3 strategic framework

Strategic Framework of Financial ManagementACC08(With slides from Gamble and David)

OBJECTIVES

At the end of this section, you are expected to :

•Distinguish the external and internal environment of the firm; and

•Discuss the relevance of different financial strategies in case situations.

ENVIRONMENT OF FIRMS• Internal Environment

• The internal environment of a business organization is itself-- its resource capabilities, relative cost position, and competitive strength versus other industry competitors.

• External Environment

• The external environment of any business organization consists of its immediate industry environ and the macro-environment

INTERNAL ENVIRONMENT OF FIRMS

Some indicators used to evaluate whether an organization has the winning advantage:

• Sales growth • Customer acquisition and retention• Profit Margin• Trends in the firm’s net profits and ROI • Overall financial strength and credit rating

INTERNAL ENVIRONMENT OF FIRMS

Some indicators used to evaluate whether an organization has the winning advantage:

• Continuous improvement in its internal performance • Trends in the company’s stock price and shareholder

value• Image and reputation with its customers• Rating on factors on which buyers base their brand choice

(e.g. Technology, product innovation, customer service, product quality, delivery time, etc.)

Figure 1. Components of a Company’s Macro-Environment (Reference:Strickland)

INDUSTRY’S DRIVING FORCES

• Changes in the long-term industry growth rate

• Increasing globalization of the industry

• Growing use of the Internet and emerging new Internet technology applications

• Changes in who buys the product and how they use it

• Product innovation

INDUSTRY’S DRIVING FORCES

• Technological change and manufacturing process innovation

• Marketing innovation

• Entry or exit of major firms

• Diffusion of technical know-how across more companies and more countries

• Changes in cost and efficiency

INDUSTRY’S DRIVING FORCES• Growing buyer preferences for differentiated

products

• Reductions in uncertainty and business risk

• Regulatory influences and government policy changes

• Changing societal concerns, attitudes, and lifestyles

GENERIC COMPETITIVE STRATEGIES

• A low-cost provider strategy: striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by under pricing rivals.

• A broad differentiation strategy: seeking to differentiate the company’s product/service offering from rivals’ in ways that will appeal to a broad spectrum of buyers


• A best-cost provider strategy: giving customers more value for the money by incorporating good-to-excellent product attributes at a lower cost than rivals; the target is to have the lowest (best) costs and prices compared to rivals offering products with comparable attributes

• A focused or market niche strategy based on lower cost: concentrating on a narrow buyer segment and outcompeting rivals by serving niche members at a lower cost than rivals


• A focused or market niche strategy based on differentiation: concentrating on a narrow buyer segment and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals products

LOW COST APPROACH 1: CONTROLLING THE COST DRIVERS• Capture scale economies• Capture learning and experience curve effects• Control percentage of capacity utilization• Pursue efforts to boost sales and spread costs

such as R&D and advertising over more units• Improve supply chain efficiency• Substitute use of low-cost for

high-cost raw materials

LOW COST APPROACH 1: CONTROLLING THE COST DRIVERS• Use online systems and sophisticated

software to achieve operating efficiencies

• Adopt labor-saving operating methods

• Use bargaining power to gain concessions from suppliers

• Compare vertical integration vs. outsourcing

• Use direct-to-end-usersales/marketing methods

• Make greater use of onlinetechnology applications

• Streamline operations by eliminating low-value-added or unnecessary work steps

LOW COST APPROACH 2: REVAMPING THE VALUE CHAIN

• Relocate facilities closer to suppliers or customers

• Offer basic, no-frills product/service

• Offer a limited product/service

LOW COST APPROACH 2: REVAMPING THE VALUE CHAIN

• Buyers are large and havesignificant bargaining power

• Industry newcomers useintroductory low prices to attractbuyers and build customer base

When Does a Low-Cost Strategy Work Best?

• Price competition is vigorous• Product is standardized or readily available

from many suppliers• There are few ways to achieve

differentiation that have value to buyers• Most buyers use product in same ways• Buyers incur low switching costs

When Does a Low-Cost Strategy Work Best?

PITFALLS OF LOW-COST STRATEGIES

• Being overly aggressive in cutting price

• Low cost methods are easilyimitated by rivals

• Technological breakthroughs open up cost reductions for rivals

PITFALLS OF LOW-COST STRATEGIES

• Becoming too fixated onreducing costs and ignoring

• Buyer interest in additional features

• Declining buyer sensitivity to price

• Changes in how the product is used

WHERE TO FIND DIFFERENTIATIONOPPORTUNITIES IN THE VALUE CHAIN

• Purchasing and procurement activities• Product R&D and product design activities• Production process / technology-related activities• Manufacturing / production activities• Distribution-related activities• Marketing, sales, and customer service activities

Activities, Costs, &

Margins ofForward

Channel Allies

InternallyPerformedActivities, Costs, &Margins


Margins ofSuppliers

Buyer/UserValue

Chains

HOW TO ACHIEVE ADIFFERENTIATION-BASED ADVANTAGE

Incorporate features that raiseperformance a buyer gets out of the product

Incorporate features that enhance buyer satisfaction in non-economic or intangible ways

Outcompete rivals via superior capabilities

Incorporate product features/attributes thatlower buyer’s overall costs of using product

Approach 1Approach 1




WHEN DOES A DIFFERENTIATIONSTRATEGY WORK BEST?

