Marketing-Industry Analysis

1. Marketing-Industry Analysis MKT 731 Instructor: Armand Gervais Web: www.ryerson.ca/~agervais Email:agervais@ryerson.ca Office: Bus 308 Phone: 416-979-5000 Ext. 4215

2. Lecture 4-Week 5 Agenda • Questions and Answers • Administration • Peer Evaluation • All Emails-Please include group # in subject line • News Items: • Auto industry and BMW • Stelco and the Steel industry • Competitive Analysis • To Do’s for next week

4. Steel Industry • Trends • Worldwide production • Price of Steel • US trade tariffs • Why do profits vary? • Dofasco • Nucor • Stelco

6. What Happen? • The mills that closed did remove some supply from the market, but generally these mills were mid-sized or smaller. • The mergers and acquisitions have had a more profound effect, though, because the companies involved were some of the biggest in the industry. • LTV produced almost 10% of some of the most valuable grades of steel, before being shuttered in early 2002. The company was purchased out of liquidation and subsequently merged with Acme Steel, which had also closed, and Bethlehem Steel, another giant that was operating under Chapter 11 protection. • US Steel also got in on the act, purchasing the assets of National Steel and regaining its status as the country’s largest steel maker. • On the electric furnace “mini-mill” side, there was also significant consolidation Nucor purchased BirminghamSteel and Trico • Steel Dynamics purchased Qualitech, and Gerdau of Brazil bought AmeriSteel and merged it with Co-Steel of Canada, creating Gerdau AmeriSteel.

7. Steel Prices US Dollars • Worldwide capacity now tops 1 billion tons a year, exceeding global demand by an estimated 200 million tons -- or twice the annual output of the entire U.S. steel industry. Between 1994 and 2002 Steel prices declined by over 33%! Source: http://www.globalinsight.com/Perspective/PerspectiveDetail654.htm

8. Stelco • Canada’s largest steel producer measured in tons at 5.1 million • 8,400 employees under funded pension of 1.3 billion • Annual pension funding costs are $41 million but will soar to $98 million in 2008 • Other benefits were $39 million last year and will grow to $50 million by 2008 • Cleveland based ISG a creation of Wilbur Ross scooped up bankrupt steel companies like Bethlehem Steel Corp and Acme Metals emerged with costs $50-60 (U.S.) lower per ton than Stelco • From Q1 1993 to Q4 2003 sold $31 Billion Cdn in Steel and earned a total of $349 million in profit. 92 cents went to the costs of making steel and 7 cents to bankers, debt holders and the taxman • National Bank Financial estimated that the company would have to chop its payroll by 125 million or 20% just to breakeven

10. Dofasco-The future of the industry • Shifted to higher value added products • Non-union shop • Mr. Simpson believes North American producers can produce steel in the long term by undertaking 3 broad initiatives: • Build a strong track record of operational performance by taking costs out and boosting customer service to satisfy customers like the auto manufacturers • Be better than anyone else in their segment de-commoditize their products • Real good assets-Reliable efficient equipment, low cost labour, cost-effective energy and materials • Stelco relies heavily on traditional blast furnaces which require heavy capital outlays and periodic maintenance • Electric furnaces used by new mini mills like Nucor are cheaper to install, more cost effective and reliable and use less energy. Source Globe and Mail Report On Business January 30, 2004 pages B1&B5

11. Dofasco • Why is Dofasco such a tough act to follow? • Analysts credit the solid executive team put together by recently retired CEO John Mayberry. • Ongoing investment in operations makes it less vulnerable to price slumps on the spot market. • Shift to high value finished steel products • Founded in 1912, it became the first Canadian company to offer profit sharing, in 1938. The "Dofasco Way" employee program, which has kept unions out and pays workers for productive ideas, includes morale-boosting initiatives like a recreation club, pipe band, annual picnic and legendary Christmas parties. • 1999 7,000 full-time Hamilton-based employees got equal share of $53.3 million in pretax income, half of which went into the corporate pension plan. • Believe it or not, Dofasco-with operations in Canada, the US and Mexico-is also known as an environmentally friendly steelmaker. It has voluntarily reduced energy use by about 20%-twice its initial goal. And since 1990, greenhouse gas emissions have been slashed 22%-outpacing the goal set by the controversial Kyoto Protocol.

12. Nucor • The average cost of scrap and scrap substitute has increased: • $27 (25%) since 2002 • $37 (31%) from the 4th quarter of 2002 to the 4th quarter of 2003 • $18 (13%) from the 3rd quarter of 2003 to the 4th quarter of 2003. • Costs attributable to scrap per ton of steel produced have increased $65 (57%) from Dec. 2002 to Dec. 2003.

