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CHAPTER EIGHT INVESTING IN COMPETITIVE METHODS By Maris Chen for Dr. DeMicco. OBJECTIVES. Define a competitive method (CM) as a portfolio of products and services. Explain the role of CMs in adding value to the firm. Evaluate the CM as an investment in the future.
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CHAPTER EIGHT INVESTING IN COMPETITIVE METHODS By Maris Chen for Dr. DeMicco
OBJECTIVES • Define a competitive method (CM) as a portfolio of products and services. • Explain the role of CMs in adding value to the firm. • Evaluate the CM as an investment in the future. • Identify the nature of the economic life span of a CM. • Conduct an analysis of current and future CMs. • Describe the challenge of limited resources when many investments in CMS are needed. • Explain how investments in CMs affect the market value of the firm.
Competitive Methods as Combinations of Goods and Services • Define a competitive method (CM) as a portfolio of products and services. • A CM is a portfolio of products and services bundled in such a way that is attracts those customers from within the overall demand curve of the industry. • In service industry, many of CMs are intangible and difficult to produce consistently over time. • CMs are unique bundles of products and services. Ex 1: Hotel room service combining products such as menu items with Individualized services. Ex 2: The individual butler concept in hotels. Ex 3: Expedia packages complete trips for individuals based on customers’ desires. • Please read page 230 and 232 in the textbook for the details of these examples. The exhibit on the next slide explains how CM relates to goods & services, and environment & investment return.
Competitive Methods as Combinations of Goods and Services Products/Services Competitive Methods In service industry, CMs are combinations of goods and services, both tangible and intangible. P1 P2 Competitive Methods One Cash Flow to Shareholders P4 P3 Environmental Events S1 S2 Competitive Methods Two S3 • Each CM reflects the • opportunities and threats • within the environment, • and produce the needed • returns sought by investors. S4
Competitive Methods to Add Value to Firms • Explain the role of CMs in adding value to the firm. • CM becomes the primary way for firms to differentiate themselves from other firms and seek to achieve sustainable competitive advantage. • Truly unique CMs are hard to be duplicated. The more CMs, the greater the chance of achieving profitable and sustainable advantage. • Each CM is unique and appeals to the customer in the marketplace and serve as the main reason why that customer is willing to part with his or her money. So, the CM is a revenue producer that has strong market appeal and can offer the firm competitive advantage.
Investment in the future 3) Evaluate the CM as an investment in the future. • A CM must unique to the individual firm. CSFs can not be included in a CM. • For a firm to consider a CSF as a CM it must lead the industry, and this leadership must result in improved return on invested capital over time. Ex: Although loyalty programs and reservation systems are considered industry-wide CSFs, Marriott has enjoyed better performance from them and can consider its investment in both as CMs. • The life cycle is an important determinant relative to estimating the cash flow streams associated with an investment in a CM. • Please read page 232 and 233 in the textbook for further information.
Life Cycle of Competitive Methods 4) Identify the nature of the economic life span of a CM. • It is possible to sustain the life cycles of CMs for extended periods with good planning and future-oriented management. Ex: McDonald’s continues to lead the industry by extending the life of its CMs. • Please read page 233 and 234 in the text book for more detail about this example. • The life of a CM is linked to several key variables such as forces driving change, value drivers, competitor actions, demand curve makeup. • In mature industries, many of the previous CMs have turned into CSFs, which put great strain on management to be creative in how it plans to compete in the future. The following slide illustrates the life cycle of industries, organizations, and competitive methods.
Industry, Organization, and Competitive Method Life Cycles Growth Industry Life Cycle As the industry matures, it is harder for firms to grow value. Their CMs’ lives grow increasingly shorter. Thus, firms should recognize where their firm is situated and to make investment decisions in CMs that reflect this position. Competitive Methods Life Cycle Firm Life Cycle Time
Conducting an Analysis of Current and Future Competitive Methods • Each CM is valued using the discounted cash flow technique referred to as net • present value (NPV). • Process of evaluating CMs: 5) Conduct an analysis of current and future CMs. Review of each CM (product + service) • forces driving change • value driver • critical success factors • life cycle Review changes in remote and task environment Changes in cash flow estimates and NPV Assessment of CMs’ future performance • Please read the example of evaluating current CMs on page 239 in the textbook for more understanding.
