MMVA ZG512 Manufacturing

Strategy
Rajiv Gupta
BITS Pilani
Session 2
 Session 2
• Module 1
– Recap of Session 1
• Module 2
– Role and Limitations of Manufacturing in Business
Strategy Formulation
• Module 3
– Porter’s 5 Forces of Competition
– Threat of New Entrants
• Module 4
– Rivalry Among Existing Competitors
• Module 5
– Summary and Wrap-up

2
 Session 2
• Begin Module 1
– Recap of Session 1

3
 Recap of Session 1
• In Session 1, we introduced the topic of strategy
• We discussed how strategy had its origins in
warfare and in ancient Greece
• The use of the term in business context is about
60 years old
• Strategy is necessary in business as a means to
define the business a company is in
• Strategy helps make decisions in those cases
where the decisions have long term impact

4
 Recap of Session 1
• Strategy helps employees and managers
understand the priorities and direction of
the organization.
• Strategy can be defined at the corporate
level, at the business unit level, and at the
functional levels. The strategies at each
level should be mutually supportive.

5
 Session 2
• End of module 1

6
 Session 2
• Begin Module 2
– Role and Limitations of Manufacturing in
Business Strategy Formulation

7
 Business Strategy and
Functional Strategy
• Business strategy sets the overall direction
for the business in terms of customers,
markets, range of products, pricing, etc.
• Business strategy is typically evaluated on
how effective it is, i.e., whether the
company is involved in the right activities,
markets, etc., and not necessarily in terms
of how well the activities are performed,
i.e., on the efficiency
8
 Business Strategy and
Functional Strategy
• Individual functional areas tend to be
evaluated on the basis of well they are
run, i.e., on their efficiency. They tend to
be less focused on doing the right things,
i.e., on their effectiveness
• This causes a schism between the
business strategy goals and the functional
strategy goals

9
 Role of Manufacturing in
Business Strategy
• Typically manufacturing tends to not lead
the organization when it comes to
developing strategic goals. The role of
manufacturing tends to be more meeting
the requirements set by other areas
including marketing, sales and finance
• So generally manufacturing’s role in
business strategy is not well understood or
recognized
10
 Role of Manufacturing
• Manufacturing had a more important role in
setting the direction for organization in the older
days when manufacturing capacity and
capability determined the profitability of the
organization
• With increased global manufacturing capacity,
the focus turned towards the ability to sell what
had been produced. This meant greater
emphasis on marketing, advertising, and pricing
issues
11
 Role of Manufacturing
• Manufacturing executives and managers often
were busy trying to meet their schedules as
opposed to be concerned about looking at long
range issues
• The perspective of manufacturing turned more
inward especially after the 1960s and 1970s
• Even today, the focus of people in charge of
manufacturing is more on efficiency and
conformance to requirements than on the setting
of long term plans
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 Role of Manufacturing
• The kind of training that manufacturing
personnel tended to receive was more
focused on technology than on broader
issues
• Promotions and financial rewards were
also tied to how well the people performed
the tasks they were assigned. There was
less incentive to think beyond short term
goals.
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 Role of Manufacturing
• The result was that manufacturing was not
closely involved during strategy
formulation
• The manufacturing people started to feel
that their role was not strategic
• This is a serious drawback of several
organizations

14
 Impact of Manufacturing
• Wickham Skinner did early research to
indicate that manufacturing had incorrectly
slid into a secondary role in the organization
• Among all the functional areas, the one that
contributes most directly to creating value for
the customer is manufacturing. All other
functions play a supporting role

15
 Impact of Manufacturing
• Manufacturing has the biggest impact on
cost, quality and speed of delivery as
compared to other functions. Cost, quality
and speed of delivery are determinants of a
company’s market position
• Manufacturing represents the biggest
investment in terms of plant and equipment. If
incorrect decisions are made, they will impact
the organization’s competitive ability.
16
 Session 2
• End of module 2

17
 Session 2
• Begin Module 3
– Porter’s 5 Competitive Forces
– Threat of New Entrants

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 The Porter Framework
Industry Profitability is Determined by

