Development of the firm s international competitiveness

Transcription

1 4 Deveopment of the firm s internationa competitiveness Contents 4.1 Introduction 4.2 Anaysis of nationa competitiveness (the Porter diamond) 4.3 Competition anaysis in an industry 4.4 Vaue chain anaysis 4.5 Bue ocean strategy and vaue innovation 4.6 Summary Case studies 4.1 Microsoft Xbox 4.2 Senseo 4.3 Video case study: Nike Learning objectives After studying this chapter you shoud be abe to do the foowing: Define the concept internationa competitiveness in a broader perspective from a macro eve to a micro eve. Discuss the factors infuencing the firm s internationa competitiveness. Expain how Porter s traditiona competitive-based five forces mode can be extended to a coaborative (five sources) mode. Expore the idea behind the competitive triange. Anayse the basic sources of competitive advantage. Expain the steps in competitive benchmarking. 4.1 Introduction The topic of this chapter is how the firm creates and deveops competitive advantages in the internationa market. Deveopment of a firm s internationa competitiveness takes pace interactivey with the environment. The firm must be abe to adjust to customers, competitors and pubic authorities. To be abe to participate in the internationa competitive arena the firm must have estabished a competitive basis consisting of resources, competences and reations to others in the internationa arena. To enabe an understanding of the deveopment of a firm s internationa competitiveness in a broader perspective, a mode in three stages (see Figure 4.1) wi be presented: 96

2 Chapter 4 Deveopment of the firm s internationa competitiveness Figure 4.1 Deveopment of a firm s internationa competitiveness 97

3 Part I The decision whether to internationaize 1 anaysis of nationa competitiveness (the Porter diamond) Macro eve; 2 competition anaysis in an industry (Porter s five forces) Meso eve; 3 vaue chain anaysis Micro eve: (a) competitive triange; (b) benchmarking. The anaysis starts at the macro eve and then moves into the firm s competitive arena through Porter s five forces framework. Based on the firm s vaue chain, the anaysis is concuded with a discussion of which activities/functions in the vaue chain are the firm s core competences (and must be deveoped internay in the firm) and which competences must be paced with others through aiances and market reations. The graphica system used in Figure 4.1 (which wi be referred to throughout this chapter) paces the modes after each other in a hierarchica windows ogic, where you get from stage 1 to stage 2 by cicking on the icon box: Firm strategy, structure and rivary. Here Porter s five forces mode appears. From stage 2 to 3 we cick the midde box abeed Market competitors/intensity of rivary and the mode for a vaue chain anaysis/competitive triange appears. Individua competitiveness and time-based competition In this chapter the anaysis ends at the firm eve but it is possibe to go a step further by anaysing individua competitiveness (Veiyath and Zahra, 2000). The factors infuencing the capacity of an individua to become competitive woud incude intrinsic abiities, skis, motivation eves and the amount of effort invoved. Traditiona decision-making perspectives maintain that uncertainty eads executives to search for more additiona information with which to increase certainty. However Kedia et a. (2002) showed that some executives increase competitiveness by using tactics to acceerate anaysis of information and aternatives during the decision-making process. For exampe, these executives examine severa aternatives simutaneousy. The comparison process speeds their anaysis of the strengths and weaknesses of options. 4.2 Anaysis of nationa competitiveness (the Porter diamond) Anaysis of nationa competitiveness represents the highest eve in the entire mode (Figure 4.1). Michae E. Porter caed his work The Competitive Advantage of Nations (1990), but as a starting point it is important to say that it is firms which are competing in the internationa arena, not nations. Yet the characteristics of the home nation pay a centra roe in a firm s internationa success. The home base shapes a company s capacity to innovate rapidy in technoogy and methods, and to do so in the proper directions. It is the pace from which competitive advantage utimatey emanates and from which it must be sustained. Competitive advantage utimatey resuts from an effective combination of nationa circumstances and company strategy. Conditions in a nation may create an environment in which firms can attain internationa competitive advantage, but it is up to a company to seize the opportunity. The nationa diamond becomes centra to choosing the industries to compete with, as we as the appropriate strategy. The home base is an important determinant of a firm s strengths and weaknesses reative to foreign rivas. Understanding the home base of foreign competitors is essentia in anaysing them. Their home nation yieds them advantages and disadvantages. It aso shapes their ikey future strategies. 98

4 Chapter 4 Deveopment of the firm s internationa competitiveness Porter s diamond The characteristics of the home base pay a centra roe in expaining the internationa competitiveness of the firm the expaining eements consist of factor conditions, demand conditions, reated and supporting industries, firm strategy structure and rivary, chance and government. Porter (1990) describes a concentration of firms within a certain industry as industria custers. Within such industria custers firms have a network of reations to other firms in the industry: customers (incuding firms that work on semi-manufactured goods), suppiers and competitors. These industria custers may go wordwide, but they wi usuay have their starting point and ocation in a certain country or region of a country. A firm gains important competitive advantages from the presence in its home nation of word-cass buyers, suppiers and reated industries. They provide insight into future market needs and technoogica deveopments. They contribute to a cimate for change and improvement, and become partners and aies in the innovation process. Having a strong custer at home unbocks the fow of information and aows deeper and more open contact than is possibe when deaing with foreign firms. Being part of a custer ocaised in a sma geographic area can be even more vauabe, so the centra question we can ask is: what accounts for the nationa ocation of a particuar goba industry? The answer begins, as does a cassica trade theory, with the match between the factor endowments of the country and the needs of the industry. Let us now take a coser ook at the different eements in Porter s diamond, beginning with the factor conditions. Factor conditions In this connection it is important to mention that the most enduring competitive advantages for nations are created by those factors that have the east degree of mobiity. Factors with ow mobiity create the ground for internationa competitiveness. For exampe, India has a high growth in IT but the poor infrastructure is sti a barrier for creating further internationa competitiveness in many industries. Tabe 4.1 ists the various factors of production and indicates the mobiity of each. At one extreme, we have cimate with no mobiity. Finand wi never be a major producer of citrus fruit, no matter what government and industry do to try to change the rest of the nationa diamond. At the other end of the mobiity scae we have capita, probaby the most mobie of the factors of production. Over the years we have seen enormous increases in the infow and outfow of foreign investment capita in the industriaized and deveoping countries of the word. This can be seen as part of the process of goba economic integration. Technoogy and the oosening of currency restrictions throughout the word have improved the fow of capita across nations and suggest that differences in capita avaiabiity are no onger ikey to constitute a very stabe competitive advantage for an area. Demand conditions The nature and size of home demand is represented in the right-hand box of Porter s diamond (Figure 4.1). There exists an interaction between scae economies, Tabe 4.1 Factor conditions and their degree of mobiity Factor Cimate Physica infrastructure (transport, etc.) Natura resources (mineras, oi) Educationa system Human resources (movement of abour) Technoogica infrastructure (software, communication network) Capita Degree of mobiity Low High 99

5 Part I The decision whether to internationaize transportation costs and the size of the home market. Given sufficienty strong economies of scae, each producer wants to serve a geographicay extensive market from a singe ocation. To minimize transportation costs the producer chooses a ocation with arge oca demand. When scae economies imit the number of production ocations the size of a market wi be an important determinant of its attractiveness. Large home markets wi aso ensure that firms ocated at that site deveop a cost advantage based on scae and often on experience as we. An interesting pattern is that an eary arge home market that has become saturated forces efficient firms to ook abroad for new business. For exampe, the Japanese motorcyce industry with its arge home market used its scae advantages in the goba marketpace after an eary start in Japan. The composition of demand aso pays an important roe. A product s fundamenta or core design neary aways refects home market needs. In eectrica transmission equipment, for exampe, Sweden dominates the word in the high-votage distribution market. In Sweden there is a reativey arge demand for transporting high votage over ong distances, as a consequence of the ocation of popuation and industry custers. Here the needs of the home market shaped the industry that was ater abe to respond to goba markets (with ABB as one of the eading producers in the word market). The sophistication of the buyer is aso important. The US government was the first buyer of chips and remained the ony customer for many years. The price ineasticity of government encouraged firms to deveop technicay advanced products without worrying too much about costs. Under these conditions the technoogica frontier was ceary pushed much further and much faster than it woud have been had the buyer been either ess sophisticated or more price sensitive. Today the Japanese, who dominate the market for semiconductors, are infuencing the shape of the industry and price issues have become more saient. Reated and supporting industries In part, the advantages of custering come from a reduction in the transportation costs for intermediate goods. In many other cases advantages come from being abe to use abour that is attracted to an area to serve the core industry, but which is avaiabe and skied for supporting industries. Coordination of technoogy is aso eased by geographic proximity. Porter argues that Itaian word eadership in god and siver jeweery has been sustained in part by the oca presence of manufacturers of jeweery-making machinery. Here the advantage of custering is not so much transportation cost reductions but technica and marketing cooperation. In the semiconductor industry, the strength of the eectronics industry in Japan (which buys the semiconductors) is a strong incentive to the ocation of semiconductors in the same area. It shoud be noted that custering is not independent of scae economies. If there were no scae economies in the production of intermediate inputs, then the sma-scae centres of production coud riva the arge-scae centres. It is the fact that there are scae economies in both semiconductors and eectronics, couped with the technoogica and marketing connections between the two, that give rise to custering advantages. Firm strategy, structure and rivary One of the most compeing resuts of Porter s study of successfu industries in ten different nations is the powerfu and positive effect that domestic competition has on the abiity to compete in the goba marketpace. In Germany, the fierce domestic rivary 100

6 Chapter 4 Deveopment of the firm s internationa competitiveness among BASF, Hoechst and Bayer in the pharmaceutica industry is we known. Furthermore, the process of competition weeds out inferior technoogies, products and management practices, and eaves as survivors ony the most efficient firms. When domestic competition is vigorous firms are forced to become more efficient, adopt new cost-saving technoogies, reduce product deveopment time, and earn to motivate and contro workers more effectivey. Domestic rivary is especiay important in stimuating technoogica deveopments among goba firms. The sma country of Denmark has three producers of hearing-aids (Wiiam Demant, Widex and GN Resound/Danavox), which are a among the top ten of the word s argest producers of hearing-aids. In 1996 Oticon (the earier Wiiam Demant) and Widex fought a vioent technoogica batte to be the first in the word to aunch a 100 per cent digitaized hearing-aid. Widex (the smaer of the two producers) won, but forced Oticon at the same time to keep a eading edge in technoogica deveopment. Chance When we ook at the history of most industries we aso see the roe payed by chance. Perhaps the most important instance of chance invoves the question of who comes up with a major new idea first. For reasons having itte to do with economics, entrepreneurs wi typicay start their new operations in their home countries. Once the industry begins in a given country scae and custering effects can cement the industry s position in that country. Government Governments pay a powerfu roe in encouraging the deveopment of industries within their own borders that wi assume goba positions. One way governments do this is through their effect on other eements of the nationa diamond. Governments finance and construct infrastructure, providing roads, airports, education and heath care, and can support use of aternative energy (e.g. windmis) or other environmenta systems that affect factors of production. From the firm s point of view the ast two variabes, chance and government, can be regarded as exogenous variabes which the firm must adjust to. Aternativey, the government may be considered susceptibe through obbying, interest organizations and mass media. In summary, we have identified six factors that infuence the ocation of goba industries: factors of production, home demand, the ocation of supporting industries, the interna structure of the domestic industry, chance and government. We have aso suggested that these factors are interconnected. As industries evove their dependence on particuar ocations may aso change. For exampe, the shift in users of semiconductors from the miitary to the eectronics industry has had a profound effect on the shape of the nationa diamond in that industry. To the extent that governments and firms recognize the source of any ocationa advantages that they have, they wi be better abe to both expoit those differences and anticipate their shifts. 4.3 Competition anaysis in an industry The next step in understanding the firm s competitiveness is to ook at the competitive arena in an industry, which is the top box in the diamond mode (see Figure 4.1). 101

7 Part I The decision whether to internationaize Porter s five-forces mode The state of competition and profit potentia in an industry depends on five basic competitive forces: new entrants, suppiers, buyers, substitutes, buyers and market competitors. One of the most usefu frameworks for anaysing the competitive structure has been deveoped by Porter. Porter (1980) suggests that competition in an industry is rooted in its underying economic structure and goes beyond the behaviour of current competitors. The state of competition depends upon five basic competitive forces, as shown in Figure 4.1. Together these factors determine the utimate profit potentia in an industry, where profit is measured in terms of ong-run return on invested capita. The profit potentia wi differ from industry to industry. To make things cearer we need to define a number of key terms. An industry is a group of firms that offer a product or cass of products which are cose substitutes for each other. Exampes are the car industry and the pharmaceutica industry (Koter, 1997, p. 230). A market is a set of actua and potentia buyers of a product and seers. A distinction wi be made between industry and market eve, as we assume that the industry may contain severa different markets. This is why the outer box in Figure 4.1 is designated industry eve and the inner box market eve. Thus the industry eve (Porter s five-forces mode) consists of a types of actors (new entrants, suppiers, substitutes, buyers and market competitors) that have a potentia or current interest in the industry. The market eve consists of actors with a current interest in the market: that is, buyers and seers (market competitors). In section 4.4 (vaue chain anaysis) this market eve wi be further eaborated on as the buyers perceived vaue of different competitor offerings wi be discussed. Athough division into the above-mentioned two eves is appropriate for this approach, Levitt (1960) pointed out the danger of marketing myopia, where the seer defines the competition fied (i.e. the market) too narrowy. For exampe, European uxury car manufacturers showed this myopia with their focus on each other rather than on the Japanese mass manufacturers, who were new entrants into the uxury car market. The goa of competition anaysis is to find a position in industry where the company can best defend itsef against the five forces, or can infuence them in its favour. Knowedge of these underying pressures highights the critica strengths and weaknesses of the company, shows its position in the industry, and carifies areas where strategy changes yied the greatest pay-off. Structure anaysis is fundamenta for formuating competitive strategy. Each of the five forces in the Porter mode in turn comprises a number of eements that combine to determine the strength of each force, and its effect on the degree of competition. Each force is now discussed. Market competitors The intensity of rivary between existing competitors in the market depends on a number of factors: The concentration of the industry. Numerous competitors of equa size wi ead to more intense rivary. There wi be ess rivary when a cear eader (at east 50 per cent arger than the second) exists with a arge cost advantage. Rate of market growth. Sow growth wi tend towards greater rivary. Structure of costs. High fixed costs encourage price cutting to fi capacity. Degree of differentiation. Commodity products encourage rivary, whie highy differentiated products, which are hard to copy, are associated with ess intense rivary. Switching costs. When switching costs are high because the product is speciaized, the customer has invested a ot of resources in earning how to use the product or has made taior-made investments that are worthess with other products and suppiers (high asset specificity), rivary is reduced. 102

