Transcript Slides - WordPress.com

ELEC5701
Sustainable Competitive
sdfl
Advantage
Matt Barrie
Chief Executive
Freelancer.com
[email protected]
Bill Bartee
Managing Director
SXVP
[email protected]
Matt
Barrie
[email protected]
+61 4 11331123
Sustainable competitive advantage
• Otherwise known as unfair advantage
Some things to think about:
• What core competencies are needed to win?
• What does it take to continue to win?
Sustainable competitive advantage
• Competitive advantage includes efforts to encourage loyalty
and make it very hard for a competitor to match without
costly effort.
• Buying loyalty is hard.
• Frequent flyer points are not true loyalty. Customers leave
as soon as the program ends, everyone is a member of all
programs.
• The secret of “lock in” is to offer something that
– Customers don’t want to do themselves
– Competitors don’t offer
– Customers don’t perceive they are giving away too much power by
taking up (at least initially!)
Sustainable competitive advantage
• Over aggressive lock-in e.g. “terminator genes” in GM seeds.
• Sustainable competitive advantage can come from:
–
–
–
–
–
–
–
–
–
Customer loyalty
Customer lock-in
Competitor lock-out
Buying power
Lowest cost producer
Supply-chain control
First-mover advantage
Economies of scale (reducing avg. cost) and scope (across 2+ areas)
Intellectual Property
McKesson
McKesson???
• McKesson was a conglomerate with divisions in Drug
Distribution, Housing, Concrete etc…
• The Drug Distribution business consisted of 1200 traveling
sales reps, servicing chemists..
The Chains – Economies of Scale
• In 1979, the writing was on the wall..
Dog of a Business
• McKesson tried selling the drug distribution business
• Unfortunately everyone knew the business was a dog..
Lipstick for the Pig
• McKesson searched long and hard for a fresh coat of paint to
apply to the company so they could sell it..
• Nobody had any great ideas, the chains were coming and
with their economies of scale, it was clear that the corner
chemist’s days were over
• Then the IT guy had an idea..
An Experiment
• He had been experimenting with an Apple II computer and
300 baud modem..
• If McKesson put an apple computer into every one of the
chemists they supplied..
Cost Efficiencies
• Perhaps they could replace some of the sales reps, and the
business could look fresh enough for it to be sold.
• McKesson spent an unprecedented amount of money - $6M
at the time - to place an Apple II computer in every chemist
for free.
Plan B
• Unfortunately everyone still thought the business was a dog
and they couldn’t sell it.
• So McKesson went to Plan B: minimise losses by making this
business more efficient.
• The new Apple II computer system had with it an order entry
system, so McKesson could start to lay off sales reps.
Order Entry
Efficient Ordering
• The first thing the IT person realised was that these corner
stores were poorly managed, and the store owners had no
idea about simple things like efficient order quantities…
• So he built into the system the ability to automatically
suggest efficient order sizes..
Efficient
Ordering
Order Entry
Efficient Delivery
• He also discovered that 25% of labour costs, one of the
largest costs in the business, was spent restacking shelves..
• So he invented a ‘bar code’ system where the Apple II was
placed in a shopping trolley with a lead acid battery and
wand..
• When the delivery arrived, the drugs were packaged in the
same order as they were scanned..
Efficient
Ordering
Efficient
Delivery
Order Entry
Drug Database
• This made the chemists more efficient and more profitable.
• At the time, 1/3rd of the space in the chemist’s stores was
used for storage… now this could be turned into retail space!
• Also added into the system was a drug database which
became the definitive reference for prescriptions..
Drug
Database
Efficient
Ordering
Efficient
Delivery
Order Entry
Competitors Mimic
• Shortly thereafter, competitors came in, and they tried to
offer a free IBM PC..
Drug
Database
Efficient
Ordering
Efficient
Delivery
Competition
Order Entry
• And a funny thing happened…
First Mover Advantage
• The chemists didn’t want it!
• Many didn’t have space to put it in the store, and many
didn’t want to learn a second system..
