2014-navigate-essentials foundations of market entry strategies

Economics, Planning &Development

Community Research& Strategy

Building a Strategic Foundation for New Market Entry

August, 6th – 7th, 2014

University of Western Australia

Executive MBA – Winter Workshop Series

Two Day SeminarInformation & Knowledge

ManagementBusiness Strategy &

Finance

Design, Marketing & Advertising

John GreggPrincipal

Navigate Consulting ina Changing A leadingAustralian consulting grouprecognised through thesuccess of our clients

Table of Contents

• Agenda and Introduction Pages 3-4

• Overview of the Strategic Pillars underpinning market analysis Pages 6-9

• Pillar 1 – Understanding the Industry Structure Pages 12 – 54

• Pillar 2 – Understanding Customer Value and Who to Target Pages 55 – 110

• Pillar 3 – Identifying and Understanding Your Competitors Pages 111 – 128

• Pillar 4 – Understanding you Own Business Capabilities Pages 129 – 150

• A Brief Introduction to the Basics of a Market Entry Strategy Pages 151 - 158

2

Agenda for This Weekend’s Workshop

• Introduction to the course

• Quick brief on the importance of developing a strategic foundation to prepare for entering a new market

• Overview of the four strategic foundation components

• Deep dive into each of the steps

1. Industry Structure Analysis

2. Customer Identification and Value

3. Competitor Identification

4. Our Business Capabilities

• Brief introduction to the market entry strategy

3

Why does it matter?

• In a globalised and internationally competitive world, entering new markets is often critical to thecontinued growth of firms.

• But before developing a market entry plan a comprehensive strategic knowledge base of allrelevant aspects of the market must be gathered.

• This knowledge base becomes the foundation which should guide and help shape the market entrystrategy.

• The foundation comprises four key pillars;

1. The industry structure

2. The customer target and their value

3. A full audit of the existing market competitors

4. A fearless examination of your business capabilities and fit with the dynamics of themarket.

• Our objective today and tomorrow is to learn about these steps in an interactive ways, we’ll bedoing group exercises, problems solving tasks and running analysis on real case studies to help usassimilate the ideas

3

OverviewOf the Four Pillars

5

6

The Four Pillars of a Solid Strategic foundation to Guide Market Entry Strategies

• To capture basic snapshot of industry

• To identify paradigm shifts and external trends

• To identify a company’s core competencies and gaps

• To understand a company’s competitive advantage and sustainability

1. Strategic foundation

Industry structure Customer valueCompetitor

Identification Business capabilities

• To identify customer needs and company role in their fulfillment

• To prioritize customer requirements and competitive markets

• To understand differentiating qualities of competitor portfolios

• To predict competitor moves and market positions

Developing a comprehensive understanding of the structure of and industry in a new market is often determine whether market entry strategies succeed or rail.

The four pillars

7

Strategic questions answeredRelated tools

1. Industry structure key concepts and tools

Industrystructure

Customervalue

Businesscapabilities

Competitor Identification

1. Market overview• What is the forecasted size and growth of the market?

• How attractive are the major market segments?

• What returns should I expect?

2. Value chain analysis • What are the components of the full product value chain?

• What segments of the value chain drive competitive advantage?

• Which segments provide opportunities for performance improvement and competitive advantage?

3. Profit pools • What are the main drivers of profitability in the industry?

• How is this shifting?

4. Technology overview and evolution

• How is new technology changing industry dynamics?

• Are there emerging applications of technology from other industries/markets

6. Regulatory, geo-political and globalization trends

• Are there any emerging regulatory, geo-political or globalization trends that could significantly change the “rules of the game”?

5. New threat assessment • Are there any emerging macro-trends that could significantly change the “rules of the game”?

6

8

Industrystructure

Customervalue



2. Customer value key concepts and tools


2. Assessment of customer segment attractiveness

• What are the most attractive customer segments for the business?

• Which segments fit most clearly with business core competencies?

• Which segments are most profitable to serve?

5. Channel segmentation and attractiveness

• What are the most attractive channels for the business?

• Which channels fit most clearly with business core competencies?

• Which channels are most profitable to use?

4. Share of wallet • What is the full portfolio of customer needs?

• How does the business fit within a customer segment’s spending habits?

1. Customer segmentation • What customers constitute the market, and what are their differentiating needs?

• How do customers segment according to their needs and behaviors?

• How do customers segment according to observable characteristics (e.g. demographic)?

3. Customer needs and attitudes • What needs drive customer requirements and satisfaction?

• How well does the business (and its competitors) fulfill these needs?

6. Customer loyalty • How “loyal” are the business’ customer segments?

• What advantages/disadvantages does customer loyalty have on the business?

7

9

3. Competitive position toolsIndustrystructure

Customervalue




1. Competitor portfolio overview

• What do competitors offer?

• How does this compare to your business’ portfolio/offerings?

3. Return/relative market share (RMS)

• What is the industry relationship between return and market share?

• How do competitors perform according to this relationship?

4. Competitor investment strategy and technology assessment

• On what market segments or products are competitors focusing investments and where do they expect future growth?

• What new technologies are competitors developing, and how will this be leveraged across product lines and their portfolios?

• How do likely competitor actions interact with your business’ strategy?

2. Competitor profitability assessment

• How profitable are competitors, and what are their main profit drivers?

• Competitor strengths, weaknesses, opportunities and threats

8

10

4. Business capabilities tools

Industrystructure

Customervalue




3. Capabilities assessment • What are the business’ capabilities, strengths and key gaps, especially across technology, personnel and financial strength?

• How does the business perform in meeting the industries’ required competencies across the value chain?

2. Core capabilitiesdefinitions

• What are the key elements of your industry’s value chain?

• What special skills or technologies could the business use to drive or create differential customer value?

1. Relative cost position (RCP) • How does business cost align with the industry/market?

• Does the business’ profitability/cost position fall within the industry’s norms?

• What is the full potential cost position?

9

11

After completing the industry analysis, Strategic decisions on growth must be made

1. Strategic foundation

Industrystructure

Customervalue

Competitiveposition

2. Strategic decisions

Insights for business decisions Where should

I compete?

How do I win?

- What businesses, segments, geographies?

- What is my core(s)?

- What drives profit?

- How and where do I differentially invest/divest?


10

1. Industry structure

12

13


Strategic foundation

Industry structure Customer value Business capabilitiesCompetitive position



• To identify a company’s core competencies and gaps

• To understand a company’s competitive advantage and sustainability

• understand differentiating qualities of competitor portfolios


14


Industry structure toolsIndustrystructure

Customervalue








• Which segments provide opportunities for performance improvement?





• Are there emerging applications of technology from other industries/markets?



5. New threat assessment • Are there any emerging trends that could significantly change the “rules of the game”?

15

A market can be segmented many ways

Customer

ProductTechnology

ChannelGeography

What is the most important way to segment your business?

To what level should you segment?

16 Source: Medical and Healthcare Marketplace Guide; Analyst Reports

Australian Medical Device Market

Market maps show the size of market segments, market share and level of fragmentationIt is important to first cut your market at a high level. If you are the #1 or #2 player in your market, how can you more largely cut the boundaries of your market so you only have 5-10% market share?

By starting at a high level, you are able to see where some potential adjacent or lateral opportunities could exist.

17

Mapping regional market segments can also uncover distinct differencesRegional subtleties can help determine where you should prioritize potential expansion and/or where to potentially divest. Many times the differences may result from different regional “tastes.” other times regulatory and/or other government issues can drive the differences.

