The Identification of competitive strategies that. PPC Cement could use within the Eastern Cape. border market segment to maintain its market. share.

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1 The Identification of competitive strategies that PPC Cement could use within the Eastern Cape border market segment to maintain its market share. By S.W.Goliath Submitted in partial fulfilment of the requirements for the Master s Degree in Business Administration At the Port Elizabeth Technikon Promotor: Miss M Cullen December 2004

2 2 DECLARATION I, Sebastian Warren Goliath, hereby declare that: This work has not been previously accepted in substance for any degree and is not being currently submitted in candidature for any degree. This dissertation is being submitted in partial fulfilment of the requirements for the degree of Masters in Business Administration. This dissertation is the result of my independent work/investigation, except where otherwise stated. Other sources are acknowledged by complete referencing. A reference list is attached. Opinions expressed and conclusions arrived at, are those of the researcher and are not necessarily to be attributed to PPC Cement. Signed: Date :.

3 3 ACKNOWLEDGEMENTS It would have been impossible to complete this research without the contributions and support of various individuals. To all those who have contributed by way of encouragement, help, professional advice, suggestions and general discussion, I wish to express my sincere appreciation. In particular I wish to thank the following persons: Margaret Cullen, my promoter, for her guidance, support and help in all aspects of this study My wife, Elize, for her endless support, encouragement and inspiration through the years; and Tara our daughter for giving me the inspiration to complete this study. The Goliath, Geswint and Mungur family for their support over the years. Staff at the MBA unit at PE Technikon for the guidance, assistance and advice Ernest Gorgonzola and Catherine Frier and other members of various study groups during the three years of study for helping me to keep focused and motivated. Friends for their support and encouragement

4 4 EXECUTIVE SUMMARY PPC Cement operates under the corporate umbrella of Barloworld Leading Brands, a multi-national company. PPC Cement operates within an oligopolistic competitive environment which comprises two major direct competitors in South Africa, which are Lafarge Cement and Holcim. PPC Cement operates a managed market share strategy which is consistent with their vision to be the preferred supplier in their chosen markets. This research paper focused on the identification of competitive strategies that PPC Cement could use within the Eastern Cape border market segment to maintain its market share. The following research methodology was followed: Literature survey to determine possible competitive strategies that PPC Cement could utilise and to determine how important or sustainable lower prices are as a competitive strategy within an oligopolistic market. A survey will be conducted to determine how important or sustainable lower prices were as a competitive strategy within an oligopolistic market compared to other services offered by PPC Cement, according to the customers of PPC Cement by means of a questionnaire. The findings from the literature study and empirical study would be used to determine which competitive strategies could be used by PPC Cement to maintain its market share within the Eastern Cape border region

5 5 A self administered questionnaire, which is a variation of the Mail survey, and personal interviews were used to collect the data required for this research. In conclusion it was said that given the facts from both the literature and empirical study, PPC Cement should implement a differentiation strategy because according to Porter (1985:11) a differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by the customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. It was recommended that PPC Cement should not reduce or alter its pricing to the market but differentiate its product to the market by capitalising on their strengths which are product availability and product quality.

6 6 CONTENTS PAGE TABLE OF CONTENTS... i LIST OF FIGURES... vi LIST OF TABLES... vii LIST OF ANNEXURES... viii TABLE OF CONTENTS CHAPTER ONE PROBLEM STATEMENT AND DEFINITION OF CONCEPTS 1.1 INTRODUCTION TOPIC PROPOSAL PROBLEM STATEMENT Sub-problems KEY CONCEPTS DELIMINATION OF RESEARCH MOTIVATION FOR RESEARCH ANALYSIS OF RELEVANT LITERATURE Oligopolies Strategy Competitive strategy Pricing strategy Differentiation strategy... 11