X
Competitor
Lockout
Drug
Database
First
Mover
Advantage
Efficient
Ordering
Efficient
Delivery
Competition
Order Entry
General Ledger
• Then McKesson realised, that most of the chemists did shoe
box accounting…
Reporting
Drug
Database
First
Mover
Advantage
Efficient
Ordering
Efficient
Delivery
Order Entry
Competitor
Lockout
• So they implemented a general ledger system
High Switching Costs
• Competitors tried to lure customers away with special offers
Reporting
Drug
Database
First
Mover
Advantage
Efficient
Ordering
Efficient
Delivery
50% off!
High
Switching
Costs
Order Entry
Competitor
Lockout
• The problem was, that if the chemists bought from the
competitors, they would have to extra work at the end of
the year to merge the accounts. For these small stores, the
cost of doing so was higher than the savings..
Economies of Scope
• Not only had the market stopped contracting, but McKesson
had locked in the market
• McKesson also became more efficient than the chains
• They soon came to them to purchase the same system….
Reporting
Economies
Of
Scale
Drug
Database
First
Mover
Advantage
Efficient
Delivery
Efficient
Ordering
Competitor
Lockout
High
Switching
Costs
Order Entry
Vertical Integration
• McKesson noticed that there
was a lot of paperwork
involved in filling out
Reporting
prescriptions
Drug
Database
First
Mover
Advantage
Competitor
Lock out
Efficient
Ordering
Efficient
Delivery
Economies
of
Scale
Prescription
Management
• They automated that too.
McKesson’s system could
process paperwork in less than
6 seconds..
High
Switching
Costs
Market
Lock-in
Order Entry
Vertical
Integration
Transaction Processing
• They also found that
economies of scale meant
they could do medical
billing (transaction
processing) better than
anyone else
Drug
Database
Reporting
First
Mover
Advantage
Competitor
Lock out
Efficient
Ordering
Efficient
Delivery
Economies
of
Scale
Prescription
Management
High
Switching
Costs
Market
Lock-in
Transaction
Processing
Order Entry
Vertical
Integration
Financial Factoring
•
•
McKesson also started to factor
medical rebates so customers
could get them at the time of
prescription rather than waiting for
weeks
Drug
Database
Reporting
They were so efficient, they also
sold this system to the HMOs..
First
Mover
Advantage
Financial
Factoring
Competitor
Lock out
Efficient
Ordering
Efficient
Delivery
Economies
of
Scale
Prescription
Management
High
Switching
Costs
Market
Lock-in
Transaction
Processing
Order Entry
Vertical
Integration
McKesson
• In 1994 they sold off their medical transaction processing
division
• Revenues: $105M
• Earnings: $25M
• Growth Rate: 18% per year
• Sold for $4Bn cash.
Economies of Scope
•
McKesson took the system and did it all
again in:
– Wine & Spirits
– Industrial Chemicals
– Wood Products
– Paper
– …
•
In 1999 they tried buying up all
distribution competitors in these markets,
but the government refused to let them…
Economies
of Scope
McKesson Financials
1979
Revenue
$920M
Opex
1x
# Orders
1x
Order Entry
700
Purchasing
Agents
140
Sales
1200
Warehouse
1x
1994
2011
McKesson Financials
1979
1994
Revenue
$920M
$12.5B
Opex
1x
86x
# Orders
1x
15x
Order Entry
700
8
Purchasing
Agents
140
12
Sales
1200
600
Warehouse
1x
11x
2011
McKesson Financials
1979
1994
2011
Revenue
$920M
$12.5B
$114.6B
Opex
1x
86x
?
# Orders
1x
15x
?
Order Entry
700
8
?
Purchasing
Agents
140
12
?
Sales
1200
600
?
Warehouse
1x
11x
?
How big is your market?
Be realistic when estimating
the size of your market
TAM vs SAM vs SOM
I am an OEM
Manufacturer &
supplier entering
the LED Living
Colors Market:
My strategy as
OEM
manufacturer is to
focus and work
together with the
Top Market
Player, in this
case Philips only.
As I am a new
customer to
Philips, they agree
to test me out and
ask me to produce
only 200.000
pieces of the
800.000 that they
expect to sell in
2011.
Total Available Market (TAM)
What is the Total Achievable Sales Amount
incorporating all market players together?
100% of the
market for type of
product you sell
What can Philips achieve in 2011 in sales?
100% of the
market you could
actually sell to
Serviceable Addressable Market (SAM)
What can I (as company XYZ) achieve in
2011 selling to Philips?
Serviceable Obtainable Market (SOM)
Reality.
Achievable.