Source: Jaako Pöyry; ABC estimates

2011

18

Market sizing procedures may vary based on how well an industry is documentedMarket sizing objectives:Identify growth and size of defined market to establish target company/business growth potential and market shareIllustrate company/business position relative to competitors within and across segmentsIdentify key events which influence market size

Poorly Documented

• Market size information is usually publicly available

• Examples:- Government purchases- Consumer products- Housewares- Automobile industry

• Market size information needs to be constructed

• Examples:- Unique goods (e.g., weather

forecasting software)- Handicrafts

• Get to the central data source quickly

• Look at the “source’s source”

- Talk to industry associations

• Be willing to make educated assumptions• Look for proxies to represent missing data• Develop creative approaches and calculations to

obtain market size

Well Documented

19


Industry structure tools

Industrystructure

Customervalue

















20

Value chain analysis provides a systematic method for disaggregating a firm or industry into its major discrete activities to understand sources of competitive advantage

• Value chain analysis can help identify opportunities and clarify business boundaries

- Opportunities for cost advantage/improve performance

- Where to increase competitive differentiation

- Distinct boundaries across business (or industry) processes

- Clear framework to evaluate and prioritize activities on which to focus

Value Chain analysis

Equipment Design Install Operate Service Monitor

Successively finer disaggregations of activities can expose differences important to competitive advantage

21

Distribution/OutboundLogistics

Service

Value chain scope depends largely on the purpose for which it is being used

Firm value chain:

Major activity value chain:

Tech., R&D

Purchasing/InboundLogistics

Manu-facturing/Operations

Marketing&

Sales

ConversionFinal

AssemblyQuality

AssurancePackaging

Cost analysis

Process re-engineering

Cost analysis

System or industry value chain:

Inputs(Supplier)

Conversion(Manufacturer)

Distribution(Distributor/

Retailer)

Consumption(End-User)

Potential supplier identification

Sample Use

MaterialPreparation

22

When to use value chain analysis at different levels

Cost analysis

Process re-engineering

Business definition

Industry collaboration/Identifying potential suppliers

Competitive positioning

Map Major Activities

MapSub-Activities

Always

Sometimes

Unlikely

23

Disaggregating the chain helps you decide where you should or need to play

Description:

Importance of local market share:

Revenuestream:

Compe-tencies:

Influence on buying decision:

Spec systems for larger projects ($100K+)

Medium

One time

Engineering and design

High

Install and commission equipment

High

One time

Technician

Low

Merge databases of disparate systems

Low

One time

Computerprogramming

Low

Maintenance

On going

Medium

Monitor system

On going

Manufacture and sell hardware and software

Manuf: lowDealer: high (except nat’l accounts)

One time + upgrades and service

R&D, manufacturing, distribution

Low

InstallProduct

(Equipment and software)

Databaseintegration

Service Monitor

Software onlyEquip –ongoing

Consulting/Engineering

AssessAssess Plan Specify

Support, upgrade

Low

High Low High Low

On-site Central station

Tech. Computer programming

Guard Operator

SecuritySystems

Several chain sections (Consulting/Engineering, Service and Monitor) have been further sub-dividedTo build long-term relationships and revenue streams, the business may want to consider participating in the servicing and monitoring components of the chain

24



Industrystructure

Customervalue


CompetitorIdentification















25

Profit pools learning objectives

• Learn the profit pool concept and how you can use profit pools to better understand your industry and where to compete

• Learn the basic steps on how to create a profit pool

26

Accounting profit - business earnings as formally reported

- Most commonly used as the basic profit measure

- Examples include Net Income or Earnings per Share calculations

Return on investment - business earnings after taking the cost of capital into account. Commonly used measures include:

- Return on Capital (book value)

- Return on Invested Capital (book value)

- Return on Assets

• Cash-flow contribution - business earnings before taking fixed-asset and capital costs into account (e.g. Earnings before interest, tax, depreciation and amortization – EBITDA)

- Used as a basis for decision-making in mature, high fixed cost and cyclical industries

“Profit” can be defined in several ways

Be aware of differences in accounting standards when evaluating companies with profits spanning different industries

27

Mapping a profit pool involves four steps

1. Define the pool2. Determine the size

of the pool

3. Estimate the distribution of

profits

4. Reconcile the estimates

Tasks: • Identify which value chain activities influence the industry’s ability to generate current and future profits

• Develop a baseline estimate of the profits generated by all profit pool activities within the value chain

• Determine the profits generated by each activity within the value chain

• Compare the results previous two steps and reconcile numbers

• List of value chain activities in profit pool (in sequential order)

• Estimate of total profit pools (may be a range)

• Point estimates of profit for each value chain activity

• Final estimates of activity and total pool profits

Output:

28

Profit pool “choke points” control profit flow

Examples:

Computer industry example

Impact:

•Intel’s dominance of microprocessors

•Establishment of an industry-wide standard that all companies must now follow

•Microsoft’s dominance of Windows

•Consolidation of control over the customer interface

Micro-processors

Other Components

Personal Computers

Software Peripherals Services

Control of a choke point can influence the distribution of profits among competitors and more distant value-chain participants

29

Three ways to use profit pools

•“Take a Truck”: identified a large untapped source of profit in the low margin truck rental business

- Seized first mover advantage

- Entered accessory business at a low cost

- Reduced prices (and profits) in core truck rental business to attract customers for higher margin accessory business

Identify new sources of profit

•Dell: evaluates which customers to pursue and which channels to use

- With direct sales, Dell splits what would be dealer’s profits with itself and customers through lower prices

- Regular customer re-segmentation identifies most profitable customers, allowing Dell to react quickly to new profit sources

Develop distribution strategy

Guide pricing,product and

operating decisions

•Lion Nathan in Australia: recognized industry’s profit pool driven by premium beer

- Increased marketing of premium brands

- Vertically integrated into can production, thereby raising competitive barriers around the pool by cutting manufacturing and distribution cost

Seeing what others do not will best prepare you to capturea disproportionate share of industry profits

30

Tips for success

Take a broad view of the value chain

Examine the industry from different views, building estimates from multiple perspectives

Prioritize focus to look at the largest and easiest components first

Look at relevant internal and external comparables

Think creatively

Creating profit pools can be a difficult exercise, but generates highly valuable insights

Key Activities in doing profit pools:

•Lay out the key supplier and buyer elements of the value chain

•Find overall revenue (i.e. market size) for each of the supplier and buyer side elements

•Find an average industry profit margin for each of the supplier and buyer side elements

31



Industrystructure

Customervalue

















32

Technology overview and evolution learning objectives

• View potential frameworks and tools you can use to assess technology evolution and convergence

• Gain a better understanding as to why some technologies failed to live up to their hype

• See how studying analogies and talking to customers can help provide insights into and better predict technological evolution

33

Assessing technology’s evolution and its’ potential impact is a multi-step process

Competitors’ capabilities

My capabilities

Current and

future customer

needs

34

Printers and related

As product life cycles (PLCs) continue to shorten, assessing new threats is more important than ever

35

Diagnose Intervene Monitor/Manage

In

vitro

In vivo

internal

Non-

invasive

Min.

invasive

Inva-

sive

Rehab/

Recovery

Moni-

toring

Disease

Mgmt

IT

R&D

Research Dvpt.In vivo

external

Targeted Rx delivery

GEMS Core GEMS Core

Radiation Implants

Smart Implants

Endoscopy-enabled Procedures

Image-enabled Procedures

Imaging for Soft Tissue Characterization

Molecular Imaging, Radiopharmaceuticals

Pharmacogenomics

Treatment Efficacy Monitoring

PoC Dx Monitoring, Remote Monitoring

Convergence has created new combinations in health care

36

There are four requirements for technology convergence to be successful

UnmetneedsAttractive economics

(Consumer vs Supplier)

Manageable adoptionbarriers

Existingtriggers

--------------------- Convergence requirements ---------------------

Media & digital technology (TV + PC) eg: AOL Time Warner

Internet telephony eg: various start-ups

•Always up-to-date, customized information

•No unmet need (regular tel lines satisfactory)

•Cons: Weak willingness to pay for internet content

•Suppl: No critical mass for sufficient revenue

•Cons: Cheaper than traditional

•Supplnot attractive; start-ups unable to reach critical mass

•Customer behavior (passive communi-cation with TV, inte-ractive with PC)

•Cumbersome dialing required

•Lack of sufficient, widespread broadband

• Immature technology (=> inferior connec-tion quality)

Failu

re

Unfavorable

Favorable

Neutral

Financial services(banking + brokerage + insurance) eg: Citigroup, USAA

Electric & gas utilities eg: Reliant

•One-stop shopping

• None

•Cons: Lower aggregate fees

•Suppl: Significant cross-selling opportunities

•Cons: Some price benefit

•Suppl: Strong customer and cost synergies

•Time-consuming account consolidation

•No customer behavior change required

•Deregulation

• IT enabling sharing of info across platforms

•Deregulation (and pri-vatization overseas)

Succ

ess

40

37

Customer interviews can help assess trends and their impact on current/future boundaries

• For each key product or service (and related business extension currently being discussed), who at the customer makes the buying decision? Who are the influencers?

