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 Seminar
Information & Knowledge
Management
Business Strategy &
Finance
Design, Marketing & Advertising
John Gregg
Principal
Navigate Consulting in
a Changing A leading
Australian consulting group
recognised through the
success 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 the
continued growth of firms.
• But before developing a market entry plan a comprehensive strategic knowledge base of all
relevant aspects of the market must be gathered.
• This knowledge base becomes the foundation which should guide and help shape the market entry
strategy.
• 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 the
market.
• Our objective today and tomorrow is to learn about these steps in an interactive ways, we’ll be
doing group exercises, problems solving tasks and running analysis on real case studies to help us
assimilate the ideas
3

Overview
Of 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 value
Competitor
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
Industry
structure
Customer
value
Business
capabilities
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
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
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 tools
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
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

1
0
4. Business capabilities tools
Industry
structure
Customer
value
Competitor
Identification
Business
capabilities
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 capabilities
definitions
• 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

1
1
After completing the industry analysis, Strategic
decisions on growth must be made
1. Strategic foundation
Industry
structure
Customer
value
Competitive
position
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?
Business
capabilities
10

13
1. Industry structure
Strategic foundation
Industry structure Customer value Business capabilitiesCompetitive position
• 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
• understand
differentiating
qualities of
competitor
portfolios
• To predict
competitor
moves and
market
positions

14
Industry structure tools
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
1. Market overview
• Which segments provide opportunities for performance improvement?
evolution
• Are there emerging applications of technology from other industries/markets?
6. Regulatory, geo-political and
globalization trends
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 fragmentation
It 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
differences
Regional 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 documented
Market sizing objectives:
Identify growth and size of defined market to establish target company/business growth potential and market share
Illustrate company/business position relative to competitors within and across segments
Identify 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
Customer
value
Business
capabilities
Competitor
Identification
1. Market overview
evolution
• 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”?

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/
Outbound
Logistics
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/
Inbound
Logistics
Manu-
facturing/
Operations
Marketing
&
Sales
Conversion
Final
Assembly
Quality
Assurance
Packaging
 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
Material
Preparation

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
Map
Sub-Activities
Always
Sometimes
Unlikely

23
Disaggregating the chain helps you decide where you
should or need to play
Description:
Importance of
local market
share:
Revenue
stream:
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
Computer
programming
Low
Mainte
nance
On going
Medium
Monitor
system
On going
Manufacture
and sell
hardware and
software
Manuf: low
Dealer: high
(except nat’l
accounts)
One time +
upgrades
and service
R&D,
manufacturing,
distribution
Low
Install
Product
(Equipment
and software)
Database
integration
Service Monitor
Software onlyEquip –
ongoing
Consulting/
Engineering
AssessAssess Plan Specify
Support,
upgrade
Low
High Low High Low
On-site Central
station
Tech. Computer
programm
ing
Guard Operator
Security
Systems
Several chain sections (Consulting/Engineering, Service and Monitor) have been further sub-divided
To build long-term relationships and revenue streams, the business may want to consider participating in the
servicing and monitoring components of the chain

24
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
1. Market overview
evolution
• Are there emerging applications of technology from other
industries/markets?
• 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 trends that could significantly change the “rules
of the game”?

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 pool
2. 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 capture
a 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
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
1. Market overview
evolution
industries/markets?
of the game”?

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
Unmetneeds
Attractive economics
(Consumer vs Supplier)
Manageable
adoption
barriers
Existing
triggers
--------------------- 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)
Failure
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)
Success
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
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
1. Market overview
evolution
industries/markets?
of the game”?

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
Potential
entrants
Substitutes
Buyers
Industry
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
Potential
entrants
Substitutes
Buyers
Industry
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
Potential
entrants
Substitutes
Buyers
Industry
competitors

44
• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute
Determinants of substitution threat
Suppliers
Potential
entrants
Substitutes
Buyers
Industry
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
Bargaining
Leverage
Price
Sensitivity
Suppliers
Potential
entrants
Substitutes
Buyers
Industry
competitors

47
Qantas
11%
Baker’s Delight
10%
Samsung
13%
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
Iphone
67%
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
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
1. Market overview
evolution
industries/markets?
of the game”?

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
Definition
Domestic
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 value
Competitor
Identification Business capabilities
• To capture
basic snapshot
of industry
• To identify
paradigm
shifts and
external
trends
• To identify
customer needs
and their
implications for
the business
• To prioritize
customer
requirements
and competitive
markets
• To identify a
business’ core
competencies
and gaps
• To understand
a business’
competitive
advantage and
sustainability
• To understand
differentiating
qualities of
competitor
portfolios
• To predict
competitor
moves and
market
positions
61

5
7
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
Customer value tools
• Which segments fit most clearly with the business’s core competencies?
and attractiveness
• 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?
• What advantages/disadvantages does customer loyalty have on the
business?
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 data
3. 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
attitudes
2. 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
(Covered in
next section)
Example: Customer segmentation for 4 Seasons
Hotels is a multi-step process
64

Low profit
Medium profit
High profit
Customers Profit
0
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 Profit
per Customer Type
1-2 3-5 6-8 9-10 11
$50
$85
$140 $150
$260
0
100
200
$300
per Customer Type
Days per Year
Less than 2 days 2-4 days 4+ days
$40
$70
$130
0
50
100
$150
per Customer Type
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 profit
segments
Annual
frequency
Length of stay Occasion

68
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
and attractiveness
needs?
demographic)?
attitudes
business?

