Case Study- Domino`s Pizza, Inc. (DPZ)

CASE STUDY 1

CaseStudy- Domino’s Pizza, Inc. (DPZ)

1.0 Porter’s Analysis

1.1Framework

The porter model was developed in 1980 by Michael E Porter in a bookby the name, ‘Competitive strategy: techniques for analyzingIndustries and competitors’. The model is based on a view that theexternal environment should set the standard of opportunities andthreats that are faced within an industry. Competitive strategy isstressed in the model whereby a company should have a properunderstanding of the industrial structure and changes over time. Thismodel recognizes five competitive forces that determine competitivestrength that plays a big role in profitability of individual firmsand hence shape the structure of the market. The main aim ofcorporate strategies is to shift these forces in their favor.

The five forces described above can be identified as follows

Threat of new entrants

Diagram 1

Bargaining power of buyers

Rivalry among existing players

Bargaining power of suppliers

Threat of substitutes

  1. Bargaining power of suppliers: this comprises of every source of raw materials or inputs acquired by a firm to aid in production of goods and services. The buying industry in this case often faces a lot of pressure on margins from suppliers.

  2. Bargaining power of customers: the ability of customers to bargain can also have a big impact on volumes and margins of a company.

  3. Threat of new entrants: if the industry offers favorable conditions for new businesses to enter, the threat of increased competition within the industry rises. This will have a big impact on factors such as customer loyalty, prices and market share.

  4. Threat of substitutes: this emerges if there are alternative products available to consumers at lower prices that could potentially pull a significant portion of the market hence affecting sales and profitability. Complementary products have almost similar effects.

  5. Competitive rivalry between players in the industry: this is defined by the intensity or level of competiveness between existing firms in the market that piles pressure on margins and prices hence individual profits within the industry.

1.2 Case Study Analysis

This segment will aim to sufficiently analyze the pizzerias industryin which Domino is part of using porter’s analysis as describedabove to determine its attractiveness.

1.2.1 Competitive Rivalry

This involves the degree of rivalry in the industry and the abilityto understand the marketing strategies and actions of competitors.This knowledge is very important in determining a reliable strategy.There are 2 indices used to judge competitive edge concentrationratio (CRx) and Herfindahl-Hirschman Index (HHI). The CRx is a ratiothat determines the market share of the largest companies in theindustry in terms of sales. For the purpose of this paper, CR5 willbe used which determines the market share of the 5 largest companies:Pizza Hut, Domino’s, Papa John’s, Little Caesars and other largechains as seen in exhibit 5. The concentration range in this case(CR5) is 48.34% representing medium concentration. HHI on the otherhand is more complex and involves understanding a firm’s relationto the industry. It weights firms between zero and one where zerorepresents a big concentration of small firms and one a monopoly. TheHHI in this case is 0.48 which means that competition is on thehigher end.

1.2.2 Threat of New Entrants

This isdetermined by the barriers to market entry such as governmentpolicies, asset specificity, patents or propriety knowledge andinternal economies of scale. Restricted distribution channels canalso act as a hindrance. The market has low barriers to entry that isdemonstrated by the fact that 58% of pizzerias are in the control ofindependent ownership.

1.2.3Threat of Substitutes

A largeconcentration of substitutes limits the ability of suppliers to tweakprices and increases the level of competition in the market placehence influencing profitability levels. Due to increased awarenessand an all-time high level of obesity in the market, people arelooking away from pizza consumption to alternative food. Thisincreases the level of competitiveness hence, the treat ofsubstitutes can be ranked from medium to high depending on randomfluctuations.

1.2.4Bargaining Power of Suppliers

Theorganizational need for production recourses and raw materialscreates a seller-buyer relationship between suppliers and the market.The distribution of power in this relationship varies but if thesupplier has more power, they are able to dictate prices andavailability of recourses which could be to the detriment of firms inthe market. Most of the firms in the case study have their own supplychains which means that they cannot be easily manipulated bysuppliers hence a low bargaining power for suppliers.

