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“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value .”. Michael E. Porter.

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michael e porter

“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value.”

Michael E. Porter

slide2

Corporate strategy is basically concerned with the choice of businesses, products and markets. It tries to answer certain key questions:

(i) What businesses the firm should be in, in terms of the range of products it supplies. Punjab Tractors is a specialized company. It is involved almost exclusively in the manufacture of tractors. Hindustan Lever Ltd. is highly diversified with interests in soaps, tea, washing powders, detergents, tooth pastes, shampoo, creams, salt, hair oils etc.

(ii) What should be the optional geographic spread of activities for the firm? In the restaurant business, most firms serve small local markets, whereas McDonald’s operates in more than one hundred countries throughout the world.

(iii) What range of vertically linked activities should the firm encompass? Reliance Industries is a key player in each of the products in the Petrochemical—Fibre intermediate chain (synthetic textiles, PSF, PFY, PTA MEG)

(iv) How the corporate office should manage its group of businesses? Corporate strategy spells out the businesses in which the firm will participate, the markets it will serve and the customer needs it will satisfy.

the five generic competitive strategies
The five Generic Competitive Strategies
  • Five Competitive Strategies
  • Low-Cost Provider Strategies
  • Differentiation Strategies
  • Best-Cost Provider Strategies
  • Focused (or Market Niche) Strategies
long term objectives
Quantitative

Measurable

Realistic

Understandable

Challenging

Hierarchical

Obtainable

Congruent

Long Term Objectives
slide5

Financial vs. Strategic Objectives

Financial Objectives

  • Growth in revenues
  • Growth in earnings
  • Higher dividends
  • Larger profit margins
  • Greater ROI
  • Higher earnings per share
  • Rising stock price
  • Improved cash flow
financial vs strategic objectives strategic objectives
Financial vs. Strategic ObjectivesStrategic Objectives
  • Larger market share
  • Quicker on-time delivery than rivals
  • Shorter design-to-market times than rivals
  • Lower costs than rivals
  • Higher product quality than rivals
  • Wider geographic coverage than rivals
  • Achieving technological leadership
  • Consistently getting new or improved products to market ahead of rivals
slide7

Not Managing by Objectives

  • Managing by Extrapolation – “If it ain’t broke, don’t fix it”
  • Managing by Crisis – The true measure of a good strategist is the ability to fix problems
  • Managing by Subjectives – “Do your own thing, the best way you know how”
  • Managing by Hope – The future is full of uncertainty and if at first you don’t succeed, then you may on the second or third try
slide8

The Balanced Scorecard

Robert Kaplan & David Norton –

  • Strategy evaluation & control technique
  • Balance financial measures with nonfinancial measures
  • Balance shareholder objectives with customer & operational objectives
slide9

The Balanced Score Card: A Balanced Approach

  • R S Kaplan and D P Norton came out with a popular, balanced score card approach in early 90s linking corporate goals with strategic actions undertaken at the business unit, departmental and individual level. The score-card allows managers to evaluate a firm from different complementary perspectives. The arguments run thus:
  • A firm can offer superior returns to stockholders if it has a competitive advantage in its product or service offerings when compared to its rivals.
  • (ii) In order to sustain a competitive advantage, a firm must offer superior value to customers.
  • (iii) This, in turn, requires development of operations with necessary capabilities.
  • (iv) In order to develop the needed operational capabilities, a firm requires the services of employees having requisite skills, creativity, diversity and motivations. Thus, the performance as assessed in one perspective supports performance in other areas—as shown below:

Cont….

slide10

Four Perspectives of the Balanced Scorecard

EVA

Profitability

Financial

Growth

Differentiation

Cost

Customer

Quick Response

Product Development

Demand Management

Operations

Order Fulfilment

Leadership

Organisational Learning

Organisational

Ability to Change

strategy and competitive advantage
Strategy and Competitive Advantage
  • Competitive advantage exists when a firm’s strategy gives it an edge in
    • Attracting customers and
    • Defending against competitive forces
  • Convince customers firm’s product / service offers superior value
    • A good product at a low price
    • A superior product worth paying more for
    • A best-value product

Key to Gaining a Competitive Advantage

what is competitive strategy
What Is“Competitive Strategy”?
  • Deals exclusively with a company’sbusiness plans to compete successfully
    • Specific efforts to please customers
    • Offensive and defensive movesto counter maneuvers of rivals
    • Responses to prevailing market conditions
    • Initiatives to strengthen its market position
  • Narrower in scope than business strategy
low cost provider strategies
Low-Cost Provider Strategies