• Which products or services are bought at the same time? Different?

• What else does each decision maker buy? Each influencer?

• How valuable would a fully integrated system be? Why?

• How will the buying process change in the near to medium term? (Convergence?)

38



Industrystructure

Customervalue

















39

New threat assessment learning objectives

• Understand how to apply Porter’s Five Forces market analysis tool, with special focus on assessing new threats

40

Porter's Five Forces offers a framework to assess new threats (1 of 6)

Rivalry among existing firms

Suppliers

Bargaining power of suppliers

Potential entrants

Substitutes

Buyers

Threat of new entrants

Bargaining power of buyers

Threat of substitute products or services

Industry competitors

41

• Economies of scale

• Proprietary product differences

• Brand identity

• Switching costs

• Capital requirements

• Access to distribution

• Absolute cost advantages

- Proprietary learning curve access to necessary inputs proprietary low-cost product design

• Government policy

• Expected retaliation

Entry barriers

Porter’s Five Forces (2 of 6)

Suppliers

Potentialentrants

Substitutes

BuyersIndustry

competitors

42

• Industry growth

• Fixed (or storage) costs/value added

• Intermittent overcapacity

• Product differences

• Brand identity

• Switching costs

• Concentration and balance

• Informational complexity

• Diversity of competitors

• Corporate stakes

• Exit barriers


Determinants of rivalry among existing firms

Suppliers

Potentialentrants

Substitutes

BuyersIndustry

competitors

43

• Differentiation of inputs

• Switching costs of suppliers and firms in the industry

• Presence of substitute inputs

• Supplier concentration

• Importance of volume to supplier

• Cost relative to total purchases in the industry

• Impact of inputs on cost or differentiation

• Threat of forward integration relative to threat of backward integration by firms in the industry


Determinants of supplier power

Suppliers

Potentialentrants

Substitutes

BuyersIndustry

competitors

44

• Relative price performance of substitutes

• Switching costs

• Buyer propensity to substitute


Determinants of substitution threat

Suppliers

Potentialentrants

Substitutes

BuyersIndustry

competitors

Substitution example: Pricing and sales trends uncover insights and potential threats

The convergence of granite and solid surface pricing has led to solid surface share loss

45

46

• Buyer concentration versus firm concentration

• Buyer volume

• Buyer switching costs relative to firm switching costs

• Buyer information

• Ability to backward integrate

• Substitute products

• Pull-through

• Price/total purchases

• Product differences

• Brand identity

• Impact on quality/performance

• Buyer profits

• Decision makers’ incentives


Determinants of buyer power

BargainingLeverage

Price Sensitivity

Suppliers

Potentialentrants

Substitutes

BuyersIndustry

competitors

47

Qantas11%

Baker’s Delight10%

Samsung13%

Continental-10%

Virgin Air(5%)

Low

High

High

Low Airlines Bread Smartphones

Relative competitive advantage

Relative Industry Attractiveness

Narrow application of Five Forces can miss possibility of earning good returns in bad businesses

Iphone67%

Key takeaway: Using Porter’s Five forces to assess threats can be very helpful, but the Five Forces framework should not be solely relied upon in any look at strategy.

• Firms in lousy businesses that fail to develop a competitive advantage destroy shareholder wealth (Qantas), but firms in lousy businesses can provide excess returns to shareholders (Virgin)

• Competitive advantage in an attractive business leads to excess returns (Iphone), but being in an attractive business does not guarantee excess returns (Samsung)

48



Industrystructure

Customervalue

















49

Regulatory, geo-political and globalization trends learning objectives

• View some potential tools and frameworks to help you better assess opportunities and challenges provided by regulatory, geo-political and globalization trends

50

Regulations are one of the a of inter-related forces that can change industries

Telecom Regulation

1992 Australian Productivity Commission report recommended the break of Teltra’s Australian telecommunication monopoly

Telecom and Media Act 1996

- 50% of Telstra privatized

- Market competition opened for both services and hardware (exchanges, fiber optic routes)

- Broadcast ownership rules opened

• 2014 – Over 40 carriers and hardware suppliers vying for market share

Rule changes have opened markets and resulted in intensified competition (E.G Current privatization of many UK NHS service areas)

51

Regulatory structure and government involvement can significantly impact profitability

Examples

Government intervention

Repossession/ senior debt laws

Pricing environment

Low

• Germany

• Banks often used to further public policy goals

• Supplier has claim on goods until they are paid for

• Banks not return driven

• France/Italy

• France: Lenders potentially subject to usury laws at high yield levels

• Supplier has claim on inventory until sold

• France: Can exploit niches with attractive pricing

• Italy: Captives not return driven

High

• UK

• Low; favorable lending environment

• No claim on inventory

• Attractive

Structural attractiveness

52

• Government stability• China/Taiwan/Hong Kong• World currencies• Levels and locations of Foreign Direct

Investment (FDI)• Middle income trap (Mexico, Thailand,)• Western world stagnation posy 2007• Sudden unexpected military action

Geo-political and globalization trends must be examined

Geo-Political Key Issues

Globalization Key Trends

• Global capital markets• Trade liberalization

- WTO, GATT, NAFTA, EU

• Technology innovation & electronic distribution

• Deregulation

Potential data sources

• Analyst reports

• Industry trade groups

• Industry lobby groups

• Literature searches

• Expert interviews

53

Example: The Chinese express delivery market is structurally very different from Australia

• Paper-based articles that fit into a standard-sized express envelop

• Weight <500g

DefinitionDomestic regulation

International regulation

• Non-Express Mail Service (EMS) companies not allowed to deliver documents with informational content

• Heavily restricted market

• All non-EMS companies are allowed to participate, BUT…

• …Grey area due to definition of personal mail, business mail and parcels

• Packages that weigh up to 25kg (international) and up to ~30kg (domestic) per shipment

• Heavy weight parcels, greater than 25kg (international) and ~30kg (domestic) per shipment

• All companies are allowed to participate

• Non-EMS companies are allowed to participate, BUT…

• …can not deliver documents with informational content

• All companies are allowed to participate

• All non-EMS companies are allowed to participate, BUT…

• …EMS and China Post are trying to close up this segment

Documents:

Express Freight:

Parcels:

Source: Literature Search; Interviews. 2009 data.

