Strategic Management for the Foundation Business Simulation: Analysis

Strategic Management for the Foundation Business Simulation: Analysis

Strategic Management for the Foundation Business Simulation: Analysis and Assessment 1 Comparison of SIC and NAICS SIC code sequence for chewing gum, bubble gum manufacturers SIC Code Type of Code Description 20 Sector Food and kindred products 206 3 digit sub-sector Sugar and confectionary product manufacturing 2067 4 digit sub-sector Chewing gum, bubble gum, and chewing gum base NAICS code sequence for chewing gum, bubble gum manufacturers NAICS Code Type of Code

Description 1997 Value of Product Shipments ($000) 311 3 digit subsector Food manufacturing 423,262,220 3113 4 digit subsector Sugar and confectionary product manufacturing 24,301,957 311340 U.S. industry code Non-chocolate confectionary manufacturing 5,080,263 3113404 Product class Chewing gum, bubble gum, and chewing gum base

1,310,938 2 Porters Model of Industry Competition Potential Entrants Economies Economiesofofscale scale Cost Costadvantage advantage Brand Brandidentity identity Access Accesstotodistribution distribution Government Governmentpolicy policy Threat of new entrants Suppliers Supplier Supplierconcentration Number of buyers concentration Switching Number costs of buyers Availability

Switching of costs substitute raw Availability materialsof Threat of forward substitute raw materials integration Threat of forward integration Bargaining power of suppliers Degree of Rivalry of competitors Industry growth Asset intensity Product differentiation Exit barriers Number Bargaining power of buyers Buyers concentration Number of suppliers Switching costs Substitute products Threat of backward integration Buyer

Threat of substitute products/services. Substitutes similarity Price performance trend Brand recognition Functional 3 Industry Analysis of the North American Railroad Industry Potential Entrants barriers to entry Economies of scale No brand identity Low switching costs Deregulated High Threat of new entrants minimal Suppliers Suppliers are concentrated Unionized Few buyers Bargaining power of suppliers moderate Degree of RivalrySignificant 7 competitors Modest industry growth Little product differentiation High exit barriers Rigid assets Bargaining power of

buyers significant Buyers switching costs Many types of buyers Buyers are dispersed geographically Low Threat of substitute products/services significant Substitutes substitutes Firms compete primarily on price Close 4 Stages of Industry Evolution Introduction Stage Growth Stage Maturity Stage Decline Stage 5 Industry Evolution and Firm Strategy Firm Level Strategy Introduction Growth Maturity Decline

Must be focused upon new products for new markets. Expansion of product lines Costs of production must be lowered to compete. Competitors and initial firm are viewed as providing similar products/services. Firms which remain are trying to compete on price rather than value. Niche markets. Expansion into new markets Firms attempt to achieve market penetration of existing and new markets. Market needs have been met. Firm must begin to recover R&D investments. Use product R&D to offer added features to existing products Process R&D to achieve efficiencies (e.g. TQM) Use in other, higher growth industries.

First mover has developed new products for new markets. Firms enter to compete with first mover. Firms attempt to become low cost provider. Competitors have relocated to more attractive industries. First mover is providing products/services for a small number of customers. Development of infrastructure to increase service to existing and new markets. Long-term relationships are being developed with suppliers/customers. Minimal Expenses: Existing infrastructure is being utilized. Pricing Attempt to recover product R&D costs by price skimming. Few, if any, competitors. Price is inelastic. Price becomes more elastic

as competitors introduce similar products. Price is elastic. Pricing to achieve economies of scale. Price to attempt to maintain margins on smaller demand. Advertising Firm must communicate value of new products/services to target market. Because competitors have entered industry, first mover needs to advertise value added features. Focus is upon existing markets. Message is lower price than competitors. None: Invest in higher growth industries. Products Markets Role of Technology Competition Distribution 6

Industry Growth and Firm Profitability Industry Growth Rate Low Low Moderate High Do not invest Moderate Firm Profitability Process R&D High Process R&D Investment in distribution and advertising rather than products/ services New product development 7 An Industry Analysis as Firms Move Through the Industry Life Cycle Bargaining Power of Suppliers Introduction

Growth Maturity Decline Significant: No prior relationships may exist Moderate: Distribution channels become larger and more extensive Moderate: Firms will attempt to lock suppliers into long term contracts to reduce costs Minimal: Firms use existing channels 8 An Industry Analysis as Firms Move Through the Industry Life Cycle Introduction Growth Maturity Bargaining Power of Suppliers Significant: No prior

relationships may exist Moderate: Distribution channels become larger and more extensive Moderate: Firms will attempt to lock suppliers into long term contracts to reduce costs Bargaining Power of Buyers Significant: No revenues without customers Significant: Customer acceptance is crucial to generate larger volume of revenue Significant: Customers put pressure on manufacturers to add value and/or reduce price Decline Minimal: Firms use existing channels Significant: Customers purchase other

goods/services 9 An Industry Analysis as Firms Move Through the Industry Life Cycle Introduction Growth Maturity Decline Bargaining Power of Suppliers Significant: No prior relationships may exist Moderate: Distribution channels become larger and more extensive Moderate: Firms will attempt to lock suppliers into long term contracts to reduce costs Bargaining Power of Buyers Significant: No revenues without customers

