:– R/C analysis for current strategy– Generic strategy and targeted market segment
• Source of existing Competitive Advantage if any
– For the three key markets:• Key Success Factors
• Current 4Ps
– TOWS
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