Competition Analysis and Business Strategy

Competition and Business Strategy: The Quest for Competitive AdvantagePresentation by C. Nagapavannagapavanc@gmail.com

OutlineIdentifying CompetitionBusiness Environment & Impact on CompetitionWhat is Strategy?The Purpose of strategy Gaining Competitive AdvantageCompetitive ForcesGeneric Strategies for Competitive Advantage Analyzing Value from Business Activities Value ChainFatal Flaws in Company Thinking on Competitive AdvantageCompetitionThe effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms.Levels of CompetitionDirect competitionSubstituteCompetitionBudget competitionSimilar productsPrice of Petrol and Impact on Demand for two wheelers / diesel carsMoney spent Onion Prices Vs EntertainmentTwo WheelersSimilar valueBusiness Environment & Impact on CompetitionSingur & Tata Motors, Growth of Telecom companies, 2G, POSCOEnvironmental Clearance and Lavasa / Adarsh ProjectsAvailability of Capital for businessWorking wife; Travelling WomenCloud Computing, ATMs, Mobile BankingFloods, Rainfall, Forests, Mines What is Strategy?A strategy is a commitment to undertake one set of actions rather than anotherManagements game plan for growing the businessA companys strategy consists of the competitive moves and business approaches that managers employ to attract and please customers, compete successfully, grow the business, conduct operations and achieve targeted objectivesThe Purpose of Strategy Gaining Competitive AdvantageBusiness strategy is about taking defensive or offensive action to create a defendable position in the industry, in order to cope successfully with competitive forces and generate a superior return on investment. The Purpose of Strategy Gaining Competitive AdvantageBusiness strategy is about taking defensive or offensive action to create a defendable position in the industry, in order to cope successfully with competitive forces and generate a superior return on investment. Competitive ForcesAnalyzing the Business Environment9Porters Industry Analysis: Five Forces ModelThreat of new entrantsNew entrants to an industry Brings new capacityCapture market share from existing playersMore competitionPrice warsFalling returns - decline in profitabilityAcquisition - the preferred way to enter into a new marketBarriers to entry into a new marketAnalyzing the Business Environment10Five Forces Model - Threat of New EntrantsBarriers of entry into new marketEconomies of scaleProduct differentiationCapital requirementsCost disadvantages independent of sizeAccess to distribution channelsGovernment policyAnalyzing the Business Environment11Five Forces ModelIntensity of rivalry among existing competitorsLead to Price wars, Advertising battles, Launches of new products and increased services and Warranties.Intensity of rivalry depends onNumber of competitorsSlowdown in industrial growthLack of differentiation among productsAbsence of switching costUnder-pricing to avoid spoilage of goodsPrice-cut to disrupt the supply-demand balanceAnalyzing the Business Environment12Five Forces ModelThe Bargaining Power of BuyersBuyers are powerful whenThe suppliers are many and the buyers are a few and largeThe buyers purchase in large quantitiesThe suppliers industry depends on the buyers for a large percentage of its total ordersThe buyers can switch orders between supply companies at a low costIts is economically feasible for the buyers to purchase the input from several companies at a timeThe buyers can use the threat to provide for their own needs through vertical integration as a device for forcing down priceAnalyzing the Business Environment13Five Forces ModelThe Bargaining Power of SuppliersSuppliers are powerful whenThe product as few substitute and is important to the purchasing companyNo single industry is a major customerProducts are too much differentiated and switching cost is higher for a buyerSupplier can use the threat of vertically integrating forward into the industry and competing directly with the buying companyBuyers cannot use the threat of vertically integrating backward and supplying their own needsAnalyzing the Business Environment14Five Forces ModelThreat of Substitute ProductsSubstitute products can match the needs of the customer in the same way as the original productA close substitute is a potential threat to the companys productIt limits the price charged by a companyAnalyzing the Business Environment15Internal Analysis of the FirmAnalyzing Departments and FunctionsProduction/Operations/TechnicalStrategies for Small Business UnitStrategies for Large Business UnitFinance and AccountingMarketingResearch and Development15Analyzing the Business Environment16Learning CurveA graphical representation of the "average" rate of learning for an activity or toolIt can represent at a glance the initial difficulty of learning something and, to an extent, how much there is to learn after initial familiarityMore times a task has been performed, the less time will be required on each subsequent iteration It encompasses only time factor Analyzing the Business Environment17Learning Curve

