Business Strategy Chapter 8 McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives 1. 2. 3. 4. 5. 6. Determine why a business would choose a lowcost, differentiation, or speed-based strategy Explain the nature and value of a market focus strategy Illustrate how a firm can pursue both low-cost and differentiation strategies Identify requirements for business success at different stages of industry evolution Determine good business strategies in fragmented and global industries Decide when a business should diversify 8-3 Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage   The two most prominent sources of competitive advantage can be found in the business’s cost structure and its ability to differentiate the business from competitors Businesses that have one or more sources/capabilities that let them operate at a lower cost will consistently outperform their rivals that don’t 8-4 Evaluating Cost Leadership Opportunities  Business success built on cost leadership requires the business to be able to provide its product or service at a cost below what its competitors can achieve 8-5 Evaluating a Business’s Cost and Leadership Opportunities 8-6 Sustainable Low-Cost Activities 1. 2. 3. 4. 5. Some low-cost advantages reduce the likelihood of buyers’ pricing pressure Truly sustained low-cost advantages may push rivals into other areas New entrants competing on price must face an entrenched cost leader Low-cost advantages should lessen the attractiveness of substitute products Higher margins allow low-cost producers to withstand supplier cost increases 8-7 Risks of a Cost Leadership Strategy 1. 2. 3. 4. Many cost-saving activities are easily duplicated Exclusive cost leadership can be a trap Obsessive cost cutting can shrink other competitive advantages Cost differences often decline over time 8-8 Evaluating Differentiation    Differentiation requires that the business have sustainable advantages that allow it to provide buyers with something uniquely valuable to them Differentiation usually arises from one or more activities in the value chain that create a unique value important to buyers Strategists use benchmarking and consider the 5 forces in considering differentiation 8-9 Evaluating a Business’s Differentiation Opportunities 8-10 Evaluating Speed as a Competitive Advantage  Speed-based strategies, or rapid response to customer requests or market and technological changes, have become a major source of competitive advantage for numerous firms in today’s intensely competitive global economy 8-11 Evaluating a Business’s Rapid Response (Speed) Opportunities 8-12 Speed can be created by:      Customer responsiveness Product development cycles Product or service improvements Speed in delivery or distribution Information Sharing and Technology 8-13 Risks of Speed-based Strategy    Speeding up activities that haven’t been conducted in a fashion that prioritizes rapid response should only be done after considerable attention to training, reorganization, and/or reengineering Some industries may not offer much advantage to the firm that introduces some forms of rapid response Customers in such settings may prefer the slower pace or the lower costs currently available, or they may have long time frames in purchasing 8-14 Evaluating Market Focus as a Way to Competitive Advantage    Market focus: the extent to which a business concentrates on a narrowly defined market Small companies, at least the better ones, usually thrive because they serve narrow market niches Market focus allows some businesses to compete on the basis of low cost, differentiation, and rapid response against much larger businesses with greater resources 8-15 Risks of Market Focus The risk of focus is that you attract major competitors who have waited for your business to “prove” the market Managers evaluating opportunities to build competitive advantage should link strategies to   • • • Resources Capabilities Value chain activities that exploit low cost, differentiation, and rapid response 8-16 Stages of Industry Evolution and Business Strategy Choices   The requirements for success in industry segments change over time Strategists can use these changing requirements, which are associated with different stages of industry evolution, as a way to isolate key competitive advantages and shape strategic choices around them 8-17 Emerging Industries   Emerging industries are newly formed or re-formed industries that typically are created by technological innovation, newly emerging customer needs, or other economic or sociological changes There are no “rules of the game” 8-18 Business Strategies in Emerging Industries        Technologies that are most proprietary to the pioneering firms and technological uncertainty will unfold Competitor uncertainty because of inadequate information about competitors, buyers, and the timing of demand High initial costs but steep cost declines Few entry barriers First-time buyers requiring initial inducement to purchase Inability to obtain raw materials and components until suppliers gear up to meet the industry’s needs Need for high-risk capital because of the industry’s uncertain prospects 8-19 Emerging Industries        For success in this industry setting, business strategies require one or more of these features: The ability to shape the industry’s structure The ability to rapidly improve product quality and performance features Advantageous relationships with key suppliers and promising distribution channels The ability to establish the firm’s technology as the dominant one The early acquisition of a core group of loyal customers and then the expansion of that customer base The ability to forecast future competitors 8-20 Competitive Advantages and Strategic Choices in Growing Industries   Rapid growth brings new competitors into the industry At this stage, growth industry strategies that emphasize brand recognition, product differentiation, and the financial resources to support both heavy marketing expenses and the effect of price competition on cash flow can be key strengths 8-21 Growth Industries  For success in this industry setting, business strategies require one or more of the following features:  The ability to establish strong brand recognition  The ability and resources to scale up to meet increasing demand  Strong product design skills to be able to adapt products and services  The ability to differentiate the firm’s product[s] from competitors entering the market  R&D resources and skills to create product variations  The ability to build repeat buying from established customers  Strong capabilities in sales and marketing 8-22 Competitive Advantages and Strategic Choices in Mature Industries    As an industry evolves, its rate of growth eventually declines Firms working with the mature industry strategies sell increasingly to experienced, repeat buyers who are now making choices among known alternatives Competition becomes more oriented to cost and service as knowledgeable buyers expect similar price and features 8-23 Mature Industries  Strategy elements of successful firms in maturing industries often include the following:  Product line pricing Emphasis on process innovation that permits low-cost product design, manufacturing methods, and distribution synergy Emphasis on cost reduction Careful buyer selection to focus on buyers who are less aggressive, more closely tied to the firm, and able to buy more from the firm Horizontal integration to acquire rival firms whose weaknesses can be used to gain a bargain price International expansion to markets where attractive growth and limited competition still exist      8-24 Competitive Advantages and Strategic Choices in Declining Industries      Declining industries are those that make products or services for which demand is growing slower than demand in the economy as a whole or is actually declining Focus on higher growth or a higher return Emphasize product innovation and quality improvement Emphasize production and distribution efficiency Gradually harvest the business 8-25 Competitive Advantage in Fragmented Industries       A fragmented industry is one in which no firm has a significant market share and can strongly influence industry outcomes Tightly managed decentralization “Formula” facilities Increased value added Specialization Bare bones/no frills 8-26 Competitive Advantage in Global Industries  A global industry is one that comprises firms whose competitive positions in major geographic or national markets are fundamentally affected by their overall global competitive positions    License foreign firms to produce and distribute the firm’s products Maintain a domestic production base and export products to foreign countries Establish foreign-based plants and distribution to compete directly in the markets of one or more foreign countries 8-27 Four Generic Global Competitive Strategies     Broad-line global competition Global focus strategy National focus strategy Protected niche strategy 8-28 Grand Strategy Selection Matrix 8-29 Model of Grand Strategy Clusters 8-30 Building Value as a Basis for Choosing Diversification or Integration  The grand strategy selection matrix and model of grand strategy clusters are useful tools to help dominant product company managers evaluate and narrow their choices among alternative grand strategies  Dominant product company managers who choose diversification or integration eventually create another management challenge 8-31