Challenge of limited resources • 6) Describe the challenge of limited resources when many investments in CMs are • needed. • There is hardly ever enough resources to meet all the investment needs of the firm. • The exhibit below contains a look at the firm in which the project list exceeds the resources available. What to Do? To make investment by rank according to NPV. So, for this example, CSF3 first, followed by CSF2, and then CM2,CSF1 and CM1. • Please read page 239 and 241 in the text book for more detail about this example.
Challenge of limited resources • The challenge that the manager will face is whether or not to invest in CSFs where the firm is weak or to ignore those needs and go with new ideas that will provide new advantages. • One of the unique feature of the hospitality industry is that management is very often separated with ownership. Managers must respond to the needs of the owners of these assets. This includes requiring the manager to understand the needs of the owner with respect to the returns on capital associated with key CMs. • Please read the example on page 240 in the text book for more understanding about this challenge.
Market Value from CMs 7) Explain how investments in CMs affect the market value of the firm. • Not all of the firm’s value can be easily explained by the NPVs of each CM because of intangible value. • Managers are expected to grow more value out of each CM and add new ones when possible. • Overlap among the CMs should be view as a positive strategic move. • By allowing this overlap, it is possible that firms can leverage resources across several CMs. • This overlap keeps the competitors from completely understanding how value is created, thus making it difficult for them to copy. This is especially important in service firms where many services can be copied easily. The following slide illustrates the market value of firm as estimated by aggregating NPVs of CMs.
Market Value from CMs • Overlap among the • CMs : positive strategic • move Represents the expected growth in returns by investors CM CM CM CM CM CM CM Unexplainable portion of the firm’s value Ex, brand name, employees, the talent of leader, location, R&D department, and so on. Total market value of the firm in $ Explainable portion of the firm’s value
Chapter Questions 1. What determines successful competition in the hospitality industry once the segment is chosen? Analysis of environment Total array of competitive methods that the firm invests in Resource allocation None of the above 2. What offers firms the opportunity to sustain competitive advantage and is very much a part of the strategic thinking process? Products only Services only Unique bundles of products and services None of the above
Chapter Questions 3. The life of a competitive method is linked to: the forces driving change as identified in the remote environmental analysis. the value drivers competitor actions. the demand curve makeup. All of the above 4. If the CM is performing well, what must management do next? Management must probe further to be sure that all the value that was originally forecasted has actually been achieved. Management needs to investigate the internal resource allocation process to see if costs of implementing the CM can be improved. The processes to produce, inventory, and sell the products and services related to the CM must also be looked at to be sure they are reflecting the current best practices in the industry. All of the above
Chapter Questions 5. When considering the investment resource, the challenge(s) the managers meet include: whether or not to invest in critical success factors where the firm is weak. whether or not to ignore those needs and go with new ideas that will provide new advantage. whether or not there are too many resources to meet the investment needs of the firm. whether or not to invest in critical success factors where the firm is weak; whether or not to ignore those needs and go with new ideas that will provide new advantages. 6. What does the dotted line around the silver dollar in Exhibit 8-8 imply? The investors expect that dollar to grow in value on a consistent basis. Managers are expected to grow more value out of each CM and add new ones when possible. The co-alignment process is dynamic in the sense that managers must manage each competitive method to be sure that it continues to generate cash flows and that each CM grows in value. All of the above
Chapter Questions 7. The life cycle is an important determinant relative to estimating the cash flow streams associated with an investment in a CM. True False 8. Managers should allocate resources to those CMs that create the greatest value. True False 9. In trying to fully understand the value of any firm, financial analysts often comment on the difference between the book value of the firm and its market value. True False
Chapter Questions 10. What is the definition of Competitive Methods? Please briefly explain it as it relates to the service industry. 11. Why do we say the concept of the life cycle provides a useful link between the elements of the environment and strategy choice in the co-alignment model? 12. What reviews must take place when deciding what competitive method to invest in within the context of its domain? 13. Briefly explain the process of evaluating competitive methods. 14. Why should the overlaps among the CM be viewed as a positive strategic move?