Analyzing the Business Environment18Experience CurveMore often a task is performed the lower will be the cost of doing it, the task can be the production of any good or serviceEach time cumulative volume doubles, value added costs (including administration, marketing, distribution, and manufacturing) fall by a constant and predictable percentage Under ideal conditions, the profitability of each firm should be a function of its accumulated experience in producing a particular productExperience effect = Volume effect + Learning effectVolume effectWhen a firm increases production, its fixed costs do not change but an increase in production brings down the cost per unitAnalyzing the Business Environment19Experience Curve

Analyzing the Business Environment20Experience CurveExperience effect depends on following factors other than time factorLabor efficiency Standardization, specialization, and methods improvements Technology-driven learning Better use of equipment Changes in the resource mix Product redesign Value chain effects Network-building and use-cost reductions Shared experience effects Analyzing the Business Environment21Vulnerability AnalysisA process that defines, identifies, and classifies the security holes (vulnerabilities) in a systemIn addition, vulnerability analysis can forecast the effectiveness of proposed counter measures and evaluate their actual effectiveness after they are put into useIt assumes that every business is based on some PillarsNeeds or Use function Uses, Habits, ValuesTechnology stabilityInputs and resourcesNiche or market segmentExistent constraints, sanctions, incentivesComplementary products and servicesAlternative products or services cost stability - are pillarsAnalyzing the Business Environment22Vulnerability AnalysisIdentify pillars and take action against the events which might destroy the pillarsDefenselessEndangeredVulnerablePreparedHigh LowLowHighCompanys Ability to ReactImpact of ThreatAnalyzing the Business Environment23Vulnerability AnalysisVulnerability analysis consists of several stepsIdentification of business pillarsIdentification of events which may destroy these pillarsAnalyzing the probability of the occurrence of the event and its impactIdentification of the actions to be taken when the event occurs

Analyzing the Business Environment24Strategic AnalysisAnalysis of strategies can be done at Company (Corporate) LevelProduct LevelIndustry (Business) LevelAnalyzing the Business Environment25Strategic AnalysisTools for strategic analysis Company Capability ProfileSWOT AnalysisEnvironmental Threat and Opportunity Profile (ETOP)Profit Impact of Market Strategies (PIMS)Vulnerability AnalysisBCG Growth-Share MatrixGE Nine Cell Planning GridAnalyzing the Business Environment26BCG Growth-Share MatrixObjectivesAnalyze generators and optimum users of corporate usersAllocate resources between competing SBUsCriterionThe growth rate of the marketThe relative market share of the SBUsCategories of SBUsCash CowsStarsQuestion MarkDogsAnalyzing the Business Environment27BCG Growth-Share Matrix

