CHAPTER 7

1. CHAPTER 7 Strategic Analysis and Choice in Single- or Dominant-Product Businesses: Building Sustainable Competitive Advantages

2. Chapter Topics • Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage • Selected Industry Environments and Business Strategy Choices • Dominant Product/Service Businesses: Evaluating and Choosing to Diversify to Build Value

3. Key Issues: Strategic Analysis and Choice 1. What strategies are most effective at building sustainable competitive advantages for single business units? 2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

4. Prominent Sources of Competitive Advantage Cost leadership Speed Market focus Differentiation

5. A. Skills and Resources Sustained capital investment and access to capital Process engineering skills Intense supervision of labor or core technical operations Products or services designed for ease of manufacture or delivery Low-cost distribution systems B. Organizational Requirements Tight cost control Frequent, detailed control reports Continuous improvement and benchmarking orientation Structured organization and responsibilities Incentives based on meeting strict, usually quantitative targets Ex. 7-2: Evaluating a Business’s Cost Leadership Opportunities

6. Ex. 7-2 (contd.) Process innovation Lowering production costs Product redesign to reduce number of components Technology development Safety training for all employees reduces absenteeism, downtime, and accidents HRM General administration Reduced level of management cuts corporate overhead Computerized, integrated info. systems Reduces errors and costs Profit Favorable long-term contracts; captive suppliers or key customer for supplier Procurement Cooperative advtg. creates local cost advantage in buying media space/time Subcontracted service techs. Repair products correctly first time or bear costs Service Economy of scale in plant reduces equipment costs and depreciation Global, online suppliers provide automatic restocking of orders based on sales Computerized routing lowers transportation expense Margin Operations Outbound logistics Mkt & sales Inbound logistics

7. Advantages of a Cost Leadership Strategy • Low-cost advantages reduce likelihood of pricing pressure from buyers • Sustained low-cost advantages may push rivals into other areas, lessening price competition • New entrants must face an entrenched cost leader without experience to replicate cost advantages • Low-cost advantages should lessen attractiveness of substitutes • Higher margins allow low-cost producers to withstand supplier cost increases

8. Key Risks of Cost Leadership • Many cost-saving activities are easily duplicated • Exclusive cost leadership can become a trap • Obsessive cost cutting can shrink other competitive advantages involving key product attributes • Cost differences often decline over time

9. A. Skills and Resources Strong marketing abilities Product engineering Creative talent and flair Strong capabilities in basic research Corporate reputation for quality or technological leadership Long tradition in an industry or unique combination of skills Strong cooperation from channels/suppliers B. Organizational Requirements Strong coordination among functions in R&D, product development, and marketing Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labor, scientists, and creative people Tradition of closeness to key customers Some personnel skilled in sales and operations – technical and marketing Ex. 7-3: Evaluating a Business’s Differentiation Opportunities

10. Ex. 7-3 (contd.) Cutting-edge production technology and product features to maintain a distinct image and actual product Technology development Programs to ensure technical competence of sales staff and a marketing orientation of service personnel HRM General administration Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, replaced Profit Quality control presence at key supplier facilities; work with suppliers’ new product development activities Procurement Purchase superior quality well-known components, raising quality/image of final products Expensive, informative advertising and promotion to build image Service personnel have considerable discretion to credit customers for repairs Service Careful inspection of products at each step to improve product performance and lower defect rate JIT coordination with buyers; use of own/captive transportation service to ensure timeliness Margin Operations Outbound logistics Mkt & sales Inbound logistics

11. Advantages of a Differentiation Strategy • Rivalry is reduced when a business successfully differentiates itself • Buyers are less sensitive to prices for effectively differentiated products • Brand loyalty is hard for new entrants to overcome

12. Key Risks of Differentiation • Imitation narrows perceived differentiation, rendering differentiation meaningless • Technological changes that nullify past investments or learning • Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

13. Creating a Competitive Advantage Based on Speed • Has become a major source of competitive advantage for many firms • Involves the availability of a rapid response to customers by • Providing current products quicker • Accelerating new product development or improvement • Quickly adjusting production processes • Making decisions quickly

14. A. Skills and resources Process engineering skills Excellent inbound and outbound logistics Technical people in sales and customer service High levels of automation Corporate reputation for quality or technical leadership Flexible manufacturing capabilities Strong downstream partners Strong cooperation from suppliers of major components B. Organizational Requirements Strong coordination among functions in R&D, product development, and marketing Major emphasis on customer satisfaction in incentive programs Strong delegation to operating personnel Tradition of closeness to key customers Some personnel skilled in sales and operations – technical and marketing Empowered customer service personnel Ex. 7-4: Evaluating a Business’s Rapid Response Opportunities

15. Ex. 7-4 (contd.) Use of companywide technology sharing activities and autonomous product dev. teams to speed new product dev. Technology development Develop self-managed work teams and decision-making at the lowest levels to increase responsiveness HRM General administration Highly automated and integrated information processing system. Include major buyers in the system on a real-time basis Profit Preapproved, online suppliers integrated into production Procurement Working very closely with suppliers to include their choice of warehouse to minimize delivery time Standardize dies, etc. and prod. equipment to allow quick changeover to new or special order JIT delivery plus partnering with express mail services to ensure very rapid delivery Use of laptops linked directly to operations to speed order process Locate service technicians at customer facilities that are geographically close Service Margin Operations Outbound logistics Mkt & sales Inbound logistics