7 7 PAGE Defensive strategy RESEARCH METHOD CHAPTER HEADINGS SUMMARY CHAPTER TWO HISTORY OF THE CEMENT INDUSTRY IN SOUTH AFRICA 2.1 INTRODUCTION HISTORY MARKET ARRANGEMENTS MARKET REVIEW SUMMARY CHAPTER THREE THE IDENTIFICATION OF COMPETITIVE STRATEGIES AND THE ROLE IT PLAYS WITHIN AN ORGANISATION 3.1 INTRODUSTION REALITY OF BUSINESS STRATEGY Cost leadership strategy Differentiation strategy Focus strategy... 34

8 8 PAGE Combining generic strategies Generic strategies and industry forces COMPETITIVE STRATEGY PRICING STRATEGY Market structure and competition Effects of price wars CONCLUSION SUMMARY CHAPTER FOUR THE EMPIRICAL STUDY 4.1 INTRODUCTION RESEARCH METHODOLGY SURVEY METHOD QUESTIONAIRE CONSTRUCTION Question content Types of questions Wording of questions Question sequence SAMPLING SUMMARY... 66

9 9 CHAPTER FIVE RESULTS OF THE EMPIRICAL STUDY PAGE 5.1 INTRODUCTION RESPONSE RATE RESULTS OF THE CUSTOMER SURVEY Type of account Number of years trading with PPC Cement Tonnage per annum Does your store stock any other cementious products other than PPC Cement? Having you considered changing your cement supplier? Please list at least six factors, which in your opinion are critical to the sale of cement? Please rate PPC Cement s performance In your opinion, what are the strengths and weaknesses that PPC Cement possess? In your opinion what are the threats and opportunities How could PPC Cement transform their weaknesses into strengths and threats into opportunities? SUMMARY CONCLUSION... 84

10 10 CHAPTER SIX SUMMARY, CONCLUSION AND RECOMMENDATION PAGE 6.1 INTRODUCTION SUMMARY OF CHAPTERS RECOMMENDATIONS Transforming weaknesses to strengths Transforming threats to opportunities CONCLUSION 93 SOURCE OF REFERENCE 94

11 11 LIST OF FIGURES PAGE 2.1 Ownership structure of cement companies Porter s generic strategies Competitive advantage cyclical process Type of account Number of years trading with PPC Cement Tonnage per annum Does your store stock any other cementious product other than PPC Cement? Have you considered changing your cement supplier? List six factors which are critical to the sale of cement PPC Cement s performance rating... 78

12 12 LIST OF TABLES PAGE 3.1 Generic strategies and industries forces Type of account Number of years trading with PPC Cement Tonnage per annum Does your store stock any other cementious product other than PPC Cement? Have you considered changing your cement supplier? List six factors which are critical to the sale of cement PPC Cement s performance rating What are the strengths and weaknesses of PPC Cement? What are the opportunities and threats that face PPC Cement?. 80

13 13 LIST OF ANNEXURES PAGE Annexure A Questionnaire Cover letter Annexure B Questionnaire... 99

14 14 CHAPTER ONE PROBLEM STATEMENT AND DEFINITION OF CONCEPTS 1.1 INTRODUCTION PPC Cement is part of Barloworld Leading Brands, a multi-national company. PPC Cement operate within an oligopolistic competitive environment which comprises three major direct competitors in South Africa; Lafarge Cement, Holcim and Natal Portland Cement. Salvatore (2001:426) defines an Oligopoly as the form of market organisation in which there are few sellers of a homogeneous or differentiated product. In the case of the cement industry the product is totally homogenous thus the environment is viewed as a true oligopoly. Both of these competitors are international suppliers of cement, Lafarge being the largest in the world and Holcim the second largest. However, PPC Cement is the largest Cement manufacturer in South Africa. It consists of nine manufacturing plants, of which the Port Elizabeth factory is the oldest. PPC Cement operates a managed market share strategy, which is consistent with their vision to be the preferred supplier in their chosen markets. The preferable market share for the Eastern Cape border region is 51 per cent.