Keys to Success

  • Make achievement of meaningful lower coststhan rivals the theme of firm’s strategy
  • Include features and services in productoffering that buyers consider essential
  • Find approaches to achieve a cost advantagein ways difficultfor rivals to copy or match

Low-cost leadership means low

overall costs, not just low

manufacturing or production costs!

options achieving a low costadvantage
Options: Achieving a Low-CostAdvantage

Option 1: Use lower-cost edge to

  • Underprice competitors and attractprice-sensitive buyers in enoughnumbers to increase total profits

Option 2: Maintain present price, be content with present market share, and use lower-cost edge to

  • Earn a higher profit margin oneach unit sold, therebyincreasing total profits
nucor corporation s low cost provider strategy

Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment

Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs

Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity

Hire a nonunion workforce that uses team-based incentive compensation systems

Heavily emphasize consistent product quality and maintain rigorous quality systems

Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management

Nucor Corporation’sLow-Cost Provider Strategy
approaches to securing a cost advantage

Control costs!

By-pass

costs!

Approaches to Securing a Cost Advantage

Do a better job than rivals of performing value chain activities efficiently and cost effectively

Revamp value chain to bypass cost-producing activities that add little value from the buyer’s perspective

Approach 1

Approach 2

approach 1 controlling the cost drivers
Approach 1: Controllingthe Cost Drivers
  • Capture scale economies; avoid scale diseconomies
  • Capture learning and experience curve effects
  • Manage costs of key resource inputs
  • Consider linkages with other activities in value chain
  • Find sharing opportunities with other business units
  • Compare vertical integration vs. outsourcing
  • Assess first-mover advantages vs. disadvantages
  • Control percentage of capacity utilization
  • Make prudent strategic choices related to operations
approach 2 revamping the value chain
Approach 2: Revampingthe Value Chain
  • Make greater use of Internet technology applications
  • Use direct-to-end-user sales/marketing methods
  • Simplify product design
  • Offer basic, no-frills product/service
  • Shift to a simpler, less capital-intensive, or more flexible technological process
  • Find ways to bypass use of high-cost raw materials
  • Relocate facilities closer to suppliers or customers
  • Drop “something for everyone” approach and focus on a limited product/service
keys to success in achieving low cost leadership
Keys to Success in AchievingLow-Cost Leadership
  • Scrutinize each cost-creating activity, identifying cost drivers
  • Use knowledge about cost drivers to managecosts of each activity down year after year
  • Find ways to restructure value chain to eliminatenonessential work steps and low-value activities
  • Work diligently to create cost-conscious corporate cultures
    • Feature broad employee participation in continuous cost-improvement efforts and limited perks for executives
    • Strive to operate with exceptionally small corporate staffs
  • Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business
characteristics of a low cost provider
Characteristics of aLow-Cost Provider
  • Cost conscious corporate culture
  • Employee participation in cost-control efforts
  • Ongoing efforts to benchmark costs
  • Intensive scrutiny of budget requests
  • Programs promoting continuous cost improvement

Successful low-cost producerschampion

frugalitybut wisely and aggressively

invest in cost-saving improvements !

when does a low cost strategy work best
When Does a Low-CostStrategy Work Best?
  • Price competition is vigorous
  • Product is standardized or readily availablefrom many suppliers
  • There are few ways to achievedifferentiation that have value to buyers
  • Most buyers use product in same ways
  • Buyers incur low switching costs
  • Buyers are large and havesignificant bargaining power
  • Industry newcomers use introductory low prices to attract buyers and build customer base
pitfalls of low cost strategies
Pitfalls of Low-Cost Strategies
  • Being overly aggressive in cutting price
  • Low cost methods are easily imitated by rivals
  • Becoming too fixated on reducing costsand ignoring
    • Buyer interest in additional features
    • Declining buyer sensitivity to price
    • Changes in how the product is used
  • Technological breakthroughs open up cost reductions for rivals
differentiation strategies
Differentiation Strategies

Objective

  • Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals
  • Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals
  • Not spending more to achieve differentiationthan the price premium that can be charged

Keys to Success

benefits of successful differentiation

Whichhat is unique?