8 Chapter 4 Deveopment of the firm s internationa competitiveness Exit barriers. When barriers to eaving a market are high due to such factors as ack of opportunities esewhere, high vertica integration, emotiona barriers or the high cost of cosing down pant, rivary wi be more intense than when exit barriers are ow. Firms need to be carefu not to spoi a situation of competitive stabiity. They need to baance their own position against the we-being of the industry as a whoe. For exampe, an intense price or promotiona war may gain a few percentage points in market share, but ead to an overa fa in ong-run industry profitabiity as competitors respond to these moves. It is sometimes better to protect industry structure than to foow short-term sef-interest. Suppiers The cost of raw materias and components can have a major bearing on a firm s profitabiity. The higher the bargaining power of suppiers, the higher the costs. The bargaining power of suppiers wi be higher in the foowing circumstances: Suppy is dominated by few companies and they are more concentrated than the industry they se to. Their products are unique or differentiated, or they have buit up switching costs. They are not obiged to contend with other products for sae to the industry. They pose a credibe threat of integrating forwards into the industry s business. Buyers do not threaten to integrate backwards into suppy. The market is not an important customer to the suppier group. A firm can reduce the bargaining power of suppiers by seeking new sources of suppy, threatening to integrate backwards into suppy, and designing standardized components so that many suppiers are capabe of producing them. Buyers The bargaining power of buyers is higher in the foowing circumstances: Buyers are concentrated and/or purchase in arge voumes. Buyers pose a credibe threat of integrating backwards to manufacture the industry s product. Products they purchase are standard or undifferentiated. There are many suppiers (seers) of the product. Buyers earn ow profits, which create a great incentive to ower purchasing costs. The industry s product is unimportant to the quaity of the buyer s products, but price is very important. Firms in the industry can attempt to ower buyer power by increasing the number of buyers they se to, threatening to integrate forward into the buyer s industry, and producing highy vaued, differentiated products. In supermarket retaiing, the brand eader normay achieves the highest profitabiity, partiay because being number one means that supermarkets need to stock the brand, thereby reducing buyer power in price negotiations. Substitutes The presence of substitute products can reduce industry attractiveness and profitabiity because they put a constraint on price eves. 103

9 Part I The decision whether to internationaize If the industry is successfu and earning high profits it is more ikey that competitors wi enter the market via substitute products in order to obtain a share of the potentia profits avaiabe. The threat of substitute products depends on the foowing factors: the buyer s wiingness to substitute; the reative price and performance of substitutes; the costs of switching to substitutes. The threat of substitute products can be owered by buiding up switching costs. These costs may be psychoogica. Exampes are the creation of strong, distinctive brand personaities, and maintaining a price differentia commensurate with perceived customer vaues. New entrants New entrants can serve to increase the degree of competition in an industry. In turn, the threat of new entrants is argey a function of the extent to which barriers to entry exist in the market. Some key factors affecting these entry barriers incude the foowing: economies of scae; product differentiation and brand identity, which give existing firms customer oyaty; capita requirements in production; switching costs the cost of switching from one suppier to another; access to distribution channes. Because high barriers to entry can make even a potentiay ucrative market unattractive (or even impossibe) to enter for new competitors, the marketing panner shoud not take a passive approach but shoud activey pursue ways of raising barriers to new competitors. High promotiona and R&D expenditures and ceary communicated retaiatory actions to entry are some methods of raising barriers. Some manageria actions can unwittingy ower barriers. For exampe, new product designs that dramaticay ower manufacturing costs can make entry by newcomers easier. The coaborative five-sources mode Porter s origina mode is based on the hypothesis that the competitive advantage of the firm is best deveoped in a very competitive market with intense rivary reations. The five-forces framework thus provides an anaysis for considering how to squeeze the maximum competitive gain out of the context in which the business is ocated or how to minimize the prospect of being squeezed by it on the five competitive dimensions that it confronts. Over the past decade, however, an aternative schoo (e.g. Reve, 1990; Kanter, 1994; Burton, 1995) has emerged which emphasises the positive roe of cooperative (rather than competitive) arrangements between industry participants, and the consequent importance of what Kanter (1994) has termed coaborative advantage as a foundation of superior business performance. An a-or-nothing choice between a singe-minded striving for either competitive or coaborative advantage woud, however, be a fase one. The rea strategic choice probem that a businesses face is where (and how much) to coaborate, and where (and how intensey) to act competitivey. 104

10 Chapter 4 Deveopment of the firm s internationa competitiveness Five-sources mode Corresponding to Porter s five competitive forces there are aso five potentia sources for buiding coaborative advantages together with the firm s surrounding actors. Put another way, the basic questions that firms must dea with in respect of these matters are as foows: choosing the combination of competitive and coaborative strategies that are appropriate in the various dimensions of the industry environment of the firm; bending the two eements together so that they interact in a mutuay consistent and reinforcing, and not counterproductive, manner; in this way, optimizing the firm s overa position, drawing upon the foundation and utiization of both coaborative and competitive advantage. This points to the imperative in the contemporary context of compementing the competitive strategy mode with a sister framework that focuses on the assessment of coaborative advantage and strategy. Such a compementary anaysis, which is caed the five-sources framework (Burton, 1995), is outined beow. Corresponding to the array of five competitive forces that surround a company as eaborated in Porter s treatment there are aso five potentia sources for the buiding of coaborative advantage in the industria environments of the firm (the five-sources mode). These sources are isted in Tabe 4.2. In order to forge an effective and coherent business strategy, a firm must evauate and formuate its coaborative and competitive poicies side by side. It shoud do this for two purposes: to achieve the appropriate baance between coaboration and competition in each dimension of its industry environment (e.g. reations with suppiers, poicies towards customers/channes); Tabe 4.2 The five sources mode and the corresponding five forces in the Porter mode Porter s five-forces mode Market competitors Suppiers Buyers Substitutes New entrants The five-sources mode Horizonta coaborations with other enterprises operating at the same stage of the production process/producing the same group of cosey reated products (e.g. contemporary goba partnering arrangements among car manufacturers). Vertica coaborations with suppiers of components or services to the firm sometimes termed vertica quasiintegration arrangements (e.g. the keiretsu formations between suppiers and assembers that typify the car, eectronics and other industries in Japan). Seective partnering arrangements with specific channes or customers (e.g. ead users) that invove coaboration extending beyond standard, purey transactiona reationships. Reated diversification aiances with producers of both compements and substitutes. Producers of substitutes are not natura aies, but such aiances are not inconceivabe (e.g. coaborations between fixed-wire and mobie teephone firms in order to grow their joint network size). Diversification aiances with firms based in previousy unreated sectors, but between which a burring of industry borders is potentiay occurring, or a process (commony due to new technoogica possibiities) that opens up the prospect of cross-industry fertiization of technoogies/business that did not exist before (e.g. the coaborations in the emerging mutimedia fied). Source: from Burton, Reproduced with permission from The Braybrooke Press Ltd. 105

11 Part I The decision whether to internationaize to integrate them in a way that avoids potentia cashes and possiby destructive inconsistencies between them. This is the terrain of composite strategy, which concerns the bringing together of competitive and coaborative endeavours. 4.4 Vaue chain anaysis Unti now we have discussed the firm s internationa competitiveness from a strategic point of view. To get coser to the firm s core competences we wi now ook at the market-eve box in Porter s five-forces mode, which treats buyers and seers (market competitors). Here we wi ook more cosey at what creates a competitive advantage among market competitors towards customers at the same competitive eve. Competitive triange Consists of a customer, the firm and a competitor (the triange ). The firm or competitor winning the customer s favour depends on perceived vaue offered to the customer compared to the reative costs between the firm and the competitor. Perceived vaue The customer s overa evauation of the product/service offered by a firm. The competitive triange Success in the marketpace is dependent not ony upon identifying and responding to customer needs, but aso upon our abiity to ensure that our response is judged by customers to be superior to that of competitors (i.e. high perceived vaue). Severa writers (e.g. Porter, 1980; Day and Wensey, 1988) have argued that causes of difference in performance within a market can be anaysed at various eves. The immediate causes of differences in the performance of different firms, these writers argue, can be reduced to two basic factors: 1 The perceived vaue of the product/services offered, compared to the perceived sacrifice. The perceived sacrifice incudes a the costs the buyer faces when making a purchase, primariy the purchase price, but aso acquisition costs, transportation, instaation, handing, repairs and maintenance (Ravad and Grönroos, 1996). In the modes presented the (purchase) price wi be used as a representative of the perceived sacrifice. 2 The firm-reated costs incurred in creating this perceived vaue. These two basic factors wi be further discussed ater in this section. The more vaue customers perceive in a market offering reative to competing offerings, and the ower the costs in producing the vaue reative to competing producers, the higher the performance of the business. Hence firms producing offerings with a higher perceived vaue and/or ower reative costs than competing firms are said to have a competitive advantage in that market. This can be iustrated by the competitive triange (see Figure 4.1, earier). There is no one-dimensiona measure of competitive advantage, and perceived vaue (compared to the price) and reative costs have to be assessed simutaneousy. Given this two-dimensiona nature of competitive advantage it wi not aways be cear which of the two businesses wi have a competitive advantage over the other. Looking at Figure 4.2, firm A wi ceary have an advantage over firm B in case I, and ceary have a disadvantage in case IV, whie cases II and III do not immediatey aow such a concusion. Firm B may have an advantage in case II, if customers in the market are highy quaity conscious and have differentiated needs and ow price easticity, whie firm A may have a simiar advantage in case II when customers have homogeneous needs and high price easticity. The opposite wi take pace in case III. 106

12 Chapter 4 Deveopment of the firm s internationa competitiveness Figure 4.2 Perceived vaue, reative costs and competitive advantage Even if firm A has a cear competitive advantage over firm B, this may not necessariy resut in a higher return on investment for A, if A has a growth and B a hod poicy. Thus performance woud have to be measured by a combination of return on investment and capacity expansion, which can be regarded as postponed return on investment. Whie the reationship between perceived vaue, reative costs and performance is rather intricate, we can retain the basic statement that these two variabes are the cornerstone of competitive advantage. Let us take a coser ook at these two fundamenta sources of competitive advantage. Perceived vaue advantage We have aready observed that customers do not buy products, they buy benefits. Put another way, the product is purchased not for itsef but for the promise of what it wi deiver. These benefits may be intangibe: that is, they may reate not to specific product features but rather to such things as image or reputation. Aternativey, the deivered offering may be seen to outperform its rivas in some functiona aspect. Perceived vaue is the customer s overa evauation of the product/service offered. So, estabishing what vaue the customer is actuay seeking from the firm s offering (vaue chain) is the starting point for being abe to deiver the correct mix of vaueproviding activities. It may be some combination of physica attributes, service attributes and technica support avaiabe in reation to the particuar use of the product. This aso requires an understanding of the activities that constitute the customer s vaue chain. Uness the product or service we offer can be distinguished in some way from its competitors there is a strong ikeihood that the marketpace wi view it as a commodity, and so the sae wi tend to go to the cheapest suppier. Hence the importance of seeking to attach additiona vaues to our offering to mark it out from the competition. What are the means by which such vaue differentiation may be gained? If we start in the vaue chain perspective (see section 1.6), we can say that each activity in the business system adds perceived vaue to the product or service. Vaue, for the customer, is the perceived stream of benefits that accrue from obtaining the product or service. Price is what the customer is wiing to pay for that stream of benefits. If the price of a good or service is high it must provide high vaue, otherwise it is driven out of the market. If the vaue of a good or service is ow its price must be ow, otherwise it is aso driven out of the market. Hence, in a competitive situation, and over a period of time, the price that customers are wiing to pay for a good or service is a good proxy measure of its vaue. 107

13 Part I The decision whether to internationaize If we ook especiay at the downstream functions of the vaue chain, a differentia advantage can be created with any aspect of the traditiona 4-P marketing mix: product, distribution, promotion and price are a capabe of creating added customer perceived vaue. The key to whether improving an aspect of marketing is worthwhie is to know if the potentia benefit provides vaue to the customer. If we extend this mode particuar emphasis must be paced upon the foowing (see Booms and Bitner, 1981; Magrath, 1986; Rafiq and Ahmed, 1995): Peope. These incude both consumers, who must be educated to participate in the service, and empoyees (personne), who must be motivated and we trained in order to ensure that high standards of service are maintained. Customers identify and associate the traits of service personne with the firms they work for. Physica aspects. These incude the appearance of the deivery ocation and the eements provided to make the service more tangibe. For exampe, visitors experience Disneyand by what they see, but the hidden, beow-ground support machinery is essentia for the park s fantasy fufiment. Process. The service is dependent on a we-designed method of deivery. Process management assures service avaiabiity and consistent quaity in the face of simutaneous consumption and production of the service offered. Without sound process management baancing service demand with service suppy is extremey difficut. Of these three additiona Ps, the firm s personne occupy a key position in infuencing customer perception of product quaity. As a consequence the image of the firm is very much infuenced by the personne. It is therefore important to pay particuar attention to the quaity of empoyees and to monitor their performance. Marketing managers need to manage not ony the service provider customer interface but aso the actions of other customers; for exampe, the number, type and behaviour of other peope wi infuence a mea at a restaurant. Reative cost advantage A firm s cost position depends on the configuration of the activities in its vaue chain versus that of the competitors. Reative cost advantage Each activity in the vaue chain is performed at a cost. Getting the stream of benefits that accrue from the good or service to the customer is thus done at a certain deivered cost, which sets a ower imit to the price of the good or service if the business system is to remain profitabe. Decreasing the price wi thus impy that the deivered cost be first decreased by adjusting the business system. As mentioned earier, the rues of the game may be described as providing the highest possibe perceived vaue to the fina customer, at the owest possibe deivered cost. A firm s cost position depends on the configuration of the activities in its vaue chain versus that of competitors and its reative ocation on the cost drivers of each activity. A cost advantage is gained when the cumuative cost of performing a the activities is ower than competitors costs. This evauation of the reative cost position requires an identification of each important competitor s vaue chain. In practice, this step is extremey difficut because the firm does not have direct information on the costs of competitors vaue activities. However, some costs can be estimated from pubic data or interviews with suppiers and distributors. Creating a reative cost advantage requires an understanding of the factors that affect costs. It is often said that big is beautifu. This is party due to economies of scae, which enabe fixed costs to be spread over a greater output, but more particuary it is due to the impact of the experience curve. The experience curve is a phenomenon that has its roots in the earier notion of the earning curve. The effects of earning on costs were seen in the manufacture of fighter panes for the Second Word War. The time taken to produce each pane graduay fe as earning took pace. The combined effect of economies of scae and earning on 108

14 Chapter 4 Deveopment of the firm s internationa competitiveness cumuative output has been termed the experience curve. The Boston Consuting Group estimated that costs reduced on average by approximatey per cent each time cumuative output doubed. Subsequent work by Bruce Henderson, founder of the Boston Consuting Group, extended this concept by demonstrating that a costs, not just production costs, woud decine at a given rate as voume increased. In fact, to be precise, the reationship that the experience curve describes is between rea unit costs and cumuative voume. This suggests that firms with greater market share wi have a cost advantage through the experience curve effect, assuming that a companies are operating on the same curve. However, a move towards a new manufacturing technoogy can ower the experience curve for adopting companies, aowing them to eapfrog over more traditiona firms and thereby gain a cost advantage even though cumuative output may be ower. The genera form of the experience curve and the above-mentioned eapfrogging to another curve are shown in Figure 4.3. Leapfrogging the experience curve by investing in new technoogy is a specia opportunity for SMEs and newcomers to a market, since they wi (as a starting point) have ony a sma market share and thereby a sma cumuative output. The impications of the experience curve for the pricing strategy wi be discussed further in Chapter 16. According to Porter (1980) there are other cost drivers that determine the costs in vaue chains: Capacity utiization. Underutiization incurs costs. Linkages. Costs of activities are affected by how other activities are performed. For exampe, improving quaity assurance can reduce after-saes service costs. Interreationships. For exampe, different SBUs sharing of R&D, purchasing and marketing wi ower costs. Integration. For exampe, deintegration (outsourcing) of activities to subsuppiers can ower costs and raise fexibiity. Timing. For exampe, first movers in a market can gain cost advantage. It is cheaper to estabish a brand name in the minds of the customers if there are no competitors. Poicy decisions. Product width, eve of service and channe decisions are exampes of poicy decisions that affect costs. Location. Locating near suppiers reduces in-bound distribution costs. Locating near customers can ower out-bound distribution costs. Some producers ocate their production activities in eastern Europe or the Far East to take advantage of ow wage costs. Figure 4.3 Leapfrogging the experience curve 109