13. Nucor Production

14. Threat to the Steel industry comes from China • By 2010 China now a huge net importer of Steel, should turn into a net exporter and start displacing domestic production in Russia, setting of a global chain reaction in the rest of the world • The Yangtze (Yang-zee) Dam will be completed in 2009 • 610 foot high dam stretching 1.3 miles (6884 ft) across the Yangtze river • For comparison Hoover dam is 726 feet high and 1244 ft wide

15. Competitive Analysis Chapter 4 Strategic Market Management David A. Aaker

16. WHO ARE THE COMPETITORS? • Against whom does the company usually compete? • Who are our most intense competitors? Rank them. • Less intense but still serious competitors? • Makers of substitute products? • Can these competitors be grouped into strategic groups on the basis of their assets, competencies, customers and/or strategies? • Who are the potential competitive entrants? What are their barriers to entry? How are these barriers changing? • Is there, anything that can be done to discourage them?

17. EVALUATING THE COMPETITORS • What are their objectives and strategies? Their level of commitment? Their exit barriers? • What is their cost structure? Do they have a cost advantage or disadvantage? What are the key cost drivers? Labour, energy materials • What is their image and positioning strategy? • Which are the most successful/unsuccessful competitors over time? Why? • What are the strengths and weaknesses of each competitor or strategic group? • What leverage points (our strategic weaknesses or customer problems or unmet needs) could competitors exploit to enter the market or become more serious competitors? • Evaluate the competitors with respect to their assets and competencies. • Generate a weighted competitor strength grid

18. Weighted Competitor Strength Grid

19. IDENTIFYING COMPETITORS - STRATEGIC GROUPS The concept of a strategic group provides a very different approach toward under-standing the competitive structure of an industry. A strategic group is a group of firms that: • Over time pursue similar competitive strategies (for example, the use of the same distribution channel, the same type of communication strategies, or the same price/quality position). • Have similar characteristics (e.g., size, aggressiveness). • Have similar assets and competencies (such as brand associations, logistics capability, global presence, or research and development).

20. POTENTIAL COMPETITORS In to addition to current competitors, it is important to consider potentialmarket entrants, such as firms that might engage in: • Market expansion. Perhaps the most obvious source of potential competitors is firms operating in other geographic regions or in other countries. • Product expansion. Nike into hockey equipment • Backward integration.Campbell soup integrated backward to make their own soup containers. • Forward integration. Suppliers attracted by margins are also potential competitors. Intel, for example, entered the consumer marker with-end-user products such as video cards. Computers cost less than a thousand. Video cards from $50-1000 Samsung into cell phones • The export of assets or competencies. U.S. retailers into Canada Retaliatory or defensive strategies. Firms that are threatened by a potential or actual move into their market might retaliate. Microsoft and Internet Explorer vs. Netscape, X-box

21. Competitor Analysis-Understanding Competitors Size, Growth, and Profitability • The level and growth of sales and market share provide indicators of the vitality of a business strategy. • Strong market position or the achievement of rapid growth usually reflects a strong competitor (or strategic group) and a successful strategy. • In contrast, a deteriorating market position can signal financial or organizational strains that might affect the interest and ability of the business to pursue certain strategies. • To provide a crude sales estimate for businesses that are buried in a large company take the number of employees and multiply it by $20,000. For many businesses this method is remarkably accurate, and the number of employees is often easy to obtain. • Businesses that are unprofitable over an extended periods of time may find it difficult to gain access to capital either externally or internally. Image and Positioning Strategy • A cornerstone of a business strategy can be an association, such as being the strongest truck FI50, the safest car VOLVO, • More often, it is useful to move beyond class related product attributes to intangibles that span product class, such as quality (Toyota) or innovation (3M, Rubbermaid). • Helpful to determine the image and brand personality of major competitors

22. Competitor Analysis-Understanding Competitors Competitor Objectives and Commitment • A knowledge of competitor objectives provides the potential to predict whether or not a competitor's present performance is satisfactory or strategic changes are likely. • Non financial objectives are also helpful. Does the competitor want to be a technological leader? Sony Or develop a service organization? Or to expand distribution? Coke • Such objectives provide a good indication of the competitor's possible future strategy. • The objectives of the competitor's parent company (if one exists) are also relevant. What are the current performance levels and financial objectives of the parent? If the business unit is not performing as well as the parent, pressure might be exerted to improve or the investment might be withdrawn. • Of critical importance is the role attached to the business unit. Is it central to the parent's long-term plans, or is it peripheral? Is it seen as a growth area, or is it expected to supply cash to fund other areas? Does the business create synergy with other operations? • Does the parent have an emotional attachment to the business unit for any reason? Current and Past Strategies of Competitors • The competitor's current and past strategies should be reviewed. In particular, past strategies that have failed should be noted, because such experiences can inhibit the competitor from trying similar strategies again.

