Marketing-Industry Analysis

Web: www.ryerson.ca/~agervais

Email: agervais@ryerson.ca

Office: Bus 308

Phone: 416-979-5000 Ext. 4215

MKT 731 Instructor: Armand Gervais

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Lecture 4-Week 5 Agenda

Questions and Answers Administration

Peer Evaluation All Emails-Please include group # in

subject line News Items:

Auto industry and BMW Stelco and the Steel industry

Competitive Analysis To Do’s for next week

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Steel Industry

Trends Worldwide production Price of Steel US trade tariffs Why do profits vary? Dofasco Nucor Stelco

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What Happen?• The mills that closed did remove some supply from the market, but

generally these mills were mid-sized or smaller.• The mergers and acquisitions have had a more profound effect,

though, because the companies involved were some of the biggest in the industry.

• LTV produced almost 10% of some of the most valuable grades of steel, before being shuttered in early 2002. The company was purchased out of liquidation and subsequently merged with Acme Steel, which had also closed, and Bethlehem Steel, another giant that was operating under Chapter 11 protection.

• US Steel also got in on the act, purchasing the assets of National Steel and regaining its status as the country’s largest steel maker.

• On the electric furnace “mini-mill” side, there was also significant consolidation Nucor purchased Birmingham Steel and Trico

• Steel Dynamics purchased Qualitech, and Gerdau of Brazil bought AmeriSteel and merged it with Co-Steel of Canada, creating Gerdau AmeriSteel.

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Steel Prices US Dollars

Worldwide capacity now tops 1 billion tons a year, exceeding global demand by an estimated 200 million tons -- or twice the annual output of the entire U.S. steel industry.

Source: http://www.globalinsight.com/Perspective/PerspectiveDetail654.htm

Between 1994 and 2002 Steel prices declined by over 33%!

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Stelco

Canada’s largest steel producer measured in tons at 5.1 million 8,400 employees under funded pension of 1.3 billion Annual pension funding costs are $41 million but will soar to $98

million in 2008 Other benefits were $39 million last year and will grow to $50 million

by 2008 Cleveland based ISG a creation of Wilbur Ross scooped up bankrupt

steel companies like Bethlehem Steel Corp and Acme Metals emerged with costs $50-60 (U.S.) lower per ton than Stelco

From Q1 1993 to Q4 2003 sold $31 Billion Cdn in Steel and earned a total of $349 million in profit. 92 cents went to the costs of making steel and 7 cents to bankers, debt holders and the taxman

National Bank Financial estimated that the company would have to chop its payroll by 125 million or 20% just to breakeven

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Dofasco-The future of the industry

Shifted to higher value added products Non-union shop Mr. Simpson believes North American producers can produce steel in

the long term by undertaking 3 broad initiatives:1. Build a strong track record of operational performance by taking costs

out and boosting customer service to satisfy customers like the auto manufacturers

2. Be better than anyone else in their segment de-commoditize their products

3. Real good assets-Reliable efficient equipment, low cost labour, cost-effective energy and materials

Stelco relies heavily on traditional blast furnaces which require heavy capital outlays and periodic maintenance

Electric furnaces used by new mini mills like Nucor are cheaper to install, more cost effective and reliable and use less energy.

Source Globe and Mail Report On Business January 30, 2004 pages B1&B5

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Dofasco

Why is Dofasco such a tough act to follow? Analysts credit the solid executive team put together by recently retired CEO

John Mayberry. Ongoing investment in operations makes it less vulnerable to price slumps on

the spot market. Shift to high value finished steel products Founded in 1912, it became the first Canadian company to offer profit sharing,

in 1938. The "Dofasco Way" employee program, which has kept unions out and pays workers for productive ideas, includes morale-boosting initiatives like a recreation club, pipe band, annual picnic and legendary Christmas parties.

1999 7,000 full-time Hamilton-based employees got equal share of $53.3 million in pretax income, half of which went into the corporate pension plan.

