Despite its limitations, the model is used with some success on industries like the mobile phone industry (Johnson and Scholes 2002; 116).
(Fig. 3. Adapted from Johnson and Scholes 2002;113)
Four Trajectories of Industry Change
This model was developed by Anita M. McGahan in October 2004 and builds on Porter’s ideas. It suggests that industries evolve as a result of two types of threats of obsolescence: (1) A threat to the industry’s core activities. (2) A threat to the industry’s core assets. Resulting from a combination of these types of threats, industries change along one of four trajectories of industry change.
Radical – pursuing near-term profits while avoiding investments that could later prevent reducing commitments, plus, assess how core assets are depreciating so to protect the competitive position.
Progressive - develop a system of interrelated activities that are defensible because of their compounding effects on profits, not because they are hard to understand or replicate.
Creative - assess how core assets are depreciating so to protect the competitive position.
Intermediating - pursuing near-term profits while avoiding investments that could later prevent reducing commitments.
(Fig. 4. Adapted from McGahan 2004)
STRATEGIC CHOICE
Four Links/Co-operation Model and Game Theory
Many organisations compete as well as co-operate with rivals. Until recently, such links were rarely analysed – the analysis stopped at Porter’s Five Forces, however, it is now becoming increasingly clearer that co-operation between the organisation and others in its environment is also important (Lynch 2000). Game theory is a branch of mathematical analysis developed during the Second World War to study decision making in conflict situations. Like a situation where two or more companies, who have different objectives, acts on the same system or shares the same resources. Game theory provides a mathematical process for selecting an optimum strategy in the face of a competitor.
These models are used to get a broader prospective and create links between competitor’s interests and see how co-opetition (Brandenburger and Nalebuff 1996) (cited by Carayannis and Alexander 1999) can benefit the companies.
(Fig. 5. Adapted from Lynch 2000; 133)
BCG Matrix
This model was developed by the Boston Consulting Group and was designed to help diversified companies allocate resources so to optimise performance and to balance cash flow (Johnson and Scholes 2002). Lynch (2000) states that the two factors that define a product’s strategic place in the market according to this model is Relative market-share and Market growth rate.
According to the model, there are four types of business: (1) Question marks, (2) Stars, (3) Cash-cows and (4) Dogs. (Fig X) “It is used to analyse the product range with a view to aiding decisions on how the products should be treated in an internal strategic analysis” (Campbell, Stonehouse and Houston 2002, 108). Prahalad and Hamel (1994) dismisses this model on the grounds that business units are highly autonomous (cited by de Wit and Meyer 2004). It seems that only the Question marks needs management thought, but all categories needs thought (Mintzberg and Quinn 1991) “No management model can safely substitute for analysis and common sense” (ibid. 682).
(Fig. 6. Adapted from Mintzberg and Quinn 1991; 679)
Generic Strategies
This model was developed by Michael Porter (1980b). There are two decisions organisations must make on its strategy (Campbell et al 2003, 159): (1) Should the strategy be one of differentiation or cost leadership? (2) Should the scope of the strategy be broad or narrow? Porter outlined the three main strategic options open to organisations that wish to achieve a sustainable competitive advantage.
The generic strategies are: 1. Cost leadership, 2. Differentiation, and 3. Focus/Niche. Porter argued that a business must choose between differentiation and cost leadership and not get caught in the middle, which will result in sub-optimal performance. There is reported confusion between the strategies (Murray 1988). “A strategist using a focused approach must first differentiate the product offering from offerings aimed at other segments of the same market” (ibid. 391). Several academics have questioned the use of generic strategies claiming they lack specificity, flexibility, and are limiting (Bowman et al 1991). In particular, Millar (1992) questions the notion of being “caught in the middle”. He claims that there is a viable middle ground between strategies. Many companies, for example, have entered a market as a niche player and gradually expanded. Treacy and Wiesema (1993) have modified Porter’s three strategies to describe three basic “value disciplines” that can create customer value and provide a competitive advantage. They are (1) operational excellence, (2) product innovation, and (3) customer intimacy. This model means that a company should choose to excel in one value discipline, where it aims to be the best.
