module 6 - matching strategy to a company's situation

Module 6

Matching Strategy to a

Company’s Situation

Module Outline

• Strategies for Competing in Emerging Industries

• Strategies for Competing in a Maturing Industry

• Strategies for Firms in Declining Industries

• Strategies for Firms in Fragmented Industries

• Strategies for Competing in International Markets

• Strategies for Industry Leaders

• Strategies for Runner-Up Firms

• Strategies for Weak Businesses

• Thirteen Commandments for Crafting strategies

Overview: Matching Strategy to a

Company’s Situation

• The most important drivers shaping a firm’s

strategic options falls into 2 categories:

1. Nature on industry and competitive conditions

2. Firm’s own competitive capabilities market

position, and best opportunities

• Matching strategy to a company’s situation

can be examine via

– 5 classic types of industry environments

– 3 classic types of company situations

What is an Emerging Industry?

• Market is new and unproven

• Buyers first-time users

• Companies in grow-and-build mode

• Technological know-how emerging

• Information about customers and market

conditions hard to get

• Uncertainty about how fast demand for

product will grow and how big market will get

• First-generation product improved rapidly

Features of an Emerging Industry

• No “rules of the game”

• Technological know-how is proprietary

• Entry barriers tend to be low

• Experience curve effects often permit significant cost reductions as volume builds

• Marketing task involves inducing initial purchase and overcoming customer concerns

• Difficulties in securing raw materials

• Firms run short of funds for R&D and start-up

Strategy Options: Competing in

Emerging Industries

• Try to win early race for industry leadership by

employing a bold, creative strategy

• Push hard to

– Perfect technology

– Improve product quality

– Develop attractive performance features

– Shape rules of competition

• Try to capture potential first-mover advantages

• Pursue new

– Customer and user applications

– Geographical areas to enter


Emerging Industries

• Shift advertising focus from building product

awareness to

– increasing frequency of use, and

– Creating brand loyalty

• Move quickly when technological uncertainty

clears and a “dominant” technology emerges

• Use price cuts to attract price-sensitive buyers

• Expect established firms looking for growth

opportunities to enter market when risk lessens


Emerging Industries

• Strategic success in an emerging industry

calls for

– Bold entrepreneurship

– Willingness to pioneer and take risks

– Intuitive feel for what buyer will like and how they

will use product

– Quick response to new developments

– Opportunistic strategy-making

Features: Transitioning to Industry

Maturity

• Slowing demand generates head-to-head

competition for market share

• Buyers are more sophisticated, driving harder

bargain on repeat purchases

• Greater emphasis on cost and service

• Firms have “topping out” problem in adding

production capacity

• Product innovation and new end-use applications

harder to come by

• International competition increases

• Industry profitability falls

Transition to Industry Maturity

Principle

• Slower rates of market growth cause

competition pressures to intensify, often

producing a

– Shake-out of weaker competitors, and

– Slimmer profit margins industry-wide

Strategy Options: Competing in a

Maturing Industry

• Prune product line

• Emphasize process innovation

• Push hard for cost reduction

• Find ways to increase sales to present

customers

• Purchase rival firms at bargain prices

• Expand internationally

Strategic Mistakes in a Maturing

Industry

• Not pursuing a strategy which gives firm strong

image with buyers –

Stuck in the Middle!

• Putting more emphasize on boosting short-term

profits than on strengthening long-term competitive

position

• Waiting too long to respond to price-cutting by

aggressive rivals

• Getting caught with too much excess capacity

• Failing to aggressively pursue cost reductions

Strategic Management Principle

One of the greatest strategic mistakes firm

can make in a maturing industry is pursuing

a compromise between low-cost,

differentiation, and focusing such that it ends

up “Stuck in the Middle” with little chance of

attaining industry leadership!

