BU600

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BU600

• Strategy Marketing in Mature Industries

2
Session Objectives

• Understand the characteristics of mature markets
  and the implications for strategy
• Examine drivers of industry transformations
• Discuss various strategic options in mature
  markets
• Extract the management information requirements
  for effective strategy in mature markets

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Characteristics of Mature Markets

• Slower growth, flatter demand
• Increased competitive intensity
• Broader and higher performance platforms
• Pressures on costs innovation
• Separation clarification of market positions
• Tighter profit margins
• Mergers acquisitions

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Transformation of Mature Industries - The Drivers

• Deregulation - e.g., telecommunications,
  utilities, airlines
• Globalization - consolidation rationalization
  of players on a global scale e.g., airline
  mergers, auto manufacturers
• Integration of industries - e.g.,
  telecommunications and computers
• Innovative strategies - e.g., mass customization,
  virtual commerce
• Information technology - e.g., new business
  models
• Increased transparency customer power

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Industry Transformations

• What to look for?
• Value chain - players, roles, profits, new
  entrants
• Integration, Disintermediation Reintermediation
• Value provision - information, physical
  processes, commoditization, distinctive
  specialization
• Sources of power - market access, customer base,
  product/services, capital, networks
• Push-pull forces
• Conventions
• Mergers/acquisitions/alliances - within, outside

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Strategic Flexibility
The capability of a firm to proact and react
quickly to changing competitive conditions and
thereby develop and/or maintain competitive
advantage
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Strategic Responses

• Prune customers, distributors, product lines
• Emphasize process innovation
• Push hard for cost reduction outsourcing,
  consolidation of activities, cutting activities
• Increase sales to present customers share of
  wallet
• Forward/backward integration
• Purchase rival firms
• Expand Internationally
• Others?

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Some Strategic Considerations

• Organizational Restructuring
• Strategic role alignment
• Market gap assessment
• New basis for differentiation
• Competitive Strategy
• Consolidation around value creation
• Pricing
• Mergers Acquisitions
• Creative Destruction
• Others????

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Strategy Viewed in Terms of Participation
Competitive Position
Which customer segments?
Which product segments?
Participation Strategy
Which geographic segments?
Business Strategy
Which offering strategy?
Competitive Strategy
What pricing strategy?
What operating Strategy?
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Strategic Drivers of Economic Profit
Market Economics
The average economic profitability of all
competitors in a market segment
Economic Profit


The business units economic profitability
relative to the average profitability of the
market segment
Competitive Position
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Economic profitability among industries in the
SP 5001 is variable
Cosmetics/Personal Care
Computers/Electronics
Agriculture
Toys/Games/Hobbies
Food Beverages
Airline/Aerospace/Defense
Pharmaceuticals/Healthcare
Hospitality/Leisure
Office/Business Equip
Machinery
Environmental Control
Household Products
Building/Furnishings
Packaging and Containers
Commercial Services
Distribution/Wholesale
Avg. ROE1 - Ke
Retail/Apparel
Chemicals
Electric
Transportation
REITS
Biotechnology
Misc. Manufacturing
Telecommunications
Financial Services
Metals/Mining
Media/Entertainment/Advertising
OilGas/Pipelines
Semiconductors
Software/Internet
Automotive

• Over time and across all industries, economic
  profitability is near breakeven
• Differences in economic profitability across
  various industries result from differences in
  structural forces
• Over time, competitive forces drive returns in a
  given industry to the cost of equity

Forest ProductsPaper
1. Analysis of 3-year average ROE minus the cost
of equity of each company in the SP 500. 18
stocks were omitted b/c their 3-year average
ROEs were not available. Source Bloomberg
Financial
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Within a given industry1, economic profitability
is variable depending on the segment
Media/Entertainment/Advertising
1. Casino Services
1
2. Publishing/Newspapers
2
3. Advertising Agencies
3
6
4
5
4. Television
5. Multimedia
6. Broadcast Services
Avg. ROE - Ke
1. Diversified Fin. Services
2. Savings Loan Inst.
3. Other Insurance
Financial Services
1
4. Credit Card Companies
2
5. Retail/Commercial Banks
3
4
5
6. Investment Banks/Brokers
6
7
8
9
7. Life/Health Insurance
8. Multi-Line Insurance
9. Property/Casualty Insurance
60 separate industries were determined by
Bloomberg based on SIC codes. Industries were
then regrouped into 32 groups in order to better
analyze the data Source Bloomberg Financial
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Drivers of Market Economics
Industry Forces
Market Economics