15 15 Due to competition based on price, PPC Cement has lost at least five percent of its market share to Holcim (Cement Review 2002). Therefore PPC Cement has to analyse its current competitive strategy. A question to answer before strategy is analysed, is why are customers strategically important? Jenkins (1997:7) contributes that in considering this question there are three areas in which customers contribute to the development of the business: The revenue stream Market evaluation Sustained competitive advantage Revenue stream Customers are those individuals or businesses who provide revenue for a business thus the revenue stream is sourced from customers. Therefore the customers would be regarded as potentially the most important strategic stakeholders. Market valuation Customers are not only strategic stakeholders in terms of delivering revenue streams; they are also a strategic asset, which can enhance market valuation. Thus it could be said that companies create equity value through their relationships with their customers.

16 16 Sustained competitive advantage Within present market conditions in corporate environments the rules of the game and the structures of industries are continually undergoing rapid change, which reduces the opportunity for effective sustainable advantage. However customers can play a vital role in providing a basis for sustaining advantage. Whereas advantage lies in having something different to competition, sustainability comes about when you have something different, which is very difficult for competitors to imitate or substitute. Customers are a significant source of learning because they have a perspective, which is based on meeting their needs and solving their problems. They can identify when a company is no longer in touch with their needs and thereby are a catalyst for change. Creating a dialogue with customers is fundamental to understanding where the opportunities for sustainable competitive advantage exist and, most importantly what needs to be done in the organisation to realise this (Jenkins, 1997:7). After an analysis of why the customer is important to a company in terms of profitability it is thus evident that all strategy should be based on customers and not markets because customers provide us with the opportunity to identify bases for sustained competitive advantage.

17 17 Relevant literature will be analysed and researched for the identification of possible solutions or possible research for the problem of interest within PPC Cement. The proposal will follow the following sequence, 1.2 Topic proposal 1.3 Problem statement Sub-problems 1.4 Definition of key concepts 1.5 Delimitation of the research 1.6 Motivation for research 1.7 Analysis of relevant literature 1.8 Research method 1.9 Chapter Headings List of sources 1.2 TOPIC PROPOSAL The Identification of competitive strategies that PPC Cement could use within the Eastern Cape border market segment to maintain its market share. 1.3 PROBLEM STATEMENT Which competitive strategies could be used by PPC Cement to maintain its market share within the Eastern Cape?

18 Sub-problems Which competitive strategies, does the literature reveal could be used by a company focusing on market share protection? How important or sustainable are lower prices as a competitive strategy within an oligopolistic market compared to other services offered by PPC Cement, according to the customers of PPC Cement? How could PPC Cement maintain its competitive position by utilising the competitive strategies? 1.4 KEY CONCEPTS For purposes of this study the following key concepts are defined. Strategy is the direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a changing environment to fulfil stakeholder expectations (Johnson and Scholes, 2003:10). Pearson (1990:36) states strategy has to do with long term prosperity of an organisation. Botten and McManus (1999:185) add that strategy is concerned with long term business plans for the effective management of environmental opportunities and threats, in light of a firm s strengths and weaknesses.

19 19 Competitive strategies Competitive strategy is the basis on which a business unit might achieve competitive advantage in its market (Johnson and Scholes, 2003:319). Competitive strategies specify the means by which a business will achieve competitive advantage. Low price strategy- this strategy involves the adoption of low prices to penetrate markets and gain market share (O Shaughnessy, 1995:622). Market segment is the subdivision of a market into homogeneous subgroups of customers where any subgroup may conceivably be selected as a target market to be reached with a distinct marketing mix (Adcock, 2000:292). Lynch (1997:225) believes that market segmentation is the identification of specific groups of customers who respond differently from other groups to competitive strategies. Market share is the total current customer base serviced by a given company within the total market segment. This market share may either increase, decrease or could be maintained depending on the strategy utilised by a given company (Parry, 2003:11). Johnson & Scholes (1988:75) believe the extent to which one competitor has a greater market share than another is an important aspect of the capability of that competitor. Market share is, in effect, a measure of market power.