Benefits of Successful Differentiation
  • A product / service with unique, appealing attributes allows a firm to
    • Command a premium priceand/or
    • Increase unit salesand/or
    • Build brand loyalty
  • = Competitive Advantage
types of differentiation themes
Types of Differentiation Themes
  • Unique taste -- Dr. Pepper
  • Multiple features -- Microsoft Windows and Office
  • Wide selection and one-stop shopping -- Home Depot and Amazon.com
  • Superior service -- FedEx, Ritz-Carlton
  • Spare parts availability -- Caterpillar
  • More for your money -- McDonald’s, Wal-Mart
  • Prestige -- Rolex
  • Quality manufacture -- Honda, Toyota
  • Technological leadership -- 3M Corporation
  • Top-of-line image -- Ralph Lauren, Chanel, Cross
sustaining differentiation keys to competitive advantage
Sustaining Differentiation: Keys to Competitive Advantage
  • Most appealing approaches to differentiation
    • Those hardest for rivals to match or imitate
    • Those buyers will find most appealing
  • Best choices to gain a longer-lasting, more profitable competitive edge
    • New product innovation
    • Technical superiority
    • Product quality and reliability
    • Comprehensive customer service
    • Unique competitive capabilities
where to find differentiation opportunities in the value chain
Where to Find Differentiation Opportunities in the Value Chain
  • Purchasing and procurement activities
  • Product R&D and product design activities
  • Production process / technology-related activities
  • Manufacturing / production activities
  • Distribution-related activities
  • Marketing, sales, and customer service activities
where to find differentiation opportunities in the value chain1

Activities,

Costs, &

Margins of

Suppliers

Internally

Performed

Activities,

Costs, &

Margins

Buyer/User

Value

Chains

Activities, Costs,

& Margins of

Forward Channel

Allies &

Strategic Partners

Where to Find Differentiation Opportunities in the Value Chain
how to achieve a differentiation based advantage
How to Achieve aDifferentiation-Based Advantage

Approach 1

Incorporate product features/attributes thatlower buyer’s overall costs of using product

Approach 2

Incorporate features/attributes that raise theperformance a buyer gets out of the product

Approach 3

Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways

Approach 4

Compete on the basis of superior capabilities

importance of perceived value
Importance of Perceived Value
  • Buyers seldom pay for value that is not perceived
  • Price premium of a differentiation strategy reflects
    • Value actually delivered to the buyer and
    • Value perceived by the buyer
  • Actual and perceived value can differ when buyers are unable to assess their experience with a product
signaling value as well as delivering value
Signaling Value as Wellas Delivering Value
  • Incomplete knowledge of buyers causes them tojudge value based on such signals as
    • Price
    • Attractive packaging
    • Extensive ad campaigns
    • Ad content and image
    • Characteristics of seller
      • Facilities
      • Customers
      • Professionalism and personality of employees
  • Signals of value may be as important as actual value when
    • Nature of differentiation is hard to quantify
    • Buyers are making first-time purchases
    • Repurchase is infrequent
    • Buyers are unsophisticated
when does a differentiation strategy work best
When Does a DifferentiationStrategy Work Best?
  • There are many ways to differentiate a productthat have value and please customers
  • Buyer needs and uses are diverse
  • Few rivals are following a similardifferentiation approach
  • Technological change andproduct innovation are fast-paced
when does a differentiation strategy work best1
When Does a DifferentiationStrategy Work Best?
  • There are many ways to differentiate a product that have value and please customers
  • Buyer needs and uses are diverse
  • Few rivals are following a similar differentiation approach
  • Technological change andproduct innovation are fast-paced
pitfalls of differentiation strategies
Pitfalls ofDifferentiation Strategies
  • Buyers see little value in unique attributes of product
  • Appealing product features are easily copied by rivals
  • Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being
  • Over-differentiating such that productfeatures exceed buyers’ needs
  • Charging a price premium buyers perceive is too high
  • Not striving to open up meaningful gaps in quality, service, or performance features vis-à-vis rivals’ products
best cost provider strategies
Best-Cost Provider Strategies
  • Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation
    • Make an upscale product at a lower cost
    • Give customers more value for the money
  • Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations
  • Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands

Objectives

competitive strength of a best cost providerstrategy
Competitive Strength of a Best-Cost ProviderStrategy
  • A best-cost provider’s competitive advantage comes from matchingclose rivals on key product attributes and beating them on price
  • Success depends on having the skills and capabilities to provide attractive performanceandfeatures at a lower cost than rivals
  • A best-cost producer can often out-compete botha low-cost provider and a differentiator when
    • Standardized features/attributeswon’t meet diverse needs of buyers
    • Many buyers are price and value sensitive
risk of a best cost provider strategy
Risk of a Best-CostProvider Strategy
  • A best-cost provider may get squeezedbetween strategies of firms using low-cost and differentiation strategies
    • Low-cost leaders may be able to siphoncustomers away with a lower price
    • High-end differentiators may be able tosteal customers away with better product attributes
focus niche strategies
Focus / Niche Strategies
  • Involve concentrated attention on a narrow piece of the total market

