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Managing in the competitive environment
Long Range Planning, Vol. 17, No. Printed in Great Britain
0024-6301/84 S3.00 + .OO Pergamon Press Ltd.
1, pp. 59 to 64, 1984
59
Managing in the Competitive Environment Lyn S. Wilson,
Haybridge House Europe, London
in 43 compati-
customsrs who gwss iu&mmt services.
ad80 sacum &n&ant wa dos8& int~rated. responses made by on corporate products or
‘In the end, however, what destroys jobs is not higher productivity or new technology; they are destroyed by the failrrre to be rorllyerititje’, said Sir Adrian Cadbury, in a thought-provoking speech about the need for big business to be devolved into smaller, human scale, units.’ The same point has been made in two recent articles about Japanese industry and management. Abiliry fo rmyerc has been a key theme: ‘Europeans must drastically raise their competitive power’* and, ‘Size alone, however, does not account for their competitive prowess’.3 A fundamental challenge to management is how to really understand the competitive environment. This is the base from which to develop strategy, and it is recognized in the United Kingdom at last with the establishment of the Centre for Business Strategy which will study business policy and competitive strategy.* Since 1970 one of the best managed companies in the world, and one of the largest, has incorporated competitor analysis as a key element of strategic thinking at the top level and, subsequently, in the
L. S. Wilson. Harbridge WI. @ 1983 the Author.
House
Europe,
3 Hanover
Square,
London
development of marketing plans by each operating unit. To do this required a very rtroq k/l to rmrqe. The position in the 1960s was that sales were growing vigorously but that profits were below expectations; earnings per share were static; return on investment was falling. The planning and control systems were considered by many to be excellent, yet the results showed profitless growth. Rigorous questioning and self-analysis revealed that the company weakness was in the market place, where competitors proved more resistant and aggressive than had been anticipated when the corporate plans had been prepared. Top management-led by the Chairman-said repeatedly, ‘What about competition?’ The Chairman himself directed the education intiatives to improve strategic planning and demonstrate the need to fully understand existing and potential competitors. It was the Chairman who led top managers in a week-long introduction to the new thinking; it was he who insisted that several hundred senior people spend 2 weeks at a strategic planning workshop-and remember that the participants were committed managers of MBAcalibre so that the involvement was intense; and it was the Chairman who introduced the 8-hr audio visual presentation to thousands more of the corporation managers as the basis for discussion about, and commitment to, real strategic thinking and planning. How many industrial leaders have this dedication to creating the skills and the climate of thought likely to ensure the long term viability of the enterprise for which they are responsible? Before tackling the analysis ofcompetitors there are three earlier steps to complete (see Figure 1): first, an appreciation of the company’s position in its markets; second, an analysis of the environment; third, market analysis. The resources appropriate for these activities are all likely to be available inhouse. Some of the information required for environmental analysis has already been published.5
60
Long Range
4.
Planning
5.
Vol. 17
1
February
6.
h9.
The purpose of competitor analysis is to understand the strengths, weaknesses, capabilities, and possible and likely strategies of existing and potential competitors. Is
Monitor Changes and Progress
this difficult? Not really, but it requires discipline to collect data, ascertain information and then analyse it in a logical manner in order to think through competitors probable actions. Senior management can then consider possible impacts on their own business and the prospects for developing market strategies to exploit weaknesses exposed in the competitive environment.
1 Revise Marketing -Plan and Take Corrective Action
Figure
1980 Harbridge
House Inc.
1
Focus on Competitors In a single product company it is relatively easy to identify competitors. In a multi-product enterprise challenging others which may also be multinational corporations it is more difficult. Some companies respond to this problem by creating Strategic Business Units (SBU), which should meet three criteria : *
it should
be a complete
*
the strategies objectives;
*
the competitors
business;
should balance short and long-term should
be clearly
professional association of business planners in the United Kingdom suggest that it is all too often the case that planning positions are filled by ‘bright young things’ as part of a programme to gain business experience and who find it difficult to communicate with top management; and the senior personnel are all too often unaware of, firstly, the need and, secondly, the techniques of rigorous analysis which must be applied to a business before developing strategy. If this depressing thought has more than a grain of truth how can competent strategies vs competitors be created and implemented? Let us assume that the strategic planner has been appointed for the SBU, and the first three stages of planning have been completed-position in the market, environmental analysis, market analysis. What’s new about competitor analysis?
Implementation Strategy
Copyright
1984
identifiable.