20 DELIMINATION OF RESEARCH The proposed topic will focus on competitive strategies, to maximise the outcome of the objective of the study. The target audience for the survey would be limited to the top 40 customers in the retail market segment in which PPC Cement and Holcim are directly competing for market share. These customers would be ranked according to tonnage and margin. The study will only be conducted within the Eastern Cape border areas, comprising of Willowmore, Aberdeen, Graaff-Reinet, Cradock, Tarkastad, Port Alfred, East London, Cookhouse and Paterson. 1.6 MOTIVATION FOR RESEARCH PPC Cement operates a managed market share strategy within the Eastern Cape market segment, thus the objective would be to maintain PPC Cement s market share of 51 percent. PPC Cement is losing market share to Holcim, a direct competitor because of a low price strategy being practised by this competitor. PPC Cement would not wish to engage in a price war with Holcim because of the negative implications a low price strategy would have on the profit margins of PPC Cement. Thus it would be advisable for PPC Cement to research other possible competitive strategies to maintain its market share within the Eastern Cape.

21 ANALYSIS OF RELEVANT LITERATURE Oligopolies As stated in the introduction Salvatore (2001:426) defines an oligopoly as a form of market organisation in which there are a few sellers of a homogeneous or differentiated product and entry into or exit from the industry is difficult. Oligopoly is most prevalent form of market organisation in the manufacturing sector. An Oligopoly can also exist when transportation costs limit the market area. For example, even though there are many cement producers in the United States, competition is limited to the few local producers in a local area (Salvatore, 2001:429). Since there are only a few firms selling a homogenous product in an oligopolistic market, the action of each firm affects the other firms in the industry and vice versa. Furthermore, since price competition can lead to detrimental price wars, oligopolists prefer to compete on the basis of product differentiation, advertising or service. These are referred to as non price competition (Salvatore, 2001:427). Since an oligopolist knows that its own actions will have a significant impact on other oligopolists in the industry, each oligopolist must consider the reaction of competitors in deciding its pricing policies, the degree of product differentiation to introduce, the level of advertising to undertake and the amount of service to provide. Managerial decision

22 22 making is thus much more complex under an oligopoly than under other forms of market structure. Therefore it is vital to analyse and understand all possible competitive strategies available to the oligopolist Strategy Strategy is the direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a changing environment and to fulfil stakeholder expectations (Johnson and Scholes, 2003:10). Pearson (1990:36) states strategy has to do with long term prosperity of an organisation. Botten and McManus (1999:185) add that strategy is concerned with long term business plans for the effective management of environmental opportunities and threats, in light of a firm s strengths and weaknesses. Strategy clearly means different things to different people in different situations. Botten and McManus (1999:185) state there appears to be few truths about strategy, but the notion remains that it is about the most important of management responsibilities, capable of the most profound impacts on corporate development and success. Strategy has to do with long term prosperity; it is to ensure that the business is still around in ten or twenty years. It is concerned with long term asset growth, not short term profit (Pearson, 1990:36).

23 Competitive strategy Competitive strategy on the other hand is the basis on which a business unit might achieve competitive advantage in its market (Johnson and Scholes, 2003:319). A firm's relative position within the industry, and its long term profitability, is determined by the degree to which it is able to establish a sustainable advantage over its competitors Pricing strategy Pricing as a strategy is important because of its short term impact on profits. It allows a product to be positioned against others because it is a measure of the value for money delivered by the organisation (Lynch, 1997:225). To develop pricing strategy, it is necessary to examine both costs and competitive prices. The result also needs to be balanced by a number of other factors in the market place, such as price elasticity, the position in the product life cycle and the role of pricing in the product. Lynch (1997:225) believes that firms that compete with one another do so over time. This implies that competitive moves that might have short term benefits may, in the longer run, hurt the company. For example, a firm that cuts its price today to steal business from rivals may find that they retaliate

