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

Transcription

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

2 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 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 4 Prominent Sources of Competitive Advantage Cost leadership Speed Market focus Differentiation

5 5 Ex. 7-2: Evaluating a Business s Cost Leadership Opportunities 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

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

7 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 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 9 Ex. 7-3: Evaluating a Business s Differentiation Opportunities 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

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

11 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 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 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 14 Ex. 7-4: Evaluating a Business s Rapid Response Opportunities 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

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

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

17 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 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 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 20 Typical Industry Settings Emerging Industries Industries Transitioning to Maturity Mature and Decline Industries Fragmented Industries Global Industries

21 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 22 Strategic Options for Emerging Industries 1. Ability to shape industry s 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

23 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 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 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 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 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 28 Pitfalls to Avoid in Competing in Mature/Declining Industry Harvesting from a weak position Being overly optimistic about prospects for an industry revival Getting trapped in a profitless war of attrition

29 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 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 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 32 Key Components of Competing in Global Industries Approach to gain global market coverage Generic competitive strategy

33 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 34 Strategic Options: Choosing a Generic Competitive Strategy 1. Broad-line global competition 2. Global focus strategy 3. National focus strategy 4. Protected niche strategy

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

36 Ex. 7-10: Model of Grand Strategy Clusters 36 Rapid market growth Strong competitive position 1. Concentrated growth 2. Vertical Integration 3. Concentric diversification 1. Concentric diversification 2. Conglomerate diversification 3. Joint venture I IV II III 1. Reformulation of concentrated growth 2. Horizontal integration 3. Divestiture 4. Liquidation 5. Liquidation Slow market growth Weak competitive position 1. Turnaround or retrenchment 2. Concentric diversification 3. Conglomerate diversification 4. Divestiture

37 37 Opportunities to Build Value Opportunities to build value via diversification, integration, or joint venture strategies are usually found in marketrelated, 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