«Carolina Coelho Advisor: Prof. Nuno Guedes Dissertation submitted in partial fulfillment of requirements for the degree of MSc in Business ...»
Firms reach competitive advantage through constant innovation, including new technologies and new ways of doing things. Moreover, a firm’s capability to ensure a sustainable competitive advantage in international markets is based on skills and assets created in the home country: in other words, it is influenced by its national competitive advantage which is based on four determinants that constitute Porter’s theory called “The Diamond of National Advantage”, although almost any advantage can be imitated. The four determinants that allow firms to constantly innovate and maintain the competitive advantage are: (1) Production factors conditions, (2) Demand conditions, (3) Related and Supporting Industries and (4) Firm Strategy, Structure and Rivalry. Hence, demanding local customers, strong domestic rivals and aggressive home-based suppliers can pressure firms to
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innovate faster (Porter, M. E., 1990). Also, Barney, J. (1991) ensures that for a firm to have a sustainable competitive advantage over time its resources and capabilities have to comply with four conditions: they have to be valuable, difficult to imitate, difficult to substitute and rare.
Nevertheless, Peteraf, M. A. (1993) suggests a different model with four different conditions that ensure a sustained competitive advantage known as “Resource-Based View”. This model includes heterogeneity within an industry (superior resources), ex ante limits to competition, ex post limits to competition and imperfect resource mobility.
2.4.2. Porter’s Five Forces Porter, M. E. (1979) developed a model to measure the degree of competition in a certain industry based on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services and rivalry.
The threat of new entrants translates into the possibility of new entrants to gain market share and this threat depends on six major barriers to enter: economies of scale, product differentiation, capital requirements, cost disadvantages independent of size, access to distribution channels and Government policy. The bargaining power of customers occurs when customers have the power to decrease prices and demand high quality or more service. The bargaining power of suppliers happens when they can raise prices or reduce the quality of the products and services. Threat of substitute products or services put a ceiling on prices which lead to a loss on the industry’s potential, limiting the profits and the chance to growth. Lastly, rivalry causes firms to fight for their position in the market. An industry has an intense rivalry if there are numerous competitors or competitors are approximately the same size; there is no differentiation or switching costs; fixed costs are high or the product is perishable; there are strong exit barriers; the capacity is normally amplified in large increments and if the rivals are very different from each other in terms of origins, strategies and “personalities” (Porter, M. E., 1979).
2.5. Product Differentiation and Cost Leadership Dickson, P. R., and Ginter, J. L. (1987) defined product differentiation as “a product offering is perceived by the consumer to differ from its competition on any physical or nonphysical product characteristic including price”. Product differentiation has two effects on demand: (1) increase brand loyalty and (2) broaden the appeal of the product in consumers’ minds. Thus, this strategy enables to decrease the product’s price elasticity of demand and the volume of the sales. Nevertheless, the impact of these effects depends on three contingencies: the firm’s ability of differentiating its product, the competitive environment of the product market and the level of commitment
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consumers express towards rival products (Hill, C. W., 1988). Following this strategy, consumers are more willing to buy the product at a higher price. Cost leadership strategy is when a firm has a sustainable competitive advantage in its cost structure which translates into lower prices and higher volumes of sales, leading to higher economies of scale when compared with competitors. This strategy is more advantageous for late entrants than for pioneers and early followers because they can learn from pioneers’ mistakes and save on the costs of learning how to enter the new business, therefore, they face less barriers to enter. It is also considered the best strategy to gain market share (Coeurderoy, R. & Durand, R., 2004). Moreover, Amit, R. (1986) reinforces this idea by proving in his study that the investment on the cost leadership strategy should only occur in a presence of learning in order to have a long-lasting cost advantage. In the absence of learning, the firm cannot reach longlasting advantages therefore, it doesn’t have incentive to invest.
Even though Porter (1980, 1985) claims that differentiation and cost leadership are two different approaches in creating a sustainable competitive advantage stating that “achieving cost leadership and differentiation are usually inconsistent, because differentiation is usually costly”, Hill, C. W.
(1988) counters by saying that “the combination of differentiation and low cost may be necessary for firms to establish a sustainable competitive advantage” concluding that differentiation can be a way of achieving a cost leadership position or combining the two simultaneously may be the only way of keeping a sustainable competitive advantage. However, there are some contingencies affecting the compatibility of differentiation and cost leadership such as the extent to which costs reduce when increasing volume, since the direct effect of differentiation is to increase unit costs and the extent to which spending on differentiation significantly increases demand (Hill, C. W., 1988).
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3. TEACHING NOTE
3.1. Teaching Objectives This case study shows the evolution of S4Y in terms of strategy, business development and its steps towards an internationalization process. It was designed for management students taking classes in the field of Strategy and the academic purpose is to analyze the internationalization strategy to the UK adopted by S4Y, using the knowledge learned in class in order to apply it in a real business case.
Students should be able to identify the strategy and competitive advantage of Scienc4you in Portugal and Spain, as well as analyze the pros and cons of the decision of entering the U.K. market and make recommendations for the future.
In order to analyze the case, students can use tools, frameworks and content given in classes, such as, Porter’s 5 Forces, SWOT Analysis, the Hofstede cultural dimensions, Porter’s Generic Competitive Strategies, sustainable competitive advantage concept, Industry life cycle, Porter’s Diamond and internationalization drivers, among others that the instructor may find suitable.