24 24 with their own price cuts in the future, thus nullifying the business stealing benefits of the original price cuts. Johnson and Scholes (2003:354) believe that a business unit opting not to use a low price strategy have the following alternative strategies available to utilise in order to maintain its competitive advantage Differentiation strategy A differentiation strategy seeks to provide products or services, which are unique or different from competitors. The aim is to achieve higher market share than competitors, this could in turn yield cost benefits, by offering better products or services at the same price; or enhanced margins by pricing slightly higher. This could also increase the profit margins per product. This strategy can be achieved through the following: Uniqueness or improvements in products: for example, by building on innovatory capabilities in the organisation. Marketing based approaches demonstrating better than the competition how the product or service meets the customer s needs. Competence based approaches in which an organisation tries to build differentiation on the basis of its competencies. Focused differentiation strategy A focused differentiation strategy seeks to provide high-perceived value justifying a substantial price premium usually a selected market

25 25 segment. It is important to be clear about which market segments to target, defined in terms of a coherent set of customer needs; and this needs to be translated into action, which satisfies those customers. The advantages of the focused approach have to be carefully monitored because the market situation may change. Differences between segments may be eroded, leaving the organisation open to wider competition. Johnson and Scholes (2003:348) state that business could also sustain competitive advantage by building barriers to prevent competitors entering their domains or against them succeeding if they do. Firms may try to build competitive advantage through the robustness of their resources and competencies. Another way of trying to hold on to competitive advantage is to build strongholds. A firm may try to dominate particular areas for example a geographic area or market segment, by doing so they seek to achieve market power in that area. However Johnson and Scholes (2003:350) argue that a firm may develop a product or service and seek to achieve advantage by its distinctiveness, or differentiation, in its market. However, this will be imitated, and in hypercompetitive conditions, this may happen rapidly. The firm may try to build barriers, perhaps based on greater exploitation of its resource base or competencies. However, this may prove difficult in conditions where know-how and technical advance are fast moving. The firm may also try to stretch competencies and

26 26 resources to find new markets but if this is successful competitors will follow. Therefore Johnson and Scholes (2003:130) insist that the business unit must be sure and confident about understanding what customers value because no matter which strategy is used it will fail if the critical success factors which are of value to the customers are not met. Company positioning or competitive positioning covers the chosen attitude of an organisation in its competitive arena, thus an organisation will need to decide the basis on which it is going to compete (Adcock, 2000:127). Porter (1980) suggested three generic strategies; cost leadership, differentiation and focus as the basis of competitive advantage. According to Adcock (2000:127) Porter argues that cost leadership has nothing to do about prices charged, competitive value or customer satisfaction. A cost leader does, however, have more choices in deciding how to use its cost base advantage while still delivering an acceptable profit from its operations due to the low cost production capabilities. Adcock (2000:130) states that differentiation by itself will not be sufficient to attract customers. The factors leading to effective differentiation must be offered in a way that produces real value for

27 27 customers. A company could therefore position itself as a differentiator offering either high value or low cost to its customers. The comparative positioning could be directly against another offering by highlighting the different features of each, or it could be away from competitors. Another way of considering company positioning is to describe it in terms of marketing objectives within a given market place. Companies will adopt a different strategy depending upon their starting positions and the activity of their competitors. The objectives that could be adopted are to defend a market position or to attack a competitor. O Shaughnessy (1995:244) states that the goal of the firm is to protect or enhance market share, the firm must decide whether to: Move before competition. Should the firm act ahead of competition? Such a leadership role is not just a matter of taste but depends on what the firm has to offer and the possibilities of retaliation; Move with competition. If a firm moves with competition, it reacts immediately to competitive moves. This assumes the firm possesses the capacity and flexibility to respond; Move away from competitors. A firm may decide not to meet competition head on but to seek its goals in a more round about way.