Significant: Customer acceptance is crucial to generate larger volume of revenue Significant: Customers put pressure on manufacturers to add value and/or reduce price Significant: Customers purchase other goods/services Threat of Substitute Products/ Services None: Substitutes do not exist Significant: Firms are expanding in coverage: Initial firms may begin to add additional product/service benefits Significant: Products/ services are perceived to be homogeneous. Customers search for lowest priced provider Minimal: Competitors utilize funds and

resources to grow within other industries Minimal: Firms use existing channels 10 An Industry Analysis as Firms Move Through the Industry Life Cycle Introduction Growth Maturity Decline Bargaining Power of Suppliers Significant: No prior relationships may exist Moderate: Distribution channels become larger and more extensive Moderate: Firms will attempt to lock suppliers into long term contracts to reduce costs Bargaining Power of Buyers

Significant: No revenues without customers Significant: Customer acceptance is crucial to generate larger volume of revenue Significant: Customers put pressure on manufacturers to add value and/or reduce price Significant: Customers purchase other goods/services Threat of Substitute Products/ Services None: Substitutes do not exist Significant: Firms are expanding in coverage: Initial firms may begin to add additional product/service benefits Significant: Products/ services are perceived to be homogeneous. Customers search for

lowest priced provider Minimal: Competitors utilize funds and resources to grow within other industries Threat of New Entrants Minimal: Firm with the innovation dominates Significant: Firms enter the industry with similar products/ services Minimal: Price becomes a significant buying factor for customers. Potential entrants look for more attractive industries Minimal: Industry profitability and industry growth are declining Minimal: Firms use existing channels 11 An Industry Analysis as Firms Move Through the Industry Life Cycle Introduction

Growth Maturity Decline Bargaining Power of Suppliers Significant: No prior relationships may exist Moderate: Distribution channels become larger and more extensive Moderate: Firms will attempt to lock suppliers into long term contracts to reduce costs Bargaining Power of Buyers Significant: No revenues without customers Significant: Customer acceptance is crucial to generate larger volume of revenue Significant: Customers

put pressure on manufacturers to add value and/or reduce price Significant: Customers purchase other goods/services Threat of Substitute Products/ Services None: Substitutes do not exist Significant: Firms are expanding in coverage: Initial firms may begin to add additional product/service benefits Significant: Products/ services are perceived to be homogeneous. Customers search for lowest priced provider Minimal: Competitors utilize funds and resources to grow within other industries Threat of New Entrants Minimal: Firm with the innovation

dominates Significant: Firms enter the industry with similar products/ Services Minimal: Price becomes a significant buying criteria for customers. Potential entrants look for more attractive industries Minimal: Industry growth is declining as is industry profitability Degree of Rivalry Minimal: One firm dominates the industry Moderate: Firms enter industry with similar products/ services. Incumbent firms attempt to grow by expanding into new markets or adding value to existing products/ services Significant: Because price is a key buying criteria. Firms must expand to generate

greater revenues to offset shrinking margins Minimal: Firms are exiting the industry Minimal: Firms use existing channels 12 Using Internal Analysis to Build Competitive Advantage 13 From Resources to Capabilities to Core Capabilities Core Capabilities Integration of resources and capabilities that serve as a competitive advantage over rivals Intels chip manufacturing technology Exploitation of Cokes brand name Resources Stock of assets that are controlled by the firm: Equipment Plant Trucks Managers Culture Capabilities The productive services by which firms deploy resources over time. Transformation of technology into new products

Processes which generate economies of scale and/or scope 14 Criteria for Sustainable Advantage Criteria Rare Valuable Costly to imitate Non-substitutable Definition Examples Capabilities that few, if any, competitors possess. Dell direct to customer distribution Patented technology Capabilities that allow the firm to exploit opportunities or neutralize threats in its external environment. Sophisticated external scanning processes Flexible manufacturing systems Capabilities that other firms cannot easily develop. Development of strong brand name

Air/ground hub and spoke operating system (e.g. FedEx) Capabilities that do not have strategic equivalents. Relationships with international governments Managerial decision-making 15 16 Value Chain Elements Primary Activities Definition Examples Inbound Logistics Activities used to receive, store, and disseminate inputs to a production process. Material handling Warehousing Inventory control Operations Activities needed to convert inputs into finished goods. Flexible manufacturing Robotics Automation

Outbound Logistics Activities to move finished goods to final consumers. Transportation infrastructure Distributor network Marketing and Sales Meeting unmet consumer needs. Communicating with consumers concerning new goods/services or improved goods/services. New products Re-designed products Marketing communications network Service Activities which enhance or maintain product value. Warranty Reliable customer service 17 Value Chain Elements Secondary Activities Definition Examples Procurement

