Strategic Management

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Chapter 8
Business StrategyBuilding Sustainable
Competitive Advantages
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Session Topics Three Items

• 1. Evaluating and Choosing Business Strategies
  Seeking Sustained Competitive Advantage
• Evaluating Cost Leadership Opportunities
• Evaluating Differentiation Opportunities
• Evaluating Speed as a Competitive Advantage
• Evaluating Market Focus as a Way to Win
  Competitive Advantage

• 2. Selected Industry Environments and Business
  Strategy Choices
• Emerging Industries
• Growth Industries
• Mature
• Declining Industries
• Fragmented Industries
• Global Industries
• 3. Dominant Product/Service Businesses
  Diversification to Build Value

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Key Issues Strategic Choice in Single Businesses
1. What strategies are most effective at building
sustainable competitive advantages for single
business units?
2. When should dominant-product/service
businesses diversify to build value and
competitive advantage? What grand strategies are
most appropriate?
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How should you choose among competitive advantage
strategies?
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Prominent Sources of Competitive Advantage
Cost leadership
Differentiation
Speed
Market focus
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For Each of the Four CL, Diff, Speed/RR, MF

• Skills and Resource Requirements
• Structural/Organizational Requirements
• Value Chain Examples
• Advantages
• Risks

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Evaluating A Businesss Cost Leadership
Opportunities

• A. Skills and Resources Fostering Cost Leadership
• 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 system

• B. Organizational Requirements Supporting Cost
  Leadership
• Tight cost control
• Frequent, detailed control reports
• Continuous improvement and benchmarking
  orientation
• Structured organization and responsibilities
• Incentives based on meeting strict, usually
  quantitative targets

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Evaluating A Businesss Cost Leadership
Opportunities --C. Examples of Ways Businesses
Achieve Competitive Advantage
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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
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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
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Evaluating A Businesss Differentiation
Opportunities

• A. Skills and Resources Fostering Differentiation
• 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 and suppliers of
  major components

• B. Organizational Requirements Supporting
  Differentiation
• Strong coordination among functions in RD,
  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

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Evaluating A Businesss Differentiation
Opportunities --C. Examples of Ways Businesses
Achieve Competitive Advantage
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Advantages of a Differentiation Strategy
Rivalry is reduced when a business successful
differentiates itself
Buyers are less sensitive to prices for
effectively differentiated products
Brand loyalty is hard for new entrants to overcome
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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
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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

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Evaluating A Businesss Rapid Response
Opportunities

• A. Skills and Resources Fostering Speed
• 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 Supporting Rapid
  Response
• Strong coordination among functions in RD,
  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

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Evaluating A Businesss Rapid Response
Opportunities --C. Examples of Ways Businesses
Achieve Competitive Advantage
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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
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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
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Creating a 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 strategy, by itself, creates
  success, rather than a form of low cost,
  differentiation, or speed

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Industry Environments and Strategy Choices
Emerging Industries Growth Industries Mature
Industries Declining Industries Fragmented
Industries Global Industries
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For each Industry Environment
Characteristics Strategic Options
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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 inducement
• Inability to easily obtain raw materials and
  components
• Need for high-risk capital

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Strategic Options for Emerging Industries
1. Ability to shape industrys structure
2. Ability to rapidly improve product quality
3. Establish favorable relations with key
suppliers
4. Ability to establish technology as dominant
force
5. Acquire a core group of loyal customers
6. Ability to forecast future competitors
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Characteristics of Industries Transitioning to
Maturity

• Intense competition for market share
• Increased sales to experienced, repeat buyers
• Greater emphasis on cost and service
• Declining profitability

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Strategic Options for Maturing Industries
1. Prune the product line
2. Emphasize process innovation
3. Emphasize cost reductions
4. Focus on selecting loyal buyers
5. Pursue horizontal integration
6. Expand internationally
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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 efforts to boost sales
Placing hopes on new products
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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

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Strategic Options for Mature/Declining Industries
1. Focus on key market segments offering growth
opportunities
2. Emphasize product innovation and quality
improvement
3. Emphasize production and distribution
efficiency
4. Gradually harvest the business
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Pitfalls to Avoid in Competing in
Mature/Declining Industries
Being overly optimistic about prospects for an
industry revival
Getting trapped in a profitless war of attrition
Harvesting from a weak position
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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

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

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Strategic Options Pursuing Global Market
Coverage
1. License foreign firms to produce and
distribute a firms products
2. Maintain a domestic production base and export
products
3. Establish foreign-based plants and
distribution in foreign countries
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Strategic Options Choosing a Generic
Competitive Strategy
1. Broad-line global competition
2. Global focus strategy
3. National focus strategy
4. Protected niche strategy
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Grand Strategy Selection Matrix
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Model of Grand Strategy Clusters
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Conclusion Selecting a Business Strategy
toAchieve a Competitive Advantage
Focusing on key sources of competitive advantage
requiring total, consistent commitment
Weighing skills, resources, organizational
requirements, and risks of each source of
competitive advantage
Considering unique effects of the generic
industry environment on a firms value chain
activities