28 Defensive Strategies According to O Shaughnessy (1995:244) a market share protection strategy is synonymous to a defensive strategy. In this strategy the market leader seeks to retain existing customers while attracting the same proportionate share of new entrants to the market. There are two actions that could be used to implement a successful defensive strategy. Mix adjustments and deterrent actions One way of maintaining or protecting market share is by mix adjustments, or constantly updating the offerings or marketing mix. This is the most common strategy of market leaders intent on retaining the loyalty of current customers. Another way of maintaining position is by deterrent action. A deterrent strategy could either be passive or active. A passive deterrence signals a capacity to deter, while an active deterrence proclaims an intention to deter. An active deterrence might be introduction of a product similar to that of a competitor. Imitation strategy If a firm protects its markets by moving with competitors, it counterbalances the action taken by competition. Imitation is less costly because it requires no creativity and is considered sufficient to retain those likely to move.

29 29 Lambin (2000:410) states that if a firm is a market leader then it has the following options available to successfully implement its market leader strategy. In a product market, the market leader is the firm that holds a dominant position and is acknowledged as such by its rivals. The leader is often an orientation point that rival firms try to attack, to imitate or to avoid. Primary demand development The most natural strategy that flows from the leader s responsibility is to expand total demand by looking for new users, new uses and more usage of its products. Defensive strategies Innovative firms often adopt this kind of strategy. Many defensive strategies can be adopted; innovation and technological advance which discourages competitors, market consolidation through intense distribution and full line policy to cover all market segments and direct confrontation, that is direct competing through price wars or advertising campaigns. Aggressive/offensive strategies The objective here is to reap the benefits of experience curve effects to the maximum and thus improve profitability.

30 RESEARCH METHOD The following broad procedure would be followed, Step 1 A literature study will be conducted to identify relevant competitive strategies that could be implemented by a competitive company. Step 2 Empirical study A questionnaire would be conducted comprising of the competitive strategies identified in step 1. The questionnaire would also consist of questions concerning services, which are most important to them as customers of PPC. Step 3 A personal survey would be conducted among the top 40 customers within the Eastern Cape Border market in which PPC Cement operates, to test which strategies identified in step 1 are most important to the customers and if they could be implemented. Step 4 Results would be analysed to test if there was any correlation. Step 5 Integration of empirical results with that of literature findings, to identify possible solutions to the proposed topic. Step 6 Conclusions and recommendations of how PPC Cement could utilise the identified strategies to maintain PPC Cement s competitive position.

31 CHAPTER HEADINGS 1. Problem statement and definition of concepts 2. History of the cement industry in South Africa 3 The identification of competitive strategies and the role it plays within an organisation 4 The empirical study 5 Results of the empirical findings 6. Summary, conclusion and recommendations 1.10 CONCLUSION Chapter one This chapter reveals the topic proposal, the problem statement and analysis relevant literature. Chapter two Chapter two deals with the origin and the development of the cement industry in South Africa. It highlights the competitors within the Cement industry and analysis the market structure in which these Cement manufacturers operate. Chapter three Chapter three consists of an analysis of competitive strategy and the role strategy plays within an organisation. This chapter will study and analyse the numerous competitive strategy options revealed by literature as well as analyse and discuss the second sub-problem

32 32 relating to the impact of competitive pricing as a competitive strategy within an oligopolistic market. Chapter four Chapter four will focus on the empirical study, in the empirical study the objective would be to determine how important or sustainable lower prices are as a competitive strategy within an oligopolistic market compared to other services offered by PPC Cement, according to the customers of PPC Cement by means of a questionnaire. Chapter five Chapter five presents the analysis of the results of the empirical study, followed by a summary of results. Chapter six Chapter six contains a summary of the preceding chapters, including and overview of the empirical findings. In this chapter, recommendations will be made based on the literature study and findings found in the empirical study.

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