Strategy Business Information and Analysis - Essay Example

? Business Information and Strategy Analysis Table of Contents Table of Contents 2 Introduction 3 Part 3 Force Competitive Rivalry 4 Force 2- Threat of New Entrant 5 Force 3- Threat of Substitute 5 Force 4- Supplier Power 5 Force 5- Buyer Power 6 Part 2 6 Part 3 10 Conclusion 14 Reference 15 Introduction The study has selected Soft Drink Industry as the focal point of discussion in this essay. The study will critically analyze the soft drink industry in the light of Porter Five forces such power of the buyer, power of the suppliers, substitutes of soft drink products, threat of new entrants and competitive dynamics among existing players. Contextually, this essay can be subdivided into three parts such as, Part 1- analysis of the five forces in the soft drink industry, Part 2- strategic selection of most important forces for organizations in soft drink industry with proper justification and Part 3- critical evaluation of the "outside-in" approach to strategy formulation for organizations. Interesting fact is that, porter five force analyses is an integrated component of the "outside-in" approach hence discussing porter five forces for soft drink industry in the first two sections will create silhouette for the critical evaluation "outside-in" approach to strategy formulation for organizations with the help of existing literature. Part 1 According to Deichert et al (2006), global soft drink industry is dominated by Coke and Pepsi for years but these two giants have understood the importance of diversifying product portfolio into noncarbonated beverages in order to achieve sustainable growth rate. Soft drink industry can be analyzed with the help of cumulative growth rate, market size and overall profitability. According to Datamonitor (2008), market value of soft drink industry will touch a value of more than $500 billion by the year 2014. Soft drink industry contributes almost 50% of the non-alcoholic drink industry Datamonitor (2008). Currently, the industry is growing at pace of more than 5% and it is expected that the market volume will cross 500,000 million litres within next couple of years Deichert et al (2006). According to the research report of Datamonitor (2008), although global soft drink industry is growing at a steady pace but it will decelerate in near future due market saturation and stagnation of market price. In such context, five force analysis soft drink industries will help the study to identify forces such as substitute products, suppliers, buyers, rival sellers and intra firm competitiveness which are shaping the industry. Diagrammatic representation of five forces in soft drinks industry can be explained in the following manner. (Source: Wheelen and Hunger., 2000 and 2006) Force 1- Competitive Rivalry According to Deichert et al (2006), competitive threat is the strongest among all other forces in soft drink industry. The market is saturated due to presence of many players such as Coca-Cola, Cadbury Schweppes, Pepsi Co etc; high degree of saturation in the industry has decreased scope for existing players to differentiate in the product portfolio hence they extensively focus on price competition in order to attract customers. Rivals in the industry such as Coca-Cola and PepsiCo are strong global presence and access to huge amount of both financial and non-final resources, which has further decreased the scope companies in the industry to achieve resource based advantages as mentioned by Rumelt (1986). Having top selling brands in the kitty doesn’t ensure competitive advantage in the industry, for example, Coca-Cola owns 80% of top selling brands such as Sprite, Coca-Cola, Fanta, Diet Coke but it had achieved lower sales revenue in comparison PepsiCo during 2004-05 in USA and UK market Deichert et al (2006). According to Deichert et al (2006), advertising and marketing strategy plays vital role in the industry. For example, in some cases, rivals use competitive advertisings in order to nullify relevance of other companies among customers. Force 2- Threat of New Entrant According to research report of Deichert et al (2006), existing players in the industry have created entry barrier in terms customer loyalty, market consolidation, strong distribution channel, resource requirement for new entrants. It has been already mentioned; soft drink industry is not only saturated in nature but consolidated also. According completion theory of economics, it is not easy for a new entrant to achieve competitive advantage in an industry which is saturated in terms of both resource deployment and opportunity exploration. Deichert et al (2006) have found that, global customers do not accept a relatively new and unknown brand easily. Taking help of economic theories, it can be said that, new entrants can only achieve competitive advantage by offering product at lower price in comparison to existing big players in the industry. Again, it is not possible for new entrants to cut down price of the soft drink products because huge fixed cost for maintaining warehouses, logistic system, and distribution channel has decreased the opportunity for new entrants to achieve economies of scale throughout the value chain which can help them to decrease cost of offering products to customers. Hence, threat of new entrants has been reckoned as low for the industry. Force 3- Threat of Substitute According to report of Datamonitor (2008), there is no direct substitute for fast food products but the industry faces indirect competition from non-related items like bottled water, coffee, sports drinks etc. In recent years, customers have become more health conscious hence they are showing preference for low calorie health drinks, sports drinks, caffeine contained tea and coffee. Switching cost to these substitutes is also very low because price of these substitutes are almost similar to soft drinks products. Hence, overall threat of substitute product is quite strong for the industry. Force 4- Supplier Power Deichert et al (2006) has stated