BUS 596 Independent Study Chapter 14~16

Strategic Decisions Chapter 14~16 Vertical Integration, Expansion & Entry to New Business

Vertical Integration presents how a company takes internal or administrative actions to accomplish the financial growth. The costs of scheduling, coordinating operations, and response to emergencies may be lower if the firm is fully integrated. Tapered integration is partial integration backward or forward, the firm purchasing the rest of its needs on the open market. Vertical integration decision could be more than cost saving and investment purpose. A better customer service, improvement of product development, key component acquisition, and delivery cycle time can also make the firm consider the vertical integration. Acquiring key patents is the current trend on vertical integration. This will allow the firm to enter possible higher return business by integrating more features to the future products, further raising mobility barrier.

Capital expansion measures the amount of capital involved and the complexity of the decision-making. Without the correct estimation the future demand and costs of inputs from the competitor movement, overbuilding will be a major concern and can repeatedly and severely impact the whole industry. As the product demand is cyclical and selling commodity-like product, it is more likely to face capacity overbuilding issue from time to time. Currently DRAM companies experience oversupply issue is one of the typical examples. A thoughtful consideration of production technology is the key of capital expansion. One approach to capacity expansion in a growing market is the preemptive strategy, in which the firms seek to lock up a major portion of the market to discourage the competitors from expanding and to deter entry. Texas Instrument plays well on this strategy previously on DRAM and now using it for analog IC market.

Entry into new business requires the appropriate costs & benefits analysis, which includes facilities & inventory investment costs, proprietary & technology expense and estimated cash flows. In a highly fragmented industry, the entrant may affect many firms but have only limited impact. Prime target for the internal entry fall into one of the following categories: lower entry cost than others, having distinctive ability to influence industry structure, positive effects on a firm’s existing businesses and in effectual retaliation expected from competitors.

BUS 596 Independent Study Chapter 11~13

Chapter 11~13 Transition of Industry Maturity &, Strategy to Declining and Global Industries

Slowing growth means more competition from market and competition will become more cost and service oriented. However, the mature industries may regain their rapid growth by adjust the manufacturing, marketing and sales strategy to satisfy the needs of supplicated customers. More matured products basically will have more people understand the technology know-how and the international competition will increase. The sophisticated cost analysis will help the company to squeeze more on where it can save. Process innovation, design for manufacture and the cheap asset from the distressed company will also help on lowering down the unit cost on products. The matured company may force to make the selection on one of the following strategy alternatives – cost leadership, differentiate or focus. The company that is prided itself on pioneering and on a high quality product may find it is very unused to engage in price completion and in aggressive marketing. As the firm cling to “higher quality” as an excuse for not meeting aggressive pricing and resent to take right reaction on price competition could have further low cost position on certain market in the long run.

Strategies for the declining industries can be categorized as follow:

Targeting for leadership position in terms of market share; creating a stronger position in a particular segment; diversification and then identifying the advantage of strength, or liquidating the asset and phase out as soon as possible

Global industries are industries with organizations that make operational and production decisions based on global supply and demand and global market conditions established by integrated markets around the world. Large financial corporation, health care equipment pharmaceutical, software, semi-conductor, consumer electronics, automotive, media, and oil companies all fall into this category. The firm can tailor products to fit different circumstances among the foreign markets. The cost basis could also be different as the need to compliance to the local regulation. Globalization does provide the firm be able to manufacturing product with large economic scale from marketing perspective. In general the firm is good on global competition having good reorganization on the brand name and well organized logistic system and planning control to satisfy the need from worldwide customers. As the firm know the foreign government taxation law and incentive well, it to take the full advantage to maximize the profit margin.

BUS 596 Independent Study Chapter 9&10

Chapter 9&10 Strategy in Fragmented &Emerging Industries

As no firms having a significant market shares we name it the fragmented industries. Fragmented industries vary greatly in their technical sophistication. Companies in the analog IC industry fit into this category, which the competitors all have high diverse product differentiation for the needs of different markets. To overcome fragmentation, the firm can create economics of scale on manufacturing thru technology innovation, make acquisition or spin off the aspects so the key staffs can be more focus and responsive the needs from market. Increasing the value added on product & service, specializing product type to satisfy need of different customers, better delivery time and focus on high growth geographic area.

No firms would like to be the victim of technology evolution.

Emerging industries have been created by technological innovation, shifts of cost, new customer needs, or sociological changes that make a potentially viable business opportunity. There are no rules of the game in the emerging industry. To survive timing on identifying is also critical. Threatened entities from the emerging industry can be mitigated by lowering the unit costs from the forging profit or aim to make product more competitive. Forecasting industry development is more important than formulating competitive strategy directly. The device of scenarios is an effective analysis tool to forecast the need from the emerging market. By tracking the feedback from market and competition, further digest the scenario result can improve the product development and maintain the technology leadership.

BUS 596 Independent Study Chapter 8

Chapter 8 Industry Evolution

Understanding the process of industry evolution is to predict future need of strategy change so the firm will benefit most. Industry Product lifecycle and growth of sales follow the S curve. The stages of lifecycle includes introduction, growth, maturity and decline. Each individual function from the firm may react differently. Change of industry boundaries could may supplier or buyer intend to integrate forward and backward. Author also highlights that continuous innovation may not pay if the diffusion period is short and buyers’ loyalties to pioneering firms are not strong enough. The diffusion of knowledge is to maintain position on existing know-how, ensure leading position on the technology development, or strategic position must be shore up.

