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1 Building Competitiveness-2 Ron McFarland, Tokyo, Japan

For dying companies in dying industries, part-2

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Page 1: For dying companies in dying industries, part-2

1

Building Competitiveness-2

Ron McFarland, Tokyo, Japan

Page 2: For dying companies in dying industries, part-2

2

Global Strategies

Regarding market approaches, a company can expand globally by direct export,

licensing and foreign direct investment.

There are advantages and disadvantages to all of them which must be studied carefully.

Production

Sales Office

Head Office

United States

Europe

Overall, there are two methods of extending a business to global markets. One is

investing in foreign markets and building within the company.

The second method is finding trusted and competent strategic partners.

Ron McFarland, Tokyo, Japan

Page 3: For dying companies in dying industries, part-2

3

Vertical Integration Strategies

Raw materials

Backward

integration

End user

Forward

integration

No

integration

Component

manufacturing

Raw materials

Assembly

&

Distribution

(your business)Distribution

End user

Component

manufacturing

Raw materials

Distribution

End user

Assembly

(your business)

Component

manufacturing

&

Assembly

(your business)

- Vertical integration benefits: 1-Improve trust level, 2-increase communication,

3-Increase awareness of impact of others in the chain and 4-create

commitment to others in the chain. All this leads to efficiencies.

- Vertical integration risks: 1-Higher exit barriers, 2-Increased fixed costs, 3-

Decreased flexibility, 4-Higher capital required, 5-Captive market dulls

incentives, 6-Different management skills required.

Ron McFarland, Tokyo, Japan

Page 4: For dying companies in dying industries, part-2

4

New Business Entry

& Capacity Expansion Strategies

Benefit

Risk

There are two issues that must be explored when entering

a new market or expanding capacity within the current market.

- Future demand: Is the market underserved with your current capacity?

Will the market grow in the future? How will technology change?

- Competitors’ behavior: Are the competitors preparing for added capacity

too? How will they respond if one company increases capacity?

Risk of expanding or entering

new market

Value of expanding capacity or

entering new market now.

Ron McFarland, Tokyo, Japan

Page 5: For dying companies in dying industries, part-2

1-Determine the

size/type of capacity

options

5

Capacity Expansion Strategies

3-Assess probable

technological changes

and obsolescence

2-Project future demand

and costs required

5-Based on the above, determine

industry supply/demand balance

and the resulting costs/prices

6-Determine the cash flow

from expanded capacity

7-Test analysis

for consistency

8-Request third party to

confirm expectations

4-Project additions by

competitors based on

their expectations

Expansion

process

Conduct in several business terms to confirm trend.Ron McFarland, Tokyo, Japan

Page 6: For dying companies in dying industries, part-2

6

Entering into New Businesses

Quite often companies enter very large,

healthy markets, but this might be a mistake.

Market with underserved section

Healthy, large, growing and attractive industry

There are two ways to enter a new business and market. 1- Acquire a business

in the industry. 2-Internally develop a new operation to enter the market.

It is usually best to enter an underserved, less

obvious market, where your company

expertise would be very new and valuable.

Ron McFarland, Tokyo, Japan

Page 7: For dying companies in dying industries, part-2

7

Broad or narrow competitive scope

Minor

Investment

In many

industries &

markets

Major

Investment

In single

industry &

marketIndustrial scope

Regional scope

Market segment scope

Vertical scope

Many products

& uses within

industry/market

Few products &

few uses within

industry/market

Global,

production,

R & D and sales

operation

Single country

& regional

operation

Development

& processing

in-house

Heavily use

outside

companies &

specialists

Ron McFarland, Tokyo, Japan

Page 8: For dying companies in dying industries, part-2

8

Supplier

power

Segment

Rivals

Buyer

power

Substitution

threat

New entry

threat

Buyer

Group

NOTE: Segments are groups with customers having similar desires and ability to buy

in the same location. There are also sub-segments, distribution variations, varies

service levels and others.

