Transcript Lecture 3 – Strategy Formulation in Dynamic Markets

Profit Pools and Industry
Analysis
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
[email protected]
801-422-7888
650 TNRB
THREAT OF ENTRY
HIGH
•entrants have cost advantages
•low capital requirements
•little product differentiation
•deregulation of governmental
barriers
BUYER POWER
MEDIUM/HIGH
Buyers extremely price
sensitive
Good access to information
Low switching costs
INDUSTRY
COMPETITIVENESS
HIGH
•many companies
•little differentiation
•excess capacity
•high fixed/variable
costs
•cyclical demand
THREAT OF
SUBSTITUTES
MEDIUM
•Autos/train for short
distances
Source: J. de la Torre
SUPPLIER POWER
HIGH
•strong labor unions
•concentrated aircraft
makers
THREAT OF ENTRY
LOW
•economies of scale
•capital requirements for R&D and clinical
trials
•product differentiation
•control of distribution channels
•patent protection
BUYER POWER
LOW
Physician as buyer:
Not price sensitive
No bargaining power.
(Changing with managed care.)
INDUSTRY
COMPETITIVENESS
LOW
•high concentration
•product differentiation
•patent protection
•steady demand growth
•no cyclical fluctuations
of demand
THREAT OF SUBSTITUTES
LOW
No substitutes.
(Changing as managed care
encourages generics.)
Source: J. de la Torre
SUPPLIER POWER
LOW
What are the
problems with the
5 forces model?
3
What is a value chain?
4
THE PC INDUSTRY’S PROFIT POOL
40%
The value chain for the PC industry
includes six key activities; the
profitability of the activities varies
widely. Manufacturers compete in
the largest but least-profitable
segment of the chain.
operating margin
30
20
10
0
0
microprocessors
other
components
personal
computers
Share of Industry Revenue
source: Gadiesh and Gilbert, Harvard Business Review, May-June 1998
peripherals
software
100%
services
5
THE U.S. AUTO INDUSTRY’S
PROFIT POOL
25%
The automotive industry encompasses
many value-chain activities. The way that
profits and revenues are distributed
among these activities varies greatly. The
most profitable areas of the car business
are not the ones that generate the biggest
revenues.
operating margin
20
15
10
5
0
0
auto loans
new car dealers
used car dealers
leasing
gasoline
auto insurance
warranty
auto manufacturing
Share of Industry Revenue
source: Gadiesh and Gilbert, Harvard Business Review, May-June 1998
100%
service repair
auto rental
aftermarket parts
6
Profit Pools: Company Examples
Companies
Core Business
Sources of Highest ROI
Automakers
Auto manufacturing
Leasing, insurance, service.
U-Haul
Truck Rental
Packing materials, storage
Elevators
(OTIS)
Elevator Manufacturing
Service
Iomega
Zip Drives
Zip Disks; Storage
Polaroid
Instant Photography
Cameras
Film
7
The Challenges of Expanding
Product or Service Offerings
Why don’t firms simply offer the entire value chain to
customers?
What is a pool?
How big is a pool?
Focus
Product
Leadership
Operational
Excellence
Faster
Customer
Intimacy
Closer
Better
Source: Adapted from Treacy and Wiersema, The Discipline of Market Leaders. Perseus Books. 1995
9
The Claimed Focus
Product
Leadership
Operational
Excellence
Customer
Intimacy
10
The Reality
197 Operating Companies
Product
Leadership
Faster
Operational
Excellence
Customer
Intimacy
?
Closer
Better
Source: Adapted from Treacy and Wiersema, The Discipline of Market Leaders. Perseus Books. 1995
11
Challenges – Overcoming Firm Legacy
Polaroid
1948 First instant camera
1981 Formation of electronic group
1989 Polaroid capable of 1.9 m pixels vs. competitors
480k
1990 Research investments cut, lab sold to MIT, focus on
marketing
1992 Prototype of digital camera ready
1996 Digital camera announced (already 40 competitors)
1998 Photo play category introduced
Stock falls from over $40 to .03 in 4 years
1999
2000
2001
2002
$10 billion invested over
10 years
Two new technologies:
Onxy
Opal
monochrome
digital images
printed from
mobile
handheld
devices
Color prints in
1 second vs.