15 Part I The decision whether to internationaize Institutiona factors. Government reguations, tariffs, oca content rues, etc., wi affect costs. Resources Basic units of anaysis financia, technoogica, human and organizationa resources found in the firm s different departments. Competences Combination of different resources into capabiities and ater competences being something that the firm is reay good at. The basic sources of competitive advantage The perceived vaue created and the costs incurred wi depend on the firm s resources and its competences (see Figure 4.4). Resources Resources are the basic units of anaysis. They incude a inputs into the business processes that is, financia, technoogica, human and organizationa resources. Athough resources provide the basis for competence buiding, on their own they are barey productive. Resources are necessary in order to participate in the market. The competitors in a market wi thus not usuay be very different with regard to these skis and resources, and the atter wi not expain differences in created perceived vaue, reative costs and the resuting performance. They are faiure preventers, but not success producers. They may, however, act as barriers to entry for potentia new competitors, and hence raise the average eve of performance in the market. Competences Competences being components of a higher eve resut from a combination of the various resources. Their formation and quaity depend on two factors. The first factor is the specific capabiities of the firm in integrating resources. These capabiities are deveoped and improved in a coective earning process. On the other hand, the basis for the quaity of a competence is the resource assortment. This forms a potentia for competences, which shoud be expoited to the maximum extent. Cardy and Sevarajan (2006) cassify competences into two broad categories: persona or corporate. Persona competences are possessed by individuas and incude characteristics such as knowedge, skis, abiities, experience, and personaity. Figure 4.4 The roots of performance and competitive advantage Source: adapted from Jüttner and Wehri,

16 Chapter 4 Deveopment of the firm s internationa competitiveness Figure 4.5 Iustration of the core competence Source: Reprinted from Long Range Panning, Vo. 27, No. 4, Tampoe, M. (1994) Expoiting the core competences of your organization, p. 74, Copyright 1994, with permission from Esevier. Core competences Vaue chain activities in which the firm is regarded as better than its competitors. Corporate competences beong to the organization and are embedded processes and structures that tend to reside within the organization, even when individuas eave. These two categories are not entirey independent. The coection of persona competences can form a way of doing things or a cuture that becomes embedded in the organization. In addition, corporate characteristics can determine the type of persona competences that wi best work or fit in the organization. A firm can have a ot of competences but ony a few of them are core competences: that is, a vaue chain activity in which the firm is regarded as a better performer than any of its competitors (see Figure 4.5). In Figure 4.5 a core competence is represented by a strategic resource (asset) that competitors cannot easiy imitate and which has the potentia to earn ong-term profit. The objective of the firm wi be to pace products and services at the top-right corner. The top-eft corner aso represents profit possibiities, but the competitive advantage is easier to imitate, so the high profit wi ony be short term. The bottom-eft corner represents the position of the price-sensitive commodity suppier. Here the profits are ikey to be ow because the product is primariy differentiated by pace (distribution) and especiay price. Competitive benchmarking A technique for assessing reative marketpace performance compared with main competitors. Competitive benchmarking The utimate test of the efficiency of any marketing strategy has to be in terms of profit. Those companies that strive for market share, but measure market share in terms of voume saes, may be deuding themseves to the extent that voume is bought at the expense of profit. Because market share is an after the event measure, we need to utiize continuing indicators of competitive performance. This wi highight areas where improvements in the marketing mix can be made. In recent years a number of companies have deveoped a technique for assessing reative marketpace performance, which has come to be known as competitive benchmarking. Originay the idea of competitive benchmarking was iteray to take apart a competitor s product, component by component, and compare its performance in a vaue engineering sense with your own product. This approach has often 111

17 Part I The decision whether to internationaize been attributed to the Japanese, but many western companies have aso found the vaue of such detaied comparisons. The concept of competitive benchmarking is simiar to what Porter (1996) cas operationa effectiveness (OE), meaning performing simiar activities better than competitors perform them. However, Porter (1996) aso thinks that OE is a necessary but not a sufficient condition for outperforming rivas. Firms aso have to consider strategic (or market) positioning, meaning the performance of different activities from rivas or performing simiar activities in different ways. Ony a few firms have competed successfuy on the basis of OE over a ong period. The main reason is the rapid diffusion of best practices. Competitors can rapidy imitate management techniques and new technoogies with support from consutants. However, the idea of benchmarking is capabe of extension beyond this simpe comparison of technoogy and cost effectiveness. Because the batte in the marketpace is for share of mind, it is customers perceptions that we must measure. The measures that can be used in this type of benchmarking programme incude deivery reiabiity, ease of ordering, after-saes service, the quaity of saes representation and the accuracy of invoices and other documentation. These measures are not chosen at random, but are seected because of their importance to the customer. Market research, often based on in-depth interviews, woud typicay be empoyed to identify what these key success factors are. The eements that customers identify as being the most important (see Figure 4.6) then form the basis for the benchmark questionnaire. This questionnaire is administered to a sampe of customers on a reguar basis: for exampe, German Teecom carries out a daiy teephone survey of a random sampe of its domestic and business customers to measure customers perceptions of service. For most companies an annua survey might suffice; in other cases, perhaps a quartery survey, particuary if market conditions are dynamic. The output these surveys might typicay be presented in the form of a competitive profie, as in the exampe in Figure 4.6. Most of the criteria mentioned above reate to downstream functions in the vaue chain. Concurrenty with coser reations between buyers and suppiers, especiay in the industria market, there wi be more focus on the suppier s competences in the upstream functions. Deveopment of a dynamic benchmarking mode On the basis of the vaue chain s functions, we wi suggest a mode for the deveopment of a firm s competitiveness in a defined market. The mode wi be based on a specific market as the market demands are assumed to differ from market to market, and from country to country. Before presenting the basic mode for deveopment of internationa competitiveness we wi first define two key terms: 1 Critica success factors. Those vaue chain functions where the customer demands/expects the suppier (firm X) to have a strong competence. 2 Core competences. Those vaue chain functions where firm X has a strong competitive position. The strategy process The mode for the strategy process is shown in Figure 4.7. Stage 1: Anaysis of situation (identification of competence gaps) We wi not go into detai here about the probems there have been in measuring the vaue chain functions. The measurements cannot be objective in the traditiona way of 112

18 Chapter 4 Deveopment of the firm s internationa competitiveness Figure 4.6 Competitive benchmarking (exampe with ony a few criteria) thinking, but must rey on interna assessments from firm representatives (interviews with reevant managers) suppemented by externa experts ( key informants ) who are abe to judge the market s (customers ) demand now and in the future. The competence profie for firm A in Figure 4.1 (top-right diagram) is an exampe of how a firm is not in accordance with the market (= customer) demand. The company has its core competences in parts of the vaue chain s functions where customers pace itte importance (market knowedge in Figure 4.1). If there is a generay good match between the critica success factors and firm A s initia position, it is important to concentrate resources and improve this core competence to create sustainabe competitive advantages. If, on the other hand, there is a arge gap between customers demands and the firm s initia position in critica success factors in Figure 4.1 (as with the persona seing functions), it may give rise to the foowing aternatives: 113

19 Part I The decision whether to internationaize Figure 4.7 Mode for deveopment of core competences Improve the position of the critica success factor(s). Find business areas where firm A s competence profie better suits the market demand and expectations. As a new business area invoves risk, it is often important to identify an eventua gap in a critica success factor as eary as possibe. In other words, an eary warning system must be estabished that continuousy monitors the critica competitive factors so that it is possibe to start initiatives that imit an eventua gap as eary as possibe. In Figure 4.1 the competence profie of firm B is aso shown. Stages 2 and 3: Scenarios and objectives To be abe to estimate future market demand different scenarios are made of the possibe future deveopment. These trends are first described generay, then the effect of the market s future demand/expectations on a suppier s vaue chain function is concretized. By this procedure the described gap between market expectations and firm A s initia position becomes more cear. At the same time the biggest gap for firm A may have moved from persona saes to, for exampe, product deveopment. From knowedge of the market eader s strategy it is possibe to compete scenarios of the market eader s future competence profie. These scenarios may be the foundation for a discussion of objectives and of which competence profie the company wants in, say, five years time. Objectives must be set reaisticay and with due consideration of the organization s resources (the scenarios are not shown in Figure 4.1). Stage 4: Strategy and impementation Depending on which of firm A s vaue chain functions are to be deveoped, a strategy is prepared. This resuts in impementation pans that incude the adjustment of the organization s current competence eve. 114

20 Chapter 4 Deveopment of the firm s internationa competitiveness 4.5 Bue ocean strategy and vaue innovation Red oceans Tough head-to-head competition in mature industries often resuts in nothing but a boody red ocean of rivas fighting over a shrinking profit poo. Bue oceans The unserved market, where competitors are not yet structured and the market is reativey unknown. Here it is about avoiding head-to-head competition. Kim and Mauborgne (2005a, b, c) use the ocean as a metaphor to describe the competitive space in which an organization chooses to swim. Red oceans refer to the frequenty accessed marketspaces where the products are we-defined, competitors are known and competition is based on price, product quaity and service. In other words, red oceans are an od paradigm that represents a the industries in existence today. In contrast, the bue oceans denote an environment where products are not yet we-defined, competitors are not structured and the market is reativey unknown. Companies that sai in the bue oceans are those beating the competition by focusing on deveoping compeing vaue innovations that create uncontested marketspace. Adopters of bue ocean strategy beieve that it is no onger vaid for companies to engage in head-to-head competition in search of sustained, profitabe growth. In Michae Porter (1980, 1985) companies are fighting for competitive advantage, batting for market share and strugging for differentiation, bue ocean strategists argue that cut-throat competition resuts in nothing but a boody red ocean of rivas fighting over a shrinking profit poo. Bue ocean is a marketspace that is created by identifying an unserved set of customers, then deivering to them a compeing new vaue proposition. This is done by reconfiguring what is on offer to better baance customer needs with the economic costs of doing so. This is as opposed to a red ocean, where the market is we defined and heaviy popuated by the competition. A parties in these markets are engaged in an intense competitive strugge for the same customers, with different and incrementa, yet easiy comparabe, vaue propositions. The bue ocean is the unserved, unstructured demand that is a around us, if we coud ony see it. The bue ocean strategy is a about avoiding head-to-head competition. Because estabished markets in the deveoped word are saturated, head-to-head competition cannot bring attractive returns. Bue-ocean strategy shoud not be a static process but a dynamic one. Consider The Body Shop. In the 1980s, The Body Shop was highy successfu, and rather than compete head on with arge cosmetics companies, it invented a whoe new marketspace for natura beauty products. During the 1990s The Body Shop aso strugged, but that does not diminish the exceence of its origina strategic move. Its genius ay in creating a new marketspace in an intensey competitive industry that historicay competed on gamour (Kim and Mauborgne, 2005b). Kim and Mauborgne (2005a) is based on a study of 150 strategic moves that spanned more than 100 years ( ) and 30 industries. Kim and Mauborgne s first point in distinguishing this strategy from the traditiona strategic frameworks is that in the traditiona business iterature, the company forms the basic unit of anaysis, and the industry anaysis is the means of positioning the company. Their hypothesis is that since markets are constanty changing in their eves of attractiveness, and companies over time vary in their eve of performance, it is the particuar strategic move of the company, and not the company itsef or the industry, which is the correct criterion for evauating the difference between red and bue ocean strategies. Vaue innovation Kim and Mauborgne (2005a) argue that tomorrow s eading companies wi succeed not by batting competitors, but by making strategic moves, which they ca vaue innovation. 115

21 Part I The decision whether to internationaize The combination of vaue with innovation is not just marketing and taxonomic positioning. It has consequences. Vaue without innovation tends to focus on vaue creation on an incrementa scae, and innovation without vaue tends to be technoogy driven, market pioneering, or futuristic, often overshooting what buyers are ready to accept and pay for. Conventiona Porter ogic (1980, 1985) eads companies ony to compete at the margin for incrementa share. The ogic of vaue innovation starts with an ambition to dominate the market by offering a tremendous eap in vaue. Many companies seek growth by retaining and expanding their customer base. This often eads to finer segmentation and greater customization of offerings to meet speciaized needs. Instead of focusing on the differences between customers, vaue innovators buid on the powerfu commonaities in the features that customers vaue (Kim and Mauborgne, 1997). Vaue innovation is intensey customer focused, but not excusivey so. Like vaue chain anaysis it baances costs of deivering the vaue proposition with what the buyer vaues are, and then resoves the trade-off diemma between the vaue deivered and the costs invoved. Instead of compromising the vaue wanted by the customer because of the high costs associated with deivering it, costs are eiminated or reduced if there is no or ess vaue paced on the offering by the customer. This is a rea win win resoution that creates the compeing proposition. Customers get what they reay want for ess, and seers get a higher rate of return on invested capita by reducing start-up and/or operationa deivery costs. The combination of these two is the catayst of bue ocean market creation. Exhibit 4.1 iustrates this by using the case of Formue 1. Exhibit 4.1 Vaue innovation at Hote Chain Formue 1 When Accor aunched Formue 1 (a ine of French budget hotes) in 1985, the budget hote industry was suffering from stagnation and overcapacity. The top management urged the managers to forget everything they knew of the existing rues, practices and traditions of the industry. There were two distinct market segments in the industry. One segment consisted of no-star and one star (very cheap, around A20 per room per night) and the other segment was two-star hotes, with an average price A40 per room. These more expensive two-star hotes attracted customers by offering better seeping faciities than the cheap segment. Accor s management undertook market research and found out what most customers of a budget hotes wanted: a good night s seep at a ow price. Then they asked themseves (and answered) the four fundamenta questions: 1 Which of the factors that the budget hote industry took for granted shoud be eiminated? The Accor management eiminated such standard hote features as costy restaurants and appeaing ounges. Accor reckoned that they might ose some customers by this, but they aso knew that most customers coud ive without these features. 2 Which factors shoud be reduced we beow the industry standard? Accor aso beieved that budget hotes were overperforming aong other dimensions. For exampe, at Formue 1 receptionists are on hand ony during peak checkin and checkout hours. At a other times, customers use an automated teer. The rooms at Formue 1 are sma and equipped ony with a bed and bare necessities no desks or decorations. Instead of cosets there are a few sheves for cothing. Source: Tony Souter Doring Kindersey. 116

22 Chapter 4 Deveopment of the firm s internationa competitiveness Figure 4.8 Formue 1 s vaue curve Source: Adapted from Kim and Mauborgne (1997). 3 Which factors shoud be raised we above the industry standard? As seen in Fomue 1 s vaue curve (Figure 4.8) the foowing factors: the bed quaity, hygiene and room quietness, were raised above the reative eve of the ow budget hotes (the one-star and two-star hotes). The priceperformance was perceived as being at the same eve as the average one-star hotes. 4 Which new factors (that the industry had never offered) shoud be deveoped? These covered cost-minimizing factors such as the avaiabiity of room keys via an automated teer. The rooms themseves are moduar bocks manufactured in a factory. That is a method which is may not resut in the nicest architectura aesthetics but give economies of scae in production and considerabe cost advantages. Formue 1 Ë 117