Pro

du

ct

vari

ati

on

s

Similar

Segment

Ron McFarland, Tokyo, Japan

Segmenting market & evaluating competitive advantage

Page 9: For dying companies in dying industries, part-2

9

Value Chain and Competitive Advantage

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

(Processing)

End Users

Technology Development

Direct Activities

Suppliers

Human Resource Management

Infrastructure

Procurement

Support

Activities

Inbound

items

&

services

(Shipping) (Marketing) (Service)(Receiving)

Value Chain Activities

Valued added, cost incurred

over time and a profit margin

Ron McFarland, Tokyo, Japan

Page 10: For dying companies in dying industries, part-2

10

Generic Value Chain and Competitive Advantage

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

Inbound

items

&

services

Direct Activities

End UsersSuppliers

(Processing) (Shipping) (Marketing) (Service)(Receiving)

Valued added, cost incurred

over time and a profit margin

Supply Chain

Management

Information System

Customer Relations

Management

Information System

The value chain is more efficient if …….

- The goods are pulled through the chain by the end user. Less efficient if

they are pushed through the chain by the suppliers.

- There is detailed communication throughout the chain.

- There is a high level of trust and close human relations along the value

chain.

Ron McFarland, Tokyo, Japan

Page 11: For dying companies in dying industries, part-2

11

Value Chain and Competitive Advantage

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

(Processing)

End Users

Technology Development

Direct Activities

Suppliers

Human Resource Management

Infrastructure

Procurement

Support

Activities

Inbound

items

&

services

(Shipping) (Marketing) (Service)(Receiving)

Overhead,

fixed asset control,

management expertise

and information

systems

Valued added, cost incurred

over time and a profit margin

Ron McFarland, Tokyo, Japan

Page 12: For dying companies in dying industries, part-2

Customer’s Value chain

Firm’s Value chain

12

Value Chain and Competitive Advantage

Op

era

tio

ns &

pro

ce

ss

ing

Ou

tbo

un

d i

tem

s &

se

rvic

es

Ma

rke

tin

g &

sa

les

Aft

er

sa

les

su

pp

ort

Inb

ou

nd

ite

ms

& s

erv

ice

s

End UsersSuppliers Valued added, cost incurred

over time and a profit marginO

pe

rati

on

s &

pro

ce

ss

ing

Ou

tbo

un

d i

tem

s &

se

rvic

es

Ma

rke

tin

g &

sa

les

Aft

er

sa

les

su

pp

ort

Inb

ou

nd

ite

ms

& s

erv

ice

s

Ron McFarland, Tokyo, Japan

Page 13: For dying companies in dying industries, part-2

Firm’s Value chain

13

Value Chain and Competitive Advantage

Op

era

tio

ns &

pro

ce

ss

ing

Ou

tbo

un

d i

tem

s &

se

rvic

es

Ma

rke

tin

g &

sa

les

Aft

er

sa

les

su

pp

ort

Inb

ou

nd

ite

ms

& s

erv

ice

s

End UsersSuppliers Valued added, cost incurred

over time and a profit margin

Op

era

tio

ns

&

pro

ce

ss

ing

Ou

tbo

un

d i

tem

s &

se

rvic

es

Ma

rke

tin

g &

sa

les

Aft

er

sa

les

su

pp

ort

Inb

ou

nd

ite

ms

& s

erv

ice

s

Customer’s Value chain

Ron McFarland, Tokyo, Japan

Page 14: For dying companies in dying industries, part-2

14

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

(Processing)

Technology Development

Direct Activities

Human Resource Management

Infrastructure

Procurement

Support

Activities

Inbound

items

&

services

(Shipping) (Marketing) (Service)(Receiving)

Creating competitive advantage within the value chain

Unique and valuable item

or serviceoffered

Very available commodity

items & services inbound

Uniqueness or low cost creating factors ….

Products easy to learn how to use

Special assortment only you can offer

Convenient location

Valued advice

Technical support

Sales and product training

Exceptional delivery time

Special after sales support

Attractive design-image

Inquiry response time

Power over end

users

Power over

suppliers

Ron McFarland, Tokyo, Japan

Page 15: For dying companies in dying industries, part-2

15

Shared functions to create competitive advantage

Operations

&

processing

Outbound

items &

services

Marketing

&

sales

After

sales

support

Inbound

items &

services

Company “A” Direct Activities

Operations

&

processing

Outbound

items &

services

Marketing

&

sales

After

sales

support

(Processing) (Shipping) (Marketing) (Service)(Receiving)

Company “B” Direct Activities

(Processing) (Shipping) (Marketing)(Receiving)