Features of Mature Industries

• Demand grows slower than economy-wide

average or begins declining

• Competitive pressures intensify, resulting in

heated battle for market share

• To grow and prosper, firm must take market

share away from rivals

• Industry consolidates to smaller number of

key players

Strategic Options: Competing in a

Mature / Declining Industry

• Pursue focus strategy by exploiting growth

segments within industry

• Pursue differentiation strategy

• Work diligently to drive costs down by

– Outsourcing activities

– Redesigning internal business processes

– Consolidating under-utilized production facilities

– Closing low-volume, high-cost distribution outlets

– Cutting marginal activities out of value chain

Strategic Pitfalls of Competing in a

Stagnant Industry

• Getting trapped in profitless war of attrition

• Diverting too much cash out of firm too

quickly, accelerating its demise

• Over-optimism about industry’s future

Competitive Features of Fragmented

Industries

• Absence of visible market leaders

• Low entry barriers and absence of scale economies

• Market for product is local

• Small quantities of customized products required

• Market is so large and diverse it takes numerous

firms to accommodate buyer needs

• High transportation costs prevent serving large

market area

• Local regulatory requirements make each

geographic area unique

• Newness of industry

Examples: Fragmented Industries

• Book publishing

• Landscaping and plant nurseries

• Auto repair

• Restaurant industry

• Public accounting

• Women’s dresses

• Meat packing

• Paperboard boxes

• Hotels and motels

• furniture

Strategic Options: Competing in a

Fragmented Industry

• Construct and operate “formula” facilities

• Become a low-cost producer

• Increase customer value via vertical

integration

• Specialized by product type

• Specialized by customer type

• Focus on limited geographic area


In fragmented industries, competitors

usually have strategic latitude to

1. Compete broadly or to focus

2. Pursue either a low-cost or differentiation-

based competitive advantage

What is the Motivation for Competing

Internationally?

• Desire to seek out new markets to sustain

growth in sales and profits

• Desire to achieve lower costs to strengthen

firm’s long-term competitive position

• Desire to access natural resource deposits in

other countries


Competing in international markets posses a

bigger strategy-making challenge than

competing in only the company’s home

market!

Competitive Features of International

Markets

• Market differences among countries

• Cost differences among countries

• Differences in host government trade policies


Markets

• Market differences among countries

– Buyer needs and habits

– Distribution channels

– Long-run growth potential

– Driving forces

– Competitive pressures


Markets

• Cost differences among countries

– Wage rates

– Worker productivity

– Natural resource availability

– Inflation rates

– Energy costs

– Tax rates

– Fluctuation currency exchange rates


Markets

• Differences in host government trade policies

– Import tariffs or quotas

– Local content requirements

– Price control policies

– Other regulations

• Technical standards

• Product certification

• Minority ownership by local citizens

• Prior approval of capital spending projects

• Withdrawal of funds from country

Manufacturing Vs. Brand Share

• Firm with biggest manufacturing share best

positioned to be –

– The global low-cost producer

• A firm’s manufacturing share can be bigger

than its own branded share since it makes

brands for other sellers

– Extra manufacturing volume may open door to

achieving lower costs

Types of International Competition

• Multi-country Competition

• Global Competition

Characteristics of Multi-Country

Competition

• Competition in each national market is

independent of competition in other national

markets

• No “international” market

• Rivals compete for market leadership country

by country

Characteristics of Global Competition

• Competitive conditions across national

markets are linked to form an international

market

• A firm’s competitive position in one country

affects and is affected by its position in other

countries

• Leading competitors compete head-to-head

in numerous countries

Strategy Options for Competing

Internationally

• License foreign firm to use one’s technology

or to produce and distribute one’s products

• Maintain a national production base and

export goods to foreign markets

• Multi-country strategy

• Global low-cost strategy

• Global differentiation strategy

• Global focus strategy

Multi-Country Strategy

• Matches strategy to host country circumstances

• Works best when

– Market conditions are diverse among countries

– Buyers insist on highly customized products

– Buyer demand for product exists in few markets

– Host government regulations preclude uniform global

approach

• Two drawbacks:

1. Entails little coordination across countries

2. Not tightly based on competitive advantage

Global Strategy

• Works best when

– Great similarities in products and buyer

requirements exist among countries

• Involves

– Coordinating firm’s strategic moves worldwide

– Selling in many, if not all, nations where

significant buyer demand exists

• Allows firm to concentrate on securing

competitive advantage over

– Both international and domestic rivals

Competitive Strategy Principle

A multi-country strategy is appropriate for

industries where multi-country competition

dominates!