One of the first companies to develop the concept and practice of SBU’s was General Electric in the U.S.A.--described for director, manager, planner in 1978.6 It is crucially important that the person responsible for strategic planning in an SBU is of to the general the highest calibre, and reports manager. This position is not for a ‘has been’, a sinecure for a long serving employee, or for a ‘lateral arabesque’ for some individual with no further prospects. There may well be high turnover of staffbefore the right individuals are in positioncertainly that is one experience, even when the Chairman took a personal interest in the short list for SBU strategic planners and their final selection. Having noted that, it is disturbing that studies in a
Experience shows that managers from a wide range of disciplines can uncover likely marketing strategies of competitors. It’s a jigsaw puzzlelooking for patterns; it’s like a crossword puzzleresponding to clues. The first steps can be taken by putting on one sheet of paper the following data about a competitor: Financial peformance over the past 5 years, and the latest forecasts for: Sales Value Net Income Return on Sales Return on Investment Earnings per Share Debt/Equity Ratio Assess the percentage changes, year by year, and indicate the overall trend. This information can usefully be plotted graphically as well. Show the portfolio of the competitors business and in terms of envirofrri~cntal aftractiverless competitive position. These judgments may be rough-hewn in the early stages-but it will quickly become apparent, in broad terms, has products or whether the competitor businesses which are in attractive or unattractive situations. It will also be possible to assess in which areas a competitor is likely to invest for development, hold, harvest cash, or divest.
Managing The same judgments may be made about individual products within an overall product grouping. For example, in the plastics portfolio how does one rank the environmental and competitive attractiveness of PVC, polyurethane, polycarbonate, polystyrene and polyamides? (One presumes that such judgments were made GE, Akzo and others by BP, ICI, Bayer, struggling with the problems of over-capacity and falling demand in the 1980s.) Company intelligence, management knowhow, and salesmen’s reports will be valuable in making a comparison between one’s own product vs that of a competitor in terms of relative abilities in marketing, innovation, production, general management, finance and selling. Make observations about weaknesses and strengths. State the apparent
strategy
the
competitors
of the competitor.
Draw conclusions about product strategies which are likely to be employed by competitors, and consequently consider one’s own approach. That’s enough for one sheet shows it is quite possible.
of paper-practice
It is worth emphasizing that the strategy requirements in any business are ruled by the competitive environment and the potential for change in that environment. Two factors give managers a sense of the nature of that environment: the first is the size of the advantage that can be created over competitors; the second is the number of ways in which that advantage can be created. More thought is, obviously, required but it is not an exaggeration to say that those who really understand their competitors know more about those enterprises than most of those employed in them! These truths are fundamental if companies are to ‘drastically raise their competitive power’, and failure to do so will destroy jobs-as said by Sir Adrian Cadbury-and destroy companies. ‘I he endeavours so far described can be made by most managers where senior people, and the chief executive, strongly support the work. What further can be done to understand the competitive environment and the opportunities therein by those responsible for formulating corporate strategy and plans? The corporate planner has a vital task in helping the Board appreciate the changes taking place in the environment. Two techniques are particularly useful: portfolio analysis and industry structure analysis.
Where Lies your Matrix? The use of matrices
Business
and business
in the screens
has been
in the Competitive
Environment
61
variously attributed to McKinsey, General Electric (U.S.A), Boston Consulting Group and Shell. The approach has provided a very useful, if rough and ready, guide for looking at strategic options. Following the early pioneers, Borg Warner, Mitsubishi and Westinghouse Electric, plus consultants and academics, have refined the methods of ‘scoring’ so that more objective positioning of companies or SBU’s is made. Rolls Royce Motors, Guinness and Charterhouse are among those which have helped ideas to be tested and proved. In the early years the two axes of the matrix were market growth and market share. There were obvious problems about how to define ‘the market’ and the approach was useful for diagnosis, but it helped little in answering the question of hot41 to improve performance of good SBU’s and transform the bad ones. Market share was seen as a criteria in which high share was the route to corporate nirvana: high share meant high volume production, the benefits of learning from experience led to a reduction in unit costs which resulted in high-to some, limitless-profitability. Hallelujah! Today, however, broadly static growth, soaring inflation, and fast moving patterns of competition have led some to question the paramount significance of market share. Boston Consulting Group, and some thoughtful managers, now plot romyctitilv position, and not market share, on one axis. The second axis, originally developed in Shell based on work Chemicals, is the prospect for market sector profitability or cuvirormeutal attractiverw_u which includes, among other variables, market growth.’ in David Hussey, with many years experience formulating business strategy and corporate plans has introduced the concept of the risk matrix where erzvirotmental risks are plotted against environment attractiveness.’ The components of the axes are only summarized here, and readers should study the references to understand the logic and methods of ‘scoring’.