54

Using a “heat map” can help identify global opportunities

United States

Germany

Japan

Italy

UK

Korea

Peru

Credit cards

Mort-gages

Mutual funds

De-posits

Life insur-ance

P&C insur-ance M&A

Under-writing

Deriva-tives

Corp. lending

Foreign ex-

change

Hot

Cold

Each cell represents a geographic product market and is shaded according to its likely profitability and growth

Opportunity assessment

2. Customer Targeting and Value

55

2. Customer Value


Industry structure Customer valueCompetitor

Identification Business capabilities



• To identify customer needs and their implications for the business


• To identify a business’ core competencies and gaps

• To understand a business’ competitive advantage and sustainability



61

57

Industrystructure

Customervalue



Customer value tools




• Which segments fit most clearly with the business’s core competencies?




• Which channels fit most clearly with the business’s core competencies?




1. Customer segmentation • What customers constitute the market and what are their differentiating needs?


• How do customers segment according to observable characteristics (e.g., demographic)?

3. Customer needs and attitudes

• What needs drive customer requirements and satisfaction?




62

• Each customer segment has a unique set of needs and requires its own value proposition

• Profit potential varies dramatically by customer segment

Customer segmentation helps companies efficiently focus scarce resources

Resources should be allocated differentially across customer segments

All customers are not created equal

58

59

The "right" customers tend to look quite different from others

0 6 12 18 24 30 36

-120

26

43 43 41 44 46

-150

-100

-50

0

$50

Profit per customer

Months

0 6 12 18 24 30 36

-70

11 11

-0

12

-2

12

-4

13

-4

14

-3

-150

-100

-50

0

$50

Profit per customer

Months

NPV

$190

NPV

$6

Example: Financial services industry

Spending Growth

Referrals

Base

Acquisition Cost

“Right” customers “Other” customers

There are three segmentation approaches, each of which answers different questions

• Who are the most profitable customers in our customer base?

• How many more customers like these are there in the market?

• Customer value

• Customer attitudes/behavior

• Customer profile

Segmentation approach Questions answered

• What value proposition will increase our most profitable customers’ loyalty to us and attract more like them?

• What demographic/product usage characteristics, if any, can we use to find high potential customers?

60

1. Divide customers into profitability buckets

2. Collect data3. Combine variables to

determine segments

• Determine appropriate profitability metric

• Bucket according to intuitive divisions

• Iterate depending on distribution between categories

• Create a list of key profit-driving behaviors

• Develop segmentation hypotheses

• Group into segments based on their responses to key variables

• “Reality check” based on distribution between categories

Example:

• Top 10%, bottom 10% of customers in terms of yearly profitability

Example:

• Frequency of use

• Duration of use

Example:

• High frequency but short duration of use

• Low frequency but long duration of use

Identification of customer groupings and their relative profitability

The Customer value approach is based on profitability

61

62

• Make a complete list of likely customer and non-customer attitudes and behaviors

• Select attitudes that

- Drive purchase behavior

- Are actionable

- Differ across customers

• Select behaviors that

- Drive usage and cost-to-serve differences

- Are easily measured

- Differ across customers

• Develop segmentation hypotheses

1. Create a list of key profit-driving behaviors and

attitudes2. Collect data

3. Conduct factor/cluster analysis to determine

segments

• Conduct a quantitative survey of a representative sample of customers and non-customers to gauge their key attitudes and behavior

• Gather additional data in the survey to make segmentation actionable

- Profitability data

- Demographic profile

- Competitor perceptions

- Defection drivers

• Customers and non-customers are statistically placed in segments based on their responses to key variables

- Attitudes/behaviors

- Demographic profile

Customer attitudes/behavior and Customer profile take a slightly different approach

Identification of profitability impact of various customer needs and groupings

• Identify gaps or redundancies in the product portfolio

• Screen out unacceptable new products

• Choose product features

• Determine product pricing

• Establish appropriate service options

• Determine optimal distribution strategy

• Advise on advertising strategy

Customer segmentation can be used to drive to a number of important insights

63

High profit customers were segmented based on their behavioral and demographic characteristics

A target segment was chosen based on its attractiveness and Highland’s ability to serve it

Customers were divided into groups based on their profitability

The behavioral and demographic drivers of profitability were determined

A value proposition was created for the target segment

Customer segmentation

Assessment of segment attractiveness

(Covered in next section)

Example: Customer segmentation for 4 Seasons Hotels is a multi-step process

64

Low profit

Medium profit

High profit

Customers Profit0

20

40

60

80

100%

Percent of Total

Example: One third of 4 Seasons customers account for more than 60% of its total profits

65

Business/leisure Leisure only Business only

$250

$75

$50

0

100

200

$300

Average Annual Profitper Customer Type

1-2 3-5 6-8 9-10 11

$50

$85

$140$150

$260

0

100

200

$300


Days per Year

Less than 2 days 2-4 days 4+ days

$40

$70

$130

0

50

100

$150


Occasion

Visit Frequency Length of Visit

Example: The primary profit drivers for4 Seasons are visit frequency, duration and occasion

66

67

“Hotel-aholics” Very frequent

(9.2x)

Medium

(3.9 days)

Business/leisure

“Honeymooners” Infrequent

(1.5x)

Long

(10.0 days)

Leisure

“Hello again” Frequent

(6.2x)

Short

(1.8 days)

Business

“One-timers” Infrequent

(1.3x)

Long

(5.4 days)

Business

4 Seasons identified four types of high value customers based on these drivers

High profitsegments

Annualfrequency

Length of stay Occasion

68

Industrystructure

Customervalue























Assessment of segment attractiveness has two components: “fit” and economics

Fit: Ability to serve in a differentiated

way

Business’ overall strategy and capabilities

Business’ competitive

position

• Strategic objectives

• Ability to leverage:

- Technology

- Costs

- Skills

- Existing resources

• Existing base in segment

• Existing market perceptions of strengths and weaknesses

• Competitive performance

Economicattractiveness: Profit potential

Revenue potential Cost to serve

• Size

• Growth potential

• Buyer power

• Product requirements

• Price sensitivity

• Advertising requirements

• Channel preference

• Service requirements

69

Fit is a fairly qualitative assessment that accounts for both internal capabilities…

1. Does segment leverage key strengths of the business?

Example:

Should Stanley Tools enter the rotary saw market?

2. Does segment conflict with existing positions?

Example:

Should Mercedes introduce a medium-priced ($20-$30K) line of family sedans?

Does segment fit with the business’ overall strategy and capabilities?

70

…and competitive positioning

Does the business have a strong competitive position within the segment

1. What are segment perceptions of the business’ strengths and weaknesses?

Example:

Should McDonald’s offer vegetarian burgers in the US?

2. What are segment perceptions of the business’ relative position vs. competitors?

Example:

Should Volvo design a sports car?

71

Calculate economicattractiveness: Profit potential

Calculate revenue potential

Calculate cost to serve

Current customers

New customers

Current customers

New customers

Determining economic attractiveness is more straightforwardly quantitative

• Number of potential customers

• Penetration

• Lifetime

• Margin

• Investment required in headcount, technology, new product development, etc.

72

Develop capabilities to serve this

segment

Target this segment

Avoid this segmentAdjust value proposition to improve attractiveness of

this segment

Low

Low

High

High

Fit: Ability to serve segment in a differentiated Way

Once segment attractiveness is assessed, “target segments” can be chosen

73

High profit customers were segmented based on their behavioral and demographic characteristics

A target segment was chosen based on its attractiveness and Highland’s ability to serve it

Customers were divided into groups based on their profitability

The behavioral and demographic drivers of profitability were determined

A value proposition was created for the target segment

Example: Four Seasons reassessed customer segment attractiveness

Customer segmentation

Assessment of segment

attractiveness

(Covered in previous section)

74

Low profit

Mediumprofit

High profit

One-timers

Hello again

Honeymooners

Hotel-

aholics

Customers High profit customers High profit customers'profitability

0

20

40

60

80

100%

Percent of Total Ability to serve in a differentiated way

“Hotel-aholics” were the most attractive and a good fit with HH capabilities

75

Priority service Special services

• Favorite room ready

• “Permanent” electronic key

• Complimentary dry cleaning

• Two phone lines

• Fax machine in room

• One 20 minute complimentary call to home

Rewards

• Frequent flier miles

• “Kids Stay Free” days

Four Seasons created a tailored value proposition for this target segment

Differentiation from competitors

76

Tips for success

“Fit” assessment:

• Iterate as necessary as “Fit” relies heavily on correct business definition (see “Where do I compete?”)