Believe it or not, Dofasco-with operations in Canada, the US and Mexico-is also known as an environmentally friendly steelmaker. It has voluntarily reduced energy use by about 20%-twice its initial goal. And since 1990, greenhouse gas emissions have been slashed 22%-outpacing the goal set by the controversial Kyoto Protocol.

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Nucor

The average cost of scrap and scrap substitute has increased:

$27 (25%) since 2002 $37 (31%) from the 4th quarter of 2002 to the 4th quarter of

2003 $18 (13%) from the 3rd quarter of 2003 to the 4th quarter of

2003. Costs attributable to scrap per ton of steel produced have

increased $65 (57%) from Dec. 2002 to Dec. 2003.

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Nucor Production

'03 Tons '02 Tons Change

Steel production $ 17,441,000 $ 13,622,000 28%

Total Steel Shipments

$ 17,656,000 $ 13,438,000 31%

Sales to Outside Customers

$ 16,263,000 $ 12,324,000 32%

Steel Joist Production

$ 503,000 $ 462,000 9%

Steel Deck Sales $ 353,000 $ 330,000 7%

Cold Finished Steel Sales

$ 237,000 $ 226,000 5%

Net Income $ 62,800,000 $ 162,100,000 -61%

Net Income/Ton $ 3.56 $ 12.06 -71%

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Threat to the Steel industry comes from China

By 2010 China now a huge net importer of Steel, should turn into a net exporter and start displacing domestic production in Russia, setting of a global chain reaction in the rest of the world

The Yangtze (Yang-zee) Dam will be completed in 2009

610 foot high dam stretching 1.3 miles (6884 ft) across the Yangtze river

For comparison Hoover dam is 726 feet high and 1244 ft wide

Competitive Analysis

Chapter 4

Strategic Market Management

David A. Aaker

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WHO ARE THE COMPETITORS?

Against whom does the company usually compete? Who are our most intense competitors? Rank them. Less intense but still serious competitors? Makers of substitute products? Can these competitors be grouped into strategic groups on

the basis of their assets, competencies, customers and/or strategies?

Who are the potential competitive entrants? What are their barriers to entry? How are these barriers changing?

Is there, anything that can be done to discourage them?

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EVALUATING THE COMPETITORS

What are their objectives and strategies? Their level of commitment? Their exit barriers?

What is their cost structure? Do they have a cost advantage or disadvantage? What are the key cost drivers? Labour, energy materials

What is their image and positioning strategy? Which are the most successful/unsuccessful competitors over time?

Why? What are the strengths and weaknesses of each competitor or

strategic group? What leverage points (our strategic weaknesses or customer

problems or unmet needs) could competitors exploit to enter the market or become more serious competitors?

Evaluate the competitors with respect to their assets and competencies.

Generate a weighted competitor strength grid

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Weighted Competitor Strength Grid

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IDENTIFYING COMPETITORS - STRATEGIC GROUPS

The concept of a strategic group provides a very different approach toward under-standing the competitive structure of an industry. A strategic group is a group of firms that:

Over time pursue similar competitive strategies (for example, the use of the same distribution channel, the same type of communication strategies, or the same price/quality position).

Have similar characteristics (e.g., size, aggressiveness). Have similar assets and competencies (such as brand

associations, logistics capability, global presence, or research and development).

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POTENTIAL COMPETITORS

In to addition to current competitors, it is important to consider potential market entrants, such as firms that might engage in:

1. Market expansion. Perhaps the most obvious source of potential competitors is firms operating in other geographic regions or in other countries.