23. Competitor Analysis-Understanding Competitors Competitor Organization and Culture • Knowledge about the background and experience of the competitor's top management can provide insight into future actions. Are the managers drawn from marketing, engineering, or manufacturing? Dave Nichols from Cott Beverage to Presidents Choice • Are they largely from same industry or different companies in different industries • An organization's culture, supported by its structure, systems, and people, often has a pervasive influence on strategy. • Does the culture promote risk taking (Virgin), cost control (Walmart), Conservative behavior (KPMG) Cost Structure • Knowledge of a competitor's cost structure, especially when the competitor is relying on a low-cost strategy, can provide an indication of its likely future pricing strategy and its staying power. Southwest 50% less than competitors • Try to understand variable, direct and fixed costs. The relative costs of raw materials and purchased components. • The investment in inventory, plant, and equipment (also fixed cost). • Sales levels and number of plants (on which the allocation of fixed costs is based). Exit Barriers • Exit barriers can be crucial to a firm's ability to withdraw from a business area, and thus are indicators of commitment. They include: • Specialized assets • Fixed Costs-Labour agreement, leases • Relationship to other business units-shared sales force, distribution channels • Government or Social Barriers- VIA rail • Managerial pride- Virgin

24. Competitors Strengths and Weaknesses Must identify the assets and competencies that are relevant to the industry: • What businesses have been successful over time? What assets or competencies have contributed to their success • What business have under performed and Why? • What are the key customer motivations • What are the large value added parts of the product or service? What are the large cost components Steel transportation cost are high. Location relative to demand or inputs can provide significant cost advantage • Examine the value chain for potential to provide competitive advantage

25. Chapter 3A Framework For Competitive Analysis Competitive Strategy Techniques for Analyzing Industries and Competitors Michael E. Porter

26. The Components of Competitive Analysis Significant and potential competitors must be analyzed Potential competitors are: • Firms not in the industry but could easily overcome entry barriers • Firms who could capitalize on obvious synergies Tim Horton's and lunch. Location capacity capabilities • Firms for whom competing in the industry is an obvious extension of the corporate strategy • Customers or suppliers who may integrate backward or forward • Four diagnostic components to Competitive Analysis • Future Goals • Current Strategy • Assumptions • Capabilities

27. Future Goals-Business Unit Goals • Stated or unstated financial goals • Attitude towards risks • Economic or noneconomic organizational values or beliefs • What is the organizational structure • What control and incentive systems are in place • What accounting system and conventions are in place • What kinds of managers comprise the leadership • How much apparent unanimity is there among management • What is the composition of the board • What are there contractual commitments • Are there any regulatory antitrust, or other governmental or social constraints on the behavior of the firm

28. Corporate Parent and Business Unit Goals • What are the current results of the parent company? • What are the overall goals of the parent? • What strategic importance does the parent attach to the particular business unit in terms of its overall corporate strategy? • Why did the parent get into this business? • What is the economic relationship between the business and others in the parent company’s portfolio? • What are the corporate-wide values or beliefs of top management? • Is there a generic strategy that the parent has applied in a number of businesses and may attempt in this one? • Given the performance and needs of other units in the corporations what are the targets (ROI, hurdles etc.) that might be place on the competitive unit? • What are the parent company’s diversification plans? • What clues does the organizational structure of the competitor’s corporate parent provide? • How is the divisional management controlled and compensated in the overall corporate scheme? Sales, ROI, Market share etc. • What kinds of executives seem to be rewarded by the corporate parent? • Where does the corporate parent recruit from? • Does the corporation as a whole have any antitrust, regulatory, or social sensitivities which may spill over to affect the business unit? • Does the corporate parent or particular top managers in the organization have an emotional attachment to the unit?

29. Portfolio Analysis and Competitors Goals • The most revealing technique for portfolio analysis of the competitor is the one the competitor uses itself: • What criteria is used to classify each business • Which business are counted on to be cash cows • Which are used for defensive moves • Which businesses are sources of stability • Which are most promising • Which have the most leverage in the portfolio

30. Assumptions A second crucial component in competitor analysis is identifying competitors assumptions: • Competitor’s assumptions about itself • Competitor's assumptions about the industry and the other companies in it • What does the competitor believe about its position • Does it have strong historical or emotional identification with particular products • Are there cultural, regional or national differences that will affect the way in which competitors perceive and assign significance to events • Are the organizational values strongly institutionalized • What does the competitor believe about future demand and industry trends • What does the competitor believe about competitors capabilities • Does the competitor believe in industry conventional wisdom • Look at the current strategy of the competitors

31. History as an indicator of Goals and Assumptions • What is the competitor’s current financial performance and market share • What has been the competitor’s history in the marketplace over time • In what areas has the competitor excelled or succeeded • How does the competitor react to particular strategic moves in the industry. Cell phone industry each competitor mirrors the other