• Be open-minded: put everything “on the table”

Economic attractiveness assessment:

• Ensure that the costs and revenues from the full customer lifecycle are captured

• Take into consideration “hidden” costs

- Include differential costs to serve (e.g., FTEs)

- Include rework/returns

77

78

Industrystructure

Customervalue























85

Customer needs and attitudes learning objectives

• Understand how to identify customer needs and assess customer satisfaction

• Understand how customer needs and attitudes fit into the Customer value analytical process

• View potential slide formats to fully utilize the information gleaned from this analysis

79

Product quality

• Usability/features

• Superior technology

• Prestige

• Serviceability

• Failure recovery

Service quality

• Speed

• Recognition

• Customer knowledge

• Treatment and interaction

• Tangibles

• Failure recovery

Cost

• Low original price

• Value ratio

• Discounts/sales

• Reliability

• Frequent buyer plans

• Terms, tax

• Durability

• Convenience

ExampleCategory

Customer satisfaction is driven by three main categories of customer needs and attitudes

80

Comprehensive research captures four levels of customer needs and attitudes

Unknown – “I never thought of that.”

Withheld – “I did not know I could get that.”

Assumed – “I thought you knew I needed that.”

Stated – “This is what I want or need.”

81

Customer needs and attitudes can be described both qualitatively and quantitatively

Quantitative Qualitative

• “Service is very important to me because I don’t have time to deal with it myself.”

• “The product had problems with durability and that was simply unacceptable.”

Example: Customer perception of relative importance in product purchasing criteria

• “Service” importance rating of 5 (“very important”) vs. “Price” importance rating of 3 (“moderately important”)

• “Design” importance rating of 5 vs. “durability” importance rating of 1 (“not at all important”)

82

Are you good at the things that matter most to customers?

Price

Speed

Reliability

Rela

tionship

s

Fle

xib

ility

Rela

tive im

port

ance/p

erf

orm

ance

Price

Speed

Rela

tionship

s

Reliability

Par/

serv

icin

g

LTV

Fle

xib

ility

Rela

tive im

port

ance/p

erf

orm

ance

GECRE

Heller

Traditional on-book

GECRE

Nomura

High

Low

High

Low

Commercial Mortgage Backed Securities

83

Tips for success

• Select customer sample that is representative of overall sales. Key criteria may include:

- Geography

- Industry focus

- Product mix

- Discount levels

- Use of customer service hot-line

- Satisfaction levels from existing research

- Sales team tenure

• Use alternative metrics to determine sample representation if applicable. For example, sample can be representative of customer counts

84

85

Industrystructure

Customervalue























Share of wallet learning objectives

• Understand share of wallet concept and potential applications to customer value analysis

• Learn how to interpret data to determine share of wallet

86

The share of wallet (SOW) tool quantifies potential customer value

What portion of a customer’s spend is captured by the business?

What portion of a customer’s spend can be captured by the business?

Identification of untapped customer potential

87

SOW has multiple applications

• Strategic tool to identify full potential and to prioritize regions, verticals, customers and products

• Operational tool to increase sales effectiveness- Prioritization of installed base and prospects

- Identification of potential for growth

• Financial controlling tool to measure operational performance on account/segment level

88

Metric Definition Example

• Share of wallet • Share of spend of a single customer

• Customer buys $10M of softwear per year. Revenue with this customer is$2M

• -> SOW = 2/10 = 20%

• Share of visits/trades

• Share of use by a single customer

• Customer buys/has ___ number of visits/trades. Portion served by business is 50%

• -> SOW = 50%

SOW is the share of spend for a single customer

Variation

89

SOW analysis is a multi-step process

Activities

Output

Determinebottom-up wallet

• Build-up wallet beginning with single customer spend

• Quantify to limits of Business Definition

• Bottom-up wallet sizing and appropriate segmentation

Matchtop-down

wallet

• Assess wallet size beginning with highest macro-impact

• Quantify to limits of Business Definition

• Top-down market sizing that ties to Bottom-up version

- Wallet by business

- Wallet by vertical

- Wallet by region

- Wallet by product

Determine share of wallet

• Determine applicable share definition

• Calculate across all segments

• Quantitative assessment of share of wallet vis-à-vis competitors in key segments

Assess customer full

potential

• Prioritize and assess segments according to potential

• Create action plan to reach full potential

• List of “target” segments and recommended actions

• Action plan to reach full potential

Database build up Database analysis

90

Trade-

Online

ACo BCo CCo

16%

23%

39%42%

0

10

20

30

40

50%

Household assets

under management

Overall

average: 67%

Frequent

trader

Most

frequent

64%

57%

0

20

40

60

80%

Percent of trades

conducted with TradeOnline

Active traders

Share of wallet

Active traders

Share of trades

Example: CommSec has room to improve SOW among frequent traders

91

Industrystructure

Customervalue


















3. Customer needs and attitudes • What needs drive customer requirements and satisfaction?




92

93

Demand Creation

Access(Reach)

Profitable Revenue

+ + = Productsuccess

Key Aspects:

• Create product awareness

• Articulate value proposition

• Educate customer

• Market towards target customer

• Provide easy access to all target consumers

• Allow for “touch & feel” of product

• Provide rich information at POS

• Access target customers

• Generate large base of profitable revenue

Channels can be prioritized according to three general attributes

No single channel must provide all of these necessary components, but overall channel mix should deliver all

three

Example: Harvey Norman has four distribution choices if it chooses to prioritize reach

Big Box A

Big Box B

RegionalCo

DeptStoreCo

MallRetailCo

E-tail

Company website

Demand creation

Med

Med

Med

Low

High

High

Low

Reach

High

High

Low

High

High

High

Low

Revenue opportunity

High

High

Low

Low

Low

Med

Low

Classification

Reach

Reach

Reach

Reach

Demand creation

Mixed

Mixed

94

Example: Further analysis identifies channel potential and drivers of success

Revenue through Big Box A channel

Units: 3,000 33,100 92,400

Placement

• Will need to fund premium placement so it will not be mistaken as “just another box”

Knowledge

• Business would have to train sales force, quality control should not be a huge problem

Fulfillment

• Low volumes should make fulfillment easy

Main challenges

• Confusion with other “boxes”

• Getting on the shelves with such low prediction volumes could be problem

• Big Box A carries the whole range of competing products

95

Industrystructure

Customervalue


Competitiveposition

2. Customer value




















96

Customer loyalty is a requirement for maximizing customer value

Success is built on getting the right customers and keeping them

97

"Satisfaction" sets too low a standard for measuring customers loyalty

Most defectors are generally satisfied

98

Loyalty includes multiple customer needs and attitudes beyond simple satisfaction

Referral

Repurchase

Satisfaction

Pride

Trust

DeservesLoyalty

99

“Loyalty Leaders” achieve better costs and growth

Average Loyalty

Leader

100%85%

0

50

100

150

200

250%

Indexed

average costs

Costs

Average Loyalty

Leader

100%

220%

0

50

100

150

200

250%

Indexed

average growth

Growth

100

Extending the customer lifecycle maximizes profit potential from the target segment

67656260585549444230

(51)(80)

(40)

0

40

80

120

5549444230

(51)(80)

(40)

0

40

80

120

0 1 2 3 4 5 6 7 8 9 10

Annual Pro

fits

Year

Example: Credit card company

101

Root cause analysis can uncover important issues for at-risk customers

Uncontrollableissues

102

Strategy

Marketing

Sales/Service Channels

Redesign Customer Experience

Teams/Compensation/Rewards

Process Statistics

•On time, first time fix• Line increase requests

Behavior

•Retention•Share of wallet

Feedback

•Employees•Customer Loyalty/Sat.•Complaints

Customer Experience Metrics

Customer loyalty Feedback/Results should be addressed through an ongoing process

103

3. Competitor Identification

111

Overview

Competitor analysis enables an organization:

– To gain an understanding of the future strategies and decisions of key competitors

– To predict competitor reactions to an organization's strategic initiatives and environmental changes

– To understand how to influence the behavior of competitors to gain competitive advantage

•It permits an organization to address the following questions:

– What can it learn from its competitors?