Serve niche buyers better than rivals

  • Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs
  • Develop unique capabilities to serve needs of target buyer segment

Objective

Keys to Success

approaches to defining a market niche
Approaches to Defininga Market Niche
  • Geographic uniqueness
  • Specialized requirements inusing product/service
  • Special product attributesappealing only to niche buyers
examples of focus strategies
Examples of Focus Strategies
  • eBay
    • Online auctions
  • Porsche
    • Sports cars
  • Jiffy Lube International
    • Maintenance for motor vehicles
  • Pottery Barn Kids
    • Children’s furniture and accessories
  • Bandag
    • Specialist in truck tire recapping
focus niche strategies and competitive advantage

Which hat is unique?

Focus / Niche Strategiesand Competitive Advantage
  • Achieve lower costs thanrivals in serving the segment --

A focused low-cost strategy

Approach 1

  • Offer niche buyers somethingdifferent from rivals --

A focused differentiation strategy

Approach 2

what makes a niche attractive for focusing
What Makes a NicheAttractive for Focusing?
  • Big enough to be profitable and offers good growth potential
  • Not crucial to success of industry leaders
  • Costly or difficult for multi-segment competitorsto meet specialized needs of niche members
  • Focuser has resources and capabilitiesto effectively serve an attractive niche
  • Few other rivals are specializing in same niche
  • Focuser can defend against challengers via superior ability to serve niche members
risks of a focus strategy
Risks of a Focus Strategy
  • Competitors find effective ways to matcha focuser’s capabilities in serving niche
  • Niche buyers’ preferences shift towards product attributes desired by majority of buyers – nichebecomes part of overall market
  • Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered
deciding which generic competitive strategy to use
Deciding Which Generic Competitive Strategy to Use
  • Each positions a company differently in its market and competitive environment
  • Each establishes a central theme for how a company will endeavor to outcompete rivals
  • Each creates some boundaries for maneuvering as market circumstances unfold
  • Each points to different ways of experimenting with the basics of the strategy
  • Each entails differences in product line, production emphasis, marketing emphasis, and means to sustainthe strategy
deciding which generic competitive strategy to use1
Deciding Which Generic Competitive Strategy to Use
  • Each positions a company differently in its market
  • Each establishes a central theme for how a company will endeavor to outcompete rivals
  • Each creates some boundaries for maneuvering as market circumstances unfold
  • Each points to different ways of experimenting with the basics of the strategy
  • Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy

The big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitiveadvantage or a distinctive competitive position.

slide50

Types of Strategies

Forward Integration

Vertical IntegrationStrategies

BackwardIntegration

HorizontalIntegration

slide52

Types of Strategies

MarketPenetration

IntensiveStrategies

MarketDevelopment

ProductDevelopment

slide54

Types of Strategies

Related

Diversification

DiversificationStrategies

Unrelated

Diversification

slide56

Types of Strategies

Retrenchment

DefensiveStrategies

Divestiture

Liquidation

means for achieving strategies
Means for Achieving Strategies
  • Cooperation among competitors
  • Joint venture / partnering
  • Merger / acquisition
  • First mover advantages
  • Outsourcing
strategic management in nonprofit and governmental organizations
Strategic Management in Nonprofit and Governmental Organizations
  • Educational Institutions
  • Medical Organizations
  • Governmental Agencies and Departments
slide60

Outsourcing in Indian Companies

Industry

National Panasonic

Ciba

-

Geigy

Since marketing has become crucial, the

The company is outsourcing its colour television

company focuses on it, buying all its bottling,

assembling processes from Salora, preferring to

packaging, and stamping since these are

direct its resources to leveraging the equity of its

commoditised aspects where it can expect to

famous brand and on breaking into a crowded

ad

d little value itself.

marketplace.

TV Sets

Pharmaceuticals

Mahindra Ford

Indo Rama

Jenson & Nicholson

Entering a crowded market,

With global markets for

Intent on catching up with

it will focus on its core

yarns still expanding, the

the leaders, the company

function of assembly,

company had opted to focus

has invested in marketing

keeping start

-

up costs as

on its core strength instead

and distribution. Unable to

low as possible, and is

of integrating. Since

integrate backwards, there

outsourcing 40 per cent of

production is crucial, it

fore, it has to outsource all

its components, its

outsources marketing,

its chemicals and raw

warehousing as

well as its

distribution, and ware

materials.

distribution.

housing .

Cont….

Textiles

Paints

Automobiles