CHAPTER EIGHT

INVESTING IN COMPETITIVE METHODS

By Maris Chen for Dr. DeMicco

OBJECTIVES

1. Define a competitive method (CM) as a portfolio of products and services.

2. Explain the role of CMs in adding value to the firm.

3. Evaluate the CM as an investment in the future.

4. Identify the nature of the economic life span of a CM.

5. Conduct an analysis of current and future CMs.

6. Describe the challenge of limited resources when many investments in CMS are needed.

7. Explain how investments in CMs affect the market value of the firm.

Competitive Methods as Combinations of Goods and Services

1) Define a competitive method (CM) as a portfolio of products and services.

A CM is a portfolio of products and services bundled in such a way that is attracts those customers

from within the overall demand curve of the industry.

In service industry, many of CMs are intangible and difficult to produce consistently over time.

CMs are unique bundles of products and services.

Ex 1: Hotel room service combining products such as menu items with Individualized services.

Ex 2: The individual butler concept in hotels.

Ex 3: Expedia packages complete trips for individuals based on customers’ desires. Please read page 230 and 232 in the textbook for the details of these examples.

The exhibit on the next slide explains how CM relates to goods & services, and environment &

investment return.

Competitive Methods as Combinations of Goods and Services

Products/Services

CompetitiveMethods One

CompetitiveMethods Two

Competitive Methods

Cash Flow to Shareholders

P1

P2

S1S2

S4

P4

P3Environmental

Events

S3

Each CM reflects the

opportunities and threats

within the environment,

and produce the needed

returns sought by

investors.

In service industry, CMs are combinations of goods and services, both tangible and intangible.

2) Explain the role of CMs in adding value to the firm.

CM becomes the primary way for firms to differentiate themselves from other firms and seek to achieve

sustainable competitive advantage.

Truly unique CMs are hard to be duplicated. The more CMs, the greater the chance of achieving

profitable and sustainable advantage.

Each CM is unique and appeals to the customer in the marketplace and serve as the main reason why that customer is willing to part with his or her money. So, the CM is a revenue producer that has strong market appeal and can offer the firm competitive advantage.

Competitive Methods to Add Value to Firms

3) Evaluate the CM as an investment in the future.

A CM must unique to the individual firm. CSFs can not be included in a CM.

For a firm to consider a CSF as a CM it must lead the industry, and this leadership must result in

improved return on invested capital over time.

Ex: Although loyalty programs and reservation systems are considered industry-wide CSFs, Marriott

has enjoyed better performance from them and can consider its investment in both as CMs.

The life cycle is an important determinant relative to estimating the cash flow streams associated with

an investment in a CM.

Please read page 232 and 233 in the textbook for further information.

Investment in the future

4) Identify the nature of the economic life span of a CM.

It is possible to sustain the life cycles of CMs for extended periods with good planning and

future-oriented management.

Ex: McDonald’s continues to lead the industry by extending the life of its CMs. Please read page 233 and 234 in the text book for more detail about this example.

The life of a CM is linked to several key variables such as forces driving change, value drivers,

competitor actions, demand curve makeup.

In mature industries, many of the previous CMs have turned into CSFs, which put great strain on

management to be creative in how it plans to compete in the future.

The following slide illustrates the life cycle of industries, organizations, and competitive methods.

Life Cycle of Competitive Methods

Industry, Organization, and Competitive Method Life Cycles

Time

Growth

Competitive Methods Life Cycle

Industry Life Cycle

Firm Life Cycle

As the industry matures, it is harder for firms to grow value. Their CMs’ lives grow increasingly shorter. Thus, firms should recognize where their firm is situated and to make investment decisions in CMs that reflect this position.

Assessment of CMs’ future performance

Changes in cash flow estimates and NPV

Review changes in remote and task environment

Review of each CM (product + service)

Conducting an Analysis of Current and Future Competitive Methods

5) Conduct an analysis of current and future CMs.

Each CM is valued using the discounted cash flow technique referred to as net

present value (NPV).

Process of evaluating CMs:

Please read the example of evaluating current CMs on page 239 in the textbook for more understanding.

forces driving change

value driver

critical success factors

life cycle

What to Do?