Analyzing the Business Environment28BCG Growth-Share MatrixCash Cows Large market share in a mature and slow-growing industry. A strong business position and negligible investment requirements The returns from these businesses are often more than their investment requirementsNet cash generatorsOrganizations often tap their cash cows in order to draw out resources required elsewhere in the organizationAnalyzing the Business Environment29BCG Growth-Share MatrixStars Large market share in fast growing markets or industriesFirms need to invest in stars as the industry is still emerging and the market share is also growingStars often generate as much revenues as they useBut once the industry reaches the stage of maturity, the stars hardly need any investment and become major sources of revenue for the firmsAnalyzing the Business Environment30BCG Growth-Share MatrixQuestion Marks ?Low market share and high growth rateDemand significant investment because their cash needs are high the norm in a growing industryThese organizations have to make a huge investment in advertising and promotionWith the market growing rapidly, it is easier to gain a market shareOnly a few question marks move to starsAnalyzing the Business Environment31BCG Growth-Share MatrixDogsA low market share in an intensely competitive, mature industry characterized by low profits. Not much need of an investment, but it ties up capital that could be invested in industries with better returnsConcentrate on recovering as much as possible from these units in terms of returns on investment and often undertake ruthless cost cuttingUnless there is a larger purpose in keeping such units, an organization should divest itself of dogs at the earliestAnalyzing the Business Environment32GE Nine-Cell Planning Grid The idea behind the matrix is to evaluate businesses along two composite dimensions: industry attractiveness and industry strength To overcome the limitations of BCG Matrix, this grid deploys multiple factors Each SBU can be portrayed as a circle plotted on the matrix, with the information conveyed as followsMarket size is represented by the size of the circleMarket share is shown by using the circle as a pie chart The expected future position of the circles is indicated by an arrowAnalyzing the Business Environment33GE Nine-Cell Planning GridThe industry attractiveness is based on following factorsMarket growth,Fluctuations in demandMarket sizeIndustry potentialCompetitive environment in the industryOpportunities in the world market, Macro environmental factorsThe industry strength is based on following factorsRelative market sharePriceCompetitivenessProduct qualityCustomer and market knowledgeSales effectiveness, and Geographic advantages Analyzing the Business Environment34

Analyzing the Business Environment35

Analyzing the Business Environment36GE Nine-Cell Planning GridBoth axes are divided into three segments, yielding nine cells. The nine cells are grouped into three zonesThe Green ZoneThe Green Zone consists of the three cells in the upper left cornerIf the SBU falls in this zone, its in a favorable position with relatively attractive growth opportunitiesThis position indicates a "green light" to invest and grow this SBUAnalyzing the Business Environment37GE Nine-Cell Planning GridThe Grey/Yellow ZoneThe Grey Zone consists of the three diagonal cells from the lower left to the upper rightA position in the yellow zone is viewed as having medium attractivenessManagement must therefore exercise caution when making additional investments in this SBUThe suggested strategy is to protect or allocate resources on a selective basis rather than growing or reducing share. The Red ZoneThe Red Zone consists of the three cells in the lower right cornerA harvest strategy should be used in the two cells just below the three-cell diagonalThese SBUs shouldnt receive substantial new resourcesThe SBUs in the lower right cell shouldnt receive any resources and should probably be divested or eliminated from a firms portfolioAnalyzing the Business Environment38Arthur D Little Life Cycle ApproachArthur D. Little (ADL), a consulting firm, methodology draws directly upon the concept of industry life cycles to develop a structural approachThe approach uses the dimensions of environmental assessment and business strength assessmentThe environmental measure is an identification of the industry's life cycleThe business strengths measure is a categorization of the corporation's SBU's into one of six competitive positionsDominant, strong, favorable, tenable, weak, and non-viable. This yields a 6 (competitive positions) by 4 (life cycle stages) matrixAnalyzing the Business Environment39Arthur D Little Life Cycle ApproachStep 1. Identify each line of business. In the ADL approach, the line of business or SBU is not especially defined by a product or organizational unit. The strategist must identify discrete businesses by finding commonalties among products and business lines using the following criteria as guidelinesCommon rivalsCustomers SubstitutabilityPricesQuality/StyleDivestment or liquidationAnalyzing the Business Environment40Arthur D Little Life Cycle ApproachStep 2. For each business, assess the life cycle stage. This assessment is made on the basis of business market share, investment, and profitability or cash flow. The three matrices - Market Share, Investment Required, and Profitability and Cash Flow - are used as guides in this process.Step 3. Identify the competitive position of a firm. This is a subjective assessment, based on the following criteria Dominant: These are rare. Dominance often results from a near monopoly or protected leadershipStrong: A strong SBU can usually follow a strategy without consideration of rival counter movesFavorable: The industry is fragmented. There is no clear leader among stronger rivalsTenable: Typically the SBU has a niche, either geographical or defined by the productWeak: Typically too small to be profitable or survive over the long term. May be a large firm, but suffers from prior mistakes or a critical weakness