that, major suppliers for soft drink industries include equipment manufacturers, secondary packaging suppliers, bottle manufacturing companies etc. In most of the cases, soft drinks companies own the bottling facilities in order to decrease cost of the value chain integration and decrease the power of suppliers, for example, Coca-Cola owns more than 30% of stake in Coca-Cola Enterprises which is one of the largest soft drink bottlers in the globe Deichert et al (2006). Abundance of equipment suppliers and lack of scope for the suppliers to bring diversification in supply material have decreased the switching cost for soft drinks companies to chose new suppliers. Hence, bargaining supplier power in the industry has reckoned as low. Force 5- Buyer Power Primary buyer for soft drinks companies are retailers, grocers, restaurants, large grocers, departmental stores, whereas from marketing viewpoint, customers are the secondary buyers soft drink companies. Soft drinks companies sell its product to retailers and retailer resale it to customers. Grocers, departmental stores purchase large volume of soft drink products at discounted price from soft drink companies and also push soft drink companies to provide point of sales display inside the store in order to sell products to customers and clear out the stock. According to Deichert et al (2006), soft drink companies provide additional benefits to large retailers, departmental store chains to push the product when demand for the product is dwindling. Hence, it can be said that bargaining buyer power in the industry is pretty much strong. Part 2 In this section the study will analyze potentiality of different industry forces that has been discussed in the above section in order to determine key forces which can alter the balance of the industry. It is evident from the above discussion that, role of two forces such as threat of new entrant and bargaining power of suppliers have minimal impact on altering the balance of soft drinks industry hence the study will analyze strategic impact only three forces such industry rivalry, threat of substitute products and bargaining power of buyers in order to identify key forces. To analyze the potentiality of industry forces the study will try to understand challenges face by the industry as a whole. Soft drink industry is part of beverage industry hence it is expect that, forces that affect beverage industry will also affect the soft drinks industry. In recent years, beverage industry has seen changing customer demand and emerging demand of low calories products. Amid ever changing competitive environment, soft drinks and beverages companies should court customers, develop high quality products, distribute the product efficiently, ensure safety in the product, maintain competitive pricing while becoming nimble enough to explore new market opportunities (Deloitte, 2005). In such macro environmental orientation, it is important for soft drinks companies to capitalize emerging opportunities in order to move ahead in competition. In the non alcoholic beverage segment, products from different category are competing with each other in the same market place, for example, carbonate soft drinks, juice, sports drinks and water are competing with each other to attract same segment of customers. Apart from the traditional non alcoholic beverage products, marketers are developing new product category in order to further intensify the competition. Soft drinks are moving towards hub spoke model in order to distribute products, while retailers and distributors play important role in the mentioned distribution channel. It is evident from the discussion that, all the three forces such as primary buyers, industry rivalry and substitutes are three most important vertical which decides the direction of soft drinks industry. The question may arise that is there any relationship between these three forces? To answer the question, the study will identify what are the business performance improvement priorities for soft drink companies and how fulfilling these priorities can help soft drink companies to achieve competitive advantage. Business Performance Indicator 1 Soft drinks companies need to protect and enhance its revenue in order to counterbalance the additional cost of increasing advertisement activities and make bottom-line growth. According to report published by Deloitte (2005), achieving top line growth by increasing marketing expenditure might not help soft drink companies to survive in economic recession because during economic crisis, bottom-line of the companies get effected painstakingly. Careful analysis of Deloitte’s (2005) report shows that competitive rivalry is the greatest force in the industry and this force has the magnitude to change both the top-line and bottom-line growth of soft drink companies. To achieve an edge in the dynamics of competitive rivalry, soft drink companies’ bank on integrated marketing communications such as sales promotion, above and below the line advertisements, discounts to primary and secondary buyers, product differentiation, customer relationship management, product and packaging innovation etc. It is evident from the above discussion that presence of substitute products increases the magnitude competitively rivalry in soft drinks industry whereas bargaining power of buyers increases when competitive rivalry gets increased (Deloitte, 2005). There can be another explanation of the triangular relationship between competitive rivalry in soft drinks industry, bargaining power of buyers and availability of substitutes. The equation between all three verticals in the industry can be explained by choosing second business performance indicator. Business Performance Indicator 2 To survive in the competitive industry environment, soft drink companies emphasize on reduction of value chain integration cost and margin improvement. Reduction of waste, labor cost, synergy of operational efficiency, inventory cost reduction, decreasing lead time in supply chain activities can help soft