chapter 8 - business strategy
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McGraw-Hill/IrwinMcGraw-Hill/IrwinStrategic Management, 10/eStrategic Management, 10/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Business Strategy
Chapter 8Chapter 8
8-2
Key Elements Chapter 8
1. Low-cost, differentiation, and speed-based strategies
2. Characteristics and value of a market focus strategy
3. Requirements for business success at different stages of industry evolution
4. Good business strategies in fragmented and global industries
5. Decide when a business should diversify
8-3
Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage
• The two most prominent sources of competitive advantage:
– business’s cost structure– and its ability to differentiate the business from
competitors
• Businesses that have one or more sources/capabilities that let them operate at a lower cost will consistently outperform their
rivals that don’t
8-4Evaluating Cost Leadership
Opportunities
• Business success built on cost leadership requires the business to be able to provide its product or service at a cost below what its competitors can achieve
8-5
Sustainable Low-Cost Activities
Benefits1. Some low-cost advantages reduce the likelihood
of buyers’ pricing pressure
2. Truly sustained low-cost advantages may push rivals into other areas
3. New entrants competing on price must face an entrenched cost leader
4. Low-cost advantages should lessen the attractiveness of substitute products
5. Higher margins allow low-cost producers to withstand supplier cost increases
8-6
Sustainable Low-Cost Activities
Limitations1. Many cost-saving activities are easily duplicated
2. Exclusive cost leadership can be a trap
3. Obsessive cost cutting can shrink other competitive advantages
4. Cost differences often decline over time
8-7Evaluating a Business’s Cost and
Leadership Opportunities
8-8
Evaluating Differentiation
• Differentiation requires that the business have sustainable advantages that allow it to provide buyers with something uniquely valuable to them
• Arises from one or more activities in the value chain that create a unique value important to buyers
• Strategists use benchmarking and consider the 5 forces in considering differentiation
8-9Evaluating a Business’s
Differentiation Opportunities
8-10Evaluating Speed as a Competitive
Advantage • Speed-based strategies, or rapid
response to customer requests or market and technological changes, have become a major source of competitive advantage for numerous firms in today’s intensely competitive global economy
8-11Evaluating a Business’s Rapid
Response (Speed) Opportunities
8-12
Speed can be created by:
• Customer responsiveness
• Product development cycles
• Product or service improvements
• Speed in delivery or distribution
• Information Sharing and Technology
8-13
Risks of Speed-based Strategy
• Speeding up activities requires considerable attention to training, reorganization, and/or reengineering
• Some industries may not offer much advantage to the firm that introduces some forms of rapid response
• Customers in such settings may prefer the slower pace or the lower costs currently available, or they may have long time frames in purchasing
8-14Evaluating Market Focus as a Way to Competitive Advantage
• Market focus: the extent to which a business concentrates on a narrowly defined market
• Better small companies thrive because they serve narrow market niches
• Market focus allows some businesses to compete on the basis of low cost, differentiation, and rapid response against much larger businesses with greater resources
8-15
Risks of Market Focus
• Can attract major competitors who have waited for your business to “prove” the market
• Managers evaluating opportunities to build competitive advantage should link strategies to
• Resources• Capabilities• Value chain activities that exploit low cost,
differentiation, and rapid response
8-16Stages of Industry Evolution and
Business Strategy Choices
• The requirements for success in industry segments change over time
• Strategists can use these changing requirements, which are associated with different stages of industry evolution, as a way to isolate key competitive advantages and shape strategic choices around them
8-17
Emerging Industries
• Emerging industries are newly formed or re-formed industries that typically are created by technological innovation, newly emerging customer needs, or other economic or sociological changes
• There are no “rules of the game”
8-18Conditions in Emerging Industries
• Technologies mostly proprietary to the pioneering firms • Technological uncertainty continuously unfolding • Competitive uncertainty due to inadequate information
about competitors, buyers, and the timing of demand • High initial costs but steep cost declines • Few entry barriers• First-time buyers requiring initial inducement to
purchase• Inability to obtain raw materials and components until
suppliers gear up to meet the industry’s needs • Need for high-risk capital because of the industry’s
uncertain prospects
8-19Business Strategies in Emerging Industries
• For success in emerging industries, business strategies require one or more of these features:
– Ability to shape the industry’s structure – Ability to rapidly improve product quality and
performance features – Advantageous relationships with key suppliers
and promising distribution channels – Ability to establish the firm’s technology as the
dominant one– Early acquisition of a core group of loyal
customers and then the expansion of that customer base
– Ability to forecast future competitors
8-20
Competitive Advantages and Strategic Choices in Growing Industries
• Rapid growth brings new competitors into the industry
• Growth industry strategies need to emphasize
– brand recognition– product differentiation– financial resources to support both heavy
marketing expenses and the effect of price competition on cash flow
8-21Business Strategies in Growth Industries
• For success business strategies in growth industries require one or more of the following features:
– Establishing strong brand recognition– Ability and resources to meet increasing demand– Strong product design skills to adapt products and
services– Ability to differentiate the firm’s product[s] from
competitors entering the market – R&D resources and skills to create product variations– Ability to build repeat buying from established
customers– Strong capabilities in sales and marketing
8-22
Competitive Advantages and Strategic Choices in Mature Industries
• As an industry evolves, its rate of growth eventually declines
• Firms in mature industry sell increasingly to experienced, repeat buyers who are now making choices among known alternatives
• Competition becomes more oriented to cost and service as knowledgeable buyers
expect similar price and features
8-23Business Strategies in Mature Industries
• Strategies in maturing industries often include the following:
– Product line pricing– Emphasis on process innovation that permits low-cost
product design, manufacturing methods, and distribution synergy
– Emphasis on cost reduction – Careful buyer selection to focus on buyers who are
less aggressive, more closely tied to the firm, and able to buy more from the firm
– Horizontal integration to acquire rival firms whose weaknesses can be used to gain a bargain price
– International expansion to markets where attractive growth and limited competition still exist
8-24
Competitive Advantages and Strategic Choices in Declining Industries
• Declining industries characterized by demand growing slower than demand in the economy or actual declines
• Strategies can involve:– Focus on higher growth or a higher return– Emphasize product innovation and quality
improvement – Emphasize production and distribution efficiency – Gradually harvest the business
8-25Competitive Advantage in
Fragmented Industries• A fragmented industry is one in which no firm
has a significant market share and can strongly influence industry outcomes
• Strategies can involve:– Tightly managed decentralization – “Formula” facilities– Increased value added – Specialization – Bare bones/no frills
8-26Competitive Advantage in
Global Industries• Global industry composed of firms whose
competitive positions in major geographic or national markets are fundamentally affected by their overall global competitive positions
• Strategies can involve: – License foreign firms to produce and distribute the firm’s
products – Maintain a domestic production base and export products
to foreign countries – Establish foreign-based plants and distribution to
compete directly in the markets of one or more foreign countries
8-27Four Generic Global
Competitive Strategies • Broad-line global competition
• Global focus strategy
• National focus strategy
• Protected niche strategy
8-28
Grand Strategy Selection Matrix
8-29
Model of Grand Strategy Clusters
8-30
Building Value as a Basis for Choosing Diversification or Integration
• The grand strategy selection matrix and model of grand strategy clusters are useful tools to help dominant product company managers evaluate and narrow their choices among alternative grand strategies
• Dominant product company managers who choose diversification or integration eventually create another management challenge