23 Part I The decision whether to internationaize Exhibit 4.1 continued has cut in haf the average cost of buiding a room and its staff costs (in reation to tota saes) dropped beow the industry average (approximatey 30 per cent) to between 20 per cent and 23 per cent. These cost savings have aowed Accor to improve the features, that customers vaue most ( a good night s seep at a ow price ). Note that in Figure 4.8 if the price is perceived as reativey ow, it is regarded as a strong performance. What has happened with Accor and Formue 1? Today Accor is owner of severa hote chains (besides Formue 1), for exampe, Mercure, Sofite, Novote, Ibis and Mote 6. In 2005 the saes of Accor Group were A7.6 biion. As of 1 January 2006 Fomue 1 has the foowing number of hotes in the foowing regions of the word: Tabe 4.1 Number of Formue 1 hotes wordwide Region Number France 284 Rest of Europe 44 North America South America 5 Africa (South Africa) 24 Asia Pacific 20 Tota 377 Formue 1 is represented in 12 countries: France, Germany, Sweden, the UK, the Netherands, Switzerand, Spain, Begium, South Africa, Japan, Austraia and Brazi. In France, Formue 1 s market share in the budget hote segment is approximatey 50 per cent. Source: Kim and Mauborgne, Summary The main issue of this chapter is how the firm creates and deveops competitive advantages in the internationa marketpace. A three-stage mode aows us to understand the deveopment of a firm s internationa competitiveness in a broader perspective: 1 anaysis of nationa competitiveness (the Porter diamond); 2 competition anaysis (Porter s five forces); 3 vaue chain anaysis: (a) competitive triange; (b) benchmarking. Anaysis of nationa competitiveness The anaysis starts at the macro eve, where the Porter diamond indicates that the characteristics of the home nation pay a centra roe in the firm s internationa success. Competition anaysis The next stage is to move to the competitive arena where the firm is the unit of anaysis. Porter s five-forces mode suggests that competition in an industry is rooted in its underying economic structure and goes beyond the behaviour of current competitors. The state of competition depends upon five basic competitive forces, which determine the profit potentia in an industry. 118

24 Chapter 4 Deveopment of the firm s internationa competitiveness Vaue chain anaysis Here we ook at what creates a competitive advantage at the same competitive eve (among industry competitors). According to the competitive triange, it can be concuded that firms have a competitive advantage in a market if they offer products with the foowing: a higher perceived vaue to the customers; ower reative costs than competing firms. A firm can find out its competitive advantages or core competences by using competitive benchmarking, which is a technique where customers measure marketpace performance of the firm compared to a first-cass competitor. The measures in the vaue chain that can be used incude deivery reiabiity, ease of ordering, after-saes service and quaity of saes representation. These vaue chain activities are chosen on the basis of their importance to the customer. As customers perceptions change over time, it may be reevant to try and estimate customers future demands on a suppier of particuar products. According to the bue ocean strategy, the red oceans represent a the industries in existence today. This is known marketspace. Bue oceans denote a the industries not in existence today. This is unknown marketspace. In the red oceans, industry boundaries are defined and accepted, and the competitive rues of the game are known. Here companies try to outperform their rivas to grab a greater share of existing demand. As the marketspace gets more and more crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean boody. Bue oceans, in contrast, are defined by untapped marketspace, demand creation and the opportunity for highy profitabe growth. Whie bue oceans are occasionay created we beyond existing industry boundaries, most are created by expanding existing industry boundaries. In bue oceans, competition is irreevant as the rues of the game are waiting to be set. Once a company has created a bue ocean, it shoud proong its profit and growth sanctuary by swimming as far as possibe in the bue ocean, making itsef a moving target, distancing itsef from potentia imitators, and discouraging them in the process. The aim here is to dominate the bue ocean over imitators for as ong as possibe. But, as other companies strategies converge on your market, and the bue ocean turns red with intense competition, companies need to reach out to create a new bue ocean to break away from the competition yet again. CASE STUDY 4.1 Microsoft Xbox: The batte for gaming eadership against Nintendo s Wii and Sony PayStation 3 In the video game market eadership has changed with each new generation of consoes, which come aong every three to five years. In a chaenge that coud have come from a beat- em-up computer game, Microsoft (the word s biggest software company), has aunched its own games consoe. But the Seatte company s attempts to musce into a market that is worth 10 biion wordwide wi meet stiff opposition from its rivas, which aready have new, faster machines either reeased or panned. Microsoft s product, dubbed the Xbox, was aunched in autumn Microsoft subcontracted production of the Xbox to an unnamed third party, but it chose to market and se the games consoe under its own name. Unike Nitendo, which targets chidren aged 7 18, Ë 119

25 Part I The decision whether to internationaize Tabe 1 The word-wide saes of game consoes in 2005 Manufacturer Miions of sod Market units in 2005 shares (%) Sony Paystation Microsoft Xbox Nintendo GameCube Tota Source: Demos, T. (2006) Xbox wi capitaize on PS3 deay, CNNMoney, 17 March, p. 1. The introduction of better bandwidth broadband wi increase popuarity and consumer awareness, with the consoe graduay phasing out the PC as the main gaming device. Source: Reprinted by permission from Microsoft Corporation. Microsoft is going after an oder and more sophisticated user. Specificay, Xbox is geared towards men aged 16 35, the same market that Sony is targeting with its Sony PayStation 2. Microsoft intends to have the word s argest onine gaming community powered by its Xbox consoe. It stresses the pug and pay eements of the onine service so that the non-technicay minded may use it easiy. In February 2001 Sega announced its departure from the consoe market, intending to focus stricty on software deveopment. This departure from the market eft three goba payers: Sony, Nintendo and Microsoft. The word gaming market In the United States and Western Europe the onine gaming market is set to be worth $5.5 biion, with 32 miion gamers in Europe by Datamonitor caims from its research that there is substantia consumer demand for onine gaming and surf and pay soutions. This wi be met by two principa growth factors games consoes and onine gaming. In 2005 the the Paystation outsod the Xbox, as seen in Tabe 1. Xbox 360 vs Paystation 3 The Xbox 360 is the successor to Microsoft s Xbox video game consoe, deveoped in co-operation with IBM, ATI, Samsung and SiS. It aso serves as the first entrant in a new generation of game consoes and wi compete against Sony s PayStation 3 and Nintendo s Wii. Both products were introduced by the end of Microsoft beieves that its push towards high-definition gaming, its year-eary headstart and its Xbox Live onine gaming service wi hep in the consoe s success. The Xbox 360 was reeased on 22 November 2005 in North America and ater in Europe, Japan, Austraia and New Zeaand. As is the case with most patform aunches, each new consoe is costing Microsoft money so much money, that Xbox 360 costs wiped out income from Home and Entertainment s profitabe projects. Though the division took in $4.2 biion in fiscayear revenue and $1.14 biion of revenue during its most recent quarter, it is sti in the red. The department suffered an annua operating oss of $1.26 biion. It shoud be noted that the strategy of seing a consoe at a oss or near-oss is common in the consoe games industry, as consoe makers can usuay expect to make up the oss through game icensing. Furthermore, since Microsoft owns the inteectua property rights to the hardware used in the Xbox 360, it can easiy switch to new fabrication processes or change suppiers in the future in order to reduce manufacturing costs. This fexibiity stands in contrast to the situation faced with the origina Xbox, where Microsoft was never abe to reduce manufacturing costs beow the break-even point. 120

26 Chapter 4 Deveopment of the firm s internationa competitiveness By 30 June 2007 Microsoft expects to have sod miion Xbox 360. The Sony Paystation 3 was reeased in North America on 17 November Sony aso announced that the aunch in Europe and Austraia/New Zeaand had been deayed unti March 2007 due to shortage of certain components. However, it was not ony Microsoft versus Sony. In November 2006 it seemed that Nintendo woud make a come-back as they aunched their new Wii in most regions of the word. For exampe, in severa of the UK s eading retai chains it was caimed that Wii had become the fastest seing consoe in the region s recorded history. Sources: Gamespot (2006) Microsoft to ship miion 360s by June 2007, 21 Juy; Financia Times (2000) Companies and Markets: Microsoft to take on video game eaders, 10 March; New Media Age (2000) Let the games begin, 8 March; BBC News (2002) Works starts on new Xbox, 26 June; BBC News (2002) Price cut boosts Xbox saes, 24 Juy; CNN News (2002) Consoe wars: Round two, 22 May. Questions 1 What were Microsoft s motives in entering the games consoe market? 2 What are the competitive advantages in the business mode of the Xbox 360? 3 What are the chances that Microsoft wi beat the other games consoe suppiers, Nintendo and Sony? CASE STUDY 4.2 Senseo: Creating competitiveness through an internationa aiance The Senseo coffee pod system ( is the resut of a partnership between eectronics expert Phiips (suppier of the Senseo-machine) and coffee roaster Douwe Egberts (suppier of the coffee pods), both word-renowned companies originay from the Netherands. Short presentation of the two aiance partners: Phiips Roya Phiips Eectronics of the Netherands is one of the word s biggest eectronics companies and Europe s argest, with saes of a30.4 biion in With activities in the three interocking domains of heath care, ifestye and technoogy and 161,500 empoyees in more than 60 countries, it has market eadership positions in medica diagnostic imaging and patient monitoring, coour teevision sets, eectric shavers, ighting and siicon system soutions. Sara Lee/Douwe Egberts (DE) A subsidiary of Chicago based Sara Lee Corporation is Sara Lee/DE, with headquarters in Utrecht, The Netherands. Sara Lee/DE is a goba group of branded consumer packaged good companies. Activities incude coffee, tea and househod and body care products. The origin of Douwe Egberts dates back to 1753, when Egbert Douwes and his wife Akke Thysses founded the company. When their son Douwe Egberts, entered the business around 1780, he buit up a reputation regionay by aso suppying shop owners esewhere, thereby spreading the Douwe Egberts brand around the country. Graduay, Douwes and his descendants buit a company that grew to become the Dutch market eader for its core products, coffee and tea. Since 1978 Douwe Egberts has been aied to the Sara Lee Corporation, which opened new horizons wordwide. Today Douwe Egberts is the second argest coffee roaster in the word, empoying over 26,000 peope wordwide. Ë 121

27 Part I The decision whether to internationaize Tabe 1 Word market for coffee machines Coffee machines Retai voume (miion units) Western Europe 16.6 Eastern Europe 0.6 North America 28.4 Latin America and Carribbean 4.1 Asia Pacific (minus Austraia and NZ) 2.9 Austraia and NZ 0.3 Africa and Midde East 0.7 Word tota 53.6 Source: Adapted from Euromonitor. Working in tandem, the two innovators deveoped every aspect of Senseo from its patented coffee machine and the brewing process to its one-of-akind coffee pods. The machine uses singe portion Senseo coffee pods, containing the finest ground coffee, to guarantee a perfect cup every time it is used. Senseo has now been aunched in ten countries wordwide: Austria, Austraia, Begium, China, Denmark, France, Germany, the Netherands, the United Kingdom and the United States. The main target group of Senseo is one/two person househods with peope between 25 and 39 years of age and where the persona househod income woud be average or above. The word market for coffee machines is shown in Tabe 1. Since Phiips & Douwe Egberts introduced the coffee pod machine in spring 2001 it has sod more than 12 miion tota and more than 7 biion coffee pods were sod in the first five years of its ifetime. In Germany aone 3 miion Senseo-machines were sod together with 900 miion coffee pods. In this way the Senseo coffee machine achieved 80 per cent of the German pod-coffee-machine market and the coffee pods themseves achieved neary 5 per cent of the very competitive German coffee market. When the Senseo coffee pod machine was introduced, the end-user price was around a75, the current recommended price is a69, but in Spring 2006 it was avaiabe for around a58. Today Phiips is one of the word s biggest eectronics companies and Douwe Egberts is the second argest coffee roaster in the word. It is reported that amost one-third of Dutch househods own a Senseo machine, and the figure is expected to cimb steadiy in years to come. Athough most Dutch househods continue to use both conventiona fiter coffee machines and singeserve coffee systems, unit saes of the atter have ceary outperformed the former. Nevertheess, industry experts suggest that it wi take a ong time for conventiona fiter machines to disappear competey. Many Dutch househods are expected to continue to use conventiona machines when hoding a party and the Senseo-type machines for everyday use. Competitive advantages of Senseo Low-cost foowers from China, used to seing cheaper fiter coffee machines, have had probems catching up on this aiance, because they cannot easiy copy the tight coaboration between Phiips and Sara Lee s Douwe Egberts subsidiary which produces the coffee packets designed especiay for the Senseo. When big retai chains ike Adi and Wa-Mart see a product ike this, they usuay go to China to request something simiar. But in the Senseo case this is not so easy, because the main profits from the Senseo concept come party from coffee machines but mainy from coffee pads. Chinese rivas have to recoup that money from machines aone and this is unattainabe. Competition is coming up The batte among coffee makers for at-home use intensified in 2005, with other eading coffee payers such as Procter & Gambe and Kraft Foods aunching singe-service machines, which can brew a highquaity cup of coffee in ess than a minute. Coffee suppiers have teamed up with eectrica appiances makers to produce the machines jointy. Phiips and Sara Lee were eary pioneers of this format, but Kraft Foods has aso cooperated with Saeco Internationa to produce its coffee maker caed Tassimo. In both systems, the coffee comes in singe-serve bags caed pods specificay suited for the machines designed as companions for the product ines. These types of coffee makers are intended to retain consumer oyaty towards certain brands. In order to gain a competitive edge, Meitta announced that from the third quarter of 2005 its pods woud be adapted to fit competitors machines. In ine with deveopments in other food and beverage categories, the strong growth of private abes remains a concern. Private abes have aready 122

28 Chapter 4 Deveopment of the firm s internationa competitiveness emerged in the portioned coffee market. In the Netherands some supermarket private abes offer varieties of coffee pods that exacty match the technica specifications of Senseo s machines, and with private abes price advantage, many Dutch consumers opt for private abe pods rather than the more expensive Douwe Egberts range. Sources: msn.com/id/ /, 11 January 2006; Questions 1 What are key success factors in this industry? 2 Expain how the competences represented in the Senseo concept can create internationa competitiveness. 3 Which threats is Senseo facing in the future saes of its product concept? 4 Which new markets are reevant for Senseo to enter? VIDEO CASE STUDY 4.3 downoad from hoensen Nike Nike ( is the argest seer of athetic footwear and athetic appare in the word. Nike s strategy for growth around the gobe is to deveop greater reach into diverse market segments. The three main segments are (1) performance athetes, (2) participant athetes, and (3) those that infuence the word and the cuture of sport. Partnerships are formed with athetes not just because of their status, but aso because they are integra in the product deveopment process. For exampe, to increase market share in Europe, Nike needed to produce a strong soccer product, which it did with the hep of star soccer payers. Questions 1 Discuss how Nike s growth can be attributed to its targeting of diverse market goba segments. 2 How did Nike penetrate the European soccer footwear market? 3 What are the key driving forces behind Nike s internationa competitiveness? For further exercises and cases, see this book s website at Questions for discussion 1 How can anaysis of nationa competitiveness expain the competitive advantage of the singe firm? 2 Identify the major dimensions used to anayse a competitor s strengths and weaknesses profie. Do oca, regiona and goba competitors need to be anaysed separatey? 3 How can a country with high abour costs improve its nationa competitiveness? 4 As the goba marketing manager for Coca-Coa, how woud you monitor reactions around the word to a major competitor such as Pepsi? 123