drink companies can improve the margin. In such conundrum of competitive environment, retailers or the primary buyers in soft drink industry plays crucial role as the value chain partners for soft drink companies. Let’s look at the sales channel for soft drinks industry. (Source: Deloitte, 2005) Soft drink companies can sell its products with the help of multiple distribution channels, 1- via retailer to customers, 2- via wholesalers to retailers to customers and 3- via retailers to restaurants to customers. Fact is that, soft drinks industry is subjected to seasonal demand, which means demand for soft drinks product diminishes during the time of winter season. Large chain retailers have larger customer base in comparison to small retailers, hence they have greater negotiating power for asking soft drinks companies to discount on bulk purchase. Presence of number of small individual retailers has increased point sales for soft drink companies. In majority of the cases, small buyers or individual retailers’ purchase of drinks product in cash and carry manner from wholesalers, hence wholesalers play critical role in terms of having information regarding point of sales in particular area, critical information regarding competitors’ portfolio etc. Hence, wholesalers got the negotiation power to ask soft drink companies to provide additional benefits such price discount, freebies, in store decoration etc. Although it is evident from the above discussion that, buyer power in the industry is pretty strong but soft drink companies has incorporated tracking of indirect selling process in order to decrease the buyer power. Indirect selling process can be explained in the following process. (Source: Deloitte, 2005) Introduction of company owned distributor in the sales channel has decreased buyer power a certain extent by pushing distributors to sell the product and exploit local pricing environment. Hence buyer power in the industry cannot be termed as most important force in the industry. Although there is pressure from substitute products but still carbonated soft drinks dominate the market with almost 50% of market share, hence threat of substitutes cannot be termed as the most important force in the soft drink industry. (Source: Deloitte, 2005) It is evident from the above discussion that, rivalry among soft drink companies has emerged as most important force in the industry. Growth of private label products, consumer demand for diversified and healthier offering, failure of new product launch (only 20% are successful), stock keeping unit (SKU) proliferation, market consolidation by big companies through acquisition of small but high growth companies and vertical integration of mid market players have further increased the degree of competitive rivalry in the industry. Part 3 According to Rothwell and Kazanas (2003) and Whittington (2001) companies have two types of approaches such as “inside-out” or “outside-in” for formulating strategies. In inside-out model, companies determine its internal strength and weaknesses in order to understand how it is positioned in comparison to its competitors. On the other hand, companies try to understand existing threat and opportunity in macro environment (both country specific advantages and disadvantages and industry specific advantages and disadvantages) while following outside-in approach to exploit its resources to formulate strategy which can help them to achieve competitive advantage over business rivals. This section of the study will only deal with “outside-in” approach for strategy formulation. In the first two part of the essay, the study has discussed various facets of porter five force analyses and interesting fact is that, five force analyses is an integrated part of “outside-in” approach for strategy formulation. Critical evaluation of two strategic management concepts such as Resource Based View (RBV) and Five Force Model is necessary in order to justify the “outside-in” approach of companies to formulate strategies. While following the “outside-in” approach, companies’ use five forces model in order to understand the dynamics in the industry in terms of five facets such as, 1- who are the competitors in the industry, how they are positioned and what strategies these competitors are following to achieve competitive advantage, 2- who are the buyers in the industry, what is their preference and how they are pushing existing companies in the industry, 3- who are the suppliers in the industry, how these suppliers are positioned and how they can create pressure on companies, 4- what are the substitute products, market penetration of these substitutes and how these substitutes can create pressure on existing players in the industry to change the product portfolio or product offering to customers and 5- who can be the new entrants in the industry, what are entry barriers for new entrants and how these entry barriers can affect the competitive threat from new entrants. Understanding five forces in the industry helps companies to identify existing opportunity and threats associated with particular industry. However, there are cases, when companies use ‘Strategic Group Analysis’ in order to understand strategic groups in the industry and what groups are associated with the industry. Going by the definition of strategic group analysis, it can be said that the analysis is closely related with five forces analysis or the miniature of five force analysis. Hence, most of the companies use five force analyses in order to understand the internal dynamics of an industry by looking at it from outside. This is the key mantra of "outside-in" approach to strategy formulation for companies. The concept of five forces framework was proliferated by the seminal research work of Michael Porter (1980, 1985 and 1991). It is evident from the research of Michael Porter, that "outside-in" is not a mere management jargon rather modern business houses are using the approach to deliver value to customers and moving ahead in the competition. For example, Foss and Knudsen (2003) and Bosse et al (2009) have found that, firms can achieve competitive advantage by overcoming market barriers or five forces in the industry. To make this point clear, the study will again take help of five force analysis of soft drink industry. Suppose, a soft drinks company want to achieve competitive advantage over other players in the industry, it will need to counterbalance the five forces in the industry. Soft Drinks Industry Power Index Outside-in View How to Achieve Competitive Advantage Supplier Power Supplier power of the industry is low. Companies can own many of the supply chain activities in order to decrease power of suppliers further. Buyer Power Buyer power in the industry is high. Soft drink companies need to focus extensively on indirect sales channel in order to decrease the buyer power. Competitive Rivalry Competitive rivalry in the industry is high. Companies should focus on various marketing activities, product diversification, supply chain integration etc in order to overcome competition. Threat of Substitute Threat of substitute is high. Soft drinks company should increase depth in the product portfolio in order to overcome threat of substitutes. Threat of New Entrant Threat of new entrant is low. Companies should deploy its resources and develop customer loyalty more efficiently in order to minimize the threat of new entrants to further extent. In the next section the study will use the concept resource based view or RBV which is also an integrated part of the "outside-in" approach to strategy formulation for companies. According to eminent research scholars such as Rumelt (1986) and Dierickx and Cool (1989), a firm can use its resource capabilities for exploring the existing business opportunity in macro environment or overcome threats in the industry. Peteraf (1993) has segregated resources into three parts such as 1- tangible resources financial capital, technology, infrastructure, 2- intangible resources such as brand name, customer loyalty, intellectual property and 3- human resources such as employees. According to Peteraf (1993), a firm must ensure that its resources are valuable, rare; non tradable and inimitable in nature in order to achieve sustainable competitive advantage by using these resources. In such context, Prahalad and Hamel (1990) have given the concept of core competency in order to identify critical resources for a firm which can give them competitive advantage in sustainable manner. Detailed examination of core competency model proposed by Prahalad and Hamel (1990), shows that a firm need to identify its most important resources which can be used in sustainable manner in order to gain advantage which cannot be exploited easily by business rivals. Other research scholars such as King (2001) and Wright et al (2001) have found that concept of core competency is related to "outside-in" approach of strategy formulation. Although research findings of King (2001) and Wright et al (2001) are more relevant to human resource perspective but their assumptions can be used in other way around. For example, suppose a soft drinks company has understood with the five forces analysis that the key success factors for the industry is product differentiation, value chain integration, distribution network optimization etc, in such context the company will try to use its core competency to explore those key success factors in order to move ahead in the competition. Till now the study has discussed the strategic explanation of "outside-in" approach but in the next section the study will define customer driven objectives of "outside-in" approach. From customer perspective, "outside-in" approach means stepping outside the organization and takes a look at market dynamics in order to understand what customers are wanting and formulate strategy to cater those wants and demands of customers. According to Day and Moorman (2012), customer value driven "outside-in" approach deals with three questions, 1- what do customers want? 2- Why there is change in customer demand? 3- What can the firm do cater to the changing customer demand? Day and Moorman (2012) have defined four verticals of customer centric "outside-in" approach. Provide value for money product and services to customers and become customer value leader Innovate new value for customers Treat customers as the asset for the firm Develop the brand as asset for the firm In value driven outside-in approach, companies need to use it’s financial and non financial resources in efficient manner in order cater demand of customers and respond quickly to changing demand of customers. Relying on innovation in full spectrum manner helps companies to deliver contemporary offerings to customers and match steps with changing customer demands. Day and Moorman (2012) have argued that, companies following value driven “outside-in” approach become able to develop a strong brand image among customers which ultimately maximize return and margin for them. Conclusion The essay has discussed two versions of “outside-in" approaches such as business driven approach and customer driven approach in this essay. However, detailed investigation of both the model reveals that, there is fine link between both the models. Both the model focuses on external environment scanning in order to understand existing opportunity and threat and use its resources to overcome the threats or explore the opportunity. Customer value driven “outside-in" more specific in nature which focuses only on delivering value to customers and maximize margin whereas business driven “outside-in" approach focuses on achieving competitive advantage by establishing equilibrium among industry forces. Analyzing the research work of Grahovac and Miller (2009), it can be said that a firm can achieve competitive advantage while following ‘outside-in" approach by reducing magnitude of competitive rivalry in the industry by decreasing marginal cost of operation and deliver differentiated product portfolio to customers. 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