(Fig. 7. Adapted from Porter 1985, cited by Campbell et al 2003; 160)
Core Competencies
Porter (1980a) argued for the importance of the industry, but this approach suggests that the organisations core competences are more important when making a strategic choice (cited by Campbell et al 2002; 170). The ideas about core competencies where developed by C K Prahalad and G Hamel in a series of articles in the Harvard Business Review (1990). Their idea is that over time companies may develop key areas of expertise, which are distinctive to that company and critical to the company’s long-term growth. There are three tests to identify a core competence: (1) provides a potential access to wider markets (2) should make a significant contribution to the perceived customer benefit of the product and (3) should be difficult to imitate. There are, however, challenges to this idea (Granstrand et al 1997). They argue that technological competencies are far more complex than assumed. Corporate technological competencies are dispersed over a wider range of sectors than their production activities.
THE ORGANISATION AND INDUSTRY
I have selected Vin & Sprit AB to perform this assignment on. V&S is a Swedish government controlled organisation operating in the international alcoholic drinks industry. Their most famous brand is Absolut vodka, which is the third largest premium spirit in the world. V&S has subsidiaries in twelve countries and a worldwide distribution network spanning over 125 markets.
The main competitor is Diageo, which only recently moved in to the alcoholic beverage business. Diageo grew rapidly through strategic acquisitions, and are now the main player on this market (Diageo 2004).
The drinks market is predicted to grow fairly slowly in value over the next 5 years (Keynote 2003). The assumptions behind this prediction include continued low inflation/deflation, an impending economic slowdown and a lack of innovation in the drinks market. Government actions will continue to have an impact on the drinks market. Licensing laws are likely to be reformed in the next 3 years; lower tax on alcohol and the forbidding of further consolidation through mergers in many drinks sectors.
APPLYING THE MODELS
For Porters Five Forces to be viable it must be applied to strategic business units within the company. V&S has three main strategic business units being V&S Distillers, Wine and Absolut Spirits. The concentration will be on Absolut Spirits in this analysis.
A strong barrier of entry is ABSOLUT’s brand loyalty. Others may be the cost advantages of low distribution costs, enabled by the acquisitions of major distributors e.g. in the USA, distribution is handled by Future Brands, in which V&S has a 49% holding. In most other major markets distribution is handled by Maxxium, in which V&S owns 25%. By acquisitions and mergers in the last few years V&S has become larger. This enables them to utilise the economies of scale.
Start-up costs to enter in the spirit market are also too high for a lot of companies. Finally, V&S is owned by the Swedish government. This acts as a deterrent to some potential competitor, particularly in the Swedish or Scandinavian markets.
The threat of substitutes works, in a way, in V&S’s favour. Because of their broad rang of products, they need not try to “catch up” with the trends. Consumption patterns are changing away from alcoholic beverages towards the café culture of continental Europe.
Buyers and Suppliers. There are ten major suppliers of alcoholic beverages, selling almost 2.5 billion litres of spirits (V&S Annual Report 2003). In the UK market, market research by Mintel estimated that the consumption of spirits reached around 115 million litres in 2003. As shown, this is a rather small portion of the total sales, which can be interpreted to mean that the power of buyers in the UK market is not strong. As for the suppliers of V&S, well they have hardly any power at all. Most of the suppliers in this industry have been taken over, or are joint ventures with the major players, in an attempt to cut costs and strengthen their supply and distribution network. As mentioned, V&S is not an exception.
Competitive Rivalry. In a not so unusual way, V&S are collaborating with their competitors. V&S has two main distributors. Future Brands, 49% of which is owned by V&S through The Absolut Spirits Company and 51% by Jim Beam Brands. Jim Beam Brands is a major competitor. This alliance is further strengthened by V&S owning 10% of Jim Beam Brands. The other is Maxxium, which is owned in equal parts by V&S and two other competitors.
It’s becoming clear when applying this model on an industry and company like this is, that it seems to be too simplified. Industries like this are too complex, too fast changing. To simply diversify away if the forces become too intense is not realistic for most companies, let alone V&S. As mentioned, V&S owns shares in two of their major distributors together with their competitors. This makes it, both easier, and, harder for them to minimise the impact that the five forces has on the industry. This co-operation sounds more like game theory, which is in itself a criticism of Porter’s model (Lynch 2000). What about macro-level factors? Economic trends, changes in demographic structure (Grant 1998) (cited by Mazzucato 2002), social and political trends? Grant goes on to argue that the model fails to take into account that competition is a process that itself changes the industry e.g. the privatisation of BT, which enabled rapid competition that eventually changed the structure of the industry. This is true for V&S, since it is a government owned company and should it be privatised the Swedish market, especially, would change drastically. This model can be used in markets, but it is more concerned with defending the position. If the company wants to grow, something like the BCG matrix, which is concerned with growth, would be a better tool.