Threat of
New Entrants

Bargaining Power Rivalry Among Bargaining Power

of Suppliers Existing Competitors of Buyers

Threat of Substitute
Products or Services
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 Threat of New Entrants
High barriers to entry come from major sources
• Large economies of scale
• Significant product differentiation
• Large capital requirements
• High switching costs
• Ready access to distribution channels
• Cost disadvantages independent of scale
• Restrictive government policies
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 Barriers to Entry
• Large economies of scale
– Certain industries are viable at large volumes
– Scale advantages can occur in any function including
manufacturing, purchasing, marketing, R&D, etc.
– Multi-business organizations can share costs of
certain functions, reducing costs
– New entrants face higher risk as a result

21
 Barriers to Entry
• Significant product differentiation
– Existing companies have established brands
– New entrants have to spend significantly to overcome
customer loyalty
• Large capital requirements
– Certain industries require significant capital outlays.
E.g., aluminium, computer chips, etc.
– Some of the capital outlay may be due to R and D,
advertising, or production equipment
– Xerox created a barrier to entry by leasing equipment

22
 Barriers to Entry
• High switching costs
– Could include employee retraining, technical help,
ancillary equipment, supplies
– Customizing supplies can make switching difficult
– Employees get comfortable with existing systems and
resist change
• Access to distribution channels
– Existing distribution channels may be reluctant to
provide outlets to new entrant
– Prime example is shelf space in food stores

23
 Barriers to Entry
• Cost disadvantage independent of scale
– Proprietary technology
– Access to raw materials
– Government subsidies
– Favorable location
– Experience curves
• Government Policy
– Licensing requirements
– Restricted access to raw materials, e.g., coal mines
– Environmental regulations
– Product testing requirements 24
 Session 2
• End of module 3

25
 Session 2
• Begin Module 4
– Rivalry Among Existing Competitors

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 Rivalry Among Existing Competitors

Intense rivalry results from interacting factors

• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs
• Lack of product differentiation or low
switching costs
• Capacity augmented in large increments
• Diverse competitors
• High strategic stakes
• High exit barriers
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 Rivalry Among Existing Competitors

• Numerous or equally balanced competitors

• When the number of existing competitors is large
and the industry is not dominated by a few
companies, there is a greater tendency for
instability due to individual moves by companies
• When the industry is dominated by a few players,
they impose more discipline
• Often foreign competitors tend to disrupt local
markets

28
 Rivalry Among Existing Competitors

• Slow industry growth

• If growth in the industry is slow, firms seeking growth
fight for market share
• Fight for market share makes the situation more
volatile as competitors have to outguess each other
• High fixed costs
• If fixed costs are high, there is a greater pressure for
higher capacity utilization
• This can often lead to aggressive price cutting to sell
excess stocks
• The same can be true if storage costs are high

29
 Rivalry Among Existing Competitors

• Lack of product differentiation or low switching

costs
• When there is little product differentiation, the product
is viewed as a commodity
• The main competitive factor then becomes price and
service
• In such cases, competition tends to become intense
and can lead to price wars

30
 Rivalry Among Existing Competitors

• Capacity augmented in large increments

• Certain chemical and process industries are limited
by large quantum of capacity increases
• When capacity has to be increased in large amounts,
it can lead to overcapacity and price cutting
• Diverse competitors
• Competitors from different backgrounds tend to follow
different competitive approaches
• Others find it difficult to read the moves of such
competitors
• Foreign competitors tend to add to diversity

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 Rivalry Among Existing Competitors

• High strategic stakes

• Certain companies place a high premium on success
in a market for strategic reasons, e.g., foreign
competitors trying to get a foothold in a market
• Such companies will be willing to forego profitability
for a while and may destabilize the market
• High exit barriers
• When exit barriers are high, due to low liquidation
value of assets, or regulatory constraints, companies
may be forced to operate even when not profitable.
• They tend to drive down prices to keep their sales up

32
 Session 2
• End of module 4

33
 Session 2
• Begin Module 5
– Summary and wrap up

34
 Summary
• The manufacturing function has the largest
stake in the success of the organization
• However, typically the manufacturing
function tends to be reactive rather than
proactive in strategy development
• Manufacturing managers and executives
are rewarded more for short term
performance than for setting strategic
objectives and achieving them
35
 Summary
• Michael Porter has defined a structural
description of the forces that affect the
competitive position of an organization
• The five forces of Porter that define the
competitive position include barriers to entry,
existing competitors, substitute products,
bargaining power of buyers and the bargaining
power of suppliers

36
 Session 2
• End Module 5
– Summary and wrap up

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