40 seconds of
current
technology
12
Trade Off’s
High
Low
Independent
Integrated
13
The Added Cost of Coordination
NewspaperBroadcast-Interactive
Sales Force
Media Net Sales
Force
Makes a Sale
Makes a Sale
Tribune is double
counting
commissions
Resulting in Twice the Sales Cost
14
Problem of Aligning Perception
Your Idea…
2+2+5
Willingness to Pay
Price
The Customer’s
Idea … 2+2=3
Willingness to Pay
Value Captured
by Customer
Value Captured
by Firm
Cost
Value Captured
by Supplier
Supplier opportunity cost
Value Captured
by Customer
Price
Value Captured
by Firm
Cost
Value Captured
by Supplier
Supplier opportunity cost
15
Problem of Managerial Skills
Moving From InDepth to Breadth
In depth
Knowledge
about the
specific
product/
services
Broad understanding of the
overarching business solution and
the ability to perform consultative
selling
A
B
C
D
E
16
Alignment Challenges
2 Cable Channels
TMN
Miss
Match
Advertising Agencies
Broadcast
Print
Interactive
Events
17
Channel Challenges
Barrier
3 million
independent
sales
representatives
The Market
J.C. Penney and
other retail outlets
18
Channel Continued…
Direct Approach via Ford.com and other online sites
Barrier
The
Corporation
The
Channel
The
Market
Ford Corporation
Purchased
Dealerships to give it
direct customer
access
In 2002 “Ford is selling its Company-owned dealerships”
Source: 2001
Annual Report
19
Channel Continued…
Brokers
The Market
ml.com
Online access to account information
– Account activity & balances
– Portfolio holdings
Online access to Merrill Lynch research
Ability to e-mail with financial consultant
Online bill payment capabilities
Access to Merrill Lynch analytical tools
Merrill Lynch sought
to involve brokers in
the online process
to minimize
dissatisfaction
Ability to execute trades
Source: ml.com
20
Channel Continued…
The Travel Agent
The Market
The Airlines
The
Solution
Frequent Flier Programs
21
Economic Challenges
It takes a substantial
investment to:
 identify the market
 And Interpret the Market
 Adapt to the Market
22
Product Dilemma
What is the point of
another flavor of
toothpaste, another
feature crammed into
Microsoft Word, or
another gizmo on the
dash of a Ford minivan?
Tom Kelly,
GM of IDEO, as
quoted in Business
Week, 2001
We knew products had
reached maturity when we
introduced several new
products and did not get
the bump in market share
we were used to getting
Corporate
Executive,
2002
23
Product Parity Forces Firms into the
Bottom Half of the Circle
Profits over time
100%
Product
Features
Radical
Innovation
80%
Price
60%
Focus
Value
Added
40%
Product
Service
20%
Industry trend
0%
Growth
Consolidation
Maturity
Decline
24
Maturing Markets
Strong
High
Profitability
Position in the
Supply Chain
Maturity
Low
Extensive
Weak
Limited
Ability to Generate Value
Enhancing Ideas
25
The Drive for Solutions
Product Parity
New Delivery Vehicles
Internet and aggregators
Customer Needs are Changing
26
Dimensions of Value
Top Line
Value
Product
Differentiation
Service
Value
Willingness to Pay
Value Captured by
Customer
Price
Cost
Value Captured
by Firm
Price
Bottom Line
Value
Value Captured
by Supplier
Supplier Opportunity Costs
27
THREE DISTINCT STRATEGIES TO BEAT
THE COMMODITY TRAP
Significant
What
you do
Scope
Extension
1
3
2
Limited
Product
Service
Company focus
Who you are
28
SEVERAL COMPANIES HAVE MADE THIS
TRANSITION SUCCESSFULLY
Significant
GEMS
Tribune
Cemex
What
you do
Scope
Extension
1
3
Starbucks
2
Cisco
Limited
Product
Company focus
Service
Who you are
29
Taking the Turn
ALTHOUGH VALUE CAN BE GENERATED BY MOVING
TOWARDS SOLUTIONS OR CUSTOMERS A COMPLETE
TURN ESSENTIAL TO SUSTAIN STRONG POSITION
Significant
GEMS
Tribune
Cemex
What
you do
Scope
Extension
1
3
Starbucks
2
Cisco
Limited
Product
Company focus