Competitive
Poritiorl
Leadership
in pricing.
Supply
capability.
Support to market sales support).
(e.g. R & D, distribution,
after-
E~~viror~rnental Aural-tivfr2c.z.z
Market
growth.
Profitability. ‘Market quality’ (defined for a particular business, substitutes, after-sales limits, e.g. technology support, market capacity . . . role of market leader . .).
62
Long Range
Environmental
Planning
February
Vol. 17
Riskr
For example, inflation, government control, energy, exchange rates, raw material availability, pressure groups, natural hazards, political issues . . . depending upon the business. Planners now have the tools to incorporate companies or SBU’s and their competitors on a three dimensional matrix which reveals competitive position, environmental attractiveness including profitability and market growth, and environmental risks. Planners in one company demonstrated to their Board the position of SBU’s using a plastic building block, thereby making the model ‘real’; the result was a very creative discussion about assumptions, weighting of impacts, significance of competitors and so on, with the consequence that the components of the corporate portfolio were seen to be not just unbalanced but in some instances in very risky positions. Therefore directors directed and managers managed: changes were made, and the effect was a reduction in risk and the improvement of performance. Portfolio analysis had proved its worth.
Industry
Structure
Analysis
Top management and the corporate planners need to know how to apply one other approach when analysing the competitive environment. The Chairman of Bankers Trust International referred in 1981 to Industry Structure Analysis-developed by Professor Porter at the Harvard Business School-as ‘the first truly comprehensive approach to competitive strategy’.’ Readers of Lor!e Ratye Plarlrlirlg were introduced to the subject in October 1980.” The concept is quite simple. Management concerned with the direction of the enterprise appraises in a logical manner: (1) the existing market place and the firm’s involved; (2) the suppliers and the risk of forward existing integration; (3) the existing customers and the risk of backward integration; (4) the threat of new entrants; (5) the possible substitute products and services; and (6) the interrelationship of all these elements within the economic system. Professor
Porter’s
book,
Techrriqfres_f;,r ,4ilalysirlg
Cor,~ycritiljc
lidustries
Stratc;?~:
arld Competitor.~,”
is now prominent in U.S. boardrooms and was the most often mentioned book on the Stanford Business School 1981 recommended reading list. It is time to take another piece of paper. On it one can start to analyse the structure of an industry and show the different forces at play and \vherc value is added. For example, in retailing. those customers with cash are exercising power over the shops; in and materials steel manufacturing substitute foreign suppliers have the whip hand; British Rail
1984
as a transport service is increasingly challenged by substitutes (coaches and lorries) and new entrants (telecommunications); car lubricant markets are dominated by original equipment manufacturers and vehicle service garages; in the oil tanker industry buyers predominate. Each of the five elements identified by Professor Porter warrant detailed examination and, further, there are important considerations about the difficulties of entry to, and exit from, an industry. Again, experience shows that the technique can be used in any enterprise where there is a real will to manage, and where time is taken to study the methodology. A start can be made on the second sheet of paper. And on a third questions: +J What
start
to answer
is the cost structure
the
following
of the industry?
A Which companies have the greatest experience Remember the Boston the industry? zonsulting Group’s analyses which suggest that it is generally the firm with the highest cumulative experience of production in the industry which has, and will have, the lowest unit costs of production. This knowledge is used by marketing management in setting prices which impact upon sales and which, in turn, affect market shares. A very relevant report recommended for all planners and board members to study is ‘Strategic alternatives for the British Motorcycle Industry’.12 * What is the differentiation between competing products or services! A few examples would be Rolls Royce vs other cars, Mothercare comprehensive baby-mother shops, VW diagnostic services and wide spread of dealers, Heineken lager vs other beverages, Townsend Thoreson vs other ferry services, Social Democratic Party vs other political parties, Benson & Hedges cigarettes vs others, etc. + Is there a focus which means that the company or SBU serves its identified market better than broader-based competitors? Rolls Royce is an example again, and so is Coutts and Company and the Coop among the banks. Does this suggest that there are clear boundaries to the corporate environment? & Why should presumably rational people goods or services from competitors?
buy
There is a strong school of thought which believes that much of top management decision making in the future will be the result of understanding more clearly the competitors in the business environment. This may be seen as a cliche: it is obviously, perhaps ominously, true in a no-growth situation or a static market, but, on some recent corporate experiences, it is true in all strategic planning. In
Managing most companies there is a great deal of information about the environment, and while more about competitors is readily, and often freely, available the difficulty is in separating the relevant from the irrelevant. A start has to be made because competition is a major force which deserves the special attention of managers, shop stewardsindeed by all employees-for without such attention, study and analysis, the determination of the most appropriate responses and their harmonious implementation will be overlooked and then commercial disaster is certain.