Student Learning Outcomes On completion of this chapter, you will be able to: 1. define a competitive method (CM) in organizations. 2. explain the role of CMs in adding value to the firm. 3. apply the life cycle of industries, organizations, and CMs into your analysis. 4. conduct an analysis of current and future CMs. 5. provide examples about how investments in CMs affect the performance of the firm.
Case Study Answers 1. Facing the environment change that North American and European markets reach saturation with fierce competition, and on the other hand, the Asia Pacific region offers excellent growth prospects, leading players of the hotel industry are targeting Asia for their future growth and boosting the number of their hotels in Asia, especially in China. Additionally, the middle class of the Asia Pacific area is growing, in order to take advantage of this change, most international hoteliers aim to expand their supply in the mid-rate and budget market. Finally, with increasing uncertainty in the external environment, key players in the hotel industry are diversifying their operation to achieve balanced growth among different geographic regions and different market segments. 2. First, Accor’s achievement attributes to its diversified portfolio strategy with emphasis upon budget properties, in which way Accor has reduced operation risk and enjoyed balanced growth. Second, innovative and user-friendly technologies such as reservation and yield management enable Accor to attract international traveler and build the base for its expansion. Third, the experience of running budget hotels in France also is an important advantage for Accor to compete with its rivals and become a key international hospitality organization.
Case Study Answers 3. In each country/region it enters, Accor has blended itself into the local culture and developed adaptable products and competitive methods according to the local situation. For example, in South Africa, it started with its budget brand Formula 1; in Brazil, it started with its mid-scale hotels; in China, Accor began its business with up-scale hotels; in the United States, however, two –pronged strategy in economy and luxury segments are adopted by Accor. In a word, based on the economy in the host country and the development stage on which the local hotel industry is and local culture, Accor has pursued the most proper competitive methods and made itself a leading international hotel player. 4. In my opinion, the first competitive method of Accor is its balanced portfolio of hotels ranging from first class to economy and diversified operation in a full range of tourism services along with hotels, which enables Accor to achieve balanced growth in increasingly uncertain environment. Second, Accor has gained competitive advantage by using technology consistently and innovatively such as centralizing its yield management to increase cross-sell opportunities, developing online booking engine with instant confirmation and daily rates, and launching multilingual booking platform. Finally, the proper and successful strategic expansion plans launched according to local situation in different geographic regions have put Accor ahead of its competitors.
Case Study Answers 7. The first political risk for Accor in China and Asia is how it gets used to a different political environment from its own country. In this sense, it is imperative for Accor to be familiar with the local government regulations and laws and operate its business in the local way. Second, it is possible for Accor to suffer unfair competition with the local hotels protected by the local government. One economic risk Accor is facing is the increasingly changeable exchange rates, which probably brings financial loss for international operators like Accor. 8. The most sustainable aspect of Accor’s strategy is to focus on accommodating the emerging lifestyle trends and needs of the fast-growing group of Asia travelers because the ability to satisfy demand plays the most fundamental role in the competition of hotel industry. Secondly, the consistent and innovative utilization of technology in its strategy is also crucial to gain sustainable advantage and keep the place of leading performer. 9. In fact, reservation and yield technology are considered industry-wide CSFS. However, Accor has enjoyed better performance on them compared to its competitors. In this sense, Accor has a leadership with respect to technology utilization and technology is the competitive method for Accor. As a result, its rivals should put more investment in technology and catch up with Accor.