2. Product expansion. Nike into hockey equipment3. Backward integration. Campbell soup integrated backward to make their

own soup containers. 4. Forward integration. Suppliers attracted by margins are also potential

competitors. Intel, for example, entered the consumer marker with-end-user products such as video cards. Computers cost less than a thousand. Video cards from $50-1000 Samsung into cell phones

5. The export of assets or competencies. U.S. retailers into CanadaRetaliatory or defensive strategies. Firms that are threatened by a potential or actual move into their market might retaliate. Microsoft and Internet Explorer vs. Netscape, X-box

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Competitor Analysis-Understanding Competitors

Size, Growth, and Profitability The level and growth of sales and market share provide indicators of the vitality of

a business strategy. Strong market position or the achievement of rapid growth usually reflects a strong

competitor (or strategic group) and a successful strategy. In contrast, a deteriorating market position can signal financial or organizational strains

that might affect the interest and ability of the business to pursue certain strategies. To provide a crude sales estimate for businesses that are buried in a large company

take the number of employees and multiply it by $20,000. For many businesses this method is remarkably accurate, and the number of employees is often easy to obtain.

Businesses that are unprofitable over an extended periods of time may find it difficult to gain access to capital either externally or internally.

Image and Positioning Strategy A cornerstone of a business strategy can be an association, such as being the

strongest truck FI50, the safest car VOLVO, More often, it is useful to move beyond class related product attributes to intangibles that

span product class, such as quality (Toyota) or innovation (3M, Rubbermaid). Helpful to determine the image and brand personality of major competitors

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Competitor Analysis-Understanding Competitors

Competitor Objectives and Commitment A knowledge of competitor objectives provides the potential to predict whether or not a

competitor's present performance is satisfactory or strategic changes are likely. Non financial objectives are also helpful. Does the competitor want to be a technological

leader? Sony Or develop a service organization? Or to expand distribution? Coke Such objectives provide a good indication of the competitor's possible future strategy. The objectives of the competitor's parent company (if one exists) are also relevant. What

are the current performance levels and financial objectives of the parent? If the business unit is not performing as well as the parent, pressure might be exerted to improve or the investment might be withdrawn.

Of critical importance is the role attached to the business unit. Is it central to the parent's long-term plans, or is it peripheral? Is it seen as a growth area, or is it expected to supply cash to fund other areas? Does the business create synergy with other operations?

Does the parent have an emotional attachment to the business unit for any reason?Current and Past Strategies of Competitors The competitor's current and past strategies should be reviewed. In particular, past

strategies that have failed should be noted, because such experiences can inhibit thecompetitor from trying similar strategies again.

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Competitor Analysis-Understanding Competitors

Competitor Organization and Culture Knowledge about the background and experience of the competitor's top management can provide insight into

future actions. Are the managers drawn from marketing, engineering, or manufacturing? Dave Nichols from Cott Beverage to Presidents Choice

Are they largely from same industry or different companies in different industries An organization's culture, supported by its structure, systems, and people, often has a pervasive influence on

strategy. Does the culture promote risk taking (Virgin), cost control (Walmart), Conservative behavior (KPMG)Cost Structure Knowledge of a competitor's cost structure, especially when the competitor is relying on a low-cost strategy,

can provide an indication of its likely future pricing strategy and its staying power. Southwest 50% less than competitors

Try to understand variable, direct and fixed costs. The relative costs of raw materials and purchased components.

The investment in inventory, plant, and equipment (also fixed cost). Sales levels and number of plants (on which the allocation of fixed costs is based).Exit Barriers Exit barriers can be crucial to a firm's ability to withdraw from a business area, and

thus are indicators of commitment. They include: Specialized assets Fixed Costs-Labour agreement, leases Relationship to other business units-shared sales force, distribution channels Government or Social Barriers- VIA rail Managerial pride- Virgin

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Competitors Strengths and Weaknesses

Must identify the assets and competencies that are relevant to the industry:

1. What businesses have been successful over time?What assets or competencies have contributed to their success

2. What business have under performed and Why?3. What are the key customer motivations4. What are the large value added parts of the product or

service? What are the large cost components Steel transportation cost are high. Location relative to demand or inputs can provide significant cost advantage