– What are they key differences between the company and its competitors? Do these differences explain the differences in performance (financial, operational) between all players?

– What are the likely changes in the competitive landscape it will need to respond to?

•It is important to understand that competitive analysis is not a strategy but merely one of the components feeding in to the identification of opportunities and the development of a strategy.

105

Framework for Competitive AnalysisA

cti

vit

ies

To

ols

/T

ech

niq

ues

Competitor Identification & Segmentation

CompetitorPerformance

Analysis

Competitor Objectives &

Strategy Analysis

Improvement Opportunities &

Competitive Response

Competitor identification (traditional, new entrants, substitutes, …)

Competitor segmentation/competitive advantages (size, segment, customers, pricing, products/services, relative threat)

Analysis of value proposition (price, service, product offering, quality)

Competitor positioning in value

Porter's 5 Forces

Competitorpositioning map

Value Chain

Mekko

Market share analysis

Analysis of competitive strengths & weaknesses (profitability, performance, competencies, capabilities)

Benchmark of competitor performance

Assessment of performance/value drivers

Activity mapping

Capability assessment

Share gain line

Identification of competitive position improvement opportunities

Assessment of competitor response to changes in environment and new strategic initiatives

Analysis of company goals and current strategy (strategic, financial, operational)

Assessment of future trends/movementsin positioning

Game theory

Scenario modeling

SWOT Analysis

Industry, market, company predictionsand forecasts

106




Analysis


Strategy Analysis

114

Identifying Your Competitors

Issues

Boundaries are not always clear

Direct vs. indirect can be on the basis of:

─ Product type (e.g. soft drinks vs alcohol)

─ Activity type/position within the industry value chain(e.g. a manufacturing company may compete with distributors if it also distributes its products)

Typical focus of effort can be:

─ Segments targeted within the industry

─ Competitive advantages characterized by each segment (e.g. price, quality, etc.)

Company X Competitive Landscape

Typical focusof effort

Regional

National Direct

Indirect

Small

Large

Size ofcompetitor

Type of competitor

Geographicfocus ofcompetitor

108

Identifying Their Competitive Advantages (1/3)

(1)Source: M. Porter, Competitive Advantage

Common behavior types;

Generalists: These companies compete on most market segments

Specialists: They usually compete in oneparticular segment

Multi-specialists: They compete on several market segments

Firms behaviors towards industry segments

• Market image

• Price policy/price positioning

• Services offered

• Product quality

• Degree of technological leadership (innovation vs. imitation)

• Sales and distribution channels

• Customer Intimacy

Types of competitive advantages(1)

Industries where innovationplays a key role

Complex products (requiring exploitation of very different competencies)

High fixed costs

Leveraging success factors

Being present in all positions of the value chain

Occupying several spots within the value chain and by outsourcing others etc.

Positioning in the value chain

Some competitors may belong to larger groups/conglomerates

Origin of equity funds plays a key role (external shareholders, managers, suppliers, etc.)

Other characteristics

109

Competitor Performance Analysis



Analysis


Strategy Analysis

117

Competitor Market Share Examples (1/4)

Top 5 players (2012) Market share evolution (1992-2012)

18%

11%10%

5%

22%

Comp #4

Top 5 players represent XX % of market

% MarketShare

10%

20%

0%

Comp #3Comp #2Comp #1Company 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

35

0

5

10

15

20

25

30

%

1

2

3

4

56

7/8

111


Market Size (2012,

$m)

Co.X (2012, $m)

Market Share (%)

Books 2,100 225 10.7%

Stationery 1,500 130 8.7%

News 4,000 120 3.0%

Video 550 90 16.4%

Cards 1,000 75 7.5%

Music 1,200 60 5.0%

112


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Others

Woolworths

Books etc

John Menzies

Dillons

Multitail

Waterstones

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Others

BootsPaperchaseDisney Store

John Menzies

Ryman's

Multitail

Woolworths

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Books Stationery News

Others

WoolworthsJohn Menzies

Multitail

$ 2.1 bn $ 1.5 bn $ 4.0 bn

Competitorshare bysector (%)

113

-10%

0%

10%

20%

30%

40%

50%

60%

-10% 0% 10% 20% 30% 40% 50% 60%

Company X Share Movements – By Sector

Total Market Growth

Company Xgaining share

Company Xlosing share

Video

News

Music

Cards

Stationery

Books

CompanyX Growth(% over4 years)

Competitor Market Share Share Gain Line By Sector

114

Competitor Market Share - Growth Vs. Market Share

Competitors sales growth vs. relative market share (1999 – 2009)

Relative marketshare (units), 2000

-20%

0%

20%

40%

60%

80%

100%

120%

00.5 1.0 1.5

G

H

X

F

B

E

A

D

C

CAGR (units) 1999-2009

115

Competitor ProfitabilityExamples (1/2)

Profitability by Competitor in Industry "A"

Sales Profit ROS

Comp 1 400,000 44,000 11.0%

Comp 2 180,000 28,800 16.0%

Comp 3 120,000 8,400 7.0%

Comp 4 110,000 9,900 9.0%

Comp 5 60,000 4,800 8.0%

Comp 6 40,000 2,800 7.0%

Comp 7 30,000 -1,500 -5.0%

Comp 8 30,000 1,800 6.0%

Comp 9 20,000 800 4.0%

Comp 10 10,000 300 3.0%

116

Benchmarking Competitor Performance

• There are many other dimensions against which to measure competitor performance, each being associated with a set of Key Performance Indicators (KPIs).

• Outlined below is an example of the performance dimensions that can be studied, with corresponding KPIs.

Supply chain efficiency

Customer retention level

Manufacturing service level

Staff utilisation level

etc

Performance Dimension

Logistics as % of sale

% of lapsed customers/year

Average manufacturing lead time

Store staff cost as % of sale

etc

Illustrative KPIs

117

Benchmarking Competitor PerformanceMeasuring KPIs

For example, world-class retailers use a combination of external and internal KPIs to align their

supply chain towards the optimum level of performance

What do retailers measure in their supply chain? Why do retailers measure their supply chain?

Financialindicators

Operationalindicators

Costs Accuracy Speed

Mix, balance and trade-offs vary with

Nature ofbusiness

Maturity ofsupply chain

Absolutelevels

Relativetrends

Externallycomparable

Internallyconsistent

Driveimprovement

targets

Monitorprogress and

realise benefits

118

Benchmarking Competitor PerformanceCompetitor Benchmark Outcome Display

KPI

Comp. 1 Comp. 2 Comp. 3 Comp. 4 Etc.

Supply chain efficiency

Customer retention level

Staff utilisation level

etc

etc

Competitors

119

Assessment of Performance DriversInsights on Specific Issues

Conclusion Insight Strategic Direction Indicated?