1.2.5Bargaining Power of Customers

Customers canalso have a big impact on the market depending on their concentrationand level of bargaining power. If they have a strong position, theycan create substantial pressure on the market by demanding highquality products at low prices. Customers in this market havesignificant bargaining power as witnessed in domino’s case whereconsumers were not satisfied with the quality of pizza and revolteduntil sufficient amendments were made. Additionally, there is a smalldifferentiation between products, customers are well educated withregard to the product on offer and the sales of firms in this marketcome from customer purchases.

1.3Remarks

Although this industry looks lucrative with regard to the largenumber of sales and returns, the level of competition is very highrequiring constant changes in structures and policies of existing toensure continuation of profitable operations. There are low barriersto entry in this market but new firms may find it difficult tosustain themselves in this very competitive environment wherecustomer bargaining power is significantly high. As a conclusion, theabove analysis shows this industry as unattractive.

2.0 Core Competencies

2.1 Framework

Having a clearunderstanding and proper identification of a firm’s competencies isat the heart of obtaining a sustainable performance level that willoffer competitive advantage in a particular market. Taking advantageof these competencies leads to higher returns on capital throughproper decision making and execution of set policies. Corecompetencies generally refer to aspects developed over time that areunique to a specific firm that are hard for competitors to imitatethus giving it competitive advantage with regard to that field. Theycan be in the form of unique services, technology expertise, businessacquisitions or a market niche among other factors. They focus mainlyon a company’s internal capacity that enables them to offercustomers unique value in their products and services.

The fourcriteria test is used to establish if recourses and othercapabilities of a firm are optimized and therefore qualify as corecompetences that can be used as a way of gaining competitiveadvantage.

2.2Case Study Analysis

This paper will make use of the 4-criteria test (table 1) to test forcore competencies with regard to Domino’s pizza.

Table 1

Resource or

capability

Rare

Valuable

Substitutable

Costly to imitate

Competitive sequence

Performance implications

Brand image

No

Yes

Yes

No

Competitive parity

Average returns

Financial position

Yes

Yes

No

Yes

Competitive advantage

Above average returns

Innovation

Yes

Yes

Yes

No

Competitive advantage

Above average returns

Geographical and demographic segmentation

Yes

Yes

No

Yes

Competitive advantage

Above average returns

2.2.1Interpretation

The brand nameDomino’s has made over the years is very important to its successalthough it is not rare considering there are other brand names thathave made a name for themselves making it substitutable. The makingof another brand name that closely resembles Domino’s is not costlygiving them competitive parity in the market hence average returns.

Domino enjoys avery strong financial position that is difficult to imitate andarguably important to its operations as it allows them to takeinitiatives such as advertisement and innovation comfortably. Thisfactor gives them competitive advantage as not many competitors canmatch its financial muscle.

Domino hasreached its current level through innovative policies that haveproved very valuable to it, some of which were rare such as the fastdeliveries. Although they can be substituted, Domino has over theyears transformed its innovative aspect to attract and improvecustomer satisfaction amid the slump that forced them to review theirpizza’s taste. This factor alone gives them considerablecompetitive advantage which increases their sales and returns ingeneral.

In terms ofdemography and geographical segmentation, Domino’s pizza hasdefinitely had its presence known with its 9,351 stores andfranchises both domestically and internationally. It is undisputablethat this is very important to its returns and dominance giving itcompetitive advantage.

2.2.2Remarks

As describedabove, it is clear that Domino’s financial position, innovation andgeographical distribution are key competences that give themsignificant competitive advantage in the market.

3.0Supply Chain Management

Supply chainmanagement has been given increased attention over the years as anessential tool for achieving competitive advantage in modern markets.It involves planning, designing, execution and control of supplychain activities with the aim of increasing net value and creatingcompetitive facilities through synchronization of information andmaterial flows. Companies are increasingly finding it essential toplace their reliance on reliable networks and supply chains to beable to compete significantly in both domestic and internationalmarkets. In recent years, policies such as outsourcing, informationtechnology and globalization have enabled numerous companies toset-up and run successful partnerships through specialized supplynetworks.

In an effort to meet consumer demands effectively, marketingdepartments have employed the use of business process integrationthat involves collaboration with consumers and suppliers to assist indetermining the strengths and weaknesses of a particular firm. Thisat some level involves the procurement process where strengths areidentified and built on while weaknesses are given more leverage andattention to contain their adverse effects.

