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BU600
Strategy & Marketing in Mature Industries
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
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
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
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
Strategic Flexibility
The capability of a firm to proact
and react quickly to changing
competitive conditions and
thereby develop and/or maintain
competitive advantage
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?
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????
Strategy: Viewed in Terms of Participation & Competitive Position
Which product segments?
Which geographic segments?
Which offering strategy?
Business Strategy
Participation Strategy
Competitive Strategy
Which customer segments?
What pricing strategy?
What operating Strategy?
Strategic Drivers of Economic Profit
Market Economics
Competitive Position
The average economic profitability of all competitors in a market segment
The business unit’s economic profitability relative to the average profitability of the market segment
+ = Economic Profit
- 2 0 .0
- 1 0 .0
0 .0
1 0 .0
2 0 .0
3 0 .0
4 0 .0
5 0 .0
6 0 .0
7 0 .0
Ec
on
om
ic P
rofi
t (%
)
Economic profitability among industries in the S&P 5001 is variable
1. Analysis of 3-year average ROE minus the cost of equity of each company in the S&P 500. 18 stocks were omitted b/c their 3-year average ROE’s were not available.Source: Bloomberg Financial
• 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
Cosmetics/Personal Care
Agriculture
Food & Beverages
Pharmaceuticals/Healthcare
Office/Business Equip
Household Products
Building/Furnishings
Commercial Services
Retail/Apparel
Transportation
Misc. Manufacturing
Financial Services
Oil&Gas/Pipelines
Software/Internet
Computers/Electronics
Chemicals
Media/Entertainment/AdvertisingSemiconductors
Automotive
Forest Products&Paper
Toys/Games/Hobbies
Airline/Aerospace/Defense
Hospitality/Leisure
Machinery
Environmental Control
Packaging and Containers
Distribution/Wholesale
ElectricREITS
Biotechnology
TelecommunicationsMetals/Mining
The choice of industry will have economic implications for companies deciding where to compete
Avg
. RO
E1 -
Ke
-2 0 .0
-1 0 .0
0 .0
1 0 .0
2 0 .0
3 0 .0
4 0 .0
5 0 .0
6 0 .0
7 0 .0
Ec
on
om
ic P
rofi
t (%
)
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
Econ
omic
Pro
fit (%
)
-10.0
0.0
10.0
20.0
30.0
Ec
on
om
ic P
rofi
t (%
)
Within a given industry1, economic profitability is variable depending on the segment
Financial Services
1. Casino Services
2. Publishing/Newspapers
3. Advertising Agencies
4. Television5. Multimedia
6. Broadcast Services
1. Diversified Fin. Services
2. Savings & Loan Inst.
3. Other Insurance
4. Credit Card Companies
5. Retail/Commercial Banks
6. Investment Banks/Brokers
7. Life/Health Insurance
8. Multi-Line Insurance
9. Property/Casualty Insurance
1
23 4 5
6 7 8 9
6
The segment that a company participates in will have an effect on its economic profit
Media/Entertainment/Advertising
1
2
3 4 5
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
Avg
. RO
E -
Ke
Drivers of Market Economics
Industry Forces Market Economics
•Direct competition
•Customer pressures
•Indirect Competition
•Supplier Pressures
•Threat of Entry
•Regulatory Pressures
Ave. Revenue
>Ave. Economic Cost*
Ave. Revenue
<
Ave. Economic Cost*
Average EP > 0
Pharmaceuticals
Soft Drinks
Average EP < 0
Integrated Steel
Air Transportation
* Economic Cost = Total operating cost + capital charge
Do or Die Struggle For Growth – McKinsey Quarterly 2005, No. 3
Growth of TRS
Low High
Growth of Revenues
Low
High Unrewarded
(n=12)
Growth Giants
(n=20)
Challenged
(n=37)
TRS Performers
(n=31)
100 Largest US Companies – 1984-2003
88% came from 4 industries – high-
tech, health, financialservices,
retail
Moving to or Finding New Market Space
• Forward or Backward Integration
• Diversification
• New Market Segments
• New Uses
• New Market Space
Example: Market Gap Analysis
• Captive sales
• Product gap
• Price gap
• Distribution gap
• Promotion gap
• Opportunities for growth - you & your competitors
Current Examples – What’s going on?
• Auto –
• Food & Beverage -
• Retail –
• Financial services -
• Airlines -
• Others????
Contributors to Competitive Position
Offer Position
(Relative Customer Benefits)
Price Position
(Relative Price)
Operating Position
(Relative Economic Cost)
Market Share
(Relative Units)
Relative Economic
Profit Per Unit
Relative Economic
Profit
Link Between Strategic Position & Economic Profitability
How would you manage this portfolio of businesses?
Competitive Position
Market Economics
Unprofitable
Profitable
Disadvantaged Advantaged
A
E
D
B
High EP & Value Creation
Negative EP & Value Creation
Mixed,usually Profitable
Mixed, usually Vulnerable
Size of circle is in proportion to amount of business represented by a business
Strategic Position
C
F
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
Zones of Competition
Performance Risk (to industry)
Low High
High
Positional Risk (to competitors)
Judo
Potential to win big but face high risk of being toppled – e.g. software
White Knuckle
Shrinking industry pie, high churn among industry leaders – e.g., telecom
Relative Stability
e.g., Pharmaceutical
Trench Warfare
Demand is either shrinking or outpaced by supply – e.g. paper
A number of industries are
moving north and east
Six Ways to Win in Extreme Competition
1. Retool strategy & restore its importance2. Manage transition economics – margin maximizing vs
share maximizing, lower cost position3. Fight aggregation with disaggregation – more
differentiated value propositions to microsegments4. Seek out new demand & new growth – diversification,
new markets5. Use the portfolio of initiatives to increase speed and
flexibility6. Count on strategic risk – value proposition risk, cost
curve risk, bad-conduct risk, bad-bet risk
Market Busting: Strategies For Exceptional Growth – HBR March 2005
• Transform the customer’s experience – Westjet, Dell
• Transform your offerings – P&G’s SpinBrush• Redefine your business’s 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 – Subway’s “healthy fastfood”, Rim’s Blackberry
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
New Basis For Differentiation
• Customer’s complete consumption chain - search to disposal
• What?