• Direct competition
• Customer pressures
• Indirect Competition
• Supplier Pressures
• Threat of Entry
• Regulatory Pressures

Ave. Revenue
Average EP 0
Pharmaceuticals Soft Drinks

Ave. Economic Cost
Average EP
Ave. Revenue
Integrated Steel Air Transportation
Economic Cost Total operating cost capital
charge
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Do or Die Struggle For Growth McKinsey
Quarterly 2005, No. 3
88 came from 4 industries high-tech, health,
financialservices, retail
100 Largest US Companies 1984-2003
Growth Giants (n20)
Unrewarded (n12)
High
Growth of Revenues
TRS Performers (n31)
Challenged (n37)
Low
Low
High
Growth of TRS
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Moving to or Finding New Market Space

• Forward or Backward Integration
• Diversification
• New Market Segments
• New Uses
• New Market Space

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Example Market Gap Analysis

• Captive sales
• Product gap
• Price gap
• Distribution gap
• Promotion gap
• Opportunities for growth - you your competitors

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Current Examples Whats going on?

• Auto
• Food Beverage -
• Retail
• Financial services -
• Airlines -
• Others????

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Contributors to Competitive Position
Offer Position
(Relative Customer Benefits)
Market Share
(Relative Units)
Price Position
Relative Economic Profit
(Relative Price)
Relative Economic Profit Per Unit
Operating Position
(Relative Economic Cost)
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Link Between Strategic Position Economic
Profitability
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How would you manage this portfolio of businesses?
Size of circle is in proportion to amount of
business represented by a business
Strategic Position
Profitable
Mixed, usually Vulnerable
High EP Value Creation
A
D
C
Market Economics
B
E
F
Negative EP Value Creation
Mixed,usually Profitable
Unprofitable
Disadvantaged
Advantaged
Competitive Position
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Extreme Competition Mckinsey Quarterly 2005,
Vol 1

• Everything in oversupply low-cost labour,
  capital, infrastructure, industrial capacity
• 3 effects on industry aggregation of formerly
  distinct markets enhanced market clearing
  efficiency greater specialization in supply
  chains
• Zones of extreme competition

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Zones of Competition
A number of industries are moving north and east
High
Judo
White Knuckle
Potential to win big but face high risk of being
toppled e.g. software
Shrinking industry pie, high churn among industry
leaders e.g., telecom
Positional Risk (to competitors)
Relative Stability
Trench Warfare
Demand is either shrinking or outpaced by supply
e.g. paper
e.g., Pharmaceutical
Low
High
Performance Risk (to industry)
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Six Ways to Win in Extreme Competition

• Retool strategy restore its importance
• Manage transition economics margin maximizing
  vs share maximizing, lower cost position
• Fight aggregation with disaggregation more
  differentiated value propositions to
  microsegments
• Seek out new demand new growth
  diversification, new markets
• Use the portfolio of initiatives to increase
  speed and flexibility
• Count on strategic risk value proposition risk,
  cost curve risk, bad-conduct risk, bad-bet risk

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Market Busting Strategies For Exceptional Growth
HBR March 2005

• Transform the customers experience Westjet,
  Dell
• Transform your offerings PGs SpinBrush
• Redefine your businesss profit drivers Cemex
  Cement delivery planning support
• Anticipate exploit industry changes Sealed
  Air Corporation new packaging solutions for the
  internet / Paypal
• Create a radically new offering Subways
  healthy fastfood, Rims Blackberry

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The Vanishing Middle Market

• Polarization premium and no frills/value
  squeezing out the middle
• 3 patterns of industry groups balanced,
  migration to high-end, migration to no
  frills/value
• Balanced growth is strong at both ends e.g.,
  appliances, banking, mobile phones, apparel
• Migration to value strong growth in this end
  e.g., airlines, groceries, PCs, servers
• Migration to the high-end digital cameras,
  MP3s, coffee makers, razors, diapers
• Driven by consumer behaviour as well as companies

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New Basis For Differentiation

• Customers complete consumption chain - search to
  disposal
• What?
• Where?
• Who?
• When?
• How?
• Why?