Inbound

items &

services

(Service)

Ron McFarland, Tokyo, Japan

Page 16: For dying companies in dying industries, part-2

16

Shared functions to create competitive advantage

Operations

&

processing

Outbound

items &

services

Marketing

&

sales

After

sales

support

Inbound

items &

services

Company “A” Direct Activities

Operations

&

processing

Outbound

items &

services

Marketing

&

sales

After

sales

support

(Processing) (Shipping) (Marketing) (Service)(Receiving)

Company “B” Direct Activities

Shared Logistics

(Processing) (Shipping) (Marketing)(Receiving)

Inbound

items &

services

Shared Sales

Activities/Sales Staff

Shared Production

Shared Service

(Service)

Ron McFarland, Tokyo, Japan

Page 17: For dying companies in dying industries, part-2

17

Shared functions to create competitive advantage

Company “B”

Support

Activities

Technology Development

Human Resource Management

Infrastructure

Procurement

Company “A”

Support

Activities

Technology Development

Human Resource Management

Infrastructure

Procurement

Shared buildings

and facilities

Shared personnel

activitiesShared

purchasing

Shared research

projects

Ron McFarland, Tokyo, Japan

Page 18: For dying companies in dying industries, part-2

Sharing activities or not

18

Company “A” & “B”

shared activities

Company “B”

separate activities

Company “A”

separate activities

Activities good atDoubtful sharing successActivities good at

Company “A” poor at Activities good at

Activities poor atActivities good at

Sharing

Success!

Strengths: It is not wise to have two organizations share activities in which both are strong and successful.

Strengths/Weaknesses: It is wise to use strengths to support another’s weakness and have that

organization support your areas of weakness. Or, you could pay for the use of their strengths.

Value: The value of sharing coming in three forms: (1) when economies of scale get more output for the

same process, (2) when there is learning of better ways to do things, (3) when there is increased utilization

and reduced downtime of existing assets.

Ron McFarland, Tokyo, Japan

Page 19: For dying companies in dying industries, part-2

Cost incurred along the value chain

19

15% of

total cost

10% of

total cost

10% of

total cost

5% of

total cost

If the burden of an activity is not great, the cost of sharing must be kept very low,

unless it offers strong differentiation of the product to competitors’ which will

result in reduced customer price resistance.

Along the value chain, where is the most cost incurred?

As there will be some degree of costs incurred to share an activity, choose an

activities that offers value over the total of all processes.

Operations

& processing

Outbound

items & services

Marketing

& salesAfter sales

support

(Processing)

Technology Development

Direct Activities

Human Resource Management

Infrastructure

Procurement

Support

Activities

Inbound items

& services

(Shipping) (Marketing) (Service)

2% of total cost

5% of total cost

1% of total cost

2% of total cost

50% of

total cost

(Receiving)

Ron McFarland, Tokyo, Japan

Page 20: For dying companies in dying industries, part-2

20

Balancing cost of sharing with value

Cost

Value

In considering sharing, for each activity studied, the cost of time, personnel and money must

be weighed against the value achieved. In many cases the cost and resistance to change is

so great that they out-weigh any benefit of working together.

Cost of Coordination: Businesses must coordinate scheduling and setting priorities. It

must set up and modify for joint operations. There could be added cost in time required,

personnel needed and perhaps direct funds assigned.

Cost of Compromise: Shared activities require modifications of current activities which

may require some sacrifice for the overall good.

Cost of Inflexibility: There may be added difficulties in responding to market changes and

competitor moves. Also, it might be difficult to divest from a shared project.

Cost

incurred

in sharing

the activity

Ron McFarland, Tokyo, Japan

Page 21: For dying companies in dying industries, part-2

21

Sharing sales activities of several departments

#1#2 #3#4

- Vehicle sales

- Maintenance

- Spare parts

More efficient

customer contact

Cost: Salesman

must learn other

departments’

products and

services, etc.

Ron McFarland, Tokyo, Japan

Page 22: For dying companies in dying industries, part-2

22

Sharing component sales with different companies

Patented system

By sharing technology and cooperating with other companies, great benefits

can be the results. Only one company is needed to sell several products.

Do packaging or

let customer?