Analyzing the Business Environment41Arthur D Little Life Cycle Approach

Step 4. Assess what is the natural strategy for the SBU, based on its life cycle stage and competitive position. This is determined by the table below Natural Development strategies are appropriate when the SBU is in a mature industry and is competitive. The SBU deserves strong support.Selective Development refers to strategies that concentrate on industries that are attractive or on SBU's that have competitive competencies.Prove Viability is transitional strategy that cannot be sustained. The situation must be changed.Out is a strategy for withdrawal.Analyzing the Business Environment42Arthur D Little Life Cycle ApproachStep 5. Assign a strategic thrust to the natural strategyThis is a set of specific actions that support the general direction in Step 4For example, within a Natural Development strategy, a SBU can pursue Start-Up: the embryonic stage for business with strong competitive potential Growth with Industry: a strong or dominant business in a mature industry seeks to maintain position Gain Position Gradually: to attain a stronger position, market share is increased incrementally Defend: in early stages of industry maturity, a strong or dominant business needs to combat rivals Harvest: in the aging stage, the resources of the business are reallocated to strong SBU's and exit is planned Analyzing the Business Environment43Arthur D Little Life Cycle ApproachBackward IntegrationForward IntegrationMarket RationalizationPure SurvivalDevelop Business OverseasHesitationMethod/Function EfficiencySame Products/New MarketDevelop Overseas FacilitiesInitial Market DevelopmentNew Products/New MarketsSame Products/Same MarketDistribution RationalizationLicensing abroadNew Products/Same MarketTechnological EfficiencyExcess CapacityComplete RationalismProduction RationalismTraditional Cost CuttingExport/Same ProductMarket PenetrationProduct Line RationalizationUnit Abandonment Step 6. Using the strategic thrust identified in Step 5, one of twenty four generic strategies is selectedAnalyzing the Business Environment44SWOT AnalysisThe process of analyzing the company and the environment in which it is operating SWOT stands for strengths, weaknesses, opportunities and threats. Internal EnvironmentStrengths Infrastructure, Employees, Marketing team, Latest product innovation, International quality standards, or even its closeness to the marketThe strength can be anything that adds value to its business

Weaknesses Incompetent management, Untrained employees, Unevenly trained sales force, Poor marketing strategies, Low quality products, or Lack of proper financial capabilities Analyzing the Business Environment45SWOT AnalysisExternal EnvironmentOpportunityA new potential market with ample scope for growth, A collaborative advantage (advantages through strategic alliances and partnerships), or opportunities to fulfill the demand of a latent marketAny such activity in the environment that helps the organization to grow, is an opportunity for itThreatsA new competitor in the market, Price reduction in the competitors product or A new product introduced in the market that will eat into the companys market share

Analyzing the Business Environment46Profit Impact of Market Strategies (PIMS)Yields solid evidence in support of both common sense and counter-intuitive principles for gaining and sustaining competitive advantage

PIMS seeks to address three basic questionsWhat is the typical profit rate for each type of business? Given current strategies in a company, what are the future operating results likely to be? What strategies are likely to help improve future operating results?

The original PIMS data survey led the PIMS project to identify 37 variables which account for the majority of business success. The most important variable are A strong market position High quality of product Lower costs Lower requirement for capital investment Analyzing the Business Environment47Product Market Matrix of AnsoffPlanning New Businesses and Downsizing Existing Businesses A tremendous gap between actual and projected salesThe firm then has to devise strategies to fill this gap or rather increase the salesIntensive growthThe organization can focus on identifying opportunities to increase the market share of existing businessesIntegrative growth it can focus on identifying business opportunities in the related business areas Diversification growth it can identify opportunities that have a vast potential but are unrelated to the present business activityAnalyzing the Business Environment48Product Market Matrix of AnsoffIntensive Growth