Example 1 Lower gross margin High operator costs

Skewed installed base

Reduce costs

Avoid price aggression

Upsell existing tone customers

Example 2 Higher operator costs

Lower productivity Reduce operator costs

─ OAS cost reduction

─ Subcontract

─ Explore voice recognition opportunities, push canned alpha message

Example 3 Fixed costs lower Higher transmission costs more than offset by other costs

Reduce transmission costs

─ Reduce leased times per transmitter (to 0 on outposts, to 1 on others)

─ Use satellites or dial-ups

─ Drop marginal locations

120

Competitor Strategy Analysis: SWOT AnalysisOnce the competitors have been identified and their performance analyzed, their particular characteristics can be more specifically assessed.

Fill in a SWOT analysis for each competitor you are assessing. Outlined below is an example of a SWOT analysis for a football club.

Strength Weaknesses

Experienced players

Key real estate location

"Cultured" football common methods shared across the squad

Midfield play

Attract further key international names

Umbrella branding (internationally recognized names)

Little development opportunities for the youth teams

Old players more accident prone

Low scoring

Inexperienced manager

Still backed by private investors cash?

Other clubs keepgetting bigger

Other teams back in contention for N° 3 spot

Opportunities Threats

121

4. Business Capabilities

129

123

Strategic foundation roles


Industry structure Customer value Business capabilitiesCompetitor

Identification



• To identify customer needs and company role in their fulfillment




• To understand a business’ competitive advantage and sustainability

• To identify a business’ core competencies and gaps

Business capabilities toolsIndustrystructure

Customervalue

Competitiveposition











130

Lower cost position is a major difference between leaders and followers

Higher Value

Lower Cost

Total difference in profitablity (#1 vs. #5)

0

20

40

60

80

100%

131

132

Theoreticalfull potential

$1.10

RCP determines full potential cost position by comparing unit costs to those of competitors

RCP = Relative Cost Position

Quantifies cost differences between your business and competitors

Insight into processes, practices, technologies resulting in cost differentials

Reveals necessary actions to close cost gaps and gain competitive advantage

Practical

$1.27

Over-head

Labor

Materials

Client-current CompetitorA

CompetitorB

CompetitorC

$1.75

$1.45$1.35 $1.30

0.00

0.50

1.00

1.50

$2.00

Unit Cost

Lowest cost

Practical cost

133

RCP analysis helps answer both strategic and tactical questions

Strategic questions Tactical questions

• In what areas do our competitors have the biggest cost advantage?

• What is driving competitors’ profitability?

• How much flexibility would our competitors have in a price war?

• Where should we focus our cost reduction efforts? (e.g., wage rates, amounts of raw material inputs)

• Which cost elements would decrease significantly with an increase in scale?

• Which cost elements might benefit from different business practices?

134

RCP can be approached from the bottom-up or top-down

Detailed bottom-up analysis Top-down analysis

• Build up each major cost element for key competitors based on primary data

• Triangulate using cost data from multiple sources

Less accurate;less time intensive

• Compare competitors’ cost structures to client’s cost structure at macro level

- Define key process/business practice differences for major cost elements

- Make assumptions about the cost impact of differences

• Test assumptions vs. overall financial data

More accurate;more time intensive

Oftentimes use a combination of these approaches

135

RCP – The Key Steps

Map the business value chain

Identify cost elements and drivers

Scour information sources for cost data on clients and competitors

Build, compare, and reality check cost bars

Calculate practical full potential cost position and savings

Draw strategic implications

Process Steps

Key Success Factors

• Map value chain from end to end (e.g., raw materials to finished product or delivery)

• Tie costs to operations not accounting categories

• Build up cost bars category by category

• Reality check results against similar companies

• Focus on areas with greatest cost savings potential• Adjust for situation (e.g., different strategy [high vs. low

quality], different equipment, different plant locations)

• Determine how to take advantage of the improved cost position

• Be persistent and creative, but ethical

130

Mapping the value chain can facilitate an understanding of cost elements

% of total cost:

Tech., R&DPurchasing/

Inbound Logistics

Manufact-uring/

Operations

Marketing&

Sales

Distribution/OutboundLogistics

Service

Major costelements:

Drivers of cost:

136

Costs are detailed and drivers are noted

• Quality of ingredients

• Mix of ingredients

• Volume of ingredients

• Amount of waste

• Cost of ingredients

• Reverse engineering

• Suppliers

• Purchasing managers

• Industry reports

Cost drivers Data sources

132

Cost data can be found in many places

Cost information

Former employees

Utility companies

Financial analysis

Client sales and marketing

Industry experts

Market research reports

Plant/site tours

Industry conventions Reverse

engineering reports

Product brochures

Government filings and

patent filings

Supplier interviews

Literature searches

Local newspapers

Equipment vendors

Customer interviews

Current employees

Labor unions

Multiple data sources should be used whenever possible

137

RCP can highlight strategic decisions

Situation

• Chewing gum manufacturer

• Diaper manufacturer with scale-driven cost advantage, but too high prices

• Bakery products manufacturer contemplating an acquisition

Action

• RCP analysis in materials usage and purchasing, process improvements, and inventory management

• RCP identified price business could charge and still be profitable, but competitors would not

• RCP of competition

Result

• Identified $29M in annual savings

• Business increased market share by 10%

• Substantial positive impact on the client’s sales and profits

• Competitor had 30% cost advantage. Acquired company would not be able to close the gap

• Prevented business from making poor acquisition decision

138

Example: RCP details all cost drivers

Cost Drivers Sure Coat First PaintsSure Coat Advantage First Paint Differences

Raw materials

Packaging materials

Labor

Taxes, insurance, depreciation

Recharge

Maintenance

Other

Utilities

Operating supplies

Total

$11.30

$13.80

$7.90

$3.60

$3.40

$2.80

$1.20

$0.60

$0.30

$44.90

$17.50

$12.80

$3.70

$2.30

$3.10

$2.00

$0.90

$0.50

$0.30

$43.10

$6.20

($1.00)

($4.20)

($1.30)

($0.30)

($0.80)

($0.30)

($0.10)

($1.80)

3.5 pounds per case; $0.50 per pound (market)

Lighter container ~5% lower cost

Lower wage rate; less overhead

Same cost per line

10% less than Sure Coat; shared with other products, smaller site

Labor - 4.5 maintenance workers vs. 7 for Sure Coat, lower wage rateExpenses - Sure Coat dollars per line

20% less than Sure Coat (Department of Energy)10% less than Sure Coat; shared with other products (travel, purchased services)10% less than Sure Coat; shared with other products; scale

Dollars per 100 Gallons

1

Standard Weatherproof

• Modified manufacturing layout to reduce labor

• Shifted salesforce focus to larger sizes (higher margins)

• Outsourced “back-end” processes

• Test marketing new weatherproof product with new raw material

Example: RCP analysis led to direct action implications and results

Increased margins by 15%

17% margin increase potential

139

140


Customervalue

Competitiveposition











141

Core capability and core competency definition

Core capabilities are attributes of a business or industry(e.g.,shared knowledge, expertise or skill) which increase the likelihood of creating sustained competitive advantage

Core competencies are the skills and knowledge of the people in the business that help create core capabilities

142

Types of core capabilities

Core capabilities Partial list Example

DistinctiveCapabilities

• 3M with new adhesive/abrasive products• Canon with fine graphics, precision mechanics

• WalMart - assistants to approach customers

• Hanson in the 1980s in acquiring manufacturing businesses

• J&J with branding of consumer health products

• Number 2 players in former monopolies with special access privileges

• Microsoft

• Newmont Mining

• Duty Free Shoppers Ltd airport arrangements

• Coca Cola

• Avon door-to-door sales network

• Nutrasweet

• Continuously innovate

• Control processes/behaviors

• Management/acquisition skills

• Manage information

• Control point

• Physical asset

• Location/space

• Brand/reputation

• Distribution/sales network

• Patent

• Access-conveying relationships

PrivilegedAssets

SpecialRelationships

143

Companies differentiate by innovating around their strengths

ProductDevelopment

Manufacturing

Distribution &Logistics

Marketing

Sales

Service

Manufacturing


Marketing

Sales

Service

Manufacturing


Traditional “innovation”(invention)

Big box home improvement retailer with innovative format that’s user-friendly for females and “weekend do-it-yourselfers”

Innovative low-cost manufacturing and distribution model to commoditize markets and compete on price

Innovative Bundling of critical services to address pet owners’ total cost of pet ownership

144

Example: 3M has created competitive advantage by combining knowledge sharing with technology

R&

D p

ractices

• Intranet- Best practices database

- Tech expertise database

• Other collaboration tools

• Cross functional meetings

- Tech fairs

- Cross-divisional meetings by sales personnel

• Incentives - Awards and career benefits

for sharing and utilizing knowledge

• 14 Technology centers- Supplement to R&D labs

- Leverage technologies across businesses units

• Tech audits- Evaluation of R&D projects by peers

(business & technical) from other business units

Knowledge sharing


Customervalue

Competitiveposition











145

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Assessment requires asking key questions around existing and required capabilities

Where are our capability gaps?