Ron McFarland, Tokyo, Japan

Page 23: For dying companies in dying industries, part-2

You

23

What do you like about the product? What would you like added? What do you think is not needed?

“A” feature

“C” service

“B” feature

Deciding what to sell as standard

One of several hundred

users of your product

Keep

Delete

Add

Decision to

offer as standard

A study of the competitors’ assortment and the ability of the user

to select his own specifications must be determined.

Ron McFarland, Tokyo, Japan

Page 24: For dying companies in dying industries, part-2

Benefits of Competitors

Are all

competitors

bad?

24

Competitors

can increase a

company’s

competitive

advantage.

Competitors

can improve

current

industry

structure.

Competitors

can aid market

development.

Competitors

can deter new

entries.

A good competitor is one that challenges the firm not to be complacent but

maintains a stable and profitable industry equilibrium without damaging the

whole industry.

Ron McFarland, Tokyo, Japan

Page 25: For dying companies in dying industries, part-2

25

Extremes of competition

Healthy competition

Where there is learning,

product development,

personnel development,

long-term strategy

development and

low stress working

environments

Fierce fighting

Where there is

discounting,

damaging

competitor

moves, high

stress, and an

overall

unattractive

image

No

competition

Where there is

complacence,

no stress,

and no

development

activities

Ron McFarland, Tokyo, Japan

Page 26: For dying companies in dying industries, part-2

26

Test of a good competitorDefinitely

not

Very

much so

Clear, self-perceived weaknesses: Knows areas where it is weak and accepts it,

while concentrating only on its strengths.

Rules of competition: Knows rules to aid in the development of the whole market

and avoids behavior that would be damaging to all.

Realistic Assumption: Knows the sizes of the market and does not over-invest

and become threatening or under-invest and encourage new competitors.

Knowledge of costs: Does not cross-subsidize product lines and sets reasonable

prices that cover all costs including overhead.

Creates Entry Barriers: Creates entry barriers that discourage new competitors

but does not lock itself into the industry.

Credible & Viable: Has sufficient resources/abilities to be a motivator to other

firms in lowering cost and improving differentiation.

Limits market segments: Is active in market segments it is most comfortable

with. In other segments, participates at lesser degree or not at all.

Ron McFarland, Tokyo, Japan

Page 27: For dying companies in dying industries, part-2

27

Recognizing bad competitors for an industry

1. They will do anything they can to do damage to all their competitors and have

no cooperative spirit. They go farther than just challenging competitors. They

hope the competitors will feel they have no choice but to give up.

2. They consider market share a very high priority.

3. They do not consider product development a high priority and will copy when

they can.

4. They do not consider long-term customer service a high priority but quick sales.

5. They poorly forecast both high and low demand, which leads to over-investment

in production capacity. This often leaves them with massive excess production

capacity.

6. They put little attention on training and learning.

7. They do not consider themselves a part of the entire industry and have no

problems making disruptive, damaging moves.

Ron McFarland, Tokyo, Japan

Page 28: For dying companies in dying industries, part-2

28

Defending against bad competitors

Extent of differentiation & segmentation

HighLow

Go

od

Co

mp

eti

tors

Ba

d

Their goal is a

large share which

causes instability

in the industry. It

could also be

costly.

The goal is a

modest share

difference from

leader and others

to maintain

stability in the

industry.

Convince the competitor that a large share in many segments is

not required or profitable. If forced, compete closely in prices, but

put major effort in differentiation or segmentation.

Ron McFarland, Tokyo, Japan

Page 29: For dying companies in dying industries, part-2

29

There are tactics to discourage new competitors.

1. Keep good product assortment and quick deliveries.

2. Block access to strongest supply channels with distributor

agreements.

3. Raise customer switching costs with training, joint activities and

special support that others cannot match.

4. Advertise when other companies are considering entering the

market.

5. Introduce new products when other companies are considering

entering the market.

6. Make exclusive agreements with major suppliers.

7. Signal commitment to defend market in press, to distributors, etc.

8. Prepare funds to counter any new competitor consideration.

Ron McFarland, Tokyo, Japan

Action plan to defend market from new entry

Page 30: For dying companies in dying industries, part-2

30

Challenging a leader

Some questions to ask when attaching a leader in the industry.