32. Managerial Backgrounds and Advisory Relationships • The functional background of top management is a key measure of it orientation and perception of the business and appropriate goals. NASA RISK VS SAFETY VS COSTS • Types of strategies that have worked for managers in the past • Other businesses managers have worked in • Major events that have affected managers Oil shocks recessions, bankruptcies • Managers perspectives can be gained from their writings or speeches • Examine management consulting firms, advertising agencies and other advisors to gain insight on the competitors

33. Current Strategy and Capabilities The third component of competitor analysis is understanding their current strategy • Key operating policies • Strategy may be explicit or implicit The final step to competitor analysis is a realistic appraisal of the competitors capabilities • See Figure 3-2 Areas of Competitor Strengths and Weaknesses Pg. 64-65 of text • Core capabilities-functional areas, how does it measure up • Ability to grow-resources cash flow, capacity, people • Quick response ability • Ability to adapt to change-fixed vs variable, competing on cost, service or products • Staying power-money, resources and management commitment

34. Chapter 5 Competitive Moves Competitive Strategy Techniques for Analyzing Industries and Competitors Michael E. Porter

35. Prisoner Dilemma • Two prisoners in jail • If they both squeal they both get hanged • If they both remain silent they both go free • If one squeals on the other he goes free and collects a bounty • Both prisoners taken together are better off if they don’t talk • But by acting in their own self interest each prisoners has an incentive to talk provided the other doesn’t • Game theory can be used to understand firms behavior in an oligopoly. • Tobacco industry in 60’s

36. Industry Instability: The Likelihood of Competitive Warfare • The underlying structure of the industry determines the intensity of competitive rivalry • The greater the number equal powered competitors, the more standardized their products, the higher the fixed costs, the slower the industry’s growth-the greater the likelihood that there will be repeated efforts by firms to pursue their own self interests. Steel Industry • A history of competing or continuity of interaction among the parties can promote stability since it facilitates the building of trust • Multiple bargaining areas can also facilitate a stable outcome in an industry.

37. Competitive Moves • Because in an oligopoly a firm is partly dependent on the behavior of its rivals, the right competitive move involves finding one whose outcomes is quickly determined and is skewed as much as possible to the firm’s own interests • Brute Force Approach –overcoming and outlasting retaliation using the firms superior resources and capabilities

38. Cooperative or Non-threatening Moves Three Categories • Moves that improve the firm’s position and improve competitor's position even if they do not match them • Moves that improve the firm’s position and improve competitors’ position only if a significant number match them • Reduced warranty coverage • Notice firms will high quality/reliable products may suffer • Moves that improve the firm’s position because competitors will not match them Moves will be perceived as non-threatening if: • Competitors don’t notice • Competitors self perceptions or assumptions filter the move • Competitors performance is impaired little if at all measured by their own criteria • Swiss Watches and Timex

39. Threatening Moves In considering threatening moves the key questions are: • How likely is retaliation? • How soon will retaliation com? • How effective will retaliation be? • How aggressive will retaliation be? • Can retaliation be influenced? Air Canada and Westjet Lags in retaliation: • Perceptual lags-statistical data • Lags in mounting a retaliatory strategy- new auto model, blast furnaces in the steel industry • Inability to pinpoint retaliation-large firms vs small firms. • Bell and long distance retaliation affects entire customer base • Lags caused by conflicting goals or mixed motives • Timex and Swiss watches Distribution channel. Computers Compaq

40. Defensive Moves • Good defense is creating a situation in which competitors will conclude the a move is unwise • To prevent a move it is necessary that competitors expect retaliation-consistent targeted retaliation • Toothbrushes, Air Fresheners-free outlet, night light etc • Think of Swifter, Pledge Grab it. Mr. Clean • Denying a base • The denial of an adequate base for the competitor to meet its goals, coupled with the expectation that the state of affairs will continue, can cause a competitor to withdraw. Virgin to Australia and London out of Toronto.

41. Commitment • Perhaps the single most important concept in planning and executing offensive or defensive competitive moves is the concept of commitment • Establishing commitments is essentially a form of communicating the firm’s resources and intentions unequivocally Three major types of commitments in the competitive setting • Commitment that the firm is unequivocally sticking with it plans • Commitment that the firm will retaliate and continue to retaliate if a competitor makes certain moves • Commitment that the firm will take no action or forgo an action

42. Communicating Commitment • The building blocks of a credible commitment are the following: • Assets, resources and other mechanisms to carry out the commitment quickly • A clear intention to car out the commitment, including a history of adherence to past commitments • Inability to back down or perceived moral resolve not to back down • Ability to detect compliance to the terms to which the commitment refers

43. To Do’s for Next Week • Prepare for Phase 1 Review meeting • Work on Phase 2 Competitive Analysis • Complete the assigned readings