29 Part I The decision whether to internationaize References Booms, B.H. and Bitner, M.J. (1981) Marketing strategies and organization structures for service firms, in Donney, J.H. and George, W.R. (eds), Marketing of Services, American Marketing Association, Chicago, IL. Burton, J. (1995) Composite strategy: the combination of coaboration and competition, Journa of Genera Management, 21(1), pp Cardy, R.L. and Sevarajan, T.T. (2006) Competencies: aternative frameworks for competitive advantage, Business Horizons, 49, pp Day, G.S. and Wensey, R. (1988) Assessing advantage: a framework for diagnosing competitive superiority, Journa of Marketing, 52(2), pp Jüttner, U. and Wehri, H.P. (1994) Competitive advantage: merging marketing and the competence-based perspective, Journa of Business and Industria Marketing, 9(4), pp Kanter, R.M. (1994) Coaborative advantage: the art of aiances, Harvard Business Review, Juy August, pp Kedia, B.L., Nordtvedt, R., Perez, L.M. (2002) Internationa business strategies, decision-making theories, and eadership styes: an integrated framework, CR, 12(1), pp Kim, W.C. and Mauborgne, R. (1997) Vaue innovation: the strategic ogic of high growth, Harvard Business Review, 75(1) (January/February), pp Kim, W.C. and Mauborgne, R. (2005a), Bue Ocean Strategy: How to Create Market Space and Make the Competition Irreevant, Harvard Business Schoo Pubishing Corporation, Boston. Kim, W.C. and Mauborgne, R. (2005b) Vaue innovation: a eap into the bue ocean, Journa of Business Strategy, 26(4), pp Kim, W.C. and Mauborgne, R. (2005c) Bue ocean strategy from theory to practice, Caifornia Review, 47(3), Spring, pp Koter, P. (1997) Marketing Management: Anaysis, panning, impementation, and contro (9th edn), Prentice-Ha, Engewood Ciffs, NJ. Levitt, T. (1960) Marketing myopia, Harvard Business Review, Juy August, pp Magrath, A.J. (1986) When marketing service s 4 Ps are not enough, Business Horizons, May June, pp Porter, M.E. (1980) Competitive Strategy, The Free Press, New York. Porter, M. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press. Porter, M.E. (1990) The Competitive Advantage of Nations, The Free Press, New York. Porter, M.E. (1996) What is strategy?, Harvard Business Review, November December, pp Rafiq, M. and Ahmed, P.K. (1995) Using the 7Ps as a generic marketing mix, Marketing Inteigence and Panning, 13(9), pp Ravad, A. and Grönroos, C. (1996) The vaue concept and reationship marketing, European Journa of Marketing, 30(2), pp Reve, T. (1990) The firm as a nexus of interna and externa contracts, in Aoki, M., Gustafsson, M. and Wiiamson, O.E. (eds), The Firm as a Nexus of Treaties, Sage, London. Tampoe, M. (1994) Expoiting the core competences of your organization, Long Range Panning, 27(4), pp Veiyath. R. and Zahra, S.A. (2000) Competitiveness in the 21st century: refections on the growing debate about gobaization, ACR, 8(1), pp

30 CASE STUDY I.1 Manchester United: Sti trying to estabish a goba brand Manchester United (abbreviated as ManUtd, has deveoped into one of the most famous and financiay successfu footba cubs in the word, being recognized in virtuay every country, even those with itte interest in the sport. Rea Madrid has dispaced ManUtd from the poe position in Deoitte s footba money eague. The ist, which has been running for the ast nine years, identifies the top 20 cubs by vaue. The top five in 2006 were: Rea Madrid with a275.7 miion, Manchester United (a246.4 miion), AC Mian (a234 miion), Juventus (a229.4 miion) and Chesea (a220.8 miion) (Accountancy, 2006). The most vauabe US sport teams, the Nationa Footba League s Washington Redskins and Baseba s New York Yankees are both worth somewhat more, but more than any US sports team, ManUtd has buit a goba brand. The intangibe assets of ManUtd ManUtd has deveoped a huge fanbase. In 2005, its goba fan base reached 75 miion. Europe had 24 miion, Asia (incuding Austraia) had 40 miion, Southern Africa had 6 miion, and the Americas had 5 miion. Expanding this base and deveoping ifeong aegiances is critica to ManUtd s ong-term growth. And providing internationa fans with a taste of the excitement at a game, through TV and Internet coverage, is key to maintaining and buiding the brand. Brand assets ManUtd s brand assets incudes (1) the physica aspects of ogos, coours, names, and faciities, and (2) the intangibe aspects of reputation, image, and perception. The officia mascot of the team is the Red Devi. Athough centray featured in ManUtd s ogo, the mascot doesn t pay a prominent roe in promotions. The team s nickname is the Reds, which seems ogica enough, given the dominant coour of its home jerseys, but unfortunatey, Liverpoo, another top team in the Premier League, is aso referred to as the Reds. Source: Manchester United Limited. Internationa brand evoution For British fans of ManUtd, passions run deep. Athough the brand is soidy entrenched in British soccer fans psyches, it is in transition. ManUtd is no onger simpy a British brand; it is a word brand. It boasts incredibe number of fans in China. A survey of China s 12 argest markets shows that 42 per cent of fans are between 15 and 24, and that 26 per cent are between 25 and 34. The team is positioned to take advantage of China s growing midde cass, with members who are anxious to enjoy the good ife and associate themseves with successfu Western brands. As an eary entrant, ManUtd has the chance to estabish itsef as one of Asia s dominant brands (Oson et a., 2006). Athough the absoute numbers are much smaer, the United States aso represents fertie ground. Of course, internationa soccer must compete with estabished groups such as the Major League Baseba, Nationa Footba League, the Nationa Basketba Association and the Nationa Hockey League. But soccer has become a stape at schoos across the country. A recent, unprompted awareness study of European soccer teams reveaed that among North American fans, the most frequenty mentioned team was ManUtd, at 10 per cent; Liverpoo, Rea Madrid, and Barceona each generated 3 per cent, and Arsena generated 2 per cent. The study aso showed that awareness 125

31 Part I The decision whether to internationaize of ManUtd is strongest in the North-Eastern and Western parts of the United States. In order to be successfu in foreign markets, ManUtd must generate memberships, se kits and other merchandise, have access to media markets (incuding TV, Internet, mobie phones, and pubishing), set up soccer schoos, form icensing agreements with strong oca sponsors, and embark on tours to create hao effects. The chaenge ManUtd faces is accompishing this transition without destroying what made it distincty British and highy successfu. Today s team is composed of payers from around the gobe. (Athough ManUtd sti has British payers, the Premier League is no onger dominated by them.) And that raises another concern: strong teams empoy strong payers who become brands themseves. Most notabe for ManUtd was the rise of David Beckham to the ranks of superstar, on the pitch and in the media, for exampe., through his marriage to Victoria, previousy one of the Spice Girs. ManUtd considered that Beckham s market vaue was greater than they coud afford, so they sod him to Rea Madrid one year before the contract expired. But now the brand buiding of ManUtd depends on new and upcoming stars such as Wayne Rooney, Cristiano Ronado and Rio Ferdinand. At the same time as they are ManUtd brand buiders, it aso aows them to buid their own persona brand. Brand chaenges ManUtd is in the enviabe position of market eader, during a time of dramatic media growth in the word s most popuar game. But eaders can stumbe and the team is not immune to the sensitive nature of sports fans. To address this concern, ManUtd has deveoped a customer reationship management (CRM) database of more than 2.5 miion fans. Many of these database members are game-day customers. A substantia group of US ManUtd fans are not oya. They cimb on the bandwagon of team, when it has success, ony to cimb off the instant it stumbes. With the number of US soccer payers hoding steady at 18 miion, the market is reativey sma. Chinese fans don t possess the same eve of experience with professiona teams as US fans and might not be as ficke. Nevertheess, cutura and physica barriers exist between British and Chinese fans. To deveop deeper oyaties in Chinese markets, ManUtd estabished a Mandarin website, started a soccer schoo in Hong Kong, and is constanty panning Asian tours whie ooking to add Asian payers to the roster (e.g. Ji-Sung Park, who joined the ManUtd team in Juy 2005). Athough these are sound moves to buid brand oyaty, we-funded competitors such as Chesea or Liverpoo can copy ManUtd. Even in Engand, ManUtd faces significant chaenges. Especiay after the Gazer invasion (see beow) it generates a ove-them-or-hate-them mentaity. Fans of opposing teams were thried to see Chesea, Arsena and Liverpoo secure the three major championships eaving ManUtd without a major trophy in the ast two years. Then Gazer came... In the ate 1990s and eary part of the 2000s, an increasing source of concern for many United supporters was the possibiity of the cub being taken over. The supporters group IMUSA (Independent Manchester United Supporters Association) were extremey active in opposing a proposed takeover by Rupert Murdoch in However, they coud not do anything in May 2005 when the US sports tycoon Macom Gazer (who aso owns the American Footba team Tampa Bay Buccaneers) paid $1.4 biion for a 98 per cent stake in ManUtd, foowing a neary year-ong takeover batte. So is the ManUtd brand worth $1.5 biion? Gazer seemed to think so, as he paid roughy $200 miion more than the team s open-market stock vauation. It was a hostie takeover of the cub which punged the cub into massive debt as his bid was heaviy funded by borrowing on the assets owned aready by ManUtd. The takeover was fiercey opposed by many fans of ManUtd. Many supporters were outraged and some formed a new cub caed F.C. United of Manchester. This cub entered the second division of the North West Counties Footba League and were confirmed as champions on 15 Apri They wi pay in the first division in the season. After the takeover the Gazer famiy (Macom Gazer and his three sons) took big steps to shore up the cub s finances. They cut more than 20 staff members, incuding some executives. They aso pan to raise ticket prices and have been ending 23 payers to other cubs, saving ManUtd more than $20 miion in fees and saaries. In genera, they have been cutting expenses everywhere they can. The season was characterized by a faiure to score goas, and ManUtd finished the season trophyess and in third pace in the Premier League. ManUtd made a poor start to the season, with midfieder Roy Keane eaving the cub to join his boyhood heroes Cetic after pubicy criticizing severa of his teammates, and the cub faied to quaify for the knock-out phase of the UEFA Champions League for the first time in over a decade after osing to Portuguese team Benfica Lissabon. ManUtd aso ensured a secondpace finish in the Premier League and automatic Champions League quaification. 126

32 Case I.1 Manchester United Sponsorships On 23 November 2005 Vodafone ended their 36 miion, four-year shirt sponsorship dea with ManUtd. On 6 Apri 2006, ManUtd announced AIG as its new shirt sponsors ManUtd in a British record shirt sponsorship dea worth 56.5 miion to be paid over four years ( 14.1 miion a year). ManUtd wi have the argest sponsorship in the word ahead of Itaian side Juventus, who have a 12.8 miion a year sponsorship dea with Tamoi. The four-year agreement has been heraded as the argest sponsorship dea in British history, ecipsing Chesea s dea with Samsung. In 2006 ManUtd aso finaised a four-year sponsorship dea with US-based financia services giant American Internationa Group for a record $56 miion. The dea repaces Vodafone, which had previousy had its name embazoned on ManUtd s famous red jerseys. Besides these sponsorships there sti exists a few others: the 13-year, 303 miion ($527.2 miion) dea with Nike aso provides ManUtd with two vita advantages. First, it cas for Nike to pay the team a fixed fee for merchandise rights to its kits (shirts, shorts, and so on), generating a guaranteed revenue base for ManUtd whie transferring product deveopment and merchandising to a firm with proven internationa expertise. Second, the team inks its brand with a market eader in a compementary industry (sporting goods appare, shoes and equipment). In the first 22 months of the agreement, Nike sod 3.8 miion repica shirts. ManUtd retains eight second-tier sponsors: Pepsi, Budweiser, Audi, Wikinson Sword, Dimension Data, Lycos.co.uk, Fuji and Century Radio. In 2004, as part of this reationship, the team invested 2 miion ($3.5 miion) in ight-emitting diode digita-advertising boards around three sides of the pitch. Future pans ca for a reduction in icensing agreements to two principas (Vodafone and Nike) and four patinum firms (to be determined). Under this arrangement, these six major sponsors wi have expanded internationa opportunities and a stronger presence at Od Trafford. The team wi then se additiona oca icensing agreements with restricted rights for specific geographic markets. Besides icensing, ManUtd generates revenues from additiona secondary business ines, predominanty financia. Fans now can finance their houses or cars with a ManUtd mortgage or oan, buy tickets with a ManUtd credit card, insure their homes/cars/trave pans with ManUtd insurance, invest in ManUtd bonds, gambe in ManUtd Super Poo otteries, or see a movie at the Red Cinema in Saford, Greater Manchester. Of course, other firms manage these ines; nevertheess, these businesses generate additiona revenues whie promoting the team and deveoping ifeong fans. Financia situation Revenues ($m) Net profits ($m) Empoyees (number) In 2005, ManUtd bamed a drop in teevision revenues foowing the negotiation of a new UK broadcast rights dea, and a decine in the cub s share of Champion s League media earnings as a resut of its weaker performance in the tournament. The footba cub aso incurred one-off costs in fees reating to its takeover by Gazer. In a statement to the 2005 financia report, chief executive David Gi said, in a statement pubished on the cub s website. Manchester United continues to be the word s biggest footba cub based on its goba brand revenues and profits ( Athough current internationa revenues account for ony 1 2 per cent of tota revenues, this segment of the business hods tremendous potentia. Sources: Cohn, L. and Homes, S. (2005) ManU Gets Kicked In the Head Again, Business Week, 12 December, pp ; Accountancy (2006) Manchester United oses top spot in Deoitte footba eague, March, 137(1351), p. 16; Oson, E.M., Sater, S.F., Cooper R.D. and Reddy V. (2006) Good Sport: Manchester United is no onger just a British brand, Marketing Management, 15(1) (January/February), pp Questions 1 How do you evauate the internationa competitiveness of ManUtd after the takeover of Macom Gazer? 2 Discuss and expain how the different aiances can increase the competitiveness of ManUtd. 3 What are the main threats to retaining Manchester United as a goba brand? 127

