Pindelski_Competitive_Strategies

Questions and discussions

1.When are substitutes a competitive threat?

2.How could we deal with the threat from substitutes?

3.How do substitutes affect the sector and the competitors therein?

Case study 15

Zelmer – the home appliances manufacturer

Zelmer is the name of a group of Polish and other EU distributors and trader in the home appliance industry. The basic object of the Zelmer Group business is manufacturing electrical home appliances. It also deals in the wholesale and retail of equipment and runs an online store. Zelmer operates on numerous markets in various continents. On the Polish market Zelmer is the leader in the small home appliances industry. In spite of the fairly unlucky sale of the control packet of Bosch – Siemens shares, Zelmer has significantly developed its operations on various markets, particularly in Central and Eastern Europe. The company strategy is most of all based on the organic growth. The business mission is the production of the best electrical products in Poland, used for keeping homes clean and products facilitating food preparation. Thanks to the developed R&D department, the perfect design and renewed offer of hi-tec products it tends to consolidate the position of a significant exporter of such products worldwide. Fulfilling the mission, the quality policy is performed with basic assumption: “Our customer is our boss”. The major financial target is the increase of sale by an average of 10-11% p.a. Zelmer competes in the home appliance area with global brands, such as Philips, Panasonic, LG Amica, or Samsung. In other product categories with SAECO, Krups, or Electrolux.

The technology of the products was built from the foundations in the company’s own facilities. Holding several hundred patents and implemented solutions and innovations, the business has become independent of suppliers of various subassemblies. Thus it could control high quality standards to a much higher extent and gain subsequent certificates of quality, such as, without limitation: ISO 9001, VSE, CSA, UL, TÜV, CE and a lot of others.

Zelmer offers the following products: classic vacuum cleaners (6 product lines) and multi-functional (2 product lines), food processors (3 product lines), food mixers (2

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product lines), choppers (2 product lines), food slicers (3 product lines), wireless kettles (2 product lines), juicers (4 lines), subassemblies for home appliances, such as electrical motors, light metal casts and plastic profiles for the production of home appliances, spare parts for the products offered.

A sectional analysis for Porter’s 5 forces was carried out for the group, which suggests that the threat of a substitutes’ arrival is relatively probable. There is large competition in the sector. Although Zelmer has its own patents and permanently modernizes the products, the buyers often follow irrational factors. In the case of small home appliances, they are relatively easy to be replaced and obtain similar functionality by means of other tools. In the case of body care products a spa can be used as an alternative.

The arrival of competitors and partly manufacturers of home appliance substitutes does not require particularly high expense. On the other hand, the market is very attractive. The margins are fairly high, which single transaction values, in relation to other purchases of individual customers – substantial. Part of the competitive offer, especially the inexpensive one is from China, others from the EU countries. Generally the threat of new competitors’ arrival on the market is high. The technology is relatively easily accessible and not too complicated, there are no specific regulations concerning taking up business in this sector. However, there is a certain capital barrier. However the brand awareness and customers’ loyalty are immensely significant factors. In this industry the consumer tends to select offers of well known businesses and that guarantee high quality and product reliability

Tab.14 Zelmer - entry and exit barriers from the sector for substitutes and competitors:

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Source: author’s own analysis, unpublished papers

Tab.15 The SWOT analysis for Zelmer is as follows:

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Discussion questions:

1.What could be a substitute of home appliances? Specify 5 such substitutes.

2.Based on the data presented, assess the possibility of such substitutes’ arrival and evaluate the threat they may represent.

3.Which is the greater threat now, competitors’ or substitutes’ arrival? Justify your answer.

4.How should Zelmer defend itself against the arrival of substitutes and the possible threat they may bring.

5.What is the difference between defense against competitors and defense against substitutes ?

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7.4. Analysis of industry suppliers and buyers.

The principles of impact reduction of both suppliers and buyers on an industry.

Pre-class readings:

1.Blonska Agnes, Rozemeijer Frank, Wetzels Martin, (2008), The Influence of Supplier Development on Gaining a Preferential Buyer Status, Supplier Adaptation

and Supplier Relational Embeddedness, 24th IMP-conference in Uppsala, Sweden, 2008

Article available on: impgroup.org/uploads/papers/6853.pdf

Task: Prepare a short presentation demonstrating the main thesis, assumptions and conclusions of the article.