Challenge of limited resources

Investments in CSFs

NPV $Investment required $

Investmentsin CM

NPV $Investment required $

CSF1 10,000 50,000 CM1 5,000 25,000

CSF2 100,000 40,000 CM2 20,000 150,000

CSF3 1,500,000 800,000 CM3 6,000,000 3,400,000

Total $1,610,000 $890,000 Total $6,025,000 $3,575,000

6) Describe the challenge of limited resources when many investments in CMs are needed.

There is hardly ever enough resources to meet all the investment needs of the firm.

The exhibit below contains a look at the firm in which the project list exceeds the resources available.

Please read page 239 and 241 in the text book for more detail about this example.

To make investment by rank according to NPV. So, for this example, CSF3 first, followed by CSF2, and then CM2,CSF1 and CM1.

The challenge that the manager will face is whether or not to invest in CSFs where the firm is weak or

to ignore those needs and go with new ideas that will provide new advantages.

One of the unique feature of the hospitality industry is that management is very often separated with

ownership.

Managers must respond to the needs of the owners of these assets. This includes requiring the manager to

understand the needs of the owner with respect to the returns on capital associated with key CMs.

Please read the example on page 240 in the text book for more understanding about this challenge.

Challenge of limited resources

7) Explain how investments in CMs affect the market value of the firm.

Not all of the firm’s value can be easily explained by the NPVs of each CM because of intangible value.

Managers are expected to grow more value out of each CM and add new ones when possible.

Overlap among the CMs should be view as a positive strategic move.

By allowing this overlap, it is possible that firms can leverage resources across several CMs.

This overlap keeps the competitors from completely understanding how value is created, thus

making it difficult for them to copy. This is especially important in service firms where many services can be copied easily.

The following slide illustrates the market value of firm as estimated by aggregating NPVs of CMs.

Market Value from CMs

Market Value from CMs

Total market value of the firm in $ Explainable portion of

the firm’s value

Unexplainable portion of the firm’s value

CMCM

CMCM

CM

CMCM

Represents the expected growth in returns by investors

Ex, brand name, employees, the talent of leader, location, R&D department, and so on.

Overlap among the CMs : positive strategic move

Chapter Questions

1. What determines successful competition in the hospitality industry once the segment is chosen?

Analysis of environment

Total array of competitive methods that the firm invests in

Resource allocation

None of the above

2. What offers firms the opportunity to sustain competitive advantage and is very much a part of the

strategic thinking process?  

Products only

Services only

Unique bundles of products and services

None of the above

Chapter Questions

3. The life of a competitive method is linked to:  

the forces driving change as identified in the remote environmental analysis.

the value drivers competitor actions.

the demand curve makeup.

All of the above

4. If the CM is performing well, what must management do next?  

Management must probe further to be sure that all the value that was originally forecasted has actually

been achieved.

Management needs to investigate the internal resource allocation process to see if costs of implementing

the CM can be improved.

The processes to produce, inventory, and sell the products and services related to the CM must also be

looked at to be sure they are reflecting the current best practices in the industry.

All of the above

Chapter Questions

5. When considering the investment resource, the challenge(s) the managers meet include:  

whether or not to invest in critical success factors where the firm is weak.

whether or not to ignore those needs and go with new ideas that will provide new advantage.

whether or not there are too many resources to meet the investment needs of the firm.

whether or not to invest in critical success factors where the firm is weak; whether or not to ignore those

needs and go with new ideas that will provide new advantages.

6. What does the dotted line around the silver dollar in Exhibit 8-8 imply?  

The investors expect that dollar to grow in value on a consistent basis.

Managers are expected to grow more value out of each CM and add new ones when possible.

The co-alignment process is dynamic in the sense that managers must manage each competitive method

to be sure that it continues to generate cash flows and that each CM grows in value.

All of the above

Chapter Questions

7. The life cycle is an important determinant relative to estimating the cash flow streams associated with

an investment in a CM.    

True

False

8. Managers should allocate resources to those CMs that create the greatest value.

True

False

9. In trying to fully understand the value of any firm, financial analysts often comment on the difference

between the book value of the firm and its market value. 