33 CASE STUDY I.2 Bridgestone Tyres: European marketing strategy It is a ovey spring morning in centra Tokyo in Athough the city is just awakening, with a its noise and stress, that does not bother the Chairman of Bridgestone Corporation, Shoshi Arakawa, as he is on his way to work. Here are some basic data about Bridgestone. Bridgestone Corporation (Bridgestone) is one of the word s argest manufacturers of tyres and other rubber products. The company is primariy engaged in the production of tyres and tubes for passenger cars, trucks and buses, construction and mining vehices, industria machinery, agricutura machinery, aircraft, motorcyces and scooters. The company has operations in Japan, the United States and Europe. It is headquartered in Tokyo, Japan and empoys about 113,700 peope. The company recorded revenues of $24 biion during the fisca year ended December 2005, an increase of 11 per cent over The operating profit of the company during fisca 2004 was $1.9 biion, an increase of 8 per cent over fisca As the tyres segment accounts for neary 80 per cent of the company s tota revenues, its strong market position in the tyre segment ensures a stabe top ine for the company. The prospects ook good. On his way into his office Shoshi Arakawa asks his assistant to give him a copy of the different manufacturers 2005 market shares in the word market (see Tabe 1), pus Bridgestone s 2005 Tabe 1 Market share for tyres in the word market, 2005 Manufacturer Market share (%) Michein 19 Bridgestone 19 Goodyear 17 Continenta 7 Pirei 5 Sumitomo 4 Yokohama 3 Cooper 2 Toyo 2 Others 22 Word tota 100 market shares in the most important tyre markets in the word. Arakawa has a meeting with the board of directors the next day, when they wi discuss Bridgestone s strategies in Europe, Asia and North America. As can be seen from Tabe 1, together with Goodyear and Michein, Bridgestone is among the word s argest manufacturers of tyres. Bridgestone has a 19 per cent wordwide market share (see Tabe 2). But sti Bridgestone has a comparativey ow market share (8 per cent) and ow brand awareness in Europe. The question for Shoshi Arakawa is: how can Bridgestone increase its market share in Europe? The foowing is a concentrated report on the market conditions for tyres in Europe. The European tyre market The European market for car tyres (incuding commercia vehices) fe sighty from 2000 to Competition among tyre producers is fierce and tyre prices in rea terms have faen over the past few years. In 2005 the tota European market for tyres was miion. A breakdown of the tota market is shown in Tabe 2 Bridgestone s market share for tyres in the most important markets, 2005 Market area Bridgestone market share (%) Asia 29 Europe 10 US 22 Word tota

34 Case I.2 Bridgestone Tyres Tabe 3 The European tyre market, 2005 Miion units Car tyres Truck tyres Tota New saes Repacement saes Tota Tabe 3. This tabe shows saes of new tyres for new cars (= new saes) and repacements of worn tyres (= repacement saes). Tabe 4 shows the tota European tyre market broken down into countries, together with the market shares of the most important producers in the individua markets. On the basis of Tabe 4 the Boston Consuting Group (BCG) charts of the individua producers have been prepared (see Figure 1). In this connection it shoud be noted that the areas of the circes show tota saes in the respective countries and not the saes of the individua companies in the markets in question, which is normay the case in BCG charts. Retreaded tyres So far the markets have been described on the assumption that ony the production and sae of new tyres was invoved. For many years consumers have considered the retreaded tyre one of ow price and ow quaity. In consequence, European consumers have been somewhat reuctant to buy retreaded tyres. Tyres can be recyced. The main probem is economic: recycing costs more than dumping, so many tyres end up in andfis or on iega dumps, adding to those aready pouting the andscape. Tyre dumps are potentiay dangerous: they can catch fire and, when they do, toxic chemicas are reeased, eaving an oiy residue that can contaminate groundwater. Currenty ony about 12 per cent of the European Union s scrap tyres are retreaded and reused. The percentage has been decreasing over the ast few years because new tyres are now so price competitive that many consumers prefer to buy them. However retreaded tyres are sti recommended by the European Commission, primariy for two reasons: 1 Waste probems connected to the accumuation of used tyres have made retreaded tyres an environmentay correct recycing soution. 2 The use of retreaded tyres reduces consumption of natura rubber, natura mineras, meta wire, oi and other chemicas that are normay used in the production of new tyres. In 2005 saes of retreaded tyres were distributed as shown in Tabe 5. The European Commission encourages and recommends the increased use of retreaded tyres (rising to approximatey 20 per cent of tota saes). One threat against such a deveopment is, however, that the price of new imported tyres from the Far East is sometimes ower than that of retreaded tyres. Characteristics of the eading producers (mentioned in Tabe 3) In many countries the producers use severa different brands to appea to a arger cientee who have different preferences for different brands of tyres. A ist of brand names is given in Tabe 6. Europe s eading tyre suppiers may be briefy characterized as foows. Michein Michein is currenty the argest tyre manufacturer in the word together with Bridgestone. Compagnie Generae des Etabissements Michein (Michein) manufactures a wide range of tyres, pubishes maps and guides and operates digita services such as wireess appication protoco (WAP) and Tabe 4 The European market for tyres (cars and trucks) France Germany Itay Spain UK Other markets Tota Saes (miion units) New saes Repacement saes Tota Producers market shares (%) Michein Continenta Goodyear Pirei SP (Dunop) Bridgestone/Firestone Others Tota Note: Other markets incude Eastern Europe and Scandinavia, for which market shares are not avaiabe. 129

35 Part I The decision whether to internationaize Figure 1 BCG charts for eading tyre producers Notes: CAGR = compound annua growth rate. Reative market share = the market share of the individua producer in reation to the argest producer on the market. Source: MarketLine. Tabe 5 Saes of retreaded tyres in main European markets, 2005 (miion units) France Germany Itay Spain UK Cars Trucks Tota mobie internet services. The company has a presence in 170 countries wordwide. It is headquartered in France and empoys about 126,000 peope. The company recorded revenues of $19.5 biion during the fisca year ended December 2004, an increase of 2.1 per cent over The increase was primariy attributabe to increased revenues from passenger car, ight truck, and truck segments. The net profit was $640.2 miion during fisca year 2004, an increase of 62.2 per cent over The French-based company organizes its operations into the foowing business units: Tabe 6 Producers nationaity and different brand names Producer Nationaity Brands (ownership) Michein France Michein, Kéber, Tyremaster Continenta Germany Continenta, Uniroya, Semperit, Barum, Viking, Gisaved, Mabor, Sava Bridgestone/ Japan Bridgestone, Firestone, Firestone Dayton, Europa, First Stop Pirei Itay Pirei, Curier Goodyear US Goodyear, DunOp, Key, Fuda Others Stomi, Tigar, Komho, Lassa, Marsha, Toyo passenger car and ight truck tyres; truck tyres; earthmover tyres; 130

36 Case I.2 Bridgestone Tyres agricutura tyres; aircraft tyres; two-whee tyres; components (rubber and eastomers, reinforcement materias); suspension systems; tourism services (maps, guidebooks). In contrast to its traditiona singe-brand strategy Michein now has a ong ist of associate brands such as BF Goodrich, Kéber, Riken, Kormoran, Taurus, Laurent, Wober, Tyremaster, Siamtyre, and Uniroya (North America ony). The company produces 3,500 different types of tyre, which are made in 65 factories in 13 countries. As part of the group s strategy to expand its share outside Europe, particuary in Asia and Latin America, Michein has acquired MRF in the Phiippines and the Coombian manufacturer, Icoantas. In Europe, meanwhie, Michein has announced pans to improve productivity by 20 per cent within three years. It expects to achieve this through deveoping its products, services and mutibrand poicy whie restructuring a its European activities, possiby by cosing pants or terminating technica activities and services. In Europe Michein is the cear market eader, with a market share of 32 per cent, we ahead of Continenta and Goodyear. Michein s argest market is North America, which takes about 45 per cent of its tyre production, foowed by Europe with 40 per cent and Asia with 5 per cent. In the 1990s Michein registered huge financia osses. This ed to widespread rationaization: for exampe, staff numbers were reduced. Since then, there has been a ot of fuctuation in Michein s resuts. Bridgestone/Firestone Bridgestone was founded by Shojiro Ishibashi in (The Engish transation of the surname Ishibashi is stone bridge.) Firestone was acquired by the Japaneseowned Bridgestone Corporation in Traditionay, Bridgestone has targeted the upper price-quaity segment, whie Firestone appeas more to the mid-range segment. Firestone has in particuar contributed to strengthening the group s saes to car producers (new saes) in Europe (primariy Ford, Ope/Vauxha, VW/Audi and Fiat). Of the tota turnover, around 25 per cent comes from non-tyre products, incuding conveyor bets, rubber crawers, construction materias and vibration isoation parts (for vehices). In Europe, Brusses-based Bridgestone/Firestone Europe SA oversees oca production and R&D at the European faciities. There are five European tyre pants: one in France, one in Itay Tabe 7 Brand awareness in the major European markets: spontaneous (unaided) awareness (%) Brand UK Germany France Itay Spain Tota Michein Pirei Goodyear Dunop Firestone Continenta Bridgestone Popuation (miion) Source: Compied by the author from different sources. and three in Spain. Bridgestone s European saes subsidiaries are ocated in Austria, Beneux, Denmark, Finand, France, Germany, Itay, Portuga, Spain, Sweden, Switzerand and the United Kingdom. However, brand awareness is sti ower for Bridgestone than some of its competitors, as shown in Tabe 7. As a consequence Bridgestone began suppying Bridgestone tyres to Formua One teams in The company s status as tyre suppier to the Formua One Word Championship is an important part of Bridgestone s promotiona strategy and has heped increase awareness of the Bridgestone brand substantiay in recent years, particuary in Europe. Bridgestone is ooking to increase its goba market share to 20 per cent from 19 per cent and its European market share to around 15 per cent from 10 per cent. To achieve this the company admits that it needs to gain a much stronger presence in Europe and North America, even though its share in North America has been increasing during the ast ten years. The company s main focus is on its Bridgestone and Firestone brands, athough its mutibrand approach to business extends to a range of budget and private brands such as Europa and First Stop in Europe or Dayton, Giette and Peeress in North America. Continenta Continenta is Germany s argest manufacturer of tyres for commercia vehices. The company aso manufactures power transmission systems, engine and suspension mounts, vehice interiors, and eectronic brake and traction contro systems. The company operates in the Americas, Europe, Asia and Africa. It is headquartered in Hanover, Germany and empoys about 69,000 peope. The company recorded revenues of $17.2 biion during the fisca year ended December 2004, an increase of 18.7 per cent over The net income was $919.1 miion during fisca year 2004, an increase of per cent over

37 Part I The decision whether to internationaize Continenta produces tyres for a forms of vehices: cars, trucks, heavy vehices, agricutura machinery, bicyces, motor cyces, etc. Continenta bought (from Michein) the rights to use the Uniroya brand a over Europe. Continenta is the fourth argest tyre manufacturer in the word as we as being a word eader in the braking segment foowing the 1998 acquisition of ITT s Brake and Chassis Division. The Group s operations are spit into five different sectors: 1 the Passenger Tire Group (controing the controed distribution chains); 2 the Commercia Vehice Tire Group; 3 the Automotive Systems Group (incudes Continenta Teves); 4 Continenta Genera Tire (the group s US subsidiary); 5 ContiTech (industria rubber products). Continenta was the first manufacturer to activey deveop a mutibrand strategy due to the uneven strength of its key brands across Europe. Today the company has eight main brands Continenta, Uniroya (in Europe ony), Semperit, Genera, Viking, Gisaved, Barum and Mabor. Part of its goba strategy is to increase its strength in markets where it is underrepresented, considered by the company to be the United States, France, Itay, Spain and Asia. In 1998 Continenta acquired Grupo Carso (Mexico), Genera Tyre and Rubber (Pakistan) and Gentyre South Africa as part of a move towards the deveoping markets, aong with joint venture and technoogy agreements such as those made in Bearus, Sovakia and Argentina. By reorganizing its controed distribution networks the company has been seeking to deveop its share of the European market. The expansion of the Pneus Expert Europe-wide branded retai network has been centra to this aim, combining Continenta s whoyowned subsidiaries such as Nationa Tyres (UK) and Vergoest (Germany) with the activities of partner groups and nationay organized franchise networks. Since Continenta began to activey deveop Pneus Expert in mid-1997 it has grown to become the biggest branded retai network in Europe. Continenta s main strategy is to deveop a position as a compete systems suppier to the automotive industry. It has been deveoping whee assemby faciities in conjunction with vehice manufacturers wordwide for some time and the company s Automotive Systems Group has aso focused on high-tech automotive deveopments. Continenta is very dependent on the German market, which accounts for 33 per cent of its wordwide saes. Goodyear The Goodyear Tire & Rubber Company (Goodyear) deveops, manufactures, distributes and ses tyres and rubber products. The company has operations across the word. It is headquartered in Ohio, USA and empoys about 84,000 peope; 20 per cent of them are working in Europe. The company recorded revenues of $20 biion in fisca 2005, an increase of 7.4 per cent on Net income rose by 98.6 per cent from fisca 2004, to reach $228 miion. Goodyear has 86 factories in 26 different countries. Some 55 per cent of the Group s saes reate to the US market, where Goodyear is the market eader. Besides tyres, the company makes severa ines of bet, hose and other rubber products, rubber-reated chemicas, and owns retai stores wordwide. It is spit into six business units: 1 Goodyear Asia; 2 Goodyear European Union; 3 Goodyear Latin America; 4 North American Tire; 5 Engineered and Chemica Products; 6 Goodyear Eastern Europe, Africa, and Midde East. Its tyres are sod under various brand names besides Goodyear, incuding Dunop, Key, Fuda, Lee, Sava, Pneumant, India and Debica. The Group s main aims are to maintain its current status by hoding a number one or number two position in specific markets, keep up a fast and profitabe growth in a core businesses and gain strategic acquisitions and expansions whie being the owest cost producer of the top three companies. The aiance with Sumitomo Rubber Industries/ Dunop was announced in January 1999 and covered the estabishment of four joint venture saes companies, one in North America, two in Japan and one in Europe. The North American joint venture incudes Dunop s tyre activities in the region but not Goodyear s. In Europe, both Goodyear and Dunop activities in Western Europe are incuded but not Goodyear s activities in Poand, Turkey and Sovenia. The Japanese joint ventures wi cover OEM saes of both brands and repacement saes of Goodyear tyres with Sumitomo owning 75 per cent of both. Two further joint venture companies, majority owned by Goodyear, wi be set up in the United States, one for purchasing and one for technoogy deveopment. Activities by both companies in Asia and Latin America remain outside the dea. The aiance, unique in its scope and arrangement, means that Goodyear has gained contro of the Dunop brand in both Europe and North America, a move that is considered by some to be a precursor to a compete takeover of Dunop s tyre activities. 132

38 Case I.2 Bridgestone Tyres Pirei The Itaian Pirei Group has two main activities: tyres and cabes, and empoys 3,800 empoyees wordwide. Pirei is the sixth argest tyre manufacturer in the word. The company has a presence in a areas of the tyre market but its particuar strengths ie in the highperformance end of the passenger tyre market, where it can justifiaby caim market eadership within Europe. The Pirei brand is an out-and-out premium brand. However, the Group aso owns a number of subsidiary brands incuding Courier, Ceat, Armstrong and the Metzeer brand of motorcyce tyres. Within Europe Pirei has key manufacturing pants in Itay, Germany, Spain and the United Kingdom. Pirei has the best market position in Itay, where it is second to Michein. In 1992 Pirei tried in vain to acquire its German competitor, Continenta. The distribution of tyres in Europe The majority of repacement saes (repacement of tyres) take pace through speciaised tyre distributors: independent chains; producer-owned chains (e.g. in Germany Continenta owns the Vergös chain and Michein owns the Euromaster chain); franchise-based chains. In addition, service stations have a certain share of repacement saes. This share is highest in newy deveoped Eastern European markets, whie it is decreasing in Western Europe. Questions As a consutant for Chairman Shoshi Arakawa you are required to answer the foowing questions. 1 Make an assessment of the competitive strategies that Michein, Continenta and Goodyear, respectivey may pursue to strengthen their European market positions. 2 Make an assessment of the aternative competitive strategies that Bridgestone can pursue to strengthen its European market position. 3 Give a we-reasoned proposa for criteria to be used by Bridgestone when choosing a market (country) that requires a arger marketing effort. 4 Give a we-reasoned proposa for Bridgestone s distribution and communication strategies in a market chosen by you. 133