Planning
for Progress
As part of a programme of strategic thinking before committing resources, what should be done to improve planning and really incorporate an analysis notes indicate of competition. 3 The following important actions: Top management leadership enterprise has to survive commercial battlefield. An intelligence system companies, the world. Quarterly strategies, future.
stressing that the in a competitive
covering,
for
many
studies of competitors existing and consideration of likely actions in
A sustained study of publications ranging competitors Annual Reports to their and material available from coverage, banks. Allocation of resources to prepare sive briefings for top management tors with the objective of knowing and preferably more than, staff in camp.
from press data
comprehenon competias much as, the ‘enemy’
Assessing the relative advantages between one’s own company and competitors in specific markets (product line, technology, manufacturing cost, delivery, selling, service, price, terms, profitability, financial and marketing strength and so on). Move from a state of mind which accepts that (complacency) to our market’ ‘we know rigorous industry structure analysis which will (probably) encourage more entrepreneurial activities for defence and offense.
in the Competitive
Environment
63
valuable in translating the work of the planner into marketing strategies and tactics. But this work has depended upon SBU’s and/or companies receiving appropriate resources once the Board has determined their future: here Industry Structure Analysis and Portfolio Analysis are useful tools. Finally, as yet another example of what managers may learn from Japan, it was recently suggested ‘How to go one better than Japan’ through improving production capability.13 Yet 16 years ago planning of productive facilities was ranked sixth out of twenty elements that make Japanese shipbuilders competitive; the five elements of greater significance were, and here’s the tough lesson: market research, sales promotion, use of customer’s operational technical experiences, research and development, good design.14 These elements are very valuable in contributing to managers understanding of, first, market position; second, environment; third, market analysis; fourth, competitors-and this understanding by those with a strong commitment to manage will determine whether the enterprises for which they are responsible will die or grow, whether jobs will be lost or will be created. This paper has been prepared on the basis of experience in studying the competitors, learning from them, and develoyiq rttarker orientarcd strategies aimed at achieving commercial advantage. TV)) itthere is r~othirq to lose ad
a great
deal to gairl.
References (1)
A. Cadbury, Big business must devolve to a human survive, The Guardian, 9 September (1981).
(2)
M. D. Beresford, Joining Today, October (1981).
(3)
D. Bishop, The true December (1981).
Management
Today,
(4)
C. L. Lorenz (ed.), Building more muscle into corporate Financial Times, 9 July (1982).
strategy,
(5)
C. Smith and L. Management Today,
(8)
J. Thackray, GE’s August (1978).
Management
Today,
with the August
battle
lessons
of Japan,
Wilson, The May (1980). planned
with
Japan,
intelligence
prognosis,
scale to
Management
of
change,
(7)
Organize the enterprise, and the management, to wrestle with competitive facts of commercial life.
D. E. Hussey, Portfolio analysis: practical experience Directional Policy Matrix, Long Range Planning, (1978).
(8)
Be prepared education.
D. E. Hussey, Introducing Corporate Planning, 2nd ed., Pergamon Press (1979). esp. Ch. 8. A Portfolio Approach to Strategy.
(9)
M. Smith, The relationship of business planning and the real world, Society for Long Range Planning Newsletter, yellow pages (1981).
to invest
in appropriate
business
Conclusion The Harbridge
(10)
House
model
(Figure
1) has proved
T. Burke and L. Wrlson, Wither of industry structure analysis, (1980).
or whither London? An example Long Range Planning, October
64
Long Range
Planning
Vol. 17
February
1984
(11)
M. J. Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors, Harvard (1979).
(13)
R. Collard, HOW to go one better than Japan, Management Today, January (1982).
(12)
Boston Consulting Group, Strategic Alternatives for the British Motorcycle Industry, H MS0 (1975).
