1 Strategic Management for the Foundation Business Simulation ®: Analysis and Assessment

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Strategic Management for the Foundation Business Simulation®:

Analysis and Assessment

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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 sub-sector

Food manufacturing 423,262,220

3113 4 digit sub-sector

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

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Porter’s Model of Industry Competition

Potential EntrantsEconomies of scaleCost advantageBrand identityAccess to distributionGovernment policy

Degree of RivalryNumber of competitorsIndustry growthAsset intensityProduct differentiationExit barriers

SubstitutesFunctional similarityPrice performance trendBrand recognition

SuppliersSupplier concentrationNumber of buyersSwitching costsAvailability of substitute raw materialsThreat of forward integration

BuyersBuyer concentrationNumber of suppliersSwitching costsSubstitute productsThreat of backward integration

Threat of new entrants

Bargaining power of buyers

Bargainingpower

of suppliers

Threat of substitute products/services.

Potential EntrantsEconomies of scaleCost advantageBrand identityAccess to distributionGovernment policy

SuppliersSupplier concentrationNumber of buyersSwitching costsAvailability of substitute raw materialsThreat of forward integration

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Industry Analysis of the North American Railroad Industry

Potential EntrantsHigh barriers to entryEconomies of scaleNo brand identityLow switching costsDeregulated

Degree of Rivalry-Significant

7 competitorsModest industry growthLittle product differentiationHigh exit barriersRigid assets

BuyersLow switching costsMany types of buyersBuyers are dispersed geographically

SuppliersSuppliers are concentratedUnionizedFew buyers

SubstitutesClose substitutesFirms compete primarily on price

Threat of new entrants – minimal

Threat of substitute products/services – significant

Bargaining power of

suppliers – moderate

Bargaining power of buyers –

significant

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Stages of Industry Evolution

Introduction Stage

Growth Stage

Maturity Stage

Decline Stage

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Industry Evolution and Firm Strategy

Firm Level Strategy Introduction Growth Maturity Decline

Products

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.

Markets

Niche markets. Expansion into new markets Firms attempt to achieve market penetration of existing and new markets.

Market needs have been met.

Role of TechnologyFirm 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.

CompetitionFirst 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.

Distribution

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.

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Industry Growth and Firm Profitability

FirmProfitability

New product development

Low Moderate High

Low Do not invest

ModerateProcess R&D Process R&D

High Investment in distribution and advertising rather than products/ services

Industry Growth Rate

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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

Minimal: Firms use existing channels

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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

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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

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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

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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

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Using Internal Analysis toBuild Competitive Advantage

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Core CapabilitiesIntegration of resources and capabilities that serve as a competitive advantage over rivalsIntel’s chip manufacturing technologyExploitation of Coke’s brand name

Capabilities The productive services by which firms deploy resources over time.

Transformation of technology into new productsProcesses which generate economies of scale and/or scope

ResourcesStock of assets that are controlled by the firm:EquipmentPlantTrucksManagersCulture

From Resources to Capabilities to Core Capabilities

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Criteria for Sustainable Advantage

Criteria Definition Examples

RareCapabilities that few, if any, competitors possess.

Dell direct to customer distributionPatented technology

ValuableCapabilities that allow the firm to exploit opportunities or neutralize threats in its external environment.

Sophisticated external scanning processesFlexible manufacturing systems

Costly to imitate Capabilities that other firms cannot easily develop.

Development of strong brand nameAir/ground hub and spoke operating system (e.g. FedEx)

Non-substitutable Capabilities that do not have strategic equivalents.

Relationships with international governmentsManagerial decision-making

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Value Chain Elements

Primary Activities Definition ExamplesInbound Logistics Activities used to receive,

store, and disseminate inputs to a production process.

Material handlingWarehousingInventory control

Operations Activities needed to convert inputs into finished goods.

Flexible manufacturingRoboticsAutomation

Outbound Logistics Activities to move finished goods to final consumers.

Transportation infrastructureDistributor network

Marketing and Sales Meeting unmet consumer needs. Communicating with consumers concerning new goods/services or improved goods/services.

New productsRe-designed productsMarketing communications network

Service Activities which enhance or maintain product value.

WarrantyReliable customer service

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Value Chain Elements

Secondary Activities Definition ExamplesProcurement Activities which address

purchasing the inputs to produce a firm’s 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&DProcess 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 planningGovernment relations Financial analysis.

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Value Chain Primary Activities and Capstone Simulation

Primary Activity Simulation ComponentInbound Logistics Process R&D

Operations AutomationTQM (Total Quality Management)

Outbound Logistics Distributor network

Marketing & Sales Sales forecastingPromotion budgetSales budgetPrice adjustments

Service Mean time before failure (MTBF)

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Value Chain Secondary Activities and Capstone Simulation

Support Activity Simulation ComponentTechnology Development Creating new products (product R&D)

Revising established products (product R&D)Reducing R&D cycle time

Human Resource Management Recruiting, training, and compensating employeesLabor negotiations

Firm Infrastructure Financial analysisSources and uses of funds

Procurement Investment in plant and equipmentSelling of plant and equipment

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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)

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Business Level Strategy

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Business Level Strategy

Definition: Actions necessary to gain and maintain competitive advantage over time within a

given product market.

Gaining Advantage: Meeting key success factors superior to competition

Maintaining Advantage: Responding to changing consumer needs more successfully than competition

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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

Key SuccessFactors

Evolution

1980’s

Point-to-point serviceOn-time reliabilityCompetitive ratesMarket coverage

2000 – 2007

Multi-modal servicesGlobal coverageOn-line real-time trackingLogistics services

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Cost Leadership Differentiation

FocusedLow Cost

Focused Differentiation

Broad Target

Competitive Scope

Narrow Target

Porter’s Generic Business Strategies

Competitive Advantage

Cost Uniqueness

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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

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Differentiation


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

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Focused Low Cost


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

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Focused Differentiation


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

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STRENGTHS STRENGTHS WEAKNESS

WEAKNESS

OPPORTUNITIES THREATS OPPORTUNITIES THREATS

Decision Making Utilizing SWOT Analysis

Firm A Firm B

: Utilize strengths of one firm (A) to capitalize upon weakness of competitor (Firm B).(Example: Dell’s direct selling model)

: Transform opportunities to strengths. (Example: Pharmaceutical firms R&D capability develops new drugs: Pfizer-Lipitor)

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Competitive Dynamics

Competitive advantage may result from responding successfully to competitor’s mistakes

Firm 1 Firm 2

Firm 1

Firm 2 Firm 1 Firm 2

+

-

ROI

: Firm 2 initially responds to firm 1’s successful launch: Firm 1’s second venture is not profitable: Firm 2 learns from firm’s 1’s error and launches its own successful product: Firm 1’s responses to firm 2’s new actions

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Southwest SWOT Analysis

Strengths Lowest cost carrier within U.S. industryReputation as successful carrierSuccessful business modelProfitable

WeaknessesNo trans-oceanic capabilitiesLabor unionsAge of aircraft

ThreatsEntry of low cost carriersUS Congress recently increased the ownership position from 25 percent to 49 percent for international companies investing in U.S. transportation firms

OpportunitiesAbility to take share from existing and new entrantsSignificant potential to increase market share if America West/U.S. Airways, United, Delta or Northwest are liquidated

Documents

1 Strategic Management for the Foundation Business Simulation ®: Analysis and Assessment