Additional questions to be answered and/or discussed after pre-class readings:

1.How can suppliers influence buyers?

2.What might be a suppliers power (on buyer) dependent on?

3.What makes suppliers more influential on a buyers behaviour ?

4.Do the borders between buyer and supplier become more difficult to be identified? Why is this so?

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The sector is largely conditioned by suppliers and customers. The entities operating therein are strongly dependent on both. Suppliers and buyers may effectively influence their actions in various ways. Two extreme situations are when a monopsony occurs on the part of buyers and a monopoly on the part of suppliers and the notion of perfect competition originating from exonomics. Extreme cases are rare, however, and the force of suppliers and buyers also originates from a number of other factors.

The bargaining force of suppliers describes the extent the suppliers are able to influence the force of action and business offer effectively. Can they, for example, reduce its competitive position. It depends on several components, such as:

•The number of suppliers – the more of them there are on the market, the weaker is their force, as the business may select them at its own discretion, using the competition between them – negotiate better delivery terms, etc. The monopolistic supplier, on its part, has an immense force towards its customers. However, it also depends on the extent the business is associated with them and what could be the costs of change.

•Costs of change of the supplier – although there are numerous office space suppliers, the costs of location change are significant to such an extent that the low force of such a service supplier is out of consideration. .

•The share of costs of the deliveries from a specific supplier within the total cost structure. The higher the value of deliveries the higher influence it may make on overhead costs rise. Even a slight rise or reduction of its prices may significantly affect the final product prices. If 70% of costs result from deliveries of one raw material, the growth of its prices by 10% causes the growth of production costs by 7%, which cannot be neutral to the final assessment and profitability.

•Making quality or basic product and service characteristics dependent on a specific supplier. Toyota producing Lexus for the European market originally resigned from its facilities for the European market, stating that local suppliers could not assure the appropriate quality and moved all the production to Japan.

•The location and transport costs from the suppliers, as such costs related to transport from a distant supplier may arise.

•The option of taking over the entire business by a supplier or vice versa, when it is the customer who takes over (vertical integration) or option of development of independent production performance and service provision by the supplier to end

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the customers cause that the supplier’s force grows while the threat of its taking over the access to the final customer is significant or drops when it is not a threat as a potential competitor or the party taking over the business.

Case study 16

Small Breweries

The distribution channel for small breweries is often represented by small specialty shops, frequently run by local beer enthusiasts.

Although there are not too many such places at the moment, their number significantly grows along with the popularization of the health and “slow food” trends. Such places are most often established in big cities, particularly in shopping malls. A support for their development is the growing number of wealthy customers, more and more sophisticated and conscious, searching for new impressions, even from the simplest activities. Moreover, many people make shopping decisions under momentary emotions. According to the surveys of breweries, 45% people between 18-29, 51% pupils and students and 45% people of a good financial standing. Along with the growth of local beers popularity, their price has dropped. They have become an element of exquisite consumption directed almost to mass consumers – masclusivity, affordable luxury. More and more beers of this kind also appear in medium-sized networks and single stores. The beer market is strongly regulated in numerous places worldwide. This is also the case in Poland where beers cannot be sold online, near schools and other public utility buildings and to people below the age of 18. So the remaining manoeuvering room is small, while licensed bars and restaurants become a very important distribution channel. Unfortunately these are customers subject to marketing, promotion and sales actions of the largest brewing companies. They offer much more to them than to stores. Sometimes, this is a large part of the bar or restaurant furnishings, such as benches, tables, parasols, heating coils, counters, refrigerators, glasses, etc. Particular investments in the cooperation with such a customer are made when the latter decides on the exclusiveness of buying one brand beers. In some places, even financial remuneration to such owners is offered. Kompania Piwowarska [The

Brewing Company] offered € 0.5 mio to the well known Harenda student’s club in exchange for taking over the patronage of it.

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Local breweries do not usually have such means, so in numerous cases wholesale customers or distributors are unavailable to them So they mainly direct their actions towards enthusiasts and people searching for new taste impressions. The larger circle of consumers to be reached by mass advertising and promotion is somewhat beyond the reach of local breweries. Thus, the present group of customers is relatively small, concentrating on specific needs. Individual customers exchange opinions on local beers on online portals and forums. The shops offering such products, although small, generate the vast majority of the turnover. The niche bars and restaurants remain with a slightly lower share in revenues, but constantly growing sales.