5. Examine the value chain for potential to provide competitive advantage

Chapter 3A Framework For Competitive Analysis

Competitive Strategy

Techniques for Analyzing Industries and Competitors

Michael E. Porter

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The Components of Competitive Analysis

Significant and potential competitors must be analyzedPotential competitors are: Firms not in the industry but could easily overcome entry barriers Firms who could capitalize on obvious synergies Tim Horton's and

lunch. Location capacity capabilities Firms for whom competing in the industry is an obvious extension of

the corporate strategy Customers or suppliers who may integrate backward or forward Four diagnostic components to Competitive Analysis

1. Future Goals2. Current Strategy3. Assumptions4. Capabilities

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Future Goals-Business Unit Goals

Stated or unstated financial goals Attitude towards risks Economic or noneconomic organizational values or beliefs What is the organizational structure What control and incentive systems are in place What accounting system and conventions are in place What kinds of managers comprise the leadership How much apparent unanimity is there among management What is the composition of the board What are there contractual commitments Are there any regulatory antitrust, or other governmental or

social constraints on the behavior of the firm

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Corporate Parent and Business Unit Goals

What are the current results of the parent company? What are the overall goals of the parent? What strategic importance does the parent attach to the particular business unit in

terms of its overall corporate strategy? Why did the parent get into this business? What is the economic relationship between the business and others in the parent

company’s portfolio? What are the corporate-wide values or beliefs of top management? Is there a generic strategy that the parent has applied in a number of businesses

and may attempt in this one? Given the performance and needs of other units in the corporations what are the

targets (ROI, hurdles etc.) that might be place on the competitive unit? What are the parent company’s diversification plans? What clues does the organizational structure of the competitor’s corporate parent

provide? How is the divisional management controlled and compensated in the overall

corporate scheme? Sales, ROI, Market share etc. What kinds of executives seem to be rewarded by the corporate parent? Where does the corporate parent recruit from? Does the corporation as a whole have any antitrust, regulatory, or social

sensitivities which may spill over to affect the business unit? Does the corporate parent or particular top managers in the organization have an

emotional attachment to the unit?

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Portfolio Analysis and Competitors Goals

The most revealing technique for portfolio analysis of the competitor is the one the competitor uses itself:

What criteria is used to classify each business Which business are counted on to be cash cows Which are used for defensive moves Which businesses are sources of stability Which are most promising Which have the most leverage in the portfolio

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Assumptions

A second crucial component in competitor analysis is identifying competitors assumptions:

Competitor’s assumptions about itself Competitor's assumptions about the industry and the other companies in it What does the competitor believe about its position Does it have strong historical or emotional identification with particular

products Are there cultural, regional or national differences that will affect the way in

which competitors perceive and assign significance to events Are the organizational values strongly institutionalized What does the competitor believe about future demand and industry trends What does the competitor believe about competitors capabilities Does the competitor believe in industry conventional wisdom Look at the current strategy of the competitors

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History as an indicator of Goals and Assumptions

What is the competitor’s current financial performance and market share

What has been the competitor’s history in the marketplace over time

In what areas has the competitor excelled or succeeded How does the competitor react to particular strategic moves in

the industry. Cell phone industry each competitor mirrors the other

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Managerial Backgrounds and Advisory Relationships

The functional background of top management is a key measure of it orientation and perception of the business and appropriate goals. NASA RISK VS SAFETY VS COSTS

Types of strategies that have worked for managers in the past Other businesses managers have worked in Major events that have affected managers Oil shocks

recessions, bankruptcies Managers perspectives can be gained from their writings or

speeches Examine management consulting firms, advertising agencies

and other advisors to gain insight on the competitors

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Current Strategy and Capabilities

The third component of competitor analysis is understanding their current strategy

Key operating policies Strategy may be explicit or implicitThe final step to competitor analysis is a realistic appraisal of the

competitors capabilities See Figure 3-2 Areas of Competitor Strengths and Weaknesses Pg.