(14)
I. Takezawa, Management Control in Shipbuilding in Japan, Royal Institute of Naval Architects (1967).
0024-6301/84 S3.00 + .OO Pergamon Press Ltd.
1, pp. 59 to 64, 1984
59
Managing in the Competitive Environment Lyn S. Wilson,
Haybridge House Europe, London
in 43 compati-
customsrs who gwss iu&mmt services.
ad80 sacum &n&ant wa dos8& int~rated. responses made by on corporate products or
‘In the end, however, what destroys jobs is not higher productivity or new technology; they are destroyed by the failrrre to be rorllyerititje’, said Sir Adrian Cadbury, in a thought-provoking speech about the need for big business to be devolved into smaller, human scale, units.’ The same point has been made in two recent articles about Japanese industry and management. Abiliry fo rmyerc has been a key theme: ‘Europeans must drastically raise their competitive power’* and, ‘Size alone, however, does not account for their competitive prowess’.3 A fundamental challenge to management is how to really understand the competitive environment. This is the base from which to develop strategy, and it is recognized in the United Kingdom at last with the establishment of the Centre for Business Strategy which will study business policy and competitive strategy.* Since 1970 one of the best managed companies in the world, and one of the largest, has incorporated competitor analysis as a key element of strategic thinking at the top level and, subsequently, in the
L. S. Wilson. Harbridge WI. @ 1983 the Author.
House
Europe,
3 Hanover
Square,
London
development of marketing plans by each operating unit. To do this required a very rtroq k/l to rmrqe. The position in the 1960s was that sales were growing vigorously but that profits were below expectations; earnings per share were static; return on investment was falling. The planning and control systems were considered by many to be excellent, yet the results showed profitless growth. Rigorous questioning and self-analysis revealed that the company weakness was in the market place, where competitors proved more resistant and aggressive than had been anticipated when the corporate plans had been prepared. Top management-led by the Chairman-said repeatedly, ‘What about competition?’ The Chairman himself directed the education intiatives to improve strategic planning and demonstrate the need to fully understand existing and potential competitors. It was the Chairman who led top managers in a week-long introduction to the new thinking; it was he who insisted that several hundred senior people spend 2 weeks at a strategic planning workshop-and remember that the participants were committed managers of MBAcalibre so that the involvement was intense; and it was the Chairman who introduced the 8-hr audio visual presentation to thousands more of the corporation managers as the basis for discussion about, and commitment to, real strategic thinking and planning. How many industrial leaders have this dedication to creating the skills and the climate of thought likely to ensure the long term viability of the enterprise for which they are responsible? Before tackling the analysis ofcompetitors there are three earlier steps to complete (see Figure 1): first, an appreciation of the company’s position in its markets; second, an analysis of the environment; third, market analysis. The resources appropriate for these activities are all likely to be available inhouse. Some of the information required for environmental analysis has already been published.5
60
Long Range
4.
Planning
5.
Vol. 17
1
February
6.
h9.
The purpose of competitor analysis is to understand the strengths, weaknesses, capabilities, and possible and likely strategies of existing and potential competitors. Is
Monitor Changes and Progress
this difficult? Not really, but it requires discipline to collect data, ascertain information and then analyse it in a logical manner in order to think through competitors probable actions. Senior management can then consider possible impacts on their own business and the prospects for developing market strategies to exploit weaknesses exposed in the competitive environment.
1 Revise Marketing -Plan and Take Corrective Action
Figure
1980 Harbridge
House Inc.
1
Focus on Competitors In a single product company it is relatively easy to identify competitors. In a multi-product enterprise challenging others which may also be multinational corporations it is more difficult. Some companies respond to this problem by creating Strategic Business Units (SBU), which should meet three criteria : *
it should
be a complete
*
the strategies objectives;
*
the competitors
business;
should balance short and long-term should
be clearly
professional association of business planners in the United Kingdom suggest that it is all too often the case that planning positions are filled by ‘bright young things’ as part of a programme to gain business experience and who find it difficult to communicate with top management; and the senior personnel are all too often unaware of, firstly, the need and, secondly, the techniques of rigorous analysis which must be applied to a business before developing strategy. If this depressing thought has more than a grain of truth how can competent strategies vs competitors be created and implemented? Let us assume that the strategic planner has been appointed for the SBU, and the first three stages of planning have been completed-position in the market, environmental analysis, market analysis. What’s new about competitor analysis?
Implementation Strategy
Copyright
1984
identifiable.
