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•Consider various pricing strategies: •Evaluate pricing strategy -- premium vs. value products (see PRICING card)
•Price discrimination
•Examine company’s core competencies, ability to leverage economies of scope and scale, potential issues
•Two-part tariff of capacity constraints.
•Bundling
•Analyze market direction and threat of new entrants
•Warranties
•Demand elasticity •Consider the impact of external factors (e.g., technology, regulation, competitors, likely competitive
responses, etc.)
•Cost of retaining and acquiring a customer (e.g., use of loyalty programs because it’s cheaper to
retain customers than to acquire new customers)
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DISTRIBUTION PROMOTION
•Understand current structure -- is it overly complex? •Analyze segments (who, what, where, how, value)
•Draw a map (e.g., show plants, distributors, customers) •Understand audience needs / perceptions (conjoint surveys, trends, etc.)
•Outline the value chain (suppliers, manufacturers, distributors, wholesalers, retailers, •Benchmark with other industries
customers, etc. -- break down each as a percentage of total costs) •Estimate potential per segment
•Analyze the objectives of distribution chain for specific case •Demand •Price •Profitability
•Channels •Growth •Competition
•Coverage •Consider various issues in company’s advertising and PR strategy including:
•Flexibility •Differentiation and sustainability of promotion
•Speed •Dilution of message
•Barriers to Entry •Use of specials, discounts, etc.
•Consider various tradeoffs: •Sales force effectiveness
•Cost vs. proximity •Identify opportunities to differentiate product (based on dimensions of quality, design, location, service,
•Service vs. product implications advertising, price, etc.) in order to:
•JIT vs. inventory •Expand feasible set of strategies (not limited to 1 dimension / product attribute)
•Evaluate impact of trends (IT, deconstruction of value chain) •Avoid price warfare
•Consider cost-benefit analysis of alternative distribution methods REMEMBER: The goal is to send the right message to the right people in the right way!
•Assess regulation as a barrier to entry (through procurement, as well as environmental and safety •high product differentiation
standards •government prohibition of concentration / local regulations
•Transportation or storage costs and cost of labor, energy, raw materials, etc. •New York City -- 16 million
•Access to established distribution channels •Los Angeles -- 12 million
•Ability to leverage value chain asymmetries •Buenos Aires , Argentina -- 12 million
•Consider management structure (i.e., multinational, centralized, transnational) •Beijing, China -- 11 million
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•Is the project a strategic necessity? If so, don’t evaluate IT investment based on current project
•BALANCE SHEET = Assets = Liabilities + Stockholder’s Equity
evaluation methods (i.e., 5 year payback, ROI criteria, etc.)
•Outsource vs. develop in-house •STOCKHOLDER’S EQUITY = Shareholder’s Equity + Common Stock + Retained Earnings
•Understand that IT infrastructure determines what a company will be able to do and not do in the future
•REAL INTEREST RATE = Nominal Interest Rate - Inflation
•Defines a company’s organizational capability
•PROFIT BEFORE TAXES = Gross Revenue - Returns & Allowances - COGS - SG&A - Depreciation -
•Must have close link between strategic planning and IT infrastructure planning
•Consider impact of current IT issues (e.g., the Year 2000 problem) on the company’s costs and •GROSS MARGIN = Gross Revenue - Returns & Allowances - COGS
profitability
•Make sure that employees are prepared to learn and adopt new system
•BREAKEVEN VOLUME = Fixed Costs / (Price - Variable Costs)
•Identify the impact of IT infrastructure on redefining the value chain
being served knowledge •Break down total costs into fixed and variable cost components
Fixed Cost Issues: Variable Cost Issues:
•Customers and how they use the product •Regulatory changes
- Capacity utilization (if it’s low, identify - Suppliers (consolidate?)
•Product, process, and market innovation •Changes in cost structure
cause, e.g., demand vs. efficiency) - Cost control
•If the market is growing, the number of entrants increases and it’s easier for all players to achieve
- Break-even analysis mechanisms and
improved performance (non-zero sum game); therefore it’s easier and cheaper to take
market share. Strategies include: (BE volume = FC / (Price - VC)) incentives in place?
