Strategic Management for the
Foundation Business Simulation®:
Analysis and Assessment
1
Comparison of SIC and NAICS
SIC code sequence for chewing gum, bubble gum manufacturers
SIC
Code
Type of Code
Description
20
Sector
Food and kindred products
206
3 digit sub-sector
Sugar and confectionary product
manufacturing
2067
4 digit sub-sector
Chewing gum, bubble gum, and chewing gum
base
NAICS code sequence for chewing gum, bubble gum manufacturers
NAICS
Code
Type of Code
Description
1997 Value of
Product
Shipments ($000)
311
3 digit subsector
Food manufacturing
423,262,220
3113
4 digit subsector
Sugar and confectionary
product manufacturing
24,301,957
311340
U.S. industry
code
Non-chocolate confectionary
manufacturing
5,080,263
3113404
Product class
Chewing gum, bubble gum,
and chewing gum base
1,310,938
2
Porter’s Model of Industry Competition
Potential Entrants
Economies

Economiesofofscale
scale
Cost

Costadvantage
advantage
Brand

Brandidentity
identity
Access

Accesstotodistribution
distribution
Government

Governmentpolicy
policy
Threat of new entrants
Suppliers
Supplier

Supplierconcentration
concentration
Number

Numberofofbuyers
buyers
Switching

Switchingcosts
costs
Availability

Availabilityofofsubstitute
raw materials
substitute
raw materials
Threat

Threatofofforward
forward
integration
Bargaining
power
of
suppliers
Degree of Rivalry
competitors
Industry growth
Asset intensity
Product differentiation
Exit barriers
Number of
Bargaining
power
of buyers
Buyers
Buyer concentration
Number of
suppliers
Switching costs
Substitute products
Threat of backward
integration
Threat of substitute products/services.
Substitutes
Functional similarity
Price
performance trend
Brand recognition
3
Industry Analysis of the North American Railroad Industry
Potential Entrants
High barriers to entry
Economies of scale
No brand identity
Low switching costs
Deregulated
Threat of new entrants – minimal
Suppliers
Suppliers are
concentrated
Unionized
Few buyers
Bargaining
power of
suppliers –
moderate
Degree of RivalrySignificant
7 competitors
Modest industry growth
Little product
differentiation
High exit barriers
Rigid assets
Bargaining
power of
buyers –
significant
Buyers
Low switching costs
Many types of buyers
Buyers are dispersed
geographically
Threat of substitute products/services – significant
Substitutes
substitutes
Firms compete primarily on price
Close
4
Stages of Industry Evolution
Introduction Stage
Growth Stage
Maturity Stage
Decline Stage
5
Industry Evolution and Firm Strategy
Firm Level Strategy
Introduction
Growth
Maturity
Decline
Must be focused upon new
products for new markets.
Expansion of product lines
Costs of production must
be lowered to compete.
Competitors and initial
firm are viewed as
providing similar
products/services.
Firms which remain are
trying to compete on
price rather than value.
Niche markets.
Expansion into new markets
Firms attempt to achieve
market penetration of
existing and new
markets.
Market needs have been
met.
Firm must begin to recover
R&D investments.
Use product R&D to offer
added features to existing
products
Process R&D to achieve
efficiencies (e.g. TQM)
Use in other, higher
growth industries.
First mover has developed
new products for new
markets.
Firms enter to compete with
first mover.
Firms attempt to become
low cost provider.
Competitors have
relocated to more
attractive industries.
First mover is providing
products/services for a small
number of customers.
Development of
infrastructure to increase
service to existing and new
markets.
Long-term relationships
are being developed with
suppliers/customers.
Minimal Expenses:
Existing infrastructure is
being utilized.
Pricing
Attempt to recover product
R&D costs by price
skimming. Few, if any,
competitors. Price is
inelastic.
Price becomes more elastic
as competitors introduce
similar products.
Price is elastic. Pricing to
achieve economies of
scale.
Price to attempt to
maintain margins on
smaller demand.
Advertising
Firm must communicate
value of new
products/services to target
market.
Because competitors have
entered industry, first mover
needs to advertise value
added features.
Focus is upon existing
markets. Message is
lower price than
competitors.
None: Invest in higher
growth industries.
Products
Markets
Role of Technology
Competition
Distribution
6
Industry Growth and Firm Profitability
Industry Growth Rate
Low
Low
Moderate
High