39 CASE STUDY I.3 OneCafé: A born goba penetrates the coffee industry Today, coffee is found in every corner store or restaurant around the word. Drunk by peope of every age, ifestye and background, it is avaiabe in many favours and at widey differing prices especiay since the recent boom in fashionabe coffee-shop chains. The fact that it is drunk by amost everybody makes coffee one of the word s most vauabe commodities and, as we have seen, gives the big payers in the coffee trade an enormous infuence over the word market, and hence over the ives of producers in Southern countries. However, the same popuarity issue gives consumers enormous power to change things by exercising freedom to choose what coffee they purchase. The background story In 2001, Håkan Löfhom and Lars Bendix had a cup of coffee at Aranda Airport in Stockhom. As usua, this was not a very peasant experience. And, whie reuctanty sipping their coffee, they started to wonder why there wasn t an easy way to make a cup of freshy brewed coffee. As true entrepreneurs, Håkan and Lars coudn t stop thinking about the probem. Together they started to investigate the matter. They soon discovered that many others had tried before them, and by studying their mistakes they started to reaize what probems they had to sove. One of the crucia barriers to cross was the construction of the fiter bag. It had to contain the coffee, but sti be abe to et the water fow through without any barriers. In addition, the package had to be designed in a way that made it easy to use and dispose of without stains and eakages. After two years of research and deveopment, they had a fuy functiona prototype. At this point, they decided that it was time to make it in to a fu time commitment. Together with Frank Thygesen and Johnny Ragazzo they formed OneCafé Internationa AB ( Today the head office of OneCafé Internationa AB is at the Ideon Science Park in Lund, Sweden. The company aso owns a production pant in Uganda through the whoy-owned subsidiary OneCafé Egonia Internationa Ltd. As shown, the coffee is packaged in an individua portion, which resembe a coffee bean. Each portion weighs 9 grams and is made of a water-resistant mouded fibre materia. Inside is a fiter bag, which is made of a patented coffeebag that aows the coffee to fuy mix with the hot water. In that way OneCafé resembes the principe behind making tea by using tea bags (see Case study 5.1: Teepack Speziamaschinen GmbH). Production in Uganda being a socia responsibe company Amost from the start, OneCafé reaized that they needed an especiay grinded coffee with superior quaity. Their research ed them to Africa and to Uganda. Here OneCafé found not just coffee beans of the right quaity, but aso craftsmen and women with both the experience and commitment. In cooperation with them, OneCafé deveoped the brand, Uganda Origina. This is now produced at their own pant in Uganda, Egonia OneCafé Internationa Ltd. Initiay, the reason for manufacturing both the coffee and the package in Uganda was to maintain a consistent grade of high quaity throughout the whoe production process from bean to cup. Soon it aso became a significant part of the vision that drives OneCafé: a sustainabe deveopment. With their presence in Uganda, OneCafé can actuay make a difference. They can contribute to Uganda s deveopment and ensure that the farmers get a fair part of the profit. OneCafé has aso decided to work in accordance with UN s Miennium Deveopment Goas 2015 ( This means that OneCafé, among other things, strives to promote 134

40 Case I.3 OneCafé How to brew a cup of OneCafé gender equaity and empower women to ensure environmenta sustainabiity and to be a part of a goba partnership for deveopment. As an exampe, OneCafé supports a project to pant trees to improve the farmers coffee production. Coffee grown without tree shade yieds 2 kg beans per tree in average. By panting a tree that shadows about ten pants, the yied grows to 4 kg each, which means an extra 20 kg per year from the ten coffee pants. In addition, the beans produced are arger and of better quaity. Panting trees aso heps to sustain underground water sources and contro of andsides. The word coffee industry Suppy Coffee is grown in more than 50 countries around the word, but the three eading producing countries (Brazi, Vietnam and Coumbia) account for more than haf of tota goba production. Brazi is by far the argest producer, with over one third of the word s suppy. 80 per cent of Brazi s organic coffee production is exported, primariy to Germany, the Netherands, Japan and the United States. Coffee beans begin at the farm on coffee trees. After trees are panted, it takes between one and three years for the trees to bear coffee cherries, which typicay contain two beans. Each tree produces 2,000 to 4,000 beans a year. However, yieds aternate with a good crop one year and a poor crop the next. Farm sizes range from 5 acres (traditiona farms) to arge pantations covering thousands of acres. Farming and harvesting methods differ greaty between traditiona sma-scae and arge coffee farms. Between 50 and 70 per cent of the goba coffee suppy came from sma-scae farms by Coffee must be processed, and it is common for sma farmers to accept a consideraby ower price to be abe to get their coffee to market. Often, these sma producers have difficuties financing their operations throughout the year and woud se their crop to middemen prior to harvest to receive a cash advance. These middemen provided sma farmers with credit at high interest rates in exchange for bringing their beans to market. The sma-scae farmers are often caught in a perpetua cyce of poverty: sma production eves imited their access to cash which, in turn, hindered the potentia for increasing output. For many producing countries, coffee was tighty connected to the socia and poitica power structures that had existed for hundreds of years. Athough severa coffee species exist, ony two make up the majority of wordwide coffee consumption. They differ greaty in taste, caffeine content, disease resistance, and cutivation conditions. Coffea Arabica, commony referred to as arabica beans, are the odest beans used in coffee production and account for 65 per cent of the word s coffee suppy; 80 per cent of these beans come from Centra and Latin America. Arabicas were susceptibe to poor sois and diseases and thus required great care in growing. Coffee connoisseurs consider arabicas to be tastier than their counterpart, coffea canephora, aso known as robusta beans. These beans evoved around 1850 but ony entered the commercia market after Word War Two. Robusta beans, typicay grown in West Africa and South-East Asia, were easier to grow because they toerated warmer and more humid cimates and a wider range of soi conditions. Experts caim that athough these beans contain more caffeine, robustas are inferior in favour because of their distinct bitterness. Since robustas were easier to grow and not neary as tasty, the beans tended to command a much ower price on the market. As a resut, robusta beans are primariy used in the instant and massproduced coffee sod in arge supermarket stores. After oi, coffee is the second most traded commodity on wordwide markets and coffee prices are set on the New York Coffee and Sugar Exchange. Overproduction is not unusua in the coffee industry and is one of the major reasons why historicay prices have traveed in cyces. The fair trade movement Over the years, sma pantations have been taken over and converted to industria cutivation on arger pantations. Coffee farmers have increasingy converted to more intensive systems, invoving high-yieding coffee 135

41 Part I The decision whether to internationaize varieties grown with no shade, and the appication of arge quantities of chemica fertiizers and pesticides. However, the fair trade trend motivates the sma coffee farmers to move away from non-shade-grown methods and to encourage environmentay, economicay and sociay sustainabe farms instead. Fair trade coffees are normay purchased directy from cooperatives of sma farmers at a guaranteed foor price. Unike shade and organic coffees, fair trade coffee focuses on the worker s economic sustainabiity. Fair trade coffee attempts to cut out or imit the middemen and provides much-needed credit to sma farmers so that they can end their poverty cyce. European sociaists were aso concerned with the coffee cutivation system and Dutchman, Bert Beekman, entered into a debate with the Dutch roaster Douwe Egberts about seing fair trade coffee. However, this subsidiary of Sara Lee never agreed to se fair trade coffee, so Beekman and other fair trade advocates decided to create their own fair trade brand. A group of smaer roasters approached Beekman and offered to aunch the coffee if the advocates created a certification abe. In 1988, Beekman aunched the Max Haveaar Quaity Mark in Hoand and the abe quicky appeared in Switzerand, Begium, Denmark, France, Germany and Austria. Since Max Haveaar was introduced in 1988, 17 countries had deveoped a fair trade sea. In 1997, an umbrea group caed the Fairtrade Labeing Organizations Internationa (FLO) was formed to coordinate monitoring and certification processes. There were 277 cooperatives from 24 countries representing 550,000 farmers that produced coffee on the Fair Trade Registry in FLO estimated that in 2006, fair trade farmers produced 180 miion pounds of coffee but ony 35 miion were actuay sod as fair trade coffee with a retai vaue of $450 miion. The 180 miion pounds produced in 2005 was 1.5 per cent of the tota goba output and infuenced ony 2.2 per cent of the farmers and workers in coffee producing countries. Consumers in the United States and Europe are creating growing demand for fair trade and organicay certified coffee, and a number of the mutinationas have responded to demand and introduced fair trade products, incuding Procter & Gambe and Starbucks. However, the fair trade market constitutes a tiny proportion of tota coffee saes and critics have derided these moves by the mutinationas as itte more than marketing poys. Café Direct in UK shows how fair trade brands can rapidy gain market share. Estabished in the UK the company sources coffee from 18 sma-scae farmer associations in nine deveoping countries. Café Direct s expanding coffee range is now stocked by a major supermarkets. Owing to high product quaity, successfu advertising and widespread avaiabiity, Café Direct now caims 4 per cent by vaue of the UK roast and ground coffee market, with saes of over 6 miion per annum. Demand The argest coffee consuming region is Western Europe (33 per cent of tota voume), as shown in Tabe 1. The argest markets and the markets with the highest growth rates are shown in Tabe 2. The industry can be broken into two main categories on the consumption side: mass-marketed and speciaty coffee. The five argest companies and their brands are Nesté (Nescafé), Kraft Foods (Maxwe House), Sara Tabe 1 Saes of coffee by Region, 2005 Region Voume % Vaue % (tonnes) (US$miion) Western Europe 1, , Eastern Europe , North America , Latin America ,850 9 Asia Pacific , Austraasia Africa and Midde East ,681 5 Word 3, , Source: Adapted from Euromonitor and other sources. Tabe 2 Major coffee markets Country 2005 per 2005 voume % voume capita saes as % growth 2000/ consumption of word tota 2005 (kg) Largest markets: USA Brazi Germany France Itay Japan Poand Mexico Netherands Fastest growing markets: Russia South Africa China Maaysia Vietnam South Korea Ukraine Morocco Thaiand Indonesia Source: Adapted from Datamonitor, Euromonitor and other sources. 136

42 Case I.3 OneCafé Tabe 3 Goba company market shares and their brands, 2005 Company Nationaity Main brands Goba market share (%) Neste SA CH Nescafé, Exea 20 Kraft Foods Inc. US Maxwe House, 16 Jacobs, Maxim Sara Lee Corp. US Douwe Egberts, 7 Hi Brothers Procter & US Fogers 4 Gambe Co. Tchibo D Tchibo 4 Hoding AG Others US, D Starbucks, 49 Meitta, Strauss-Eite Group 100 Source: Adapted from Euromonitor, Datamonitor and other sources. Lee (Douwe Egberts), Procter & Gambe (Fogers) and Tchibo (Tchibo). These companies are mosty operating in the mass-marketed segment and their products accounted for 51 per cent of word consumption in 2005, as shown in Tabe 3. Due to their size and market reach, these companies had a arge impact on coffee quaity and consumption patterns. Starbucks, on the other hand, counted among the speciaity payers. Heath concerns In terms of key heath concerns in the coffee market, caffeine continues to be a thorny issue. Whie many, particuary younger peope, continue to consume coffee for its stimuant properties, increased consumer awareness of the adverse effects of caffeine is seen in mature markets such as the United States and some European countries. In these markets oder consumers are ikey to avoid anything that prevents seep or agitates the heart. Generay decaffeinated coffee accounts for some 10 per cent of the word coffee market. Private abes in the goba coffee market Private abe is a significant factor in the hot drinks market, and continued to increase its presence, with a 7 per cent share of goba vaue saes in 2004, representing growth in absoute vaue terms of just over 25 per cent between 2000 and Private abes are particuary strong in Western Europe and North America, where the retai market is highy consoidated and private abe brands are we estabished as aternatives to traditionay branded products. However, in 2004, the two regions experienced contrasting private abe share performances, with Western Europe advancing strongy and share in North America faing sighty. Germany is a prime exampe of the strong performance of private abe products. Discounters, such as Adi, have improved the quaity of their private abe offer and in return stimuated further saes. Consequenty, Germany is characterized by a high eve of private abe saes, with its penetration in core sectors such as tea and coffee we above the goba average in The high private abe shares in the United Kingdom are attributabe to the deep penetration of private abe in back standard tea. In emerging markets, private abe saes remain insignificant, as retai markets are highy fragmented. China, for exampe, recorded no private abe saes in However, as mutinationa retaiers make inroads into emerging markets, the avaiabiity of private abe products is expected to increase in the medium term. Coffee shop chains Despite the strong performance of chained coffee shops over the review period, coffee distribution remained dominated by other food service formats in Chained coffee shops initiay made breakthroughs into markets where the traditiona drink was not coffee; or in paces such as the United States and United Kingdom where consumers had ess sophisticated tastes in coffee, tending to consume instant coffee. However, gobaization of the Starbucks brand was made compete in 2004, when a branch opened in Paris, France, a country associated with high quaity coffee consumption. The company has increased its store numbers to about 10,000 outets in 37 countries. The increasingy hectic nature of contemporary urban ifestyes has underpinned the more dynamic growth of the instant coffee format, which affords timestrapped consumers greater convenience in terms of product preparation. Time, or the ack thereof, has aso been one of the key factors supporting the rapid expansion of the coffee shop/bar concept and subsequent consumer exposure to a wider range of premium quaity coffee varieties. Whie greater sophistication of the paate has benefited the fresh coffee category, it has aso informed rising demand for premium instant coffee, aby met by manufacturers aunching speciaity variants, such as cappuccino or atte macchiato in Germany. Coffee pods create at-home café experience Faced with suggish retai saes of coffee in mature Western markets and the burgeoning coffee bar cutures in many of these markets, manufacturers are 137