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Customer Experience Cycle - Opportunity Horizon

• Requirement - Need it?
• Specification - Thats the one!
• Distribution - Who stocks it?
• Availability - Whos got it?
• Payment - Credit OK?
• Delivery - Want it Now?
• Acceptance - All there?
• Installation - All Mine
• Performance - Hows it going?
• Upgrade - Need some more?
• Repair - Time For service?
• Return - Finished
• Evaluation - Was it worth it?

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Customer Utility Map
Customer Experience Cycle
Productivity
Purchase
Delivery
Use
Supplements
Maintenance
Disposal
Utilit y L evers
Simplicity
Convenience
Risk
Fun Image
Environmental
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Total Cost-in-Use

• Acquisition Costs
• Possession Use Costs
• Disposition Costs
• Monetary Non-Monetary Costs

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Customer Value Creation Your Opportunity to
Differentiate
ADD
REDUCE

• Confusion
• Frustration
• Disappointment
• Neglect

• Respect
• Appreciation
• Recognition
• Valued

Emotional Elements

• Friendliness
• Helpfulness
• Courtesy

Organization Interaction

• Rudeness
• Lack of caring
• Mistreatment

• Delays
• Stockouts
• Waiting
• System Failures

• On time
• Accuracy
• Service guarantees

Technical Performance

• Inflexibility
• Complexity
• Red tape
• Stupid rules

Process Support

• Warranties
• Payment options

Core Product or Service

• Features
• Quality
• Options

• Price

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Differentiation Task

• Using the concepts in the article develop a new
  basis for differentiation for one of your group
  members business.
• Purpose - uncover unmet needs or underserved
  needs - business opportunities
• Perspective - customers, entire process -
  pre-purchase, purchase, post-purchase
• Considerations - steps, players, activities,
  time, evaluations - criteria, competitors/supplier
  s
• Look for problems/frustrations, trapped value -
  easier, quicker, cheaper, new opportunities/benefi
  ts - customize, better solutions
• Prepare a value proposition statement that
  reflects your new basis for differentiation.
• How much do we know/dont know about our
  customers?

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Patterns of Innovation

• Integrated Solutions
• From product to systems
• Shift your buyer definition
• Rengineer the customer process
• From Profession to do-it-yourself
• Resegment for new purchase occasions

• Lifestyle brand extensions
• Products supporting or licensed services
• Move downstream
• Reverse the pyramid
• Support service the installed base
• Channel business partner

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Pricing

• Profit impact
• Poor management of transaction pricing
• Pocket vs list prices- price waterfall
• Range of pocket prices by customer
• Implications
• Value versus price focus

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Profit Impact - 1 Change Yields. What in
Profits?

• Volume ? 3.3
• Fixed Costs? 2.3
• Variable costs? 7.8
• Price? 11.1
• Implications????????

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Value-Based Pricing
Cost -a,b
Price - a
Value -a
Value - b
0
Incremental Value b a
Profit a
Customer incentive to buy a
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Quantifying the Relative Value of Your Offering
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Perceived Performance More Intangible
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Value-Based Pricing Examples

• Hybrid Cars current difference is 2800, feel
  it is not enough why?
• Digital cinema who pays for the 100,000
  projectors studios or movie theatres?
• Canica scalpels, wound closure system
  struggled in Canada siloed budgeting benefits
  assessment, successful in US
• B2B
• Performance based pricing

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Deutsche Securities Brand Power Index

• Brand power Bottom line Shareholder Value
• Brand Power pricing scope relative to store
  brands inflation
• Lesson - Shift the action away from price if you
  can

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Pocket Price -

• How big are the holes in your pocket?

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Management of Pricing Decisions

• 3 Levels Supply/Demand, Product-Market,
  Transaction
• Transaction poorly managed dealer discounts,
  volume discount, cash discount, receivables,
  co-op advertising, merchandising allowance,
  freight
• Pocket vs List prices price waterfall
• E.g. Price Leakages 16.7 consumer goods,
  17.7 chemical company, 18.6 computers, 21.9
  auto mfg, 28.9 lighting
• Range of Pocket Prices by Customer Pocket Price
  Band
• Implications?

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Price/Margin Leakages
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Price War Article

• Do your homework first customers, company,
  competitors, contributors
• Non-Price a) signaling b) differentiation
  quality c) co-opt contributors
• Price a) complex price options b)flanker
  products c) simple price actions d)concede some
  share
• Your experience???