Do not invest
Firm
Profitability
Moderate
Process R&D
High
Investment in
distribution and
advertising rather
than products/ services
New product
Process R&D
development
7
An Industry Analysis as Firms
Move Through the Industry Life Cycle
Bargaining
Power of
Suppliers
Introduction
Growth
Maturity
Decline
Significant: No prior
relationships may
exist
Moderate:
Distribution
channels become
larger and more
extensive
Moderate: Firms will
attempt to lock
suppliers into long
term contracts to
reduce costs
Minimal: Firms use
existing channels
8
An Industry Analysis as Firms
Move Through the Industry Life Cycle
Introduction
Growth
Maturity
Bargaining
Power of
Suppliers
Significant: No prior
relationships may
exist
Moderate:
Distribution
channels become
larger and more
extensive
Moderate: Firms will
attempt to lock
suppliers into long
term contracts to
reduce costs
Bargaining
Power of
Buyers
Significant: No
revenues without
customers
Significant:
Customer
acceptance is crucial
to generate larger
volume of revenue
Significant: Customers
put pressure on
manufacturers to add
value and/or reduce
price
Decline
Minimal: Firms use
existing channels
Significant: Customers
purchase other
goods/services
9
An Industry Analysis as Firms
Move Through the Industry Life Cycle
Introduction
Growth
Maturity
Decline
Bargaining
Power of
Suppliers
Significant: No prior
relationships may
exist
Moderate:
Distribution
channels become
larger and more
extensive
Moderate: Firms will
attempt to lock
suppliers into long
term contracts to
reduce costs
Bargaining
Power of
Buyers
Significant: No
revenues without
customers
Significant:
Customer
acceptance is crucial
to generate larger
volume of revenue
Significant: Customers
put pressure on
manufacturers to add
value and/or reduce
price
Significant: Customers
purchase other
goods/services
Threat of
Substitute
Products/
Services
None: Substitutes do
not exist
Significant: Firms
are expanding in
coverage: Initial
firms may begin to
add additional
product/service
benefits
Significant: Products/
services are perceived
to be homogeneous.
Customers search for
lowest priced provider
Minimal: Competitors
utilize funds and
resources to grow
within other industries
Minimal: Firms use
existing channels
10
An Industry Analysis as Firms
Move Through the Industry Life Cycle
Introduction
Growth
Maturity
Decline
Bargaining
Power of
Suppliers
Significant: No prior
relationships may
exist
Moderate:
Distribution
channels become
larger and more
extensive
Moderate: Firms will
attempt to lock
suppliers into long
term contracts to
reduce costs
Bargaining
Power of
Buyers
Significant: No
revenues without
customers
Significant:
Customer
acceptance is crucial
to generate larger
volume of revenue
Significant: Customers
put pressure on
manufacturers to add
value and/or reduce
price
Significant: Customers
purchase other
goods/services
Threat of
Substitute
Products/
Services
None: Substitutes do
not exist
Significant: Firms
are expanding in
coverage: Initial
firms may begin to
add additional
product/service
benefits
Significant: Products/
services are perceived
to be homogeneous.
Customers search for
lowest priced provider
Minimal: Competitors
utilize funds and
resources to grow
within other industries
Threat of New
Entrants
Minimal: Firm with
the innovation
dominates
Significant: Firms
enter the industry
with similar
products/
services
Minimal: Price
becomes a significant
buying factor for
customers. Potential
entrants look for more
attractive industries
Minimal: Industry
profitability and
industry growth are
declining
Minimal: Firms use
existing channels
11
An Industry Analysis as Firms
Move Through the Industry Life Cycle
Introduction
Growth
Maturity
Decline
Bargaining
Power of
Suppliers
Significant: No prior
relationships may
exist
Moderate:
Distribution
channels become
larger and more
extensive
Moderate: Firms will
attempt to lock
suppliers into long
term contracts to
reduce costs
Bargaining
Power of
Buyers
Significant: No
revenues without
customers
Significant:
Customer
acceptance is crucial
to generate larger
volume of revenue
Significant: Customers
put pressure on
manufacturers to add
value and/or reduce
price
Significant: Customers
purchase other
goods/services
Threat of
Substitute
Products/
Services
None: Substitutes do
not exist
Significant: Firms
are expanding in
coverage: Initial
firms may begin to
add additional
product/service