BUS 596 Independent Study Chapter 6&7

Chapter 6 & 7 Strategy Towards Buyers & Suppliers, Industrial Structural Analysis

Selection of buyer can after the firm’s growth rate and reduce disruptive power of buyers. For example, selling ICs to highly price competitive consumer electronic product lines is different from sale to the high quality orientated automotive makers. The buyers with the greatest potential can also be the most powerful in exercising their power as everything down to the end is cost driven. Four board criteria determine selection of buyer and strategy should apply: Purchasing need v.s. the firm’s capability, growth potential, structure position and cost of servicing. As the buyer tries to switch the supplier, it may face the high fixed cost of switching since redo the qualification & audit of new supplier will be required. If the selling product does not have the advantage of cost leadership, another way to raise the barrier for the buyer to switch is by persuading the customer to design the firm’s product with the custom varieties and assistance training. Since the one with the final authority to decide the purchase may not from the purchasing department but the one use the equipment most; therefore, the following value-added tactics become critical to win buyers – responsive customer service, engineering assistance, rapid delivery, honor credit and user friendly features of the products. Other factors can attract buyers to make final decision making include resale value, revenue generating capacity, maintenance and installation cost.

Without well manage the supplier quality, the firm may pay for the penalty if the gross product not match the spec or the high percentage of field failures occur at the end customer site.

Industrial structural analysis is to understand how firms’ differing competencies in marketing, cost cutting, management, organization to develop the strategy make company profitable and survive in the long term. The general strategy options include – specialization, brand identification, push/pull, channel selection, quality of product, technology innovation, vertical integration, cost position, service, financial leverage, and relationship management. The 1^st step of structural analysis is to characterize the strategies of major competitors along with different strategy options. For high tech companies the innovation and specialization plus vertical integration will have more dominate effect than brand identification, cost, service and financial leverage. The author also highlights that the highest payoff is in creating a new strategic group. A technological evolution/revolution change will block all the possible competitor to grab the market share. The comparison between Apple and Nokia complete at cellar phone market is a typical example.

BUS 596 Independent Study Chapter 4&5

Chapter 4 & 5 Market Signals & Competitive Moves

Market signals can be analyzed from the quarterly or annual report or the queries during conference calls from the financial analysts. For high tech industry, the announcement of technology breakthrough can be further validated by the filed patents and technical papers being published. From a company’s historical traits and the leadership characteristics it’s easy to distinguish the real intention or just bluffs from the announcement. It is less likely that a prestigious company targets for high margin, high quality segment business will switch over to high growth, high competitive and low margin business in short period of time, unless there is a dramatically change on the leadership. The most common announcement we observed is the stock buyback plan as the company dealing with an unreasonable stock price correction. This action in general is to mitigate the shock to the investors and bring back confidence of the financial institution. Ironically In general stock buyback plan will only state the amount of buyback but no execution timeline.

The strategy of competitive moves is an interesting topic. The author stated that if all the competitive cooperate they all can make a reasonable profit while retaliate vigorously will just kill each others. I cannot fully agree author’s view since now Federal Trade Commission from US or European will further investigate the case of monopoly or antitrust if there is any under-table agreement under among competitors. The cases of Samsung, LG and other manufactures conspire to fix, raise and maintain the price of DRAMs & LCDs eventually got over 100 million fine from the federal litigations. In addition, some of the top management executives were prosecuted. To me the way to make a successfully competitive move is when only few competitors in the market and the dominate one with financial advantage that can react promptly to threat to make the others yield.

BUS 596 Independent Study Chapter 2&3

Chapter 2 & 3 Generic Strategies & Framkwork for Competitor Analysis

Overall cost leadership, differentiation and focus are three generic alternatives to outpace other competitors. Goal of competitive strategies is not to terminate other competitors but to ensure the combination of the firm's key functional features perform better than others. A low cost position does protect the firm against all five competitive forces. However, low cost is not always the best leverage for high tech industries or consumer electronics with short product life cycle, especially when new comers always use the price cutting strategy. The key to make a firm to survive is by focusing the need of specific customer(s).

Differentiation can be achieved by feature of design, brand image, technology, service and dealer network. Differentiation will generate higher returns and down play the buyer’s power and create loyalty of the customer. The author highlights that “stuck in the middle” is the extremely poor strategy situation. The book also took SHARP as the example of adopting aggressive brand recognition strategy (i.e. differentiation) in parallel with cost leadership to compete with Sony and Panasonic. Similar strategy has been adopted by Samsung.

The goal of competitor’s analysis is to develop a profile of the likely strategy changes each competitor might take, initiate and response to the range of feasible strategic moves. The analysis includes 4 major components: future goals, current strategy, assumptions and capabilities. Identifying the competitor to be examined and knowing their goals and strategic positions can mitigate the conflict and possible hostile retaliation. Knowing the competitor’s weakness will help the firm take advantage from it. Figure 3-2 summaries the area of strength and weakness should further investigate, which includes following key items: CEO ability, marketing & selling, operations, research & engineering, overall costs, financial strength, product and channel of distribution, core capabilities, ability to grow, response to change and ability to adapt to change. Figure 3-3 list functions of competitor intelligence system should cover. In addition Appendix A & B covers techniques of competitor and industry analysis.

BUS 596 Independent Study Chapter 1

Independent Study --- Competitive Strategy written by Michael Porter

Chapter 1

Competitive Strategy is to develop a top level tactical plan by accessing existing and possible actions to be taken by competitors through benchmark itself verse other competitors in terms of cost, differentiation and the focus from its products & services on all functional perspectives. The author believes that understanding industry structure is an essential starting point. Chapter 1 gives the generic idea of structure analysis through understanding the five fundamental forces. These five forces are composed of suppliers, buyers, substitutes, potential entrants and industry competitors. A good structure analysis will allow company itself to create a defendable position by SWOT analysis. Six major factors raise barriers to entry for the potential competitors. They are: scale economics, intangible assets, product differentiation, capital requirement, switching costs and government policy. The company in high entry barriers but low exit barriers will generate high and stable returns