Discussion questions:

1.Specify and characterize the local brewery customers.

2.What is the force of the particular customers in relation to local breweries?

3.How could local breweries limit this force?

4.What is the force of licensed bars and restaurants towards the breweries? How could they use it?

5.How could breweries increase their force as suppliers?

The bargaining force of buyers, as in the case of suppliers, presents the force they could

impact on the business form and its offers. Therefore, it depends on:

•The number of present and potential buyers. The more of them there are, the lower force they could affect on an entity.

•The share of a specific buyer in the business revenue structure. The larger the share is and, in consequence, the larger amounts such a buyer leaves in a company, the more the force of impact thereon grows. It even occurs that an individual customer is able to shake a business or even lead to its bankruptcy, e.g. resigning from cooperation. If half of the revenues is from one customer, the latter’s resignation from cooperation may mean that the business would not be able to survive with only half of its existing revenues.

•The costs of change of the customer, if the production or services were matched to a specific market.

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•Connections between the customers and the question whether they are able to create one uniform form, e.g. through consumer organizations, shopping groups, etc.

•Customers’ influence on other entities, e.g. media.

•Opportunities to take over by a customer part of or the whole business and the independent performance of deliveries on its increase on the customer’s force.

The lack of integration opportunity weakens the force.

Case study 17

W.Kruk

W.Kruk is a jewellry and general fashion business. It used to be a minor supplier of jewellry and jewellry haberdashery for the large brand clothing manufacturer Vistula

& Wólczanka. At the same time the jewellry suppliers’ market was becoming strongly competitive and a lot of suppliers of this kind arrived. When Vistula & Wólczanka threatened its existing supplier with a takeover through the buyout of the shares included in the stock exchange, the management board of Kruk were immensely surprised. It is not entirely clear whether is was a tactical move or the intention to invest. However, Kruk decided to offer its entire portfolio of its own shares and sold them to Vistula at a fairly high price, through relevant stock exchange transactions. At the same time, for the monies acquired in this way they bought more than 10% of

Vistula & Wólczanka shares, which gave it control over the dispersed shareholding structure. At the first stage, upon gaining control over its new shareholder, Kruk dismissed its existing management board and appointed its own. Simultaneously, using its contacts with the media, they arranged for the fact to be reported in the press as a warning to other investors.

Discussion questions:

1.What was the barganinig force of the suppliers and customers dependent on?

2.How has the bargaining force of the supplier and customer been changing?

3.What other elements may prove the existence of the bargaining force of suppliers and customers?

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Depending on the fact of how much the sector of suppliers is consolidated, the force may increase or decrease. If a business is a sole supplier, in a form of simplification we may state that it dictates the conditions to its customers. However, the greater is the customers’ force, the fewer of them there are and the fiercer fighting takes place for their preferences, the more the suppliers must adapt to their requirements. The extremes of the impact force of customers and suppliers are then determined by monopoly on the one hand and monopsony on the onther.

Fig.11 From a monopoly to monopsony – force of suppliers and force of customers

competition

Source: the authors’ own paper, unpublished materials

The monopolistic position of customer (monopsony) or supplier (see fig.11) may result in attempts to influence the behaviours of the other party. Interestingly, the supplier’s force may be increased in a planned manner. It is the case when a market niche is taken over, strategy of distinction from the market offer is performed, a brand is built, unique characteristics are created, etc. Although theoretically such a business operates on a competitive market, within the strategic position it has occupied – it becomes a monopolist. Obviously, even upon reaching the monopolistic or monopsonic position, the influence on the business partner is not unlimited. For example because monopolies are, except in legally permitted cases, prohibited and the markets which are approximately monopolistic are usually strongly regulated. This is the case with energy suppliers who could have almost any influence on the customers, however, for example, prices and other energy supply conditions are often regulated by the state. Moreover, there is always a threat that both customers and energy suppliers may seek for new supply sources or markers more intensely, or turn towards substitutes so far unnoticed, or enter another strategic group. Such a situation occurred in the winter capital of Poland – Zakopane. The conviction of the monopolistic position of the town for all those who wanted to spend

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