3.1Case Study Analysis

This section will analyze Domino’s strengths and weaknesses withregard to is supply chain management.

3.1.1 Strengths

  1. Fast deliveries that improve customer satisfaction and sales

  2. Cheap means for ordering processes such as streamlined online ordering

  3. Outsourcing for supply and deliveries that reduces costs and increases efficiency

3.1.2Weaknesses

  1. Poor planning and implementation of policies that led to numerous accidents

  2. Failure to include customer opinions in planning

  3. Inadequate number of supply chains to serve all stores and franchises

4.0Financial Performance Appraisal

A financial performance appraisal assists in developing an opinionabout the financial performance of a company. It acts as an objectiveevaluation of the financial strength and profitability of a business.

4.1Case Study Analysis

The overall appraisal of Domino’s financial position over theprevious three years is provided below.

Total revenues have been fluctuating between $1,404 and $1,570.9million over the last two years which amounted to a significant netincome of between $54 and $87 million after deducting expenses. Thisis a favorable position because the company is earning profits as aresult of its operations. Shareholders however did not receive anydividends over that period because basic common stock was cancelledout by the diluted common stock. This means that shareholders havebeen exercising their options over the three years.

5.0Blue-Ocean Strategy

The blue oceanstrategy is largely unexplored as most business strategies havefocused on the more competition based red-ocean strategy. Thered-water strategy generally involves the analysis of economicstructures in an industry through which a strategic position ischosen by a firm with regard to differentiation and low costs.Nonetheless, this paper will focus on the more reserved blue-waterstrategy that is yet to become widely used among competitive firmsconsidering it uses less of analytic frameworks.

Blue-oceanstrategy sets its focus on the capacity to create new markets insectors where competition is non-existent and consumer demand isuncontested. It challenges the basis of competitive marketsencouraging firms to create and shift their attention from competingmaking it irrelevant. This is because competing and operating inovercrowded industries does not offer a sustainable way to maintainhigh performance and sales considering demand rarely increases bysignificant levels. The best option therefore is to create demand andhave absolute competitive advantage in a market that is not crowded.There are two means that can be used to create blue oceans launchinga completely new industry such as eBay’s venture into onlineauction or by creating a new industry within the existing red ocean.This involves a company growing tremendously beyond the limits of itsindustry leading to the invention of a new one.

This strategy isguided by six main principles

  • Concentrating on the bigger picture rather than numbers

  • Being able to achieve strategic sequences correctly

  • Reconstructing market boundaries

  • Focusing beyond current demand

  • Executing strategies effectively

  • Conquering organizational hurdles facing the company

Therefore, the main aim of blue ocean strategy is to reduce the costof doing business while simultaneously raising the value of serviceand quality offered to consumers who make up the firm’s demand.

5.1 Case Study Analysis

The following blue-ocean strategies would be recommended to Domino’sCEO to deal with its strategic difficulties

  1. To deal with demographic challenges, they can introduce pizza in regions where it is unknown to create an all new market.

  2. Focus on production of organic raw materials in their supply-chain

  3. Introduce new recipes and meals on their menu that have a touch of other non-native cultures to diversify their market

  4. Tweak delivery systems to include supplementary packages to customers who satisfy a set threshold

  5. Create a package comprising a combination of different foods to suit specific groups in the society.

References

Burrow, J. L., &amp Kleindl, B. (2012). Business Management(13th ed.). Mason, US: Cengage Learning.

Chopra, S, &amp Meindl, P (2007). Supply chain management :strategy, planning, and operation (3rd ed.). Upper Saddle River,N.J.: Pearson Prentice Hall.

Grant, R. M. (2013). Contemporary strategy analysis (8th ed.).Hoboken, N.J.: Wiley  Chichester : John Wiley [distributor].

Kim, W. C &amp Mauborgne, R (2005). Blue ocean strategy : howto create uncontested market space and make the competitionirrelevant. Boston, Mass.: Harvard Business School Press.

Kroning, D., &amp Strichman, O. (2008). Decision procedures :an algorithmic point of view. Berlin: Springer.

Peterson, P. P., &amp Fabozzi, F. J. (2012). Analysis ofFinancial Statements (2nd ed.). Hoboken, N.J.: John Wiley &ampSons.