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Summary Implications

• Price last lever unless its core to your strategy
• Think value understand it from the customer
  perspective
• Superior value proposition
• Price to reflect value
• Watch the holes in your pocket

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Consolidation Rationalization of Business Based
on Value

• Where is value being created?
• Value Economic profit - profit above cost of
  capital
• Value by product
• Value by customer
• Strategic choices - long-term value

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Customer Relationship Management

• Customer Selection
• CRP Conversion, Retention, Penetration
• Risks right markets, right sales, right
  service, right costs
• Commitment integrated
• Easy to promise, hard to deliver
• Customer intelligence costing data

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Issues

• Enhanced profitability through efficient
  utilization of marketing resources
• Customer profitability
• Product rationalization
• Cost-effective marketing systems for different
  customer segments
• Managing hybrid marketing systems
• Implications for information systems

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Dimensions of Loyalty - McKinsey Quarterly -
2002, 2
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Migration vs. Defection
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Customer Retention is Not Enough
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M A in the New Economy

• Types/Motivations
• Challenges - 1) Strategic Fit, 2) Candidates, 3)
  Valuation, 4) Deal Orchestrating, 4) Integration
• Impact - Competitive Advantage, Shareholder
  Value, Industry Structure, People
• Execution

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FIVE GENERIC STRATEGIES (and one predatory)

• Overcapacity elimination 37
• Geographic roll-up 9
• Product or Market extension 36
• RD substitution 1
• Industry convergence 4
• Financial acquirers 13

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Examples

• PG - Gillette
• Sunlife Clarica
• Maple Leaf - Schneiders
• HP - Compaq
• Cisco - Pickstream
• AOL-Time Warner
• TD-Canada Trust
• Digital Christie - Electrohome
• Others???

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Challenges

• Strategic fit - proactive, opportunistic/reactive
• Candidate Identification - shopping, being
  shopped, informal network, dance
• Valuation - companies, assets, intellectual
  knowledge or capacity, brands, new versus
  established
• Negotiating structuring the deal - egos, fair,
  workable, art
• Integration - planning, resources, processes,
  values, varies by type, timing, commitment

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Lets Look at the PG Gillette Acquisition

• Price paid - 57 Bil (US), 18 Premium - 48
  Bil
• Gillettes Identifiable Assets 10 bil (US)
• What did they buy?
• Brands Gillette (16.7), Duracell (3.3), Braun
  (1), Oral B (1), Personal Care (1) 23
  Bil
• Where is the value?

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Approaches to Brand Valuation

• Cost-based costs associated with acquiring,
  building or maintaining the brand discounted to
  the present value
• Market based approaches amount at which a
  brand can be sold proxy is to separate
  intangible tangible assets and relate to entire
  value of the firm
• Income-base approaches future potential of the
  brand future net revenues of brand discounted
  to present value a) incremental profit compared
  to an unbranded product or b) royalties if the
  brand were to be licensed or c) supply demand
  effects due to brand strength
• Formulary approaches multiplier applied to a
  brands estimated profitability e.g.,
  Interbrand, Aakers Brand Equity Ten,

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Synergies

• Broadened product, distribution, markets?
• Greater operating leverage?
• Scale in purchasing/marketing?
• Redundant cost reduction?
• Asset redeployment, superior capital management
  skills, lower cost of capital?

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GES Acquisition Integration Framework

• Lessons Learned
• Continuous
• Integration Manager
• People issues ASAP
• Cultural Issues

Source HBR Jan-Feb 98
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Impact

• Competitive Advantage synergy is illusive,
  imbalance of costs over revenue growth,
  questionable diligence
• Market reaction acquisition merger, expansion
  transformational, 50 fail to add value
• Industry consolidation transformation
• People - casualties, survivors, culture

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Execution Insights

• Proactive but have process in place for
  opportunistic options
• Discipline
• Diligence - know what you are getting, giving
• Address integration upfront
• Timing can be critical
• People issues , deal
• Expertise
• Plan on it being tougher and longer

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Divestiture Strategys Missing Link - HBR May
2002

• Too little, too late.
• Reverse process - 1) prepare the orgn, 2)
  Identify candidates, 3) Structure the deal, 4)
  Communicate the decision, 5) Create new
  businesses
• Proactive, disciplined

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Summary MA

• Strategic importance - offensive defensive
• Build competencies - identifying candidates,
  diligence, valuation, deal structuring,
  integration, MA and Divestiture
• Anticipate activity impact

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Some Thoughts on Networks/Alliances