True

False

Chapter Questions

10. What is the definition of Competitive Methods? Please briefly explain it as it relates to the service industry.  

11. Why do we say the concept of the life cycle provides a useful link between the elements of the environment and strategy choice in the co-alignment model?  

12. What reviews must take place when deciding what competitive method to invest in within the context of its

domain?  

13. Briefly explain the process of evaluating competitive methods.  

14. Why should the overlaps among the CM be viewed as a positive strategic move?  

Student Learning Outcomes

On completion of this chapter, you will be able to:

1. define a competitive method (CM) in organizations.

2. explain the role of CMs in adding value to the firm.

3. apply the life cycle of industries, organizations, and CMs into your analysis.

4. conduct an analysis of current and future CMs.

5. provide examples about how investments in CMs affect the performance of the firm.

Case Study

Case Study

Case Study

Case Study

Case Study

Case Study

Case Study

Case Study Answers

1. Facing the environment change that North American and European markets reach saturation with

fierce competition, and on the other hand, the Asia Pacific region offers excellent growth prospects,

leading players of the hotel industry are targeting Asia for their future growth and boosting the number

of their hotels in Asia, especially in China. Additionally, the middle class of the Asia Pacific area is

growing, in order to take advantage of this change, most international hoteliers aim to expand their

supply in the mid-rate and budget market. Finally, with increasing uncertainty in the external

environment, key players in the hotel industry are diversifying their operation to achieve balanced

growth among different geographic regions and different market segments.

2. First, Accor’s achievement attributes to its diversified portfolio strategy with emphasis upon budget

properties, in which way Accor has reduced operation risk and enjoyed balanced growth. Second,

innovative and user-friendly technologies such as reservation and yield management enable Accor to

attract international traveler and build the base for its expansion. Third, the experience of running

budget hotels in France also is an important advantage for Accor to compete with its rivals and become

a key international hospitality organization.

Case Study Answers

3. In each country/region it enters, Accor has blended itself into the local culture and developed adaptable

products and competitive methods according to the local situation. For example, in South Africa, it started

with its budget brand Formula 1; in Brazil, it started with its mid-scale hotels; in China, Accor began its

business with up-scale hotels; in the United States, however, two –pronged strategy in economy and luxury

segments are adopted by Accor. In a word, based on the economy in the host country and the development

stage on which the local hotel industry is and local culture, Accor has pursued the most proper competitive

methods and made itself a leading international hotel player.

4. In my opinion, the first competitive method of Accor is its balanced portfolio of hotels ranging from first class

to economy and diversified operation in a full range of tourism services along with hotels, which enables Accor

to achieve balanced growth in increasingly uncertain environment. Second, Accor has gained competitive

advantage by using technology consistently and innovatively such as centralizing its yield management to

increase cross-sell opportunities, developing online booking engine with instant confirmation and daily rates,

and launching multilingual booking platform. Finally, the proper and successful strategic expansion plans

launched according to local situation in different geographic regions have put Accor ahead of its competitors.

Case Study Answers

7. The first political risk for Accor in China and Asia is how it gets used to a different political environment

from its own country. In this sense, it is imperative for Accor to be familiar with the local government regulations

and laws and operate its business in the local way. Second, it is possible for Accor to suffer unfair competition

with the local hotels protected by the local government. One economic risk Accor is facing is the increasingly

changeable exchange rates, which probably brings financial loss for international operators like Accor.

8. The most sustainable aspect of Accor’s strategy is to focus on accommodating the emerging lifestyle trends

and needs of the fast-growing group of Asia travelers because the ability to satisfy demand plays the most

fundamental role in the competition of hotel industry. Secondly, the consistent and innovative utilization of

technology in its strategy is also crucial to gain sustainable advantage and keep the place of leading performer.

 9. In fact, reservation and yield technology are considered industry-wide CSFS. However, Accor has enjoyed

better performance on them compared to its competitors. In this sense, Accor has a leadership with respect to

technology utilization and technology is the competitive method for Accor. As a result, its rivals should put more

investment in technology and catch up with Accor.