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
Economic
attractiveness:
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 economic
attractiveness:
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 segment
Adjust 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
Medium
profit
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

7
8
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
and attractiveness
needs?
demographic)?
attitudes
• How well does the business (and its competitors) fulfill these
needs?
business?
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
Relationships
Flexibility
Relativeimportance/performance
Price
Speed
Relationships
Reliability
Par/servicing
LTV
Flexibility
Relativeimportance/performance
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
Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
and attractiveness
needs?
demographic)?
attitudes
business?

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
Determine
bottom-up wallet
• Build-up wallet
beginning with
single customer
spend
• Quantify to limits
of Business
Definition
• Bottom-up wallet
sizing and
appropriate
segmentation
Match
top-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

Industry
structure
Customer
value
Business
capabilities
Competitor
Identification
2. Assessment of customer segment
attractiveness
and attractiveness
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?
• What advantages/disadvantages does customer loyalty have on the business?
92

93
Demand
Creation
Access
(Reach)
Profitable
Revenue
+ + = Product
success
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

Industry
structure
Customer
value
Business
capabilities
Competitive
position
2. Customer value
and attractiveness
needs?
demographic)?
attitudes
business?
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
Deserves
Loyalty
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
AnnualProfits
Year
Example: Credit card company
101

Root cause analysis can uncover important
issues for at-risk customers
Uncontrollable
issues
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 AnalysisActivities
Tools/
Techniques
Competitor
Identification &
Segmentation
Competitor
Performance
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
 Competitor
positioning 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/movements
in positioning
 Game theory
 Scenario modeling
 SWOT Analysis
 Industry, market, company
predictions
and forecasts
106

Competitor Identification &
Segmentation
Competitor
Identification &
Segmentation
Competitor
Performance
Analysis
Competitor
Objectives &
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 focus
of effort
Regional
National Direct
Indirect
Small
Large
Size of
competitor
Type of competitor
Geographic
focus of
competitor
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 one
particular 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 innovation
plays 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
Competitor
Identification & Segmentation
Competitor
Performance
Analysis
Competitor
Objectives &
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
% Market
Share
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
5
6
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
Boots
Paperchase
Disney Store
John Menzies
Ryman's
Multitail
Woolworths
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Books Stationery News
Others
Woolworths
John Menzies
Multitail
$ 2.1 bn $ 1.5 bn $ 4.0 bn
Competitor
share by
sector (%)
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 X
gaining share
Company X
losing share
Video
News
Music
Cards
Stationery
Books
Company
X Growth
(% over
4 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 market
share (units), 2000
-20%
0%
20%
40%
60%
80%
100%
120%
0
0.5 1.0 1.5
G
H
X
F
B
E
A
D
C
CAGR (units)
1999-2009
115

Competitor Profitability
Examples (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

Measuring 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?
Financial
indicators
Operational
indicators
Costs Accuracy Speed
Mix, balance and trade-offs vary with
Nature of
business
Maturity of
supply chain
Absolute
levels
Relative
trends
Externally
comparable
Internally
consistent
Drive
improvement
targets
Monitor
progress and
realise benefits
118

Competitor 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 Drivers
Insights 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 Analysis
Once 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 keep
getting bigger
 Other teams back in
contention for N° 3 spot
Opportunities Threats
121

123
Strategic foundation roles
Industry structure Customer value Business capabilities
Competitor
Identification
• To capture basic
snapshot of
industry
• To identify
paradigm shifts
and external
trends
• 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
• To understand a
business’
competitive
advantage and
sustainability
• To identify a
business’ core
competencies
and gaps

Business capabilities tools
Industry
structure
Customer
value
Competitive
position
Business
capabilities
definitions
norms?
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
Theoretical
full 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 Competitor
A
Competitor
B
Competitor
C
$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&D
Purchasing/
Inbound
Logistics
Manufact-
uring/
Operations
Marketing
&
Sales
Distribution/
Outbound
Logistics
Service
Major cost
elements:
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 Paints
Sure 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 rate
Expenses - 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

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
Industry
structure
Customer
value
Competitive
position
Business
capabilities
definitions
norms?

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
Distinctive
Capabilities
• 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
Privileged
Assets
Special
Relationships

143
Companies differentiate by innovating around their
strengths
Product
Development
Manufacturing
Distribution &
Logistics
Marketing
Sales
Service
Manufacturing
Distribution &
Logistics
Marketing
Sales
Service
Manufacturing
Distribution &
Logistics
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&Dpractices
• 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

Industry
structure
Customer
value
Competitive
position
Business
capabilities
definitions
norms?
145

146
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

147
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
3. Capability
execution

148
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:
People
Incentives/
culture
Information/
Technology
Process/
structure
Institutional
lack of
knowledge

145
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

149
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

150
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
3. Capability
execution

4. A Quick Look At Market Entry
Strategies
151

The Strategic Foundation Underpins, Market Entry Planning
1. Industry
structure
Summary and conclusions
Market opportunity description
Market entry strategy
Strategic directions
Pricing
Brand and communication
Sales and distribution
Products and services
Customer service
Launch phasing
The Strategic Foundation
Vision and Mission
Objectives
Overall Strategy
Positioning
Value proposition
Brand
Target segments
Tactical launch plan Contingency plan
Internal and
external factors
Products & services
Pricing
Brand and
communication
Sales & distribution
channels
Customer service149
2. Customer
Identification
& 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 ans
manageable 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
151

2014-Navigate-Essentials Foundations of Market Entry Strategies

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2014-Navigate-Essentials Foundations of Market Entry Strategies