• Unbundling the Corporation - scope drives
  customer relationship, speed drives innovation,
  scale drives infrastructure businesses
• Can the associated processes coexist in a single
  organization? - pressures of deregulation,
  globalization, technology are causing
  fracturing of industries companies
• Lower Interaction Costs - enabler for focusing
  networking
• Implications - focus, divestiture, rebundling,
  networking

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The Future of The Networked Company - the
McKinsey Quarterley 2001 Number 3 -
http//www.mckinseyquarterley.com

• Orchestrated networks - players are invited to
  contribute their capabilities with a focus on
  delivering value to customers
• Examples- Cisco (value chain focus), eBay
  (community), Charles Schwab (knowledge services)
• Characteristics -orchestrators - customer
  relationship access, market intelligence,
  financial clout network - uniform standards for
  information exchange, rigorous performance
  standards linked to customer evaluations and
  partner incentives, sharing of benefits, on-line
  presence for all key business processes,
  experimentation, commitment
• Performance - outperformed industry peers even in
  a downturn

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New Roles New Players Syndication

• Creators/Originators - content
• Distributors - deliver content to customers
• Syndicators - package content manage
  relationships between originators distributors
• Aggregators - demand supply side
• Customers
• Implications strategy, products, relationships,
  competencies

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Interaction Breakthrough..

• A Revolution in Interaction - driven by an
  increased capacity and reduction in costs -
  associated with searching, coordinating, and
  monitoring that people and firms do when they
  exchange goods, services or ideas
• Enhanced interactive capacity creates new ways to
  configure businesses, organize companies, and
  serve customers - profound effects on structure,
  strategy, competitive dynamics

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Some Questions to Think About

• Business Configuration
• Minimum maximum level of scale in your
  business? How would this change if interaction
  capacity doubled? Impact on strategy,
  configuration?
• Non-core services functions performed in-house?
  Difference if these could be effectively
  outsourced?
• Location of specific business activities if
  incremental management costs were small?
• Bottlenecks in your business? Impact if capacity
  could be significantly increased?
• Which business functions is your company are
  world class? Potential for standardizing and
  serving other businesses?
• Disintermediation opportunities? Market
  mechanisms for same functions?

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Questions contd .

• Serving Customers
• Ideal customer base? Geographic market expansion?
• Which customers most profitable why? New
  opportunities to capture surplus from you?
  Imperfections in current experience with you? Can
  these be eliminated?
• Impact of customization on your business?
• Opportunities to expand product and/or service
  scope with these customers?

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Questions contd ...

• Organizational Design
• Time spent on interactions? Biggest bottlenecks?
  Impact if these were reduced?
• Rationale for current structure? Radical
  alternatives? Impediments to experimenting?
• Organizational productivity variances? Transfer
  of knowledge and expertise across organizational
  geographic boundaries?
• Capital tied up in physical assets? If you owned
  no assets what skills and competencies could you
  trade with those who owned assets? What stops you
  from doing this?

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Canadian Industry Punching Out Stronger Dollar
and Low-cost Alternatives are sending Jobs
Offshore GM Jan23, 2004

• Nortel 1500 jobs
• Levis Strauss Company 1200 jobs
• Bauer Nike Hockey 321 jobs
• Camco (refrigerators stoves) 800 jobs
• Roots 200 jobs
• Swift Denim 600 jobs
• International - Multi-foods 135 jobs
• Canam Manac (truck trailers) 245 jobs

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Is Your Job Next?

• By 2015 roughly 3.3 million U.S. business
  processing jobs will have moved offshore
• U.S. service jobs lost to offshoring will
  increase at a rate of 30 to 40 over next five
  years
• Software developers - 60/hr in U.S. vs 6/hr in
  India

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Is offshoring a good thing or not? For Canada?
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Offshorings Value to India

• Benefit per 1 of U.S. off-shore Spending in 2002
• Offshoring Sector Labour 0.10
• Profits 0.10
• Local Suppliers 0.09
• Government Taxes Central 0.03
• State 0.01
• Net Benefit 0.33

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Example Call Centre in India
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Challenges for You?

• Anticipatory - Industry transformation,
  Competition
• Competency assessment orchestration within
  and outside
• Value chain profit pool analysis
• Costing and value assessment of offerings,
  activities, processes
• Pricing negotiations
• Competitive assessment and benchmarking
• Business rationalization
• Customer rationalization
• Partner/alliance selection
• Valuation of businesses (existing and new),
  customers, assets, brand, service, etc.
• Value risk assessment