- Economies of scope and scale - Outsourcing alternatives
•Maintain prices as costs and achieve high profitability (price effect)
- NPV of fixed cost investment with - Impact of horizontal or
•Drop prices as costs to increase market share (market share effect)
sensitivity analysis vertical integration
Note: in a growing market you want to increase market share over the long-run
•If the market is slowing, one firm’s gain is another firm’s loss (zero-sum game) •Determine slope of industry cost curve
•Price competition increases especially when there are large economies of scale, low marginal •Compare cost structure to that of competitors
costs, and learning curve effects •Identify and leverage potential cost advantages (e.g., raw materials, labor, energy sources,
•Check that market share is not from turnover of most profitable customers infrastructure, patents, location)
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•Consider likely competitive responses to the client’s actions and potential cooperative strategic •Establish long-term contracts to lock in customers
options
•Break down Revenue component (see REVENUE card): •Analyze customer’s willingness to pay for company’s product / service
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CONSOLIDATION OUTSOURCING
•Analyze the “make vs. buy” decision
•Examine feasibility and objectives of industry consolidation
•Ignore fixed and other sunk costs, only consider variable costs
•create economies of scale or learning curve effects
•Examine the company’s cost allocation method
•standardize diverse market needs
•Assess benefits of outsourcing:
•make acquisitions for critical mass
•lowers cost
•recognize industry trends early •increases flexibility and access to external capabilities
•Evaluate impact of consolidation •benefit from economies of scale and specialization of third-party provider
•achieve operational and financial synergies •may reduce new product development cycle
•cultural fit •loss of control over manufacturing process, quality, turnaround time, etc.
•increased difficulty associated with integrating different technologies and knowledge bases (may
•Assess implications of vertical vs. horizontal consolidation
diffuse the concept of core competencies which results in loss of a company’s ability to
•Understand regulatory issues innovate and develop)
•Analyze cost - benefit to the company •costs of monitoring the contractor and contract specifications may outweigh lower unit costs
•Waste: measure what percentage of raw material inputs is lost in producing output •supplier poses credible threat of forward integration
•Recognize that the sharing of benefits will depend on: •Competitive response (i.e., lead to price or quality )
•Conduct cost - benefit analysis
•Strategic intent of the partners
•Can subsidiary inefficiency / high costs be turned around?
•Ability of each partner to capture and appropriate the skills of the other
•Effect on quality of product / service
•Company’s receptiveness to the partnership
•Impact on economies of scale and scope
•Identify alternative strategies (e.g., outsourcing, M&A, etc.) -- explore as needed
•Current / future cost breakdown (fixed costs vs. variable costs, transition costs)
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DIVERSIFICATION CAPACITY
•Examine existing business situation and understand motivation behind diversification (invest free cash
flow?) •Assess overall fixed asset effectiveness (see OPERATIONS EFFICIENCY card)
•Utilization
•Avoid diversification strategy solely to smooth earnings
•Throughput against its theoretical potential
•Analyze different types of diversification
•Product acceptance and waste levels
•Expand geographically (local, regional, national, international)
•Compare to industry averages and recent trends
•Integrate vertically (offsets power of suppliers, smoother production flow, better accessibility to
markets, distribution cost advantage) •Identify causes of utilization loss
•Lack of demand
•Expand into related markets (product, business, distribution, managerial skill)
•Plant breakdowns
•Expand into unrelated markets ( risk, benefits from economies of scale, acts as “informal”
market when external markets e.g., labor or capital, are weak) •Staffing issues
•Evaluate ability to leverage existing resources, value chain, infrastructure and economies of scope and •Issues to consider in adding new capacity
scale •Demand considerations
•Consider competition and likely competitor response (e.g., impact on pricing) •Ties up capital and may result in excess capacity
•Conduct cost - benefit analysis of diversification strategy •Evaluate company’s minimum efficient plant size (MES) relative to total market output (it’s
easier to enter if MES as % of total market is smaller)
•Economic conditions
•Estimate slope of industry cost curve -- it’s easier to bring a new plant on-line below capacity if
•Market supply / demand the cost curve is flat
•Regulatory issues
•REMEMBER: Importance of utilization as fixed costs as a % of total costs