Analyzing the Business Environment49Product Market Matrix of AnsoffIntegrative growth Forward integrationIf Britannia start its own distribution networkBackward integrationIt produce its own raw materials by starting a dairy farm for milk and producing wheat etc.Horizontal integrationIt may acquire the business of one of its competitors

Analyzing the Business Environment50Product Market Matrix of AnsoffDiversification Growth When there are vast growth opportunities in a specific industry and the company has the necessary resources to tap that potentialConcentric Diversification StrategyA company tries to diversify by serving a new customer base with products that are related to the existing product categoryIf Britannia is trying to diversify into producing wheat flourHorizontal Diversification Strategy If the company tries to attract current customers with new products even if the company has to acquire a new manufacturing capabilityIf Britannia wants to enter the ice-cream industryConglomerate Diversification StrategyThe company tries to perform unrelated business activitiesIf Britannia ventures into the manufacturing of bicycles or wristwatchesAnalyzing the Business Environment51Product Market Matrix of AnsoffFailure of Diversification Diversification in terms of related areas of business, which are normally saturated and do not offer any business potentialEveryone in the industry take advantage of a potential opportunity - Reduction of market share of each player in the industryAt the same time, diversification is imminent for companies trying to overcome saturated markets and product obsolescenceTherefore, companies should devise customized strategies for diversificationAnalyzing the Business Environment52Product Market Matrix of AnsoffDownsizing Older Businesses Removing old and sick businesses that are not adding any value to the company. It clears the way for the management to allocate the resources employed in these older businesses to new and lucrative business activities. Layoffs Laying off the employees - cost cutting measureRepeated layoffs are an indication of poor management of the organizationInefficiency in the form of decreased loyalty, insecurity and decline in employee morale, decreased employee motivationAnalyzing the Business Environment53Formulating Long-term StrategiesConcentrationMarket DevelopmentProduct DevelopmentHorizontal IntegrationVertical IntegrationTapered IntegrationQuasi IntegrationDiversificationAnalyzing the Business Environment54Behavioral Considerations Affecting Strategic ChoiceRole of Past StrategyAttitude Towards RiskCompetitive ReactionDegree of Firms DependenceValues and PreferencesApproaches for Competitive Advantage Cost Leadership

Differentiation

Focus Termed as Generic Strategies by Michael Porter

Adaptation of Porters Generic StrategyDifferentiationCostBroad Target MarketNarrow Target MarketCost LeadershipBecome a low cost producer in its industryAssumed that cost leader has achieved parity or at least proximity in the bases of differentiationEconomies of scale Not more than one company in the industry can aspire this approach to competitive advantage

Eg: Maruti 800, Bajaj CT 100, Tata Nano, Reliance CDMA, Satyam, etc

DifferentiationA firm seeks to be unique in its industry along some dimensions that are valued by the buyersCannot ignore costs completely. Areas of Differentiation Product (Eg: Harley Davidson) Distribution Channels (ATM, Online Banking)Marketing (Service (IBM, Image (What is the best Bank, TV, Bike?)FocusApplication of cost leadership or focus in a specific segment is known as Focus

Characteristics of Competitive AdvantageShould be clear to the customersShould be acceptable to customersShould be unique to the companyShould provide distinct advantage to customers

Analyzing Value from Business Activities Value ChainInboundlogisticsServiceMarketing&SalesOutboundlogisticsOperationsInfrastructureHuman Resource ManagementTechnology developmentProcurementMarginSupportActivitiesPrimaryActivitiesMarginInboundlogisticsServiceMarketing&SalesOutboundlogisticsOperationsInfrastructureHuman Resource ManagementTechnology developmentProcurementMarginMarginSupportActivitiesPrimaryActivitiesFatal Flaws in Company Thinking on Competitive AdvantageThey don't have a competitive advantage but think they doThey have a competitive advantage but don't know what it is - so they lower prices insteadThey know what their competitive advantage is but neglect to tell clients about itThey mistake "strengths" for competitive advantagesThey don't concentrate on competitive advantages when making strategic and operational decisions.ANY QUESTIONS?