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Class 3

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Edward Smith

on 8 September 2011

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Transcript of Class 3

Strategy 390 - Corporate Strategy September 14, 2010
Session 3. Competitive Dynamics

Professor Ned Smith Introduction (1) Basis of
Decisions (2) Business
Strategies (3) Corporate
Strategies (4) Topics in
Strategy External

(Firm) Low Cost

Differen-tiation Related

Unrelated Diversification

Vertical Integration M & A,

Global Strategy


Entrepreneurship Integration Treat of Entry Treat of Substitutes Supplier Power Buyer Power Intra-Industry
Rivalry Differentiation - Brand equity
Economies of scale (Ex.8) - Cumulative advertising
Favorable access to valuable asset -Franchise system
High investment building national distribution [low] CP Bottlers' bargaining power is low
'' have high switching costs
'' locked by franchise agreement
'' fragmented Non-CSDs
Health conciousness Suppliers' bargaining power is low
'' product (indgredients) are low-cost commodities
Unknown ingredients
Sugar and water are added by bottler Two primary players with long histories
Competitive advantage is fleeting
High degree of "perceived"differentiation [moderate] [low] [moderate] [low] Treat of Entry Treat of Substitutes Supplier Power Buyer Power Intra-Industry
Rivalry High cost of bottling lines, trucks, distributions channels
Exclusive zones
Favorable access to shelf space [low] Bottlers Retail's bargaining power is high
Price sensitive
Low switching costs (subsidized switching costs!)
Concentrated buyers No clear substitute CPs are concentrated
Differetiated products
Not many substitutes
Material (e.g., cans) suppliers' power is low, however Geographic exclusivity (backed by law)
Intense rivalry from other brands [moderate] [High] [low] [high] Value Chain Inputs Concentrate Products Bottlers Distributors Packing Suppliers [e.g., ingredients, sugar] [e.g., Coke, Pepsi, Cadbury] [e.g., CP-owned, independent] [e.g., stores, vending] [e.g., can, plastic] Analyzing an Industry Structure

(1) Identitify (draw out) the value chain

(2) Examine industry attractiveness from the perspective of the incumbent, (e.g., low barriers to entry may be attractive for new firm, but makes the industry unattractive)

(3) Identify forces, Assess influence of each force, Determine industry attractiveness. Angry Nice People? 1. Why has RTE cereal been such a profitable business?

2. What changes lead to the industy's crisis?

3. Why have private labels been able to enter this industry successfully? How does the cost structure of private label and branded cereal manufacturers differ?

4. What does GM hope to accomplish with its April 1994 reduction in trade promotions and prices? What are the risks of such an action? How do you expect GM's competitors to respond? RTE Cereal Barrier to Entry: Fragmentation at the Brand level MES is only 3%. How can 3% consitute a barrier?
Factoring in product failures (Ex 5), it takes about 15 product launches to reach 3% MES [ = 15 new products x 0.02% average new product market yield]
Product Market Intro = $20M / brand marketing + $1M / brand slotting + $5-10 / brand development = about $27M
15 new products x $27M + $100M manufacturing plant =
...about $500M to get to MES!! Barriers to Entry Access to shelf space
Brand extensions give incumbents marketing economics of scope, higher success rates, etc.
Development expertise. Shift to non-food grocery stores Lower growth has driven the increase in rivalry among branded producers
Escalation of share-stealing competitive tactics [worse yet, inefficient competive tactics, e.g., coupons, trade promotions, etc]
Crowd out market-expanding activities [i.e., Advertising that increases to overall demand for cereal] + = "The practice of pricing up and discounting back has become more and more inefficient for manufacturers and retailers, and burdensome for consumers… Clearly, the money we were spending to print, distribute and handle those additional coupons was not benefiting consumers. The 50 cents that the consumer saves by clipping a coupon can cost manufacturers as much as 75 cents. It just doesn’t make sense."

- Stephen Sanger (GM, 1994) Reduce price gap with private labels
Reduce reliance on inefficient coupons
Shift some of the trade promotion budget to consumer promotions (e.g advertising)
Stop the mutually destructive escalation of trade promotions Intention 1. Firms naturally engage in competitive interactions when the industry structure is changing

2. Each firm has a unilateral incentive to discount but neither achieves a pricing advantage.

Both firms prefer to Discount regardless of what the other does. (Discount is a dominant strategy.)
But both firms are worse off when they both Discount than if they both Don’t. “General Motors Corp. and Ford Motor Co. slapped larger incentives on popular sport-utility vehicles, escalating a discounting war in the light-truck category… Ford added a $500 rebate on SUVs, boosting cash discounts to $2,500. The Dearborn, Mich., auto maker followed GM, which earlier in the week began offering $2,500 rebates on many of its SUVs.”

Wall Street Journal, January 31, 2003 Prisoners' Dilemma in the RTE Cereal Industry “Successful business strategy is about actively shaping the game you play, not just playing the game you find.”

Adam M. Brandenburger, Barry J. Nalebuff
Harvard Business Review, 1995 Advantages of a win/win situation:
Greater potential for finding new opportunities.
Competitors will offer less resistance to win/win moves.
Win/win strategies don´t force competitors to retaliate: more sustainable game.
Imitation in a win/win move may be beneficial, not harmful. How did the rest of the industry respond? "Studying the situation" "We will watch, too" + Data Who does this benefit the most?
Who does it constrain? If you could be a bottler for Coke or Pepsi, would you rather have NYC or Oklahoma City as your territory? Is this power imbalance sustainable? What happened in the 1990s? (pp. 12-13) Why are most of the profits in this industry earned in the concentrate business (as opposed to the bottling business)? From which perspective (e.g., incumbent, entrant, supplier, buyer) are you analyzing an industry's structure?

Static vs. Dynamic Model?

Definition of Industry or Market?

Relative Impact of each Force?

Subjectivity vs. Objectivity? Q: Are there any difference in the competitive environments of Dell and Compaq? (hint: YES!) some KEY considerations Who is winning the "Cola War"? Review Why has RTE been a profitable business? What changes have led to the industry ‘crisis’?
Why have private labels been able to enter the industry successfully? How do the cost structures of private label and branded cereal manufacturers differ?
What does General Mills hope to accomplish with its April 1994 reduction in trade promotions and prices? What are the risks associated with these actions? How do expect General Mills’ competitors to respond? What changes have led to the industry ‘crisis’? (Video Removed)
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