A global strategy works best in markets that

are globally competitive or beginning to

globalize!

Global Strategy and Competitive

Advantage

• A global strategy provides two avenues to

gain competitive advantage

1. Locating activities among nations in ways that

lower costs or helps achieve greater product

differentiation

2. Coordinating dispersed activities in ways

domestic-only competitor cannot

Principle of Competitive Markets

With a global strategy, an international

competitor can pursue sustainable

competitive advantage by locating activities

in the most advantageous countries and

coordinating strategic actions worldwide. A

domestic-only competitor forfeits such

opportunities!

Locating Activities to Build a Global

Advantage

• To build competitive advantage via location,

firm must consider

– Whether to concentrate each activity

• In one or two countries, or

• Disperse performance of activity to many

nations

– In which countries to locate activities

Locating Activities to Build a Global

Advantage

• Activities tend to be concentrated when

– Scale economies / experience curve effects exist

– Coordination of related activities is enhanced

• Dispersing activities works best when

– Buyer-related activities must take place close to

buyers

– Transportation costs, scale diseconomies, and

trade barriers make centralization expensive

– It buffers fluctuating exchange rates, supply

interruptions, and adverse political developments

Coordinating Activities and Strategic

Moves

• Competitive advantage can be built via

– Knowledge and expertise accumulated at one

location can be transferred to other locations

– Production can be shifted from one location to

another to take advantage of most favorable cast

or trade conditions

– Brand reputation can be enhanced by positioning

products with same differentiating attribute on a

worldwide basis

– Global competitor can choose where and how to

challenge rivals

Strategic Alliances

Concept

• Agreements between firms to do business

together in ways that go beyond normal fir-

to-firm dealings but fall short of merger or full

partnership


• More effective in combating competitive

disadvantage than in gaining competitive

advantage!

Strategic Alliances

• An alliance can take form of

– Joint research efforts

– Technology-sharing

– Joint use of production facilities

– Marketing one another’s products

– Jointly manufacturing components of assembling finished products

• Alliances enable firms in same industry based in different countries to compete on a

– More global scale, while

– Preserving their independence

Benefits of Strategic Alliances

• Allies may gain economies scale in

production and / or marketing

• Allies can share and / or transfer technical

and manufacturing expertise

• Alliances may allow access to markets

previously blocked by governmental barriers

• Allies can direct combines competitive

energies into building competitive advantage

and defeating mutual rivals

Pitfalls of Strategic Alliances

• Effective coordinating is challenging and time

consuming

• Language and cultural barriers and problems of

mistrust may exist

• Relationships may cool and benefits never realized

• Collaboration in competitively sensitive areas can

be difficult

• Clash of egos and company cultures may occur

• One firm may become too dependent on another

firm’s capabilities

Guidelines: Forming Strategic Alliances

• Pick a compatible partner

• Choose an ally whose products and market

strongholds complement firm’s own

products and customers

• Learn thoroughly and rapidly about partner’s

technology and management

• Be careful not to divulge competitively

sensitive information to a partner

• View alliances as temporary

How Strategic Intent Varies Among

Industry Competitors

Global Dominance

– Long-term strategic intent is pursuing a global strategy

Dominance in Home Market

– Primary strategic objective is defending home country

market

Host Country Responsiveness

– Primary strategic orientation is pursuing a multi-country

strategy

Domestic-Only

– Strategic intent is focused on home country market

Concept: Profit Sanctuaries

• Profit Sanctuaries are country markets

where a firm

– Has strong or protected market position, and

– Derives substantial profits

• A country is a firm’s profit sanctuary when it

derives a substantial fraction of total profits

from sales in that country

• Generally, a firm’s most strategically

crucial sanctuary is its home market


A global competitor with multiple profit

sanctuaries can wage and generally win a

competitive offensive against a domestic

competitor whose only profit sanctuary is its

home market!