For Porter’s Generic strategies we will look at both the industry, and the business units.
Cost Leadership. V&S are able to produce and distribute at a low cost due to facts like: For ABSOLUT, they produce the product without suppliers; they have an extensive distribution network; by merger’s and acquisitions in the last few years they have grown, which enables economies of scale; they focus on training their employees to deliver the lowest possible costs of production (V&S Annual Report 2003).
Differentiation. The market in which V&S operate is segmented. For example, the spirit market is segmented into spirits, premium spirits and super-premium spirits. Recent reports suggests that V&S was falling behind in the new lucrative super-premium market (George 2004), as well as in to premium market, where innovation is vital against a fast changing market. This is blamed on the fact that V&S was busy rebuilding their distribution network. They have decreased the gap by releasing Level, a super-premium vodka.
Focus/Niche. V&S says they will develop niche products linked to ABSOLUT to take advantage of market trends, and of the ABSOLUT band name. This year it has launched Level, and ABSOLUT Cut, a premixed drink.
It is argued that if a company select one or more approaches, and then fail to achieve them, the organisation gets stuck in the middle without a competitive advantage (Porter 1980a) This makes sense. If you are really distinctive, comparison of your costs with other companies are not relevant, or even possible. The problem with Porter’s framework is that if every business adopted the strategies advocated it would lead to a stand still. Cost leadership is a powerful competitive approach (Thompson and Strickland 1999; 136), but doesn’t necessarily mean competitive advantage. Discounting, between supplier and wholesalers, would limit differentiation strategies. For a company like V&S it seems impossible not to be stuck in the middle, but I don’t think that it necessarily means that they have no competitive advantage.
I shall identify three core competences for V&S. One for each of the factors suggested by Prahalad and Hamel.
(1) V&S’s knowledge and access to various markets. By, as part of their ongoing strategy, acquire or merge with local companies, thus gaining knowledge and experience about new markets.
(2) The innovation, skills and procedures used by V&S. Competition places great demands on creativity and innovation, both in the product development and promotions. V&S’s sensory analysis operation helps them to understand consumer preferences, and to take advantage of this when developing their products. All ABSOLUT vodka comes from the same production plant in Sweden. All the wheat grown in the local area and the water comes from V&S’s own well. Their meticulous control of the process is one of the reasons behind the brands high quality. Every bottle, before filled with ABSOLUT vodka, is rinsed and cleaned using ABSOLUT vodka. This quality, skills and controls means that consumers believe that the products from V&S has a certain standard, thus, contributing to the perceived benefit of the products.
(3) The company’s brands image. The ABSOLUT campaign has included painters, sculptors and designers. These kinds of campaigns create a certain suave, sophisticated, fashionable image. The campaigns appears in museums, fashion magazines and TV, where they are talked about and discussed, which emphasises the image of the company and the brand. This is an advertising campaign that other companies, including competitors, have been unsuccessfully trying to imitate.
I have chosen to situate core competences in the strategic choice section, rather than stakeholder analysis, because I think they are vital to making a strategic choice and fits in with the models for strategic choice as shown above.
Managers may find it difficult to specify their core competences. What they are looking for might be critical success factors, they could be looking at a too generic level or they may not understand them (Johnson and Scholes 2002). I think that Pralahad and Hamel’s three criteria enables managers to find their competences, but their objectivity will be clouded, making it hard to really understand their core competences.
SUMMARY
These models are invaluable tools to the novice and seasoned businessman alike. They concentrate the mind of the businessman into foreseeing possible future scenarios but it’s up to the businessman to use his experience and flair to decide how to cope with these situations. These methods of analysis enable the users to discover the questions but certainly do not provide the answers. As for the alcoholic beverage industry, the market seems to complex to be able to fully rely on any one of these models