Service
Who you are
30
GEMS CHANGING SCOPE AND THEN
COMPANY FOCUS
Introduction
Market leader in diagnostic imaging with over 40% market share
Grew in the 90s through acquisitions
Significant
Scope
Extension
Limited
Product
Service
Scope extension ideas
Slowly moving pure equipment sales to financial and consulting
services
Education of customers (TIP TV)
Quality and Productivity programs
Company focus
Changing company focus
Use of Field Engineers not only as technical experts but onsite
customer relationship developers
Change organization focus to allow dedicated resource focusing on
customer service
"Becoming better than the best through
a boundaryless corporation"
31
STARBUCKS CHANGING FOCUS AND
THEN SCOPE
Introduction
Gourmet coffee reseller focusing on creating "Starbucks culture"
• current market cap $1.6bn
Changing company focus
Built strong brand recognition through distinct culture building
exercise
Significant
Scope
Extension
Created "customers as partners" philosophy
Limited
Product
Service
Company focus
Joint branding and licensing agreements exercise creating faster
product recognition
• Starbucks/Pepsi frappuccino, Starbucks/Dreyers ice cream
Scope extension ideas
Extending service offering to include new products
• gourmet lunches, Tazo teas, music
Established strong partnerships allowing access to alternate
mediums of sale
• partnership with United Airlines, Barnes & Noble, Craft
"Creating a new customer culture,
providing a suite of solutions "
32
CISCO CHANGING FOCUS AND THEN
SCOPE
Introduction
Large networking solutions provider
Exponential growth through acquisition strategy
• underlying growth philosophy is new product ideas
through acquisitions, partnerships, external; R&D
• acquisition focused on small companies with customer
focus
Significant
Scope
Extension
Limited
Product
Service
Company focus
Changing company focus
Acquisition focus on companies controlling customer intimacy
rather than companies with technology capabilities
Worked with customers to tailor make networks
Customer advocacy cornerstone of culture
• customer satisfaction based compensation
Moving from segment focus business model to product focus
Scope extension ideas
Moved from router only company to end to end networking
solutions
"Customer Advocacy is the company agenda "
33
CEMEX A COMPANY THAT PURSUED
THE HYBRID APPROACH
Introduction
Cemex started as a Mexican cement company and is today the
• 3rd largest cement producer in the world
• vertically integrated into distribution of construction materials
• largest steel and cement transporter in Mexico
Significant
Scope
Extension
Limited
Product
Service
Company focus
Scope extension ideas
Broader product categories
• cement cement + cement derivatives + construction materials
Extensive client support programs including
• product education, delivery speed, inventory management,
financing of project, infrastructure cost sharing
Reconfiguration of sales channel
• introduction of Arkio, online/offline sales channel
• introduction of Promexma program, own distribution centers
Changing company focus
Changed performance metrics to reward on customer satisfaction
Leveraging IT and internet capabilities to get closer to customers
"Generating returns by providing comprehensive
construction solutions to targeted customers"
34
What is a Solution?
63% of Fortune 100 Firms claim to offer solutions.
First Steps
Finally
Product Extension
Co-created value add
Service Extension
Integrated Offering
Philosophical Extension
Creates some risk
Purchase
Experience
Product
Needs
Customer
Guest
Requires intimate customer
knowledge
Is completely customized
Solution helps customers succeed in the
marketplace by enhancing revenues, reducing
current or future costs.