One of the first companies to develop the concept and practice of SBU’s was General Electric in the U.S.A.--described for director, manager, planner in 1978.6 It is crucially important that the person responsible for strategic planning in an SBU is of to the general the highest calibre, and reports manager. This position is not for a ‘has been’, a sinecure for a long serving employee, or for a ‘lateral arabesque’ for some individual with no further prospects. There may well be high turnover of staffbefore the right individuals are in positioncertainly that is one experience, even when the Chairman took a personal interest in the short list for SBU strategic planners and their final selection. Having noted that, it is disturbing that studies in a
Experience shows that managers from a wide range of disciplines can uncover likely marketing strategies of competitors. It’s a jigsaw puzzlelooking for patterns; it’s like a crossword puzzleresponding to clues. The first steps can be taken by putting on one sheet of paper the following data about a competitor: Financial peformance over the past 5 years, and the latest forecasts for: Sales Value Net Income Return on Sales Return on Investment Earnings per Share Debt/Equity Ratio Assess the percentage changes, year by year, and indicate the overall trend. This information can usefully be plotted graphically as well. Show the portfolio of the competitors business and in terms of envirofrri~cntal aftractiverless competitive position. These judgments may be rough-hewn in the early stages-but it will quickly become apparent, in broad terms, has products or whether the competitor businesses which are in attractive or unattractive situations. It will also be possible to assess in which areas a competitor is likely to invest for development, hold, harvest cash, or divest.
Managing The same judgments may be made about individual products within an overall product grouping. For example, in the plastics portfolio how does one rank the environmental and competitive attractiveness of PVC, polyurethane, polycarbonate, polystyrene and polyamides? (One presumes that such judgments were made GE, Akzo and others by BP, ICI, Bayer, struggling with the problems of over-capacity and falling demand in the 1980s.) Company intelligence, management knowhow, and salesmen’s reports will be valuable in making a comparison between one’s own product vs that of a competitor in terms of relative abilities in marketing, innovation, production, general management, finance and selling. Make observations about weaknesses and strengths. State the apparent
strategy
the
competitors
of the competitor.
Draw conclusions about product strategies which are likely to be employed by competitors, and consequently consider one’s own approach. That’s enough for one sheet shows it is quite possible.
of paper-practice
It is worth emphasizing that the strategy requirements in any business are ruled by the competitive environment and the potential for change in that environment. Two factors give managers a sense of the nature of that environment: the first is the size of the advantage that can be created over competitors; the second is the number of ways in which that advantage can be created. More thought is, obviously, required but it is not an exaggeration to say that those who really understand their competitors know more about those enterprises than most of those employed in them! These truths are fundamental if companies are to ‘drastically raise their competitive power’, and failure to do so will destroy jobs-as said by Sir Adrian Cadbury-and destroy companies. ‘I he endeavours so far described can be made by most managers where senior people, and the chief executive, strongly support the work. What further can be done to understand the competitive environment and the opportunities therein by those responsible for formulating corporate strategy and plans? The corporate planner has a vital task in helping the Board appreciate the changes taking place in the environment. Two techniques are particularly useful: portfolio analysis and industry structure analysis.
Where Lies your Matrix? The use of matrices
Business
and business
in the screens
has been
in the Competitive
Environment
61
variously attributed to McKinsey, General Electric (U.S.A), Boston Consulting Group and Shell. The approach has provided a very useful, if rough and ready, guide for looking at strategic options. Following the early pioneers, Borg Warner, Mitsubishi and Westinghouse Electric, plus consultants and academics, have refined the methods of ‘scoring’ so that more objective positioning of companies or SBU’s is made. Rolls Royce Motors, Guinness and Charterhouse are among those which have helped ideas to be tested and proved. In the early years the two axes of the matrix were market growth and market share. There were obvious problems about how to define ‘the market’ and the approach was useful for diagnosis, but it helped little in answering the question of hot41 to improve performance of good SBU’s and transform the bad ones. Market share was seen as a criteria in which high share was the route to corporate nirvana: high share meant high volume production, the benefits of learning from experience led to a reduction in unit costs which resulted in high-to some, limitless-profitability. Hallelujah! Today, however, broadly static growth, soaring inflation, and fast moving patterns of competition have led some to question the paramount significance of market share. Boston Consulting Group, and some thoughtful managers, now plot romyctitilv position, and not market share, on one axis. The second axis, originally developed in Shell based on work Chemicals, is the prospect for market sector profitability or cuvirormeutal attractiverw_u which includes, among other variables, market growth.’ in David Hussey, with many years experience formulating business strategy and corporate plans has introduced the concept of the risk matrix where erzvirotmental risks are plotted against environment attractiveness.’ The components of the axes are only summarized here, and readers should study the references to understand the logic and methods of ‘scoring’.