64-65 of text Core capabilities-functional areas, how does it measure up Ability to grow-resources cash flow, capacity, people Quick response ability Ability to adapt to change-fixed vs variable, competing on cost,

service or products Staying power-money, resources and management commitment

Chapter 5 Competitive Moves

Competitive Strategy

Techniques for Analyzing Industries and Competitors

Michael E. Porter

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Prisoner Dilemma

Two prisoners in jail If they both squeal they both get hanged If they both remain silent they both go free If one squeals on the other he goes free and collects a bounty Both prisoners taken together are better off if they don’t talk But by acting in their own self interest each prisoners has an

incentive to talk provided the other doesn’t Game theory can be used to understand firms behavior in an

oligopoly. Tobacco industry in 60’s

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Industry Instability: The Likelihood of Competitive Warfare

The underlying structure of the industry determines the intensity of competitive rivalry

The greater the number equal powered competitors, the more standardized their products, the higher the fixed costs, the slower the industry’s growth-the greater the likelihood that there will be repeated efforts by firms to pursue their own self interests. Steel Industry

A history of competing or continuity of interaction among the parties can promote stability since it facilitates the building of trust

Multiple bargaining areas can also facilitate a stable outcome in an industry.

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Competitive Moves

Because in an oligopoly a firm is partly dependent on the behavior of its rivals, the right competitive move involves finding one whose outcomes is quickly determined and is skewed as much as possible to the firm’s own interests

Brute Force Approach –overcoming and outlasting retaliation using the firms superior resources and capabilities

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Cooperative or Non-threatening Moves

Three Categories1. Moves that improve the firm’s position and improve competitor's

position even if they do not match them2. Moves that improve the firm’s position and improve competitors’

position only if a significant number match them Reduced warranty coverage Notice firms will high quality/reliable products may suffer3. Moves that improve the firm’s position because competitors will not

match themMoves will be perceived as non-threatening if: Competitors don’t notice Competitors self perceptions or assumptions filter the move Competitors performance is impaired little if at all measured by their

own criteria Swiss Watches and Timex

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Threatening Moves

In considering threatening moves the key questions are: How likely is retaliation? How soon will retaliation com? How effective will retaliation be? How aggressive will retaliation be? Can retaliation be influenced?

Air Canada and WestjetLags in retaliation: Perceptual lags-statistical data Lags in mounting a retaliatory strategy- new auto model, blast furnaces in the

steel industry Inability to pinpoint retaliation-large firms vs small firms. Bell and long distance retaliation affects entire customer base Lags caused by conflicting goals or mixed motives Timex and Swiss watches Distribution channel. Computers Compaq

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Defensive Moves

Good defense is creating a situation in which competitors will conclude the a move is unwise

To prevent a move it is necessary that competitors expect retaliation-consistent targeted retaliation

Toothbrushes, Air Fresheners-free outlet, night light etc Think of Swifter, Pledge Grab it. Mr. Clean Denying a base The denial of an adequate base for the competitor to meet its

goals, coupled with the expectation that the state of affairs will continue, can cause a competitor to withdraw. Virgin to Australia and London out of Toronto.

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Commitment

Perhaps the single most important concept in planning and executing offensive or defensive competitive moves is the concept of commitment

Establishing commitments is essentially a form of communicating the firm’s resources and intentions unequivocally

Three major types of commitments in the competitive setting

1. Commitment that the firm is unequivocally sticking with it plans

2. Commitment that the firm will retaliate and continue to retaliate if a competitor makes certain moves

3. Commitment that the firm will take no action or forgo an action

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Communicating Commitment

The building blocks of a credible commitment are the following:

Assets, resources and other mechanisms to carry out the commitment quickly

A clear intention to car out the commitment, including a history of adherence to past commitments

Inability to back down or perceived moral resolve not to back down

Ability to detect compliance to the terms to which the commitment refers

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To Do’s for Next Week

Prepare for Phase 1 Review meeting Work on Phase 2 Competitive Analysis Complete the assigned readings