43 Part I The decision whether to internationaize trying to increase vaue saes by introducing a simiar café experience at home. Coffee suppiers normay team up with eectrica appiances makers to produce the machines jointy. For exampe, Sara Lee and Phiips were eary pioneers of this format, with the Senseo one-cup system using Douwe Egberts coffee. More recenty, Kraft Foods has cooperated with Saeco Internationa to produce its coffee maker caed Tassimo. In both systems, the coffee comes in singe-serve bags caed pods specificay suited for the machines designed as companions for the product ines. These types of coffee makers are intended to retain consumer oyaty towards certain brands. As consumers face growing choices of new stye coffee makers for home use, one of the deciding factors coud be the avaiabiity of pods. After consumers have made their machine choice, probaby based on price and the physica aspects of each machine, having easy access to the coffee pods themseves wi be key. Fexibiity may aso turn out to be a competitive advantage. In addition to coffee, the Tassimo system aso aows consumers to make hot chocoate or tea, a feature that riva Senseo has yet to offer. The singe-serve packaging format for coffee (incuding the OneCafé concept) is something of a revoution in coffee consumption. As the amount of ground coffee is pre-determined, and is packaged either in pod capsues or fat pods, consumers can rest assured that the correct amount of ground coffee is used. This is particuary usefu for peope who drink coffee ony occasionay and are therefore unsure about how much to use. The seaed meta capsues aso ensure maximum freshness, and this unique seing point of coffee pods has attracted considerabe consumer interest in many coffee-drinking nations where demographic trends show that popuations are ageing and househod sizes are becoming smaer. It can take some time for a singe person who does not spend a ot of time at home to finish 500g of fresh ground coffee, and the freshness of the coffee wi therefore be compromized towards the end of the package, whereas coffee pods wi provide more consistent quaity. Despite the fact that the average unit price of coffee pods is higher than that of reguar fiter versions (in most countries, prices for coffee pods are 2.5 times higher than reguar fiter coffee), sma househods and institutions are sti prepared to opt for coffee pods simpy due to the economic advantages of the system. In the Netherands, the argest nationa market for Sara Lee s Senseo system by vaue, the growing popuarity of coffee pods and reduction in wastage of coffee have ed directy to sower voume growth but higher vaue growth in retai saes of coffee in recent years. Understandaby, vaue saes of arger packaging sizes, namey 500g and 250g, are showing signs of decine, whie singe-serve coffee pods have shown exposive growth in saes since the introduction of Sara Lee s Senseo in 2001 (see aso Case study 4.2 Senseo). Pod contro vita to ong-term profitabiity In a repeat of simiar format wars in industries such as razors/bades, it is not the hardware (coffee machines) itsef but the software (pods) that is the rea power behind the success of these systems. As a consequence, whoever contros the pods is ikey to contro market share. Foowing the entry of another consumer products giant, Kraft Foods (with Tassimo) into the US singe-serve market in mid-2005, what remains to be determined in the short term is whether the market can support mutipe systems, such as Meitta One:One, Home Café, Senseo, Keurig, Tassimo and Bunn. Such aunches underscore how competitive and serious the batte is for America s singe-serve coffee cup. In order to gain a competitive edge, Meitta aso announced that from the third quarter of 2005 its pods are aso adapted to fit competitors machines. The singe-serve market wi aso have to dea with the faout from Procter & Gambe s acquisition of Giette, which is a partner of arch-rivas Procter & Gambe and Kraft in the Tassimo venture, with the Tassimo machines being distributed and serviced by Braun, a division of Giette. Lighter and creamier coffee appeas In order to persuade consumers to migrate from conventiona fiter coffee to coffee pods, manufacturers are introducing new favours and varieties into their coffee pod ines. The maturity of coffee consumption in Western markets means that the main task for coffee marketers is to persuade young consumers to continue drinking coffee. Young consumers demand more variety in terms of coffee favours and frothy coffee (ighter and creamer) has become a fashionabe drink over the past five years. The trend in consumption is argey in ine with goba trends favouring ight beverages and sef-indugence. To this end, the abiity to produce frothy coffee instanty is commony expoited in marketing strategies. The Senseo coffee pod system caims that it makes it possibe to prepare a fitered cup of coffee proportioned perfecty with a deicious frothy ayer on top. On a simiar theme, Tchibo Cafissimo caims with its specia steam nozze, Tchibo Cafissimo produces a rich, creamy head of frothed mik in the bink of an eye for your favorite coffee speciaties, such as cappuccino or atte macchiato. These caims appea particuary to consumers aged years, who are more ikey to use high-tech home appiances, vaue the contemporary features and enjoy the frothy taste of the coffee. 138

44 Case I.3 OneCafé Sow penetration of singe-serve pods in the US market The Senseo coffee machine system, which combines singe-serve pods of Sara Lee s Douwe Egberts coffee with new singe-serve machines made by Phiips, has experienced rapid success in Europe, but the anticipated revoution in home coffee consumption in the United States has yet to materiaize. Faced with intensifying competition from the ikes of Kraft (with Tassimo) and sower than expected saes for its Senseo one-cup coffee system, Sara Lee has decided to change its advertising direction. The tagine Coffee that fees as good as it tastes remained the same, but Sara Lee aso offered a US$20 Bet you can t find a better-tasting cup of coffee rebate on the US$70 machines. Sara Lee has indicated that the Senseo singe-serve coffee system is earmarked for strategic investment, and whie overa saes of the brand reached US$210 miion in fisca 2004 (up from US$100 miion in fisca 2003), the company expects Senseo saes to reach US$500 miion by fisca Private abes are entering the portioned coffee market As more payers are entering the market, the competition for share is intensifying. Despite the strong growth in saes, mainstream payers are wary about potentia threats and chaenges in this new market. The next few years wi see home coffee marketers try to outperform each other in terms of coffee offerings, machine specification and pricing. In ine with deveopments in other food and beverage categories, the strong growth of private abes remains a concern for many mainstream payers. Private abes have aready emerged in the portioned coffee market and currenty pose a threat to Sara Lee s position in the Netherands. Supermarket private abes offer varieties of coffee pods that exacty match the technica specifications of Senseo s machines, and with private abes obvious price advantage, many Dutch consumers opt for private abe pods rather than the expensive Douwe Egberts range. Coffee retaiing The growing dominance of the supermarkets/ hypermarkets channe is a key feature of the wider hot drinks market. Rapid expansion of discount outets by operators such as Wa-Mart and Adi, and the popuarity of EDLP (every day ow prices) strategies underpinned the one percentage point increase in goba share of coffee distribution for the discounter channe. Consoidation in retaiing During the recent years, the key incentive behind retaier consoidation has been the drive to reduce costs through economies of scae, increase negotiating power with suppiers, and buid profit through expansion into emerging regiona markets. Another key factor has been the deveopment of new convenience-stye food-/ beverage-based stores in urban ocations, which expoited busier consumer ifestyes and on-the-go consumption. A further significant factor has been the deveopment of on-ine retaiing infrastructure, with a number of major retaiers entering the growing business of e-taiing. The impact of retaier consoidation on hot drinks distribution has been to increase the emphasis on the reationship between manufacturers and a sma number of increasingy important retai accounts. This has ed to the deveopment of direct deivery, rapid response production and co-promotiona efforts in stores. Major retaiing deveopments over the review period focused on the foowing three areas: 1 retaier consoidation 2 new retai formats 3 onine retaiing. Consumer demand for cheaper private abe hot drinks has aso spurred retaier consoidation. Economies of scae in retaiing, driven by the reentess eimination of suppy costs, has aso encouraged manufacturer consoidation in order to meet the ow-cost demands of major retaiers. Greater consoidation in the retai industry has aso ed to an unprecedented eve of information-sharing and aiance-based partnerships between eading retai chains, in order to remain competitive with giant retaiers such as Wa-Mart. Greater sophistication in consumption patterns Coffee roasters (manufacturers) view greater segmentation as a good opportunity to stimuate growth in both mature and deveoping markets. Manufacturers in major markets have increasingy segmented their ranges to target more specific categories of consumers. Cutura factors have continued to exert infuence on the coffee market. The spread of the US-originated coffee house boom and continenta-stye espresso bars has impacted on amost a regiona markets. Starbucks and others are an increasing presence in arge urban areas. The company s ongoing expansion pans suggest that Starbucks is not resting on its aures and the concept has yet to hit saturation point. Further widening of trave horizons and more adventurous consumer choice can be expected to ead to increasing consumption of products that have unti now comprised a niche market. Favoured coffee and speciaty coffee wi carry on their strong growth during the forecast period, given their association with high 139

45 Part I The decision whether to internationaize Figure 1 The suppy chain of coffee and OneCafés roe in this quaity beans and high production standards by many consumers in major markets in Western Europe and North America. These products aso offer consumers a drink associated with sophistication. The coffee suppy chain and OneCafé s roe in this First the norma coffee suppy chain is expained as foows. The coffee suppy chain process varies greaty depending on origin country and buyer. In some countries, beans are exported through government coffee boards whie other countries use private exporters ony. After they are shipped to the import country, coffee beans are visuay inspected and test-tasted for quaity through a process caed cupping. After passing inspection, coffee is stored in warehouses unti it is shipped to roasters. Large roasters often have their own coffee buyers and procure green beans directy from producers. Large roasters aso stockpied green coffee at the import warehouses to hep decrease their exposure to market conditions. Conversey, smaer roasters bought coffee from independent brokers and importers who may have beans at warehouses and thus were exposed to a much arger risk of price fuctuations. After roasters buy green coffee, the beans are shipped to roasting faciities where they are roasted unti they receive their characteristic coour and aroma, and then cooed. Once the beans are cooed, roasters bend beans from different countries to baance the favours and strengths. This process is essentia because it aows for a consistent favour even if suppies vary due to prices and avaiabiity. Roasters then package, market, and distribute coffee through a variety of methods. The argest roasters grind and vacuum-pack coffee in packed bricks or cans and distribute their products through whoesae channes. These roasters can suppy coffee for restaurants, airines, and hotes in addition to seing directy to consumer through retai channes. Speciaty coffee, in contrast, is roasted and packaged in a manner to guarantee quaity and freshness. It is sod in both whoe bean and ground forms through whoesae and retai channes. In the OneCafé case the suppy chain is somewhat different (see Figure 1). In Egonia, on the hisides of the highest mountains in Uganda, OneCafé find their coffee beans of superior Arabica AA quaity. The coffee bean farmers ripe them at the right moment, and afterwards One Café dry and sort them. Ony the biggest and most even are chosen to become the Uganda Origina. After this process, the beans are roasted and ground in the OneCafé pant in Uganda. To keep the aromatic substances of the fresh coffee, OneCafé packages directy on the spot in their own production unit, Egonia OneCafé. Unti now OneCafé has mainy sod their products to the catering market in East Africa, but soon OneCafé shoud have a cear strategy of how to expand internationay with its unique product and which partners it shoud choose for this internationaization process. As iustrated in Figure 1 there are severa options: Offer the production and packaging equipment for the big roasters on a icense basis. This means that the big coffee companies coud offer the OneCafé in their product range with their own ogo or as cobranding with OneCafé, as shown in Figure 1. This coud be done for a sma icensing royaty per produced unit. 140

46 Case I.3 OneCafé OneCafé coud produce the OneCafé products itsef and se them to the big roasters as an OEM-product under the roaster s ogo or with OneCafé co-branding. OneCafé coud se its product directy to the distributors/whoesaers and/or directy to the retai chains under the OneCafé brand. OneCafé coud se its product directy to the retai chains under its own brands (private abes), or combined with some OneCafé co-branding. OneCafé coud se its product directy to the catering (food service) market under its own brand (e.g. under the Hote group name) or as co-branding with OneCafé. The possibe cooperation partners woud be restaurant chains, hote chains, airine catering companies, etc. The average retai price across borders for OneCafé is panned to be a0.9 (the price paid by the end-consumer in the retai outet). Sources: Materia from OneCafé ( the author woud ike to thank one of the four founders, Lars Bendix, for his vauabe contribution; Wateg, B. (2005), OneCafé Hoping to be a generic name in the coffee market, Nordem baage 4, Apri, pp ; Waride, L. (1996), Sustainabe Trade: The Case of Coffee in North America, Minor Internationa Deveopment Studies, McGi University; Doonar, J. (2004), Fair Trade Case Study: The Direct approach, Brand Strategy, Juy/August, pp ; materia from Euromonitor ( materia from Datamonitor ( UN s Miennium Deveopment Goas 2015 ( Questions In Spring 2007 Lars Bendix is preparing one of his many trips to visit the production unit in Uganda. He is convinced that the product concept is the right one. But how shoud the unique product be turned into a goba marketing success for OneCafé? The company is sti in the process of attracting foreign investors, and right now it has ony got imited financia resources. On his way to Aranda Airport, Lars tries to coect his thoughts, but he sti has his doubts about what to do. He decides to ca you as an internationa marketing expert. Before Lars returns to Sweden in one week, he woud ike you to prepare a report with answers to the foowing questions. Of course you woud ike to hep in this situation, and you agree to prepare the report within the next week. 1 To what degree woud you characterize OneCafé as a Born Goba? 2 What are OneCafé s main motives for estabishing production in Uganda? 3 Which internationa partners shoud OneCafé try to cooperate with and how? Set up a priority ist of potentia cooperation partners. 4 Which of the above-mentioned options woud you recommend to the OneCafé management. Set up a time pan for the impementation of the strategy option. 141

47 CASE STUDY I.4 Cerea Partners Wordwide (CPW): The No. 2 word payer is chaenging the No. 1 Keogg On a ovey spring morning in Apri 2007, whie giving her kids some Cheerios, the CEO of Cerea Partners Wordwide S.A. (CPW), Caro Smith thinks about how CPW might expand internationa saes and/or capture further market shares in the saturated breakfast cereas market. Right now, CPW is the cear No. 2 in the word market for breakfast cereas, but it is a tough competition, primariy with the Keogg Company, which is the word market eader. Maybe there woud be other ways of gaining new saes in this competitive market? Caro has just read the business bestseer Bue Ocean Strategy and she is fascinated by the thought of moving competition in the cereas breakfast market from the red ocean to the bue ocean. The question is just how? Maybe it woud be better just to take the head-on batte with Keogg Company. After a, CPW has managed to beat Keogg in severa minor internationa markets (e.g. in Midde and Far East). The chidren have finished their Cheerios and it is time to drive them to the kindergarten in Lausanne, Switzerand where CPW has its HQ. Later that day, Caro has to present the ong-term goba strategy for CPW, so she hurries to her office, and starts preparing the presentation. One of her marketing managers has prepared a background report about CPW and its position in the word breakfast cereas market. The foowing shows some important parts of the report. History of breakfast cereas Ready-to-eat cereas first appeared during the ate 1800s. According to one account, John Keogg, a doctor who beonged to a vegetarian group, deveoped wheat and corn fakes to extend the group s dietary choices. John s brother, Wi Keogg, saw potentia in the innovative grain products and initiated commercia production and marketing. Patients at a Batte Creek, Michigan, sanitarium were among Keogg s first customers. Another cerea producer with roots in the nineteenth century was the Quaker Oats Company. In 1873, the North Star Oatmea Mi buit an oatmea pant in Cedar Rapids, Iowa. North Star reorganized with other enterprises and together they formed Quaker Oats in The Washburn Crosby Company, a predecessor to Genera Mis, entered the market during the 1920s. The company s first ready-to-eat cerea, Wheaties, was introduced to the American pubic in According to Genera Mis, Wheaties was deveoped when a Minneapois cinician spied a mixture of grue that he was making for his patients on a hot stove. Cerea Partners Wordwide (CPW) Cerea Partners Wordwide (CPW) was formed in 1990 as a 50:50 joint venture between Nesté and Genera Mis (see Figure 1). Genera Mis Genera Mis, a eading goba manufacturer of consumer food products, operates in more than 30 goba markets and exports to over 100 countries. Genera Mis has 66 production faciities: 34 are ocated in the United States; 15 in the Asia/Pacific region; six in Canada; five in Europe; five in Latin America and Mexico; and one in South Africa. The company is headquartered in Minneapois, Minnesota. In financia year 2006 the tota net saes were US$11.6 of which 16 per cent came from outside the United States. In October 2001 Genera Mis competed the argest acquisition in its history when it purchased The Pisbury Company from Diageo. The US$10.4 biion dea amost doubed the size of the company, and consequenty boosted Genera Mis s wordwide ranking, making Genera Mis one of the word s argest food companies. However, the company is heaviy debt-aden foowing its Pisbury acquisition, which wi continue Figure 1 The CPW joint venture 142

48 Case I.4 Cerea Partners Wordwide (CPW) to eat into operating and net profits for the next few years. The company now has more than 100 US consumer brands, incuding Betty Crocker, Cheerios, Yopait, Pisbury Doughboy, Green Giant and Od E Paso. Integra to the successes of Genera Mis has been its abiity to buid and sustain huge brand names and maintain continued net growth. Betty Crocker, originay a pen name invented in 1921 by an empoyee in the consumer response department, has become an umbrea brand for products as diverse as cookie mixes to ready meas. The Cheerios cerea brand, which grew rapidy in the US post-war generation, remains one of the top cerea brands wordwide. However, heavy domestic dependence eaves the company vunerabe to variations in that market, such 143