Competitive
Poritiorl
Leadership
in pricing.
Supply
capability.
Support to market sales support).
(e.g. R & D, distribution,
after-
E~~viror~rnental Aural-tivfr2c.z.z
Market
growth.
Profitability. ‘Market quality’ (defined for a particular business, substitutes, after-sales limits, e.g. technology support, market capacity . . . role of market leader . .).
62
Long Range
Environmental
Planning
February
Vol. 17
Riskr
For example, inflation, government control, energy, exchange rates, raw material availability, pressure groups, natural hazards, political issues . . . depending upon the business. Planners now have the tools to incorporate companies or SBU’s and their competitors on a three dimensional matrix which reveals competitive position, environmental attractiveness including profitability and market growth, and environmental risks. Planners in one company demonstrated to their Board the position of SBU’s using a plastic building block, thereby making the model ‘real’; the result was a very creative discussion about assumptions, weighting of impacts, significance of competitors and so on, with the consequence that the components of the corporate portfolio were seen to be not just unbalanced but in some instances in very risky positions. Therefore directors directed and managers managed: changes were made, and the effect was a reduction in risk and the improvement of performance. Portfolio analysis had proved its worth.
Industry
Structure
Analysis
Top management and the corporate planners need to know how to apply one other approach when analysing the competitive environment. The Chairman of Bankers Trust International referred in 1981 to Industry Structure Analysis-developed by Professor Porter at the Harvard Business School-as ‘the first truly comprehensive approach to competitive strategy’.’ Readers of Lor!e Ratye Plarlrlirlg were introduced to the subject in October 1980.” The concept is quite simple. Management concerned with the direction of the enterprise appraises in a logical manner: (1) the existing market place and the firm’s involved; (2) the suppliers and the risk of forward existing integration; (3) the existing customers and the risk of backward integration; (4) the threat of new entrants; (5) the possible substitute products and services; and (6) the interrelationship of all these elements within the economic system. Professor
Porter’s
book,
Techrriqfres_f;,r ,4ilalysirlg
Cor,~ycritiljc
lidustries
Stratc;?~:
arld Competitor.~,”
is now prominent in U.S. boardrooms and was the most often mentioned book on the Stanford Business School 1981 recommended reading list. It is time to take another piece of paper. On it one can start to analyse the structure of an industry and show the different forces at play and \vherc value is added. For example, in retailing. those customers with cash are exercising power over the shops; in and materials steel manufacturing substitute foreign suppliers have the whip hand; British Rail
1984
as a transport service is increasingly challenged by substitutes (coaches and lorries) and new entrants (telecommunications); car lubricant markets are dominated by original equipment manufacturers and vehicle service garages; in the oil tanker industry buyers predominate. Each of the five elements identified by Professor Porter warrant detailed examination and, further, there are important considerations about the difficulties of entry to, and exit from, an industry. Again, experience shows that the technique can be used in any enterprise where there is a real will to manage, and where time is taken to study the methodology. A start can be made on the second sheet of paper. And on a third questions: +J What
start
to answer
is the cost structure
the
following
of the industry?
A Which companies have the greatest experience Remember the Boston the industry? zonsulting Group’s analyses which suggest that it is generally the firm with the highest cumulative experience of production in the industry which has, and will have, the lowest unit costs of production. This knowledge is used by marketing management in setting prices which impact upon sales and which, in turn, affect market shares. A very relevant report recommended for all planners and board members to study is ‘Strategic alternatives for the British Motorcycle Industry’.12 * What is the differentiation between competing products or services! A few examples would be Rolls Royce vs other cars, Mothercare comprehensive baby-mother shops, VW diagnostic services and wide spread of dealers, Heineken lager vs other beverages, Townsend Thoreson vs other ferry services, Social Democratic Party vs other political parties, Benson & Hedges cigarettes vs others, etc. + Is there a focus which means that the company or SBU serves its identified market better than broader-based competitors? Rolls Royce is an example again, and so is Coutts and Company and the Coop among the banks. Does this suggest that there are clear boundaries to the corporate environment? & Why should presumably rational people goods or services from competitors?
buy
There is a strong school of thought which believes that much of top management decision making in the future will be the result of understanding more clearly the competitors in the business environment. This may be seen as a cliche: it is obviously, perhaps ominously, true in a no-growth situation or a static market, but, on some recent corporate experiences, it is true in all strategic planning. In
Managing most companies there is a great deal of information about the environment, and while more about competitors is readily, and often freely, available the difficulty is in separating the relevant from the irrelevant. A start has to be made because competition is a major force which deserves the special attention of managers, shop stewardsindeed by all employees-for without such attention, study and analysis, the determination of the most appropriate responses and their harmonious implementation will be overlooked and then commercial disaster is certain.