Concept: Critical Markets

• Critical markets are in countries that

– Are profit sanctuaries of key competitors

– Have big sales volume

– Include prestigious customers whose business it

is strategically important to have

– Offer exceptionally good profit margines


Building a defense against global

competitors does not require competing in all

foreign markets, but it does mean competing

in all critical markets!

Competitive Power of Cross-

Subsidization

• Involves using profits earned in a country market to

– Support offensive against key rivals, or

– Gain increased penetration of a critical market

• Most powerful when global firm with multiple profit

sanctuaries is intent on

– Achieving global market dominance

• A global firm can use lower prices to siphon a

domestic firm’s customer while

– Gaining market share, and

– Covering losses with profit earned in another critical

market


To defend against aggressive multinational

competitors intent on global dominance, a

domestic-only competitor usually has to

– Abandon its domestic focus

– Become a multinational competitor, and

– Craft a multinational competitive strategy

Why a Global Competitor Can Defeat a

Domestic-Only Firm?

• A one-country firm cannot effectively defend

its market share in the long-term against a

global firm because

– Global multi-country rival can use profits earned

elsewhere to subsidize price cutting in domestic

firm’s profit sanctuary

– If domestic firm retaliates with matching price

cuts

• It erodes it own profitability in its only profit sanctuary

Situation of Industry Leaders

• Characteristics of industry leaders

– Competitive position ranges from stronger-than

average to powerful

– Well-known reputation

– Leadership position is usually keyed to a proven

strategy

– Main strategic concern is how to sustain the

dominant leadership position

Strategy Options: Industry Leaders

1. Stay-on-the-offensive strategy

2. Fortify and defend strategy

3. Follow-the-leader strategy

Stay-On-The-Offensive Strategy

• Best defense is a good offense

• Be a first-mover

• Relentlessly pursue continuous improvement

and innovation

• Force rivals to scramble to keep up

• Launch initiatives that keep rivals off balance

• Try to grow faster than industry and to wrest

market share from rivals

Fortify and Defend Strategy

Basic Objectives

• Make it harder for new firms to enter and for

challengers to gain ground

• Hold onto present market share

• Strengthen current market position

• Protect competitive advantage held by firm

Types of Defensive Actions

• Increase advertising spending

• Provide higher levels of customer service

• Introduce more brands to match product attributes

of rival’s brands

• Broaden product line to close off vacant niches

• Keep prices reasonable and quality attractive

• Build new capacity ahead of market demand

• Invest enough to remain cost competitive

• Patent feasible alternative technologies

• Sign exclusive contracts with best suppliers and

distributors

Follow-The-Leader Strategy

Basic objectives

• Leader’s strategic posture involves

– Using its competitive muscle to encourage

runner-up firms to be content followers

– Signaling smaller rivals that moves to cut into

leader’s business will be hard fought

Follow-The-Leader Strategy

• Strategic Themes

• Be quick to meet all competitive price cuts

• Be ready to counter with large-scale

promotional campaigns if challengers boosts

advertising

• Offer better deals to major customers of

next-in-line firms

• Use “hardball” measures to signal aggressive

small firms who should lead

Types of Runner-Up Firms

Market Challengers

– Willing and able to use offensive strategies to

gain market share

Content Followers

– Willing to coast along in current position because

profits are adequate


rarely can a runner-up firm successfully

challenge an industry leader with an imitative

strategy – regardless of the financial

resources or staying power it may have!