3.2 Assignment questions & Analysis
1. What was the initial strategy of Science4you for the Portuguese market?
Science4you was a pioneering company in the scientific educational toys market and managed to become the market leader in Portugal. To achieve such position, and especially in times of crisis, the
company came up with some important strategies in several areas of interest:
Product: the product itself works as a differentiation strategy since in Portugal the competition is barely any. Apart from this, the toys also included the instructions books which were very complete in explaining all the science behind the experiences provided by it and the theory about the theme.
Furthermore, the logo of the Science School of the University of Lisbon in every toy ensuring the quality of the product was considered to be an important competitive advantage. Lastly, the toy offer designed especially for girls allowed the company to diversify its offer and broaden the customer portfolio. Some of the toys became best sellers, for example “The Soap Factory” and the “Perfume Science”.
Partnerships: another important competitive advantage is the partnerships that S4Y have with the Universities, Science Museums, big retailers and other key companies. This allowed the company to
reduce costs, grow faster, utilize the laboratories of the Science School, ensure the quality of the products through the logo of the University in the products, and get cheaper promotion.
Marketing and Promotion: 5% of the company’s business was dedicated to educational activities and this was a smart move because it helped create brand awareness in schools and holiday camps as well as worked as a powerful marketing tool for the kids and the parents, through birthday parties and science workshops. The company also followed the trends and become massively active in the social media, namely in Facebook, Twitter and YouTube. Furthermore, a website was available with information about the company (history, shop locations, publications about the company, information about awards and the latest news) and a catalogue with all the toys available and its respective prices.
Research: due to the partnership with FCUL, S4Y is allowed to use the facilities and its laboratories. It enables the company to investigate new ideas and concepts, try new experiences and be in constant innovation, coming up with new lines of products and activities. The company went from three toys in 2009 to 204 toys, just four years later.
Cost Reduction: Apart from the benefits of having a partnership with the Science School of the University of Lisbon, that allows them to have their offices there and use the laboratories and equipment without extra costs. S4Y also took advantage of the IEFP program where 90% of the interns’ salaries were financed by the Government.
Retention/Loyalty: in order to retain the clients, incentive repetitive purchase and fight seasonality, Science4you created an identification card named Scientist Card to give the junior clients that would allow them to have discounts and access to personalized promotions and campaigns.
Team: the characteristics of the team were crucial for the success of the company. Science4you had a very young and diversified team in terms of backgrounds, with an age average of 28 where 80% were graduated.
As a conclusion, the business strategy of S4Y can be considered as a Blue Ocean strategy. The company adopted both product differentiation and cost leadership approaches to achieve a sustainable competitive advantage in order to open a new market place and create new demand. In one hand, Miguel found a gap in the market and offered educational toys that were unique in the Portuguese market with a superior quality, but on the other hand, they managed to reduce costs in
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order to reach the most affordable prices. The CEO did a smart choice because this combination of approaches works in Portugal given the consumers’ characteristics: price sensitive and the lacking of a big upper middle class. It is successful because it simultaneously attracts large numbers of consumers while raising the cost of competition, making the competition irrelevant (Chan, K.W. & Renee, M., 2011).
2. What is your evaluation of the internationalization efforts of the company, namely for the Spanish market?
The company’s international strategy was to replicate the Portuguese business model:
(1) Establishing partnerships with local Universities of Science, to get the logo on the products;
(2) Establishing protocols with Science Museums in order to offer free tickets in the toys;
(3) Offering several complementary activities;
(4) Setting small stands located in shopping centers as points of sale.
In Spain, it opened the first subsidiary in June 2010 through an agreement with big retailers such as Fnac and Dideco and a partnership with Universidade Autónoma de Madrid that was very important since the University offered help with the development of the products, space for the offices and released the logo that worked as a certification of quality. Moreover, similarly to Portugal it opened a few stands located in shopping centers, nine in total.
Despite not being a pioneer in the Spanish educational toys market, this strategy made sense for
- Spain is one of the five largest toy markets in Europe.
- It represented a large share of revenues, concerning S4Y exports (16.441, 47€).
- It is a country easy to reach geographically.
- The language was not an obstacle.
- Strong similarities between both markets economically and socially (Exhibit TN 1), namely in terms of consumers’ characteristics.
Spain was a successful move in terms of revenues and sales. It managed to generate profits and grow its turnover each year and projections continue to be optimistic, the turnover will continue to grow to 500.000€ in 2014 (Exhibit 12). However, it faced some competitors that were already well established, operating in the niche of scientific and educational toys, and S4Y couldn’t gain importance in the market. It was just “one more company”. Nevertheless, from my point of view,
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Spain never was the final objective; it was just the first step to gain international experience and learn what was necessary to reach the long term goals of further internationalization. It worked as a preparation to enter the British market. Therefore, I think that in the future S4Y is probably not going to invest a lot more in the Spanish market to evolve its market share and presence in the market. All the efforts are going to be concentrated in the UK subsidiary.
What are the main differences between the Portuguese and the English market?3.
There are three major differences between the two markets: the size of the market, the consumers’ characteristics and the competition in the toy sector. The UK’s population was six times bigger than the Portuguese with a higher percentage of children (17,5% v.s 15,2%).