Activities which address purchasing the inputs to produce a firms products. Raw material sourcing Investment in plant and equipment to improve production/manufacturing. Technological development Processes by which new or improved products are developed. Improvements in manufacturing processes. Product R&D Process R&D Human resource management Investments in human capital. Hiring, training, developing, and compensating employees. Firm infrastructure Support activities to improve primary or other secondary activities Strategic planning Government relations Financial analysis. 18 Value Chain Primary Activities and Capstone Simulation

Primary Activity Inbound Logistics Operations Simulation Component Process R&D Automation TQM (Total Quality Management) Outbound Logistics Distributor network Marketing & Sales Sales forecasting Promotion budget Sales budget Price adjustments Service Mean time before failure (MTBF) 19 Value Chain Secondary Activities and Capstone Simulation Support Activity Technology Development Human Resource Management Firm Infrastructure Procurement Simulation Component Creating new products (product R&D) Revising established products (product R&D) Reducing R&D cycle time Recruiting, training, and compensating

employees Labor negotiations Financial analysis Sources and uses of funds Investment in plant and equipment Selling of plant and equipment 20 Value Chain Activities and Technology Product R&D- Purpose is to create differentiation New product creation Revising existing products Process R&D- Purpose is to lower costs Total Quality Management (TQM) initiatives primarily reduce operating costs Automation (improves efficiency) Outsourcing Based upon the principle that a specific value chain activity can be completed by a third party superior to the firm completing the same activity. Manufacturing operations in Mexico, Southeast Asia Outbound logistics completed by a logistics firm (e.g. Ryder) 21 Business Level Strategy 22 Business Level Strategy Definition: Actions necessary to gain and maintain competitive advantage over time within a given market. Gaining Advantage:

competition product Meeting key success factors superior to Maintaining Advantage: Responding to changing consumer needs more successfully than competition 23 Key Success Factors Definition: That set of criteria, defined by the customer base, which dictate buying decisions. Key success factors change over time Air Freight Industry 1980s Key Success Factors Evolution Point-to-point service On-time reliability Competitive rates Market coverage 2000 2007 Multi-modal services Global coverage On-line real-time tracking Logistics services 24 Porters Generic Business Strategies

Competitive Advantage Broad Target Cost Uniqueness Cost Leadership Differentiation Competitive Scope Narrow Target Focused Low Cost Focused Differentiation 25 Cost Leadership Actions necessary to gain and maintain position: 1. Economies of scale through the utilization of excess capacity. 2. Automation and utilization of robotics in manufacturing processes. 3. Development of efficient distribution networks. 4. Implementation of TQM (Total Quality Management) initiatives. Example: Dell 26 Differentiation Actions necessary to gain and maintain position: 1. Developing innovative products/services to broad range of customers. 2. Significant investments in R&D. 3. Capability to generate a series of successful new products over

time. 4. Development of flexible manufacturing systems. Example: Toyota 27 Focused Low Cost Actions necessary to gain and maintain position: 1. Specific, very well defined target market, that is oriented toward products/services where price is an important key success factor. 2. A market that larger scale firms may ignore because these firms may generate greater efficiencies in other markets. 3. Customer may be willing to absorb certain costs (e.g. transportation) in return for lower prices. Example: Ikea Furniture 28 Focused Differentiation Actions necessary to gain and maintain position: 1. Customers are willing to pay more for real or perceived superior quality. 2. Brand name is important to customers. 3. Profit margins are such that firms do not need to generate significant economies of scale. 4. Promotion directed toward identification of real or perceived superior quality features. 5. Customers are brand loyal. Example: Rolls Royce 29 Decision Making Utilizing SWOT Analysis Firm A STRENGTHS OPPORTUNITIES WEAKNESS

THREATS Firm B STRENGTHS OPPORTUNITIES WEAKNESS THREATS : Utilize strengths of one firm (A) to capitalize upon weakness of competitor (Firm B). (Example: Dells direct selling model) : Transform opportunities to strengths. (Example: Pharmaceutical firms R&D capability develops new drugs: Pfizer-Lipitor) 30 Competitive Dynamics Competitive advantage may result from responding successfully to competitors mistakes + Firm 1 Firm 2 Firm 2 Firm 1 Firm 2 ROI Firm 1 : : : :

Firm 2 initially responds to firm 1s successful launch Firm 1s second venture is not profitable Firm 2 learns from firms 1s error and launches its own successful product Firm 1s responses to firm 2s new actions 31 Southwest SWOT Analysis Strengths Lowest cost carrier within U.S. industry Reputation as successful carrier Successful business model Profitable Weaknesses No trans-oceanic capabilities Labor unions Age of aircraft Threats Entry of low cost carriers US Congress recently increased the ownership position from 25 percent to 49 percent for international companies investing in U.S. transportation firms Opportunities Ability to take share from existing and new entrants Significant potential to increase market share if America West/U.S. Airways, United, Delta or Northwest are liquidated 32

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