• Where?
• Who?
• When?
• How?
• Why?
Customer Experience Cycle - Opportunity Horizon
• Requirement - Need it?• Specification - That’s the one!• Distribution - Who stocks it?• Availability - Who’s got it?• Payment - Credit OK?• Delivery - Want it Now?• Acceptance - All there?• Installation - All Mine• Performance - How’s it going?• Upgrade - Need some more?• Repair - Time For service?• Return - Finished• Evaluation - Was it worth it?
Customer Utility MapCustomer Experience Cycle
Purchase Delivery Use SupplementsMaintenance
Productivity
Disposal
Simplicity
Convenience
Risk
Fun & Image
Environmental
Utilit y L evers
Total Cost-in-Use
• Acquisition Costs
• Possession & Use Costs
• Disposition Costs
Monetary & Non-Monetary Costs
Customer Value Creation – Your Opportunity to Differentiate
Emotional Elements
Organization Interaction
Technical Performance
Process & Support
Core Product or
Service
REDUCEADD
++
•Confusion
•Frustration
•Disappointment
•Neglect
•Rudeness
•Lack of caring
•Mistreatment
•Delays
•Stockouts
•Waiting
•System Failures
•Inflexibility
•Complexity
•Red tape
•Stupid rules
•Price
•Respect
•Appreciation
•Recognition
•Valued
•Friendliness
•Helpfulness
•Courtesy
•On time
•Accuracy
•Service guarantees
•Warranties
•Payment options
•Features
•Quality
•Options
Differentiation Task
• Using the concepts in the article develop a new basis for differentiation for one of your group member’s 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/suppliers
• Look for problems/frustrations, trapped value - easier, quicker, cheaper, new opportunities/benefits - customize, better solutions
• Prepare a value proposition statement that reflects your new basis for differentiation.
• How much do we know/don’t know about our customers?
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
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
Profit Impact - 1% Change Yields…. What % in Profits?
• Volume ? 3.3%
• Fixed Costs? 2.3%
• Variable costs? 7.8%
• Price? 11.1%
• Implications????????
Value-Based Pricing
Cost -a,b Price - a Value -a Value - b
0Profit a Customer
incentive to buy a
Incremental Value b > a
Quantifying the Relative Value of Your Offering
Perceived Performance – More Intangible
Value Drivers
Importance Weight
Your Offering
Competitive Offerings
Ratio
(your/comp)
Weighted Ratio
Attribute A 10 8.1 7.2 1.13 11.3
Attribute B 30 9.0 7.3 1.23 36.9
Attribute C 20 9.2 6.5 1.42 28.4
Attribute D 25 8.0 9.0 0.89 22.3
Attribute E 15 8.0 8.0 1.00 15.0
100 113.9
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
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
Pocket Price -
How big are the holes in your pocket?
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?
Price/Margin Leakages
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???
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
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
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
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
Dimensions of Loyalty - McKinsey Quarterly - 2002, #2
Migration vs. Defection
Customer Retention is Not Enough
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
FIVE GENERIC STRATEGIES (and one predatory)
• Overcapacity elimination 37%
• Geographic roll-up 9%
• Product or Market extension 36%
• R&D substitution 1%
• Industry convergence 4%
• Financial acquirers 13%
Examples
• P&G - Gillette• Sunlife – Clarica• Maple Leaf - Schneiders• HP - Compaq• Cisco - Pickstream• AOL-Time Warner• TD-Canada Trust• Digital Christie - Electrohome• Others???
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
Let’s Look at the P&G – Gillette Acquisition
• Price paid - $57 Bil (US), 18% Premium - ~ $48 Bil
• Gillette’s 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?
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 brand’s estimated profitability – e.g., Interbrand, Aaker’s Brand Equity Ten,
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?
GE’S Acquisition Integration Framework
Lessons Learned
• Continuous
• Integration Manager
• People issues ASAP
• Cultural Issues
Source: HBR Jan-Feb 98
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
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
Divestiture: Strategy’s Missing Link - HBR May 2002
• Too little, too late.
• Reverse process - 1) prepare the org’n, 2) Identify candidates, 3) Structure the deal, 4) Communicate the decision, 5) Create new businesses
• Proactive, disciplined
Summary – M&A
• Strategic importance - offensive & defensive
• Build competencies - identifying candidates, diligence, valuation, deal structuring, integration, M&A and Divestiture
• Anticipate activity & impact
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
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
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
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
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?
Questions cont’d ….
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?
Questions cont’d ...
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?
Canadian Industry Punching Out – Stronger Dollar and Low-cost Alternatives are sending
Jobs Offshore – G&M 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
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
Is offshoring a good thing or not? For Canada?
Offshoring’s 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
Example: Call Centre in India
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