What capabilities do we have and which are necessary to succeed?

- Technology

- Personnel

- Financial

How can we leverage our capabilities?

How do we fill the gaps?

Should we divest or prune low capability areas?

Key questions

1. Capability

baseline

2. Gap assessment

3. Capability execution

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Different analysis can help answer these questions

Comparison of required capabilities against internal competencies

- Management evaluation

Capability reviews

- Identification of required capabilities

- Literature searches/competitor interviews

- Management evaluation

SWOT analysis of our key capabilities vs. competitors

Capability acquisition analysis

- Internal benchmarking to estimate acquisition cost

- Comp analysis to determine market price to obtain capability through an acquisition

Approaches

1. Capability

baseline

2. Gap assessment


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Core capability gaps can emanate from different places, including competency gaps

People

• Wrong person

• Right person, overworked

• No person responsible today

• Does somebody perform the capability at the moment?

• Who is responsible for the capability performance ?

• If so, then…

- Work load?

- Years of experience?

- Type of experience?

- Performance?

- Fit?

Incentives/culture

• Inadequate incentives scheme

• Incomplete measurement/ reporting

• Lack of accountability

• Is the capability correctly measured/ reported?

• Have incentives been established/ implemented?

• If so, then…

- Are they the right incentives?

- Is the magnitude of the incentive adequate?

- Is the right person incented?

Information/ Technology

• Lack of technology to take advantage of blurring business boundaries

• Inappropriate technology/wrong bets

• Do we clearly understand convergence opportunities?

• Do business units communicate with each other about possible cross-applications of existing technology?

• Is the technology functional and easy to use?

• Is appropriate capex allocated to technology?

Process/structure

• Inadequate process

• Misaligned organisational structure

• Is the process clearly defined?

• Are all parties involved clear about the process?

• What are the bottlenecks or choke points?

• Does the process reside within appropriate BU?

• Has there been sufficient investment in improving process, tools and structure?

Institutional lack of knowledge

• No experience, expertise or knowledge about this capability

• Does the capability exist today?

• Is this a new area of business?

Root cause:

Critical questions:

PeopleIncentives/

cultureInformation/ Technology

Process/structure

Institutional lack of

knowledge

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Example: Health Food Co.

Broad scale R&D experience

Clinical trial/regulatory experience

Significant service offering

Broad scale clinician & expert marketing

Experience building channel creation

Non-F&B industry knowledge

Unique “molecule” access

Clinical trials to obtain claims

Regulatory process

Science integration into products

Solution services

Brand building

Multi-constituent access end support

Value-added alliances

“Own” management skills

Cross-functional coordination

Long-term view/learning integration

Multi-industry knowledge

New wellness paradigm:

Health Food Co.’s assets and capabilities:

Health Food Co. critical gaps:

Science

Product and

Service Offering

Sales and Marketing

Channel

Integration

Target Consumer

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Example: De Beers

Situation

Complication

Actions

• Worldwide leader in mining and distributing raw diamonds

• De Beers wanted to assess potential retail growth opportunities

Results

• De Beers has no retail experience, making development of new retail venture difficult

• Developed business case for a joint venture to feature DeBeers products in retail outlets

• Identified several internal core capability deficiencies that would introduce execution risk

- Partnership with retailer was a key success factor

- Identified optimal partners and supported JV negotiations

• Formed De Beers LV (separate operating company) through a joint venture with LVMH

• Launched “flagship” stores in London and New York

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Example: De Beers capability assessment

• Identified De Beers’ core capabilities/assets

- Strong brand (De Beers)

- Product knowledge

- Understanding of consumer needs

• Determined capability requirements for success

• Identified capability gaps

- Retail operations experience

- Jewelry manufacturing

- Quality control of luxury goods

- Management of luxury retail brand

• Determined from capability gaps that a retail partnership was required for success

• Developed “short-list” of most attractive partnership candidates

- Strong retailer filling core capability gaps

- Good fit with De Beers

• Prepared negotiation strategy for finalizing the agreement with potential partners

• Joint Venture formed with LVMH

1. Capability

baseline

2. Gap assessment


4. A Quick Look At Market Entry Strategies

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The Strategic Foundation Underpins, Market Entry Planning


Summary and conclusions

Market opportunity description

Market entry strategy

Strategic directions

PricingBrand and communication

Sales and distribution

Products and servicesCustomer serviceLaunch phasing

The Strategic Foundation

Vision and MissionObjectives

Overall StrategyPositioning

Value propositionBrand

Target segments

Tactical launch plan Contingency plan

Internal and external factors

Products & services Pricing

Brand and communication

Sales & distribution channels

Customer service149

2. CustomerIdentification& Targeting

3. Competitor Identification &

Analysis

4. Frankly Assessing Your Own Business

Capabilities

Market Entry Strategy – The Essential Ingredients

A description of the company’s vision and mission statements as well as financial objectives form the starting point for the market entry strategy as they set the framework in which a new entrant will function

Short-term objectives, sales targets, market share and brand awareness, will be set against the market opportunity and supplied as input to the business planning team

The positioning statement visibly describes the company’s strategy in relation to competition and the value proposition captures the company’s differentiating advantages and their benefits to potential customer

The brand strategy explains which values are important to communicate in order to enhance the company’s relationship with its customers

Targeted customer segments that need be addressed in order to deliver desired objectives will be specified and prioritised

Strategic directions in all functional areas; products & services, pricing, brand & communication, sales & distribution and customer service further detail the overall entry strategy. Finally, the launch phasing section explores the various viable market entry options, their pro’s, con’s and pre-conditions

Detailed tactical launch plans enable efficient and ansmanageable lmplementation

A tactical launch plan covers all functional areas and provides the

launch team and vendors with necessary details for implementation

Pricing products and services can be helped by price modelling and

conjoint research to assist in the choice of, from customer

perspective, the most valuable pricing option

Brand and communication plan for market entry should include

development of brand wheel (attributes, benefits, values) and full

launch campaign planning

The sales and distribution channel plan involves creation of a tailor

made sales and commission model, detailing of the company’s sales

and distribution channel structure and analysis and recommendation

on commission structure and levels

The customer service plan includes high level customer service

processes and customer centre dimensioning

Clear contingency planning enables the company to pre-empt the

occurrence of situations that affect the planned activities and prepare

plans to remedy those, resulting in shortened reaction time. Both

internal and external factors will be analysed

– Internal – e.g. technical and organisational issues

– External – e.g. competitive market activities and regulatory actions

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2014-navigate-essentials foundations of market entry strategies

Marketing

new market entry

market entry strategy

market analysis pages

market entry strategies

market positions

industry structure pages

new market overview

strategic pillars