chapter 6Strategy

McGraw-Hill/IrwinPrinciples of Management

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Learning Objectives

1. Define strategy.

2. Explain why the goal of strategy is to attain superior performance.

3. Describe what is meant by competitive advantage.

4. Explain how business-level strategy can lead to competitive advantage.

5. Explain how operations strategy can lead to competitive advantage.

6. Explain how corporate-level strategy can lead to competitive advantage.

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Strategy

An action managers take to attain a goal of an organization.

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Superior Performance

Superior performancerequires …

Highprofitability

Growth in profits over

time

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Wal-Mart

• First year of operation – 1962 – Rogers, Arkansas• 1960s – 15 Wal-Mart stores• 1979-80 – 276 stores with $1 billion in sales• 1989 – 1,400 stores with $26 billion in sales• 1983 – SAM’s Club• 1988 – Supercenters• Today -- More than 1.8 million associates worldwide,

nearly 6,500 stores and wholesale clubs across 15 countries, and over $312 billion in sales.

Source: www.walmart.com

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Competitive Advantage

• Competitive advantage: Advantage obtained when a firm outperforms its rivals.

• Distinctive competency: A unique strength that rivals lack.

• Sustainable competitive advantage: A distinctive competency that rivals cannot easily match or imitate.

• Barrier to imitation: Factors that make it difficult for a firm to imitate the competitive position of a rival.

• Legacy constraints: Prior investments in a particular way of doing business that are difficult to change and limit a firm’s ability to imitate a successful rival.

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Competitive Advantage

Distinctivecompetencies

Competitive advantage

Low costs

Productdifferentiation

Superiorperformance

If protected from copying bybarriers to imitation and

legacy constraintscompetitive advantage

will be sustained

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U.S. Hospitals

• In the 20th Century, U.S. Hospitals were considered as the premier, top-notch facilities for healthcare

• 21st Century has brought the competitive pressures from focused providers

• Result: Competitive disadvantage and the need for change

Source: US Hospitals for the 21st Century, The McKinsey Quarterly, August 2006

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Business-Level Strategy

• Business-level strategy: Strategy concerned with deciding how a firm should compete in the industries in which it has elected to participate.

• Low-cost strategy: Focusing managerial energy and attention on doing everything possible to lower the costs of the organization.

• Economies of scale: Cost advantage derived from a large sales volume.

• Differentiation strategy: Increasing the value of a product offering in the eyes of consumers.

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Question

What type of business level strategy does Wal-Mart employ? Would Wal-Mart be successful, if it were to change its business-level strategy? Explain.

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The Low-Cost Value Cycles

Lower costs

Economiesof scale

Lower prices

Increaseddemand

Higherprofitabilityand profit

growth

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Options for Exploiting Differentiation

Increaseprices morethan costs

Higherprofitabilityand profit

growth

Opt

ion

1

Successfuldifferentiation

Moderate orno priceincrease

Increaseddemand

Economies ofscale and

lower costs

Opt

ion

2

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Segmenting the Market

• Markets are characterized by different types of consumers.

• Some are wealthy, some are not.

• Some are old, some are not.

• Some are influenced by popular culture, some never watch TV.

• Some care deeply about status symbols, others do not.

• Some place a high value on luxury, some on value of money.

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Consumer Markets

Consumer markets segmentation characteristics:

• Geographic• Demographic• Psychographic• Behavioralistic

Source: www.netmba.com

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Choosing Segments to Serve

• Focus Strategy: Serving a limited number of segments.

• Broad market strategy: Serving the entire market.

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Types of Business-Level Strategy

Broad low cost Broad differentiation

Focused low cost Focused differentiation

Many

Seg

men

ts s

erve

d

Few

Low cost DifferentiationCompetitive theme

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Question

In the retail industry sector, Wal-Mart could be described as following ________ strategy, whereas Nordstrom could be described as following _________ strategy.

a. broad low cost; broad differentiation

b. focused low cost; broad low cost

c. broad differentiation; broad low cost

d. focused differentiation; focused low cost

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Configuring the Value Chain

• Primary activities: Activities having to do with the design, creation, and delivery of the product; its marketing; and its support and after sales services.

• Support activities: Activities that provide inputs that allow the primary activities to occur.

• Organization architecture: The operations of the firm are embedded within the internal organization architecture of the enterprise, which includes the organization structure, incentives, control systems, people, and culture of the firm.

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Strategic Fit

Operationsstrategy

Internalorganizationarchitecture

Business-level

strategy

Industryconditions

Supports

Fits

Supports

Sup

port

s

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Competitive Tactics

• Competitive tactics: Actions that managers take to try to outmaneuver rivals in the market.

• Tactical pricing decisions:- Price war

- Price signaling

- Razor and razor blade pricing

• Tactical Product decisions:- Product proliferation

- Bundling

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Price Wars and Signaling

• Pepsi vs. Coca-cola• Cellular phones• Internet services• Long distance call rates

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Corporate-Level Strategy

• Corporate-level strategy: Strategy concerned with deciding which industries a firm should compete in and how the firm should enter or exit industries.

• Vertical integration: Moving upstream into businesses that supply inputs to a firm’s core business or downstream into businesses that use the outputs of the firm’s core business.

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Disney

Is Disney (a diversified entertainment company) vertically integrated?

- Domestic and international cable networks- TV production and distribution- Internet and mobile operations- Theme parks, hotels, restaurants, and cruise line- Animated motion pictures and licensing- Disney Stores and Web sites

Source: finance.yahoo.com

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Diversification

• Diversification: Entry into new business areas.

• Related diversity: Diversification into a business related to the existing business activities of an enterprise by distinct similarities in one or more activities in the value chain.

• Unrelated diversity: Diversification into a business not related to the existing business activities of an enterprise by distinct similarities in one or more activities in the value chain.