Competitive Advantage

50
SCHOOL OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS ADMINISTRATION BA 530 – John A. Hengeveld Winter 2004 BA 530 – John A. Hengeveld Winter 2004 BA530 Class 4 Competitive Advantage & Medical Cases John A. Hengeveld

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Transcript of Competitive Advantage

Page 1: Competitive Advantage

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

Page 2: Competitive Advantage

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

Page 3: Competitive Advantage

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

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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

Page 5: Competitive Advantage

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

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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

Page 7: Competitive Advantage

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

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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.

Page 9: Competitive Advantage

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

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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

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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 (%)

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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

Page 13: Competitive Advantage

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

Page 14: Competitive Advantage

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

Page 15: Competitive Advantage

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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

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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

Page 17: Competitive Advantage

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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

Page 18: Competitive Advantage

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

Page 19: Competitive Advantage

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

Page 20: Competitive Advantage

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

Page 21: Competitive Advantage

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

Page 22: Competitive Advantage

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)

Page 23: Competitive Advantage

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

Page 24: Competitive Advantage

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

Page 25: Competitive Advantage

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

Page 26: Competitive Advantage

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

Page 27: Competitive Advantage

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SYSTEM PRODUCT

SERVICE COMMODITY

SUPPORT(SOFTWARE)

Differentiated Undifferentiated

Differentiated

MERCHANDISE(HARDWARE)

Undifferentiated

Differentiation of Hardware and SoftwareDifferentiation of Hardware and Software

Page 28: Competitive Advantage

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..

Page 29: Competitive Advantage

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”

Page 30: Competitive Advantage

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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

Page 31: Competitive Advantage

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

Page 32: Competitive Advantage

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

Page 33: Competitive Advantage

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

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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

Page 35: Competitive Advantage

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

Page 36: Competitive Advantage

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?

Page 37: Competitive Advantage

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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

Page 38: Competitive Advantage

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 ?

Page 39: Competitive Advantage

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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

Page 40: Competitive Advantage

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

Page 41: Competitive Advantage

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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

Page 42: Competitive Advantage

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0

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4

6

8

10

12

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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

Page 43: Competitive Advantage

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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

Page 44: Competitive Advantage

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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

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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

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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?

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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

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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

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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)

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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