Transcript Marketing-Industry Analysis MKT 731 Instructor: Armand Gervais Web: www.ryerson.ca/~agervais

Marketing-Industry Analysis
MKT 731
Instructor: Armand Gervais
Web: www.ryerson.ca/~agervais
Email: [email protected]
Office: Bus 308
Phone: 416-979-5000 Ext. 4215
Lecture 4-Week 5 Agenda
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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
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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,
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which had also closed, and Bethlehem Steel,
Steel Prices US Dollars
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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.
Between 1994 and 2002 Steel prices declined by over 33%!
Source: http://www.globalinsight.com/Perspective/PerspectiveDetail654.htm
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Stelco
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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
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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:
Build a strong track record of operational performance by taking costs
out and boosting customer service to satisfy customers like the auto
manufacturers
Be better than anyone else in their segment de-commoditize their
products
Real good assets-Reliable efficient equipment, low cost labour, costeffective 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
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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
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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
Steel production
'02 Tons
Change
$ 17,441,000
$ 13,622,000
28%
$ 17,656,000
$ 13,438,000
31%
$ 16,263,000
$ 12,324,000
32%
$
503,000
$
462,000
9%
$
353,000
$
330,000
7%
$
237,000
$
226,000
5%
Total Steel Shipments
Sales to Outside Customers
Steel Joist Production
Steel Deck Sales
Cold Finished Steel Sales
Net Income
$ 62,800,000
$ 162,100,000
-61%
Net Income/Ton
$
$
-71%
3.56
12.06
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Threat to the Steel industry comes from
China
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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
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Competitive Analysis
Chapter 4
Strategic Market Management
David A. Aaker
WHO ARE THE COMPETITORS?
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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
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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:
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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).
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Have similar characteristics (e.g., size, aggressiveness).
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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:
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Market expansion. Perhaps the most obvious source of potential competitors
is firms operating in other geographic regions or in other countries.
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Product expansion. Nike into hockey equipment
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Backward integration. Campbell soup integrated backward to make their
own soup containers.
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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
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The export of assets or competencies. U.S. retailers into Canada
Retaliatory 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
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The level and growth of sales and market share provide indicators of the vitality of
a business strategy.
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Strong market position or the achievement of rapid growth usually reflects a strong
competitor (or strategic group) and a successful strategy.
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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.
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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.
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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
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A cornerstone of a business strategy can be an association, such as being the
strongest truck FI50, the safest car VOLVO,
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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).
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Helpful to determine the image and brand personality of major competitors
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Competitor Analysis-Understanding Competitors
Competitor Objectives and Commitment
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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.
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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
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Such objectives provide a good indication of the competitor's possible future strategy.
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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.
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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?
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Does the parent have an emotional attachment to the business unit for any reason?
Current and Past Strategies of Competitors
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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 the
competitor from trying similar strategies again.
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Competitor Analysis-Understanding Competitors
Competitor Organization and Culture
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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
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Are they largely from same industry or different companies in different industries
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An organization's culture, supported by its structure, systems, and people, often has a
pervasive influence on strategy.
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Does the culture promote risk taking (Virgin), cost control (Walmart), Conservative
behavior (KPMG)
Cost Structure
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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
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Try to understand variable, direct and fixed costs. The relative costs of raw materials and
purchased components.
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The investment in inventory, plant, and equipment (also fixed cost).
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Sales levels and number of plants (on which the allocation of fixed costs is based).
Exit Barriers
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Exit barriers can be crucial to a firm's ability to withdraw from a business area, and
thus are indicators of commitment. They include:
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Specialized assets
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Fixed Costs-Labour agreement, leases
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Relationship to other business units-shared sales force, distribution channels
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Government or Social Barriers- VIA rail
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Managerial pride- Virgin
Competitors Strengths and Weaknesses
Must identify the assets and competencies that are relevant to the
industry:
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What businesses have been successful over time?
What assets or competencies have contributed to their
success
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What business have under performed and Why?
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What are the key customer motivations
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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
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Examine the value chain for potential to provide competitive
advantage
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Chapter 3
A Framework For Competitive Analysis
Competitive Strategy
Techniques for Analyzing Industries and
Competitors
Michael E. Porter
The Components of Competitive Analysis
Significant and potential competitors must be analyzed
Potential competitors are:
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Firms not in the industry but could easily overcome entry barriers
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Firms who could capitalize on obvious synergies Tim Horton's and
lunch. Location capacity capabilities
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Firms for whom competing in the industry is an obvious extension of
the corporate strategy
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Customers or suppliers who may integrate backward or forward
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Four diagnostic components to Competitive Analysis
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Future Goals
Current Strategy
Assumptions
Capabilities
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Future Goals-Business Unit Goals
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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
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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
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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:
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Competitor’s assumptions about itself
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Competitor's assumptions about the industry and the other companies in it
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What does the competitor believe about its position
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Does it have strong historical or emotional identification with particular
products
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Are there cultural, regional or national differences that will affect the way in
which competitors perceive and assign significance to events
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Are the organizational values strongly institutionalized
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What does the competitor believe about future demand and industry trends
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What does the competitor believe about competitors capabilities
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Does the competitor believe in industry conventional wisdom
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Look at the current strategy of the competitors
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History as an indicator of Goals and
Assumptions
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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
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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
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Key operating policies
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Strategy may be explicit or implicit
The final step to competitor analysis is a realistic appraisal of the
competitors capabilities
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See Figure 3-2 Areas of Competitor Strengths and Weaknesses Pg.
64-65 of text
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Core capabilities-functional areas, how does it measure up
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Ability to grow-resources cash flow, capacity, people
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Quick response ability
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Ability to adapt to change-fixed vs variable, competing on cost,
service or products
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Staying power-money, resources and management commitment
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Chapter 5 Competitive Moves
Competitive Strategy
Techniques for Analyzing Industries and
Competitors
Michael E. Porter
Prisoner Dilemma
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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
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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
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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 Categories
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Moves that improve the firm’s position and improve competitor's
position even if they do not match them
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Moves that improve the firm’s position and improve competitors’
position only if a significant number match them
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Reduced warranty coverage
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Notice firms will high quality/reliable products may suffer
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Moves that improve the firm’s position because competitors will not
match them
Moves will be perceived as non-threatening if:
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Competitors don’t notice
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Competitors self perceptions or assumptions filter the move
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Competitors performance is impaired little if at all measured by their
own criteria
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Swiss Watches and Timex
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Threatening Moves
In considering threatening moves the key questions are:
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How likely is retaliation?
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How soon will retaliation com?
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How effective will retaliation be?
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How aggressive will retaliation be?
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Can retaliation be influenced?
Air Canada and Westjet
Lags in retaliation:
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Perceptual lags-statistical data
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Lags in mounting a retaliatory strategy- new auto model, blast furnaces in the
steel industry
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Inability to pinpoint retaliation-large firms vs small firms.
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Bell and long distance retaliation affects entire customer base
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Lags caused by conflicting goals or mixed motives
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Timex and Swiss watches Distribution channel. Computers Compaq
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Defensive Moves
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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
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Establishing commitments is essentially a form of
communicating the firm’s resources and intentions
unequivocally
Three major types of commitments in the competitive setting
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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
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Commitment that the firm will take no action or forgo an action
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Communicating Commitment
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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
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Prepare for Phase 1 Review meeting
Work on Phase 2 Competitive Analysis
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Complete the assigned readings
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