Rule of Offensive Strategy

Runner-up firms should avoid attacking a

leader head-on with an imitative strategy,

regardless of resources and staying power

an underdog may have!

Overcoming Obstacles of Small Size

• In industries where big size is a competitive

asset, firms with low market share are faced

with obstacles

– Less access to certain economies of scale

– Difficulty in gaining customer recognition

– Inability to afford grand-scale mass media

advertising

– Difficulty in funding capital requirements

Overcoming Obstacles of Small Size

• Runner-up firms can overcome these

obstacles by

– Focusing on a few segments where strengths

can yield a competitive edge

– Developing technical expertise highly valued by

customers

– Aggressively pursuing development of new

products for customers in target segments

– Using innovative entrepreneurial approaches to

out-manage slow-to-change market leaders

Strategy Options: Weak Business

• Launch a strategic offensive

• Play aggressively defense

• Pursue immediate abandonment

• Adopt a harvest strategy

What is a Harvest Strategy?

• Steers middle course between maintenance

and abandonment

• Reinvestment in business held to minimum

Objectives

• Short-term

– Generate largest feasible cash flow

• Long-term

– Orderly market exit

Sample Harvesting Options

• Operating budget reduced to rock-bottom level

• Emphasis placed on stringent internal cost control

• Capital investment in new equipment given minimal

financial priority

• Price gradually raised

• Promotional expenses trimmed back

• Quality reduced in not so visible ways

• Non-essential customer services curtailed

• Equipment maintenance shaved

When Should Harvesting be

Considered?

• Industry’s long-term prospect are unattractive

• Building up business would be too costly

• Market share is increasingly costly to maintain

• Reduced levels of competitive effort will not trigger

immediate fall-off in sales

• Enterprise can redeploy freed-up resources in

higher opportunity areas

• Business is not a major component of diversified

firm’s portfolio

• Business does not contribute other desired features

to overall business portfolio

Strategy Options for Achieving a

Business Turnaround

• Revise existing strategy

• Launch efforts to boost revenues

• Cut costs

• Sell off assets to generate cash and / or

reduce debt

• Combination of efforts

13 Commandments for Crafting

Successful Business Strategies

1. Always put top priority on crafting and executing strategic moves that enhance a firm’s competitive position for the long-term and that serve to establish it as an industry leader.

2. Understand that a clear, consistent competitive strategy, when well-crafted and well-executed, builds reputation and recognizable industry position whereas a strategy aimed solely at capturing momentary market opportunities yields fleeting benefits.



3. Endeavor not to get “stuck back in the

pack” with no coherent long-term strategy

or distinctive competitive position, and little

prospect of climbing into the ranks of the

industry leaders.

4. Invest in creating a sustainable competitive

advantage, for it is a most dependable

contributor to above-average profitability.



5. Play aggressive offense to build

competitive advantage and aggressive

defense to protect it.

6. Avoid strategies capable of succeeding

only in the best of circumstances.

7. Likewise, avoid rigidly prescribed or

inflexible strategies – changing market

condition may render it quickly obsolete.



8. Don’t underestimate the reactions and the

commitment of rivals firm.

9. Be wary of attacking strong, resourceful

rivals without first having solid competitive

advantage and ample financial strength.

10.Consider that attacking competitive

weakness is usually more profitable than

attacking competitive strength.



11.Be judicious in cutting prices without an established cost advantage.

12.Be aware that aggressive strategic moves to wrest crucial market share away from rivals often provoke aggressive retaliation in the form of a marketing “arm race” and / or price wars.

13.Employ bold strategic moves in pursuing differentiation strategies so as to open up very meaningful gaps in quality or service or advertising or other product attributes.

End of Module 6

module 6 - matching strategy to a company's situation

Documents

multiple profit sanctuaries

build competitive advantage

global strategy works

firms competitive position

competitive advantage

market share

home market

profit sanctuary