Source: Adapted from “From Solutions to Symbiosis” Sharma, Lucier, and Molloy. Strategy and Business, 2002
35
The Proliferation of Solutions
Change in shift from selling products/services
to selling value added solutions
Percentage of Responses
100%
=7
90%
80%
79% of all
companies
responded
5
70%
=6
60%
50%
40%
=5
30%
20%
=4
10%
<= 3
0%
Scale: 1 = Decreasing
4 = Not Changing
7 = Increasing
36
Challenges of Providing a Solution
Willingness to Pay
Value Captured
by Customer
Price
Cost
Value
Captured by
Firm
Value Captured
by Supplier
Solution must increase
the Willingness to Pay
and the price or
decrease the cost to
Serve to add value to
the firm
Supplier opportunity cost
Some Common Pitfalls
•Firm provides more product features or services (solution) but customers are unwilling to pay for
the features or additional services
•Firm is unable to quantify the value added and thus is not remunerated for the effort
•Customer requirements vary resulting in the need for an infinitely flexible system
•Solution is not scalable
•Firm is unwilling to bear higher initial cost necessary to create a solution
37
Challenges of Pricing a Solution
Number of new
systems users and
frequency of use
Revenue from
new systems
+
Revenue
with new
systems
Marginal
Revenue
Customer
Value of
Solutions
Offered
+ Revenue from
related
products and
services
+/Marginal
Cost
+/-
Revenue
without new
systems
Fees
Revenue from
old systems
+
Marginal
Investment
Source: McKinsey Quarterly Putting a Price on Solutions, 2001, Number
+
Revenue from
old system
Revenue from
related
products and
services
User fees
and access
fees
+
Add on
product fees
and service
The Key is to
generate new
revenue or be
able to charge
a premium for
the additional
service
38
Challenges of Selling Solutions
Product Selling
Vs.
Consultative Selling
Product Performance
Vs.
Customer Performance
Intra Organizational
Coordination
Vs.
Inter Organizational
Coordination
Only Product Risk
Vs.
Performance Risk
39
Product
vs.
Traffic Server
Sales a software solution for around $25,000
plus the required hardware
Benefits: Software is easy to
scale. Costs are fixed.
Problems: Huge upfront
costs.
Key Customer:
AOL
Service
Content Delivery
Benefits: Easy to sell.
Low upfront costs.
Problems: Capital
expenditures and risks are
fully shouldered by Akamai Model is difficult to Scale
Key Customer:
40
Mega Aggregators- A serious attempt
Offers the Physician one software, hardware and support to allow
an office to move all records to electronic format.
Scheduling
Electronic
Charting
Compliance
Reporting
Insurance
Reimbursement
Electronic
Co-pay
Prescription
41
Three Tools of industry analysis
Industry Analysis
Porter’s Five Forces Model
Threat of
New Entrants
Bargaining
Power of
Suppliers
Rivalry among
Existing
Competitors
Bargaining
Power of Buyers
Threat of
Substitutes
43
Additional Industry Analysis Tools
SWOT Analysis:
Numerous Environmental
Opportunities
Critical
Internal
Weaknesses
Overcome
Weaknesses
Restructure
Grow
Substantial
Diversify
Internal
Strengths
Major Environmental
Threats
44
THE U.S. AUTO INDUSTRY’S
PROFIT POOL
25%
The automotive industry encompasses
many value-chain activities. The way that
profits and revenues are distributed
among these activities varies greatly. The
most profitable areas of the car business
are not the ones that generate the biggest
revenues.
operating margin
20
15
10
5
0
0
auto loans
new car dealers
used car dealers
leasing
gasoline
auto insurance
warranty
auto manufacturing
Share of Industry Revenue
source: Gadiesh and Gilbert, Harvard Business Review, May-June 1998
100%
service repair
auto rental
aftermarket parts
45