benefits
Significant: Products/
services are perceived
to be homogeneous.
Customers search for
lowest priced provider
Minimal: Competitors
utilize funds and
resources to grow
within other industries
Threat of New
Entrants
Minimal: Firm with
the innovation
dominates
Significant: Firms
enter the industry
with similar
products/
Services
Minimal: Price
becomes a significant
buying criteria for
customers. Potential
entrants look for more
attractive industries
Minimal: Industry
growth is declining as
is industry profitability
Degree of
Rivalry
Minimal: One firm
dominates the
industry
Moderate: Firms
enter industry with
similar products/
services. Incumbent
firms attempt to
grow by expanding
into new markets or
adding value to
existing products/
services
Significant: Because
price is a key buying
criteria. Firms must
expand to generate
greater revenues to
offset shrinking
margins
Minimal: Firms are
exiting the industry
Minimal: Firms use
existing channels
12
Using Internal Analysis to
Build Competitive Advantage
13
From Resources to Capabilities to Core Capabilities
Core Capabilities
Integration of resources and
capabilities that serve as a
competitive advantage over rivals
Intel’s chip manufacturing
technology
Exploitation of Coke’s brand name
Resources
Stock of assets that are controlled
by the firm:
Equipment
Plant
Trucks
Managers
Culture
Capabilities
The productive services by which
firms deploy resources over time.
Transformation of technology into
new products
Processes which generate
economies of scale and/or scope
14
Criteria for Sustainable Advantage
Criteria
Rare
Valuable
Costly to imitate
Non-substitutable
Definition
Examples
Capabilities that few, if any,
competitors possess.
Dell direct to customer
distribution
Patented technology
Capabilities that allow the firm
to exploit opportunities or
neutralize threats in its
external environment.
Sophisticated external
scanning processes
Flexible manufacturing
systems
Capabilities that other firms
cannot easily develop.
Development of strong brand
name
Air/ground hub and spoke
operating system (e.g. FedEx)
Capabilities that do not have
strategic equivalents.
Relationships with
international governments
Managerial decision-making
15
16
Value Chain Elements
Primary Activities
Definition
Examples
Inbound Logistics
Activities used to receive,
store, and disseminate inputs
to a production process.
Material handling
Warehousing
Inventory control
Operations
Activities needed to convert
inputs into finished goods.
Flexible manufacturing
Robotics
Automation
Outbound Logistics
Activities to move finished
goods to final consumers.
Transportation infrastructure
Distributor network
Marketing and Sales
Meeting unmet consumer
needs.
Communicating with
consumers concerning new
goods/services or improved
goods/services.
New products
Re-designed products
Marketing communications
network
Activities which enhance or
maintain product value.
Warranty
Reliable customer service
Service
17
Value Chain Elements
Secondary Activities
Definition
Examples
Procurement
Activities which address
purchasing the inputs to
produce a firm’s products.
Raw material sourcing
 Investment in plant and
equipment to improve
production/manufacturing.
Technological development
Processes by which new or
improved products are
developed.
Improvements in
manufacturing processes.
Product R&D
Process R&D
Human resource management
Investments in human capital. Hiring, training, developing,
and compensating employees.
Firm infrastructure
Support activities to improve
primary or other secondary
activities
Strategic planning
Government relations
 Financial analysis.
18
Value Chain Primary Activities and Capstone Simulation
Primary Activity
Inbound Logistics
Operations
Simulation Component
Process R&D
Automation
TQM (Total Quality Management)
Outbound Logistics
Distributor network
Marketing & Sales
Sales forecasting
Promotion budget
Sales budget
Price adjustments
Service
Mean time before failure (MTBF)
19
Value Chain Secondary Activities and Capstone Simulation
Support Activity
Technology Development
Human Resource Management
Firm Infrastructure
Procurement
Simulation Component
Creating new products (product R&D)
Revising established products (product R&D)
Reducing R&D cycle time
Recruiting, training, and compensating
employees
Labor negotiations
Financial analysis
Sources and uses of funds
Investment in plant and equipment