Planning
for Progress
As part of a programme of strategic thinking before committing resources, what should be done to improve planning and really incorporate an analysis notes indicate of competition. 3 The following important actions: Top management leadership enterprise has to survive commercial battlefield. An intelligence system companies, the world. Quarterly strategies, future.
stressing that the in a competitive
covering,
for
many
studies of competitors existing and consideration of likely actions in
A sustained study of publications ranging competitors Annual Reports to their and material available from coverage, banks. Allocation of resources to prepare sive briefings for top management tors with the objective of knowing and preferably more than, staff in camp.
from press data
comprehenon competias much as, the ‘enemy’
Assessing the relative advantages between one’s own company and competitors in specific markets (product line, technology, manufacturing cost, delivery, selling, service, price, terms, profitability, financial and marketing strength and so on). Move from a state of mind which accepts that (complacency) to our market’ ‘we know rigorous industry structure analysis which will (probably) encourage more entrepreneurial activities for defence and offense.
in the Competitive
Environment
63
valuable in translating the work of the planner into marketing strategies and tactics. But this work has depended upon SBU’s and/or companies receiving appropriate resources once the Board has determined their future: here Industry Structure Analysis and Portfolio Analysis are useful tools. Finally, as yet another example of what managers may learn from Japan, it was recently suggested ‘How to go one better than Japan’ through improving production capability.13 Yet 16 years ago planning of productive facilities was ranked sixth out of twenty elements that make Japanese shipbuilders competitive; the five elements of greater significance were, and here’s the tough lesson: market research, sales promotion, use of customer’s operational technical experiences, research and development, good design.14 These elements are very valuable in contributing to managers understanding of, first, market position; second, environment; third, market analysis; fourth, competitors-and this understanding by those with a strong commitment to manage will determine whether the enterprises for which they are responsible will die or grow, whether jobs will be lost or will be created. This paper has been prepared on the basis of experience in studying the competitors, learning from them, and develoyiq rttarker orientarcd strategies aimed at achieving commercial advantage. TV)) itthere is r~othirq to lose ad
a great
deal to gairl.
References (1)
A. Cadbury, Big business must devolve to a human survive, The Guardian, 9 September (1981).
(2)
M. D. Beresford, Joining Today, October (1981).
(3)
D. Bishop, The true December (1981).
Management
Today,
(4)
C. L. Lorenz (ed.), Building more muscle into corporate Financial Times, 9 July (1982).
strategy,
(5)
C. Smith and L. Management Today,
(8)
J. Thackray, GE’s August (1978).
Management
Today,
with the August
battle
lessons
of Japan,
Wilson, The May (1980). planned
with
Japan,
intelligence
prognosis,
scale to
Management
of
change,
(7)
Organize the enterprise, and the management, to wrestle with competitive facts of commercial life.
D. E. Hussey, Portfolio analysis: practical experience Directional Policy Matrix, Long Range Planning, (1978).
(8)
Be prepared education.
D. E. Hussey, Introducing Corporate Planning, 2nd ed., Pergamon Press (1979). esp. Ch. 8. A Portfolio Approach to Strategy.
(9)
M. Smith, The relationship of business planning and the real world, Society for Long Range Planning Newsletter, yellow pages (1981).
to invest
in appropriate
business
Conclusion The Harbridge
(10)
House
model
(Figure
1) has proved
T. Burke and L. Wrlson, Wither of industry structure analysis, (1980).
or whither London? An example Long Range Planning, October
64
Long Range
Planning
Vol. 17
February
1984
(11)
M. J. Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors, Harvard (1979).
(13)
R. Collard, HOW to go one better than Japan, Management Today, January (1982).
(12)
Boston Consulting Group, Strategic Alternatives for the British Motorcycle Industry, H MS0 (1975).
(14)
I. Takezawa, Management Control in Shipbuilding in Japan, Royal Institute of Naval Architects (1967).