High

Ret

urn

on

inve

stm

ent

Market share and volume

Hig

h

Low

Low

Has the leader slipped into the middle

with raising costs?

Has the leader’s products lost their special differentiation?

Nothing special

No cost advantage

1. Are customers unhappy with the leader?

2. Has there been technical changes that influence cost and differentiation?

3. Is the leader making abnormally high profits?

4. Does the leader have problems on profit with its parent company?

Ron McFarland, Tokyo, Japan

Page 31: For dying companies in dying industries, part-2

31

BuyersSuppliersCompetitors

Rivalry

Industrial Evolution, Change and Uncertainty

Bargaining Power of Buyers

Threats of Entrants

Threats of Substitutes

Bargaining Power of Suppliers

Company “B”

Company “C”

Company “A”

New

Entrants

Substitutes

Ron McFarland, Tokyo, Japan

Page 32: For dying companies in dying industries, part-2

32

Value chain and change influencing factors

Operations

&

processing

Outbound

items

&

services

Marketing

&

sales

After

sales

support

(Processing)

Technology Development

Direct Activities

Human Resource Management

Infrastructure

Procurement

Support

Activities

Inbound

items

&

services

(Shipping) (Marketing) (Service)(Receiving)

Ron McFarland, Tokyo, Japan

Page 33: For dying companies in dying industries, part-2

Industrial change scenarios & possible action plans

33

First determine the factors that will influence change in the

industry and develop possible scenarios.

Based on market research and data gathered from questions

asked in many of the slides in this presentation, here are

actions that a company can take:

1. Plan for the most probable scenario and invests accordingly.

2. Invest in the best scenario for the company’s situation.

3. Hope for the best but prepare for the worst to set a maximum level

of risk considering all the factors.

4. Preserve flexibility by waiting for the last possible moment before

making the final decision.

5. Apply resources to try to influence the scenario that is most

advantageous to the organization.

Ron McFarland, Tokyo, Japan

Page 34: For dying companies in dying industries, part-2

34

Deciding for future – Scenario Action Plan

#3Worst case

scenario preparation

#4Wait & be flexibility

as long as possible

#5

Influence

future in

any way

possible

#1Most

probable scenario

Ch

an

ce o

f im

pro

vin

g

co

mp

an

y p

osit

ion

Company

weakens

Company

strengthens

High riskLow risk

Risk level of action plan

#2Best

scenario for

company

1. Probable scenario – High risk if not well researched for details but high chance of

strengthening position.

2. Best scenario – Very high risk for the company if not reading the market carefully

but high chance of improving position.

3. Worst – Consider all possible crises and prepare for all better than others.

4. Waits as long as possible – Low risk, but chance of company being left behind.

5. Influence the scenario – High risk but could be profitable if successful.

Also, a combination of all five can be the action plan.

What is important is understanding all risks and advance planning. If a crisis comes,

decisions and an action plan can be put in place with low stress.Ron McFarland, Tokyo, Japan

Page 35: For dying companies in dying industries, part-2

35

Deciding for the future – Risk Analysis

Low risk

Many

uncontrollable

events could

occur

High risk

Few

uncontrollable

events could

occurDoes this expose the company to forces or events

that are out of the company’s control?

Does the company have the ability to spot problems,

determine time available to solve problems, make

decisions and execute what was decided?

Could this project kill or severely

damage the company if it fails?

What is the potential damage to the

potential reward?

High chance of

going out of

business

Low chance of

going out of

business

Company does not

see danger signals,

make decisions or

take action quickly.

Company sees

danger signals,

make decisions and

takes action quickly.

High risk of losses

but little profit

potential from

project

Low risk of

losses but high

profit potential

from project

For each project proposal, ask these questions.

Loss to gain risk

Exposure risk

Response ability risk

Death line risk

If after doing the above analysis for a very new product, you feel the risk is too high,

consider not being the first company to introduce the product. Let someone else

introduce a similar product, learn from them and introduce your version very shortly after.

Ron McFarland, Tokyo, Japan

Page 36: For dying companies in dying industries, part-2

36

Thank you

Building Competitiveness

This presentation gives many suggestions on how to expand

your business. Whatever method you choose, it is vital to

start with a project that is low risk, low cost and low

distraction to your current operation. Then, expand gradually.

Ron McFarland, Tokyo, Japan