Selling of plant and equipment
20
Value Chain Activities and Technology
 Product R&D- Purpose is to create differentiation
 New product creation
 Revising existing products
 Process R&D- Purpose is to lower costs
 Total Quality Management (TQM)
initiatives primarily reduce operating costs
 Automation (improves efficiency)
Outsourcing
Based upon the principle that a specific value chain
activity can be completed by a third party superior to the
firm completing the same activity.
 Manufacturing operations in Mexico, Southeast Asia
 Outbound logistics completed by a logistics firm (e.g.
Ryder)
21
Business Level Strategy
22
Business Level Strategy
Definition:
given
Actions necessary to gain and maintain
competitive advantage over time within a
product market.
Gaining Advantage:
Meeting key success factors superior to
competition
Maintaining Advantage:
Responding to changing consumer needs more
successfully than competition
23
Key Success Factors
Definition:
That set of criteria, defined by the customer base, which
dictate buying decisions.
Key success factors change over time
Air Freight Industry
1980’s
Key
Success
Factors
Evolution
Point-to-point service
On-time reliability
Competitive rates
Market coverage
2000 – 2007
Multi-modal services
Global coverage
On-line real-time tracking
Logistics services
24
Porter’s Generic Business Strategies
Competitive Advantage
Broad Target
Cost
Uniqueness
Cost Leadership
Differentiation
Competitive
Scope
Narrow Target
Focused
Low Cost
Focused
Differentiation
25
Cost Leadership
Actions necessary to gain and maintain position:
1. Economies of scale through the utilization of excess capacity.
2. Automation and utilization of robotics in manufacturing processes.
3. Development of efficient distribution networks.
4. Implementation of TQM (Total Quality Management) initiatives.
Example: Dell
26
Differentiation
Actions necessary to gain and maintain position:
1. Developing innovative products/services to broad range of
customers.
2. Significant investments in R&D.
3. Capability to generate a series of successful new products over
time.
4. Development of flexible manufacturing systems.
Example: Toyota
27
Focused Low Cost
Actions necessary to gain and maintain position:
1. Specific, very well defined target market, that is oriented toward
products/services where price is an important key success factor.
2. A market that larger scale firms may ignore because these firms
may generate greater efficiencies in other markets.
3. Customer may be willing to absorb certain costs (e.g.
transportation) in return for lower prices.
Example: Ikea Furniture
28
Focused Differentiation
Actions necessary to gain and maintain position:
1. Customers are willing to pay more for real or perceived superior
quality.
2. Brand name is important to customers.
3. Profit margins are such that firms do not need to generate
significant economies of scale.
4. Promotion directed toward identification of real or perceived
superior quality features.
5. Customers are brand loyal.
Example: Rolls Royce
29
Decision Making Utilizing SWOT Analysis
Firm A
Firm B
STRENGTHS
STRENGTHS
WEAKNESS
OPPORTUNITIES
THREATS
OPPORTUNITIES
WEAKNESS
THREATS
: Utilize strengths of one firm (A) to capitalize upon weakness of competitor (Firm B).
(Example: Dell’s direct selling model)
: Transform opportunities to strengths.
(Example: Pharmaceutical firms R&D capability develops new drugs: Pfizer-Lipitor)
30
Competitive Dynamics
Competitive advantage may result from responding
successfully to competitor’s mistakes
+
Firm 1
Firm 2
Firm 2
Firm 1
Firm 2
ROI
Firm 1
:
:
:
:
Firm 2 initially responds to firm 1’s successful launch
Firm 1’s second venture is not profitable
Firm 2 learns from firm’s 1’s error and launches its own successful product
Firm 1’s responses to firm 2’s new actions
31
Southwest SWOT Analysis
Strengths
Lowest cost carrier within U.S. industry
Reputation as successful carrier
Successful business model
Profitable
Weaknesses
No trans-oceanic capabilities
Labor unions
Age of aircraft
Threats
Entry of low cost carriers
US Congress recently increased the
ownership position from 25 percent to 49
percent for international companies investing
in U.S. transportation firms
Opportunities
Ability to take share from existing and new
entrants
Significant potential to increase market share
if America West/U.S. Airways, United, Delta
or Northwest are liquidated
32