16. Activities Conducive to Building Speed-Based Competitive Advantage Customer responsiveness Product development cycles Product or service improvements Speed in delivery or distribution Information sharing and technology

17. Advantages of a Speed-Based Strategy • Creates a way to lessen rivalry because firm has the availability of something a rival may not • Allows firm to charge buyers more, engender loyalty, or enhance its position relative to its buyers • Generates cooperation and concessions from suppliers since they benefit from increased revenues • Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

18. Key Risks of a Speed-Based Strategy Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering Some industries – stable, mature ones – may not offer much advantage to a firm introducing some forms of rapid response

19. Creating Competitive Advantage Based on Market Focus • Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche • Allows a firm to • “Learn” its target customers • Build up organizational knowledge of ways to satisfy its target market better than larger rivals • Risks of focus strategies • Can attract major competitors to the segment • Believing a focus, by itself, creates success, rather than a form of low cost, differentiation, or speed

20. “Typical” Industry Settings • Emerging Industries • Industries Transitioning to Maturity • Mature and Decline Industries • Fragmented Industries • Global Industries

21. Characteristics of Markets in Emerging Industries • Proprietary technology and technological uncertainty • Competitor uncertainty regarding inadequate information • High initial cost structure • Few entry barriers • First-time buyers require initial inducements • Inability to easily obtain raw materials and components • Need for high-risk capital

22. Strategic Options for Emerging Industries • Ability to shape industry’s structure • Ability to rapidly improve product quality • Establish favorable relations with key suppliers • Ability to establish technology as dominant force • Acquire a core group of loyal customers • Ability to forecast future competitors

23. Characteristics of Industries Transitioning to Maturity • Intense competition for market share • Increased sales to experienced, repeat buyers • Greater emphasis on cost and service • Industry capacity “tops” out • New products and new applications harder to come by • Increase in international competition • Declining profitability

24. Strategic Options for Maturing Industries • Prune the product line • Emphasize process innovation • Emphasize cost reductions • Focus on selecting loyal buyers • Pursue horizontal integration • Expand internationally

25. Pitfalls to Avoid in Competing in Maturing Industries • A middle-ground approach to selecting a generic competitive strategy • Sacrificing market share for short-term profits • Waiting too long to respond to price reductions • Retaining unneeded excess capacity • Engaging in sporadic or irrational efforts to boost sales • Placing hopes on “new” products

26. Characteristics of Mature/Declining Industries • Demand grows more slowly than economy, or even declines • Slowing growth is caused by • Technological substitution • Demographic shifts • Shifts in consumer needs

27. Strategic Options for Mature/Declining Industries • Focus on key market segments offering growth opportunity • Emphasize product innovation and quality improvement • Emphasize production and distribution efficiency • Gradually harvest the business

28. Pitfalls to Avoid in Competing in Mature/Declining Industry Being overly optimistic about prospects for an industry revival Harvesting from a weak position Getting trapped in a profitless war of attrition

29. Characteristics of Fragmented Industries • No firm has a significant market share • No firm can significantly influence industry outcomes • Examples • Professional services • Retailing • Wood and metal fabrication • Agricultural products • Funeral industry

30. Strategic Options for Fragmented Industries • Tightly managed decentralization • Intense local coordination, high personal service, local autonomy • “Formula” facilities • Standardized, efficient, low-cost facilities at multiple locations • Increased value added • Difficult to differentiate products/services • Specialization • Product type, customer type, type of order, geographic areas • Bare bones/no frills • Intense low margin competition (low overhead, minimum wage)

31. Characteristics of Global Industries • Differences in prices and costs among countries due to • Currency exchange fluctuations • Differences in wage and inflation rates • Other economic factors • Differences in buyer needs across countries • Differences in competitors and ways of competing among countries • Differences in trade rules and governmental regulations across countries

32. Key Components of Competing in Global Industries Generic competitive strategy Approach to gain global market coverage

33. Strategic Options: Pursuing Global Market Coverage • License foreign firms to produce and distribute a firm’s products • Maintain a domestic production base and export products • Establish foreign-based plants and distribution in foreign countries

34. Strategic Options: Choosing a Generic Competitive Strategy • Broad-line global competition • Global focus strategy • National focus strategy • Protected niche strategy

35. Ex. 7-9: Grand Strategy Selection Matrix Overcome weaknesses Vertical integration Conglomerate diversification Turnaround or retrenchment Divestiture Liquidation Internal (redirected resources within the firm) External (acquisition or merger for resource capability) II I III IV Concentrated growth Mkt. Development Prod. Development Innovation Horizontal integration Concentric diversification Joint venture Maximize strengths

36. Ex. 7-10: Model of Grand Strategy Clusters Rapid market growth • Concentrated growth • Vertical Integration • Concentric diversification • Reformulation of concentrated growth • Horizontal integration • Divestiture • Liquidation I II Strong competitive position Weak competitive position IV III • Turnaround or retrenchment • Concentric diversification • Conglomerate diversification • Divestiture • Liquidation • Concentric diversification • Conglomerate diversification • Joint venture Slow market growth

37. Opportunities to Build Value Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operating-related, and management activities. Such opportunities center around reducing costs, improving margins, or providing access to new revenue sources more cost effectively than traditional internal growth options via concentration, market development, or product development