• There are many ways to differentiate a product that have value and please customers

• Buyer needs and uses are diverse• Few rivals are following a similar

differentiation approach• Technological change and

product innovation are fast-paced

PITFALLS OF DIFFERENTIATION STRATEGIES

• Appealing product features are easily copied by rivals

• Buyers see little value in unique attributes of product

• Overspending on efforts to differentiate the product offering, thus eroding profitability

• Over-differentiating such that product features exceed buyers’ needs

PITFALLS OF DIFFERENTIATION STRATEGIES

• Charging a price premium buyers perceive is too high

• Not striving to open up meaningfulgaps in quality, service, or performancefeatures vis-à-vis rivals’ products

WHEN IS A BEST-COSTPROVIDER STRATEGY APPEALING?

• When buyer diversity makes product differentiation the norm

• When many buyers are also sensitive to price and value

RISK OF A BEST-COST PROVIDER STRATEGY

• A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies

• Low-cost leaders may be able to siphoncustomers away with a lower price

• High-end differentiators maybe able to steal customers awaywith better product attributes

Focus / Niche Strategiesand Competitive Advantage

• Achieve lower costs than rivals inserving a well-defined buyer segment

Focused low-cost strategy

• Offer a product appealing to uniquepreferences of a well-defined buyer segment

Focused differentiation strategy

Which hat is unique?

Approach 1

Approach 2

WHAT MAKES A NICHE ATTRACTIVE FOR FOCUSING?

• Big enough to be profitable and offers good growth potential

• Not crucial to success of industry leaders

• Costly or difficult for multi-segmentcompetitors to meet specializedneeds of niche members

WHAT MAKES A NICHE ATTRACTIVE FOR FOCUSING?

• Focuser has resources and capabilities to effectively serve an attractive niche

• Few other rivals are specializing in same niche

• Focuser can defend against challengers via superior ability to serve niche members

RISKS OF A FOCUS STRATEGY

• Competitors with broad product lines having wide appeal find effective ways to matcha focuser’s capabilities in serving niche

• Niche buyers’ preferences shifttowards product attributes desiredby majority of buyers – nichebecomes part of overall market

• Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

Other Strategies

CHARACTERISTICS OF A STRATEGIC ALLIANCE

• Strategic alliance – A formal agreement between two or more separate companies where there is

• Strategically relevant collaboration of some sort• Joint contribution of resources• Shared risk• Shared control• Mutual dependence

CHARACTERISTICS OF A STRATEGIC ALLIANCE

• Alliances often involve• Joint marketing• Joint sales or distribution• Joint production• Design collaboration• Joint research• Projects to jointly develop new technologies or

products

• Get into critical country markets quickly to accelerate process of building a global presence

• Gain inside knowledge about unfamiliar markets and cultures

• Access valuable skills and competencies concentrated in particular geographic locations

POTENTIAL BENEFITS OF ALLIANCES TOACHIEVE GLOBAL AND INDUSTRY LEADERSHIP

• Establish a beachhead to participate in target industry

• Master new technologies and build new expertise faster than would be possible internally

• Open up expanded opportunities in target industry by combining firm’s capabilities with resources of partners

POTENTIAL BENEFITS OF ALLIANCES TOACHIEVE GLOBAL AND INDUSTRY LEADERSHIP

CAPTURING THE BENEFITSOF STRATEGIC ALLIANCES• Benefits from forming partnerships are a function of

• Picking a good partner• Being sensitive to cultural differences• Recognizing an alliance

must benefit both parties• Ensuring both parties live

up to their commitments

CAPTURING THE BENEFITSOF STRATEGIC ALLIANCES• Benefits from forming partnerships are a function of

• Structuring the decision-making processso actions can be taken swiftly when needed

• Managing the learning process and then adjusting the alliance agreement over time to fit new circumstances

WHY ALLIANCES FAIL• Ability of an alliance to endure depends on• How well partners work together• Success of partners in responding

and adapting to changing conditions• Willingness of partners to

renegotiate the bargain

WHY ALLIANCES FAIL

• Reasons for alliance failure• Diverging objectives and priorities of partners• Inability of partners to work well together• Changing conditions rendering purpose of

alliance obsolete• Emergence of more attractive technological

paths• Marketplace rivalry between one or more allies

• Merger – Combination and pooling of equals, with newly created firm often taking on a new name

• Acquisition – One firm, the acquirer,purchases and absorbs operations ofanother, the acquired

• Merger-acquisition strategy• Much-used strategic option• Especially suited for situations where alliances do not provide a

firm with needed capabilities or cost-reducing opportunities• Ownership allows for tightly integrated operations, creating

more control and autonomy than alliances

MERGER AND ACQUISITION STRATEGIES

• To create a more cost-efficient operation

• To expand a firm’s geographic coverage

• To extend a firm’s business into newproduct categories or international markets

• To gain quick access to new technologiesor competitive capabilities

• To invent a new industry and leadthe convergence of industries whose boundaries are blurred by changing technologies and new market opportunities

OBJECTIVES OF MERGERS AND ACQUISITIONS

• Combining operations may result in• Resistance from rank-and-file employees• Hard-to-resolve conflicts in management

styles and corporate cultures• Tough problems of integration• Greater-than-anticipated difficulties in• Achieving expected cost-savings• Sharing of expertise• Achieving enhanced competitive capabilities

PITFALLS OF MERGERS AND ACQUISITIONS

VERTICAL INTEGRATION STRATEGIES• Extend a firm’s competitive scope within

same industry• Backward into sources of supply• Forward toward end-users of final product

• Can aim at either full or partial integration

InternallyPerformedActivities, Costs, &Margins


Margins ofSuppliers

Buyer/UserValue

Chains

Activities, Costs,& Margins of

Forward ChannelAllies &

Strategic Partners

STRATEGIC ADVANTAGESOF BACKWARD INTEGRATION• Generates cost savings only if

volume needed is big enoughto capture efficiencies of suppliers

• Potential to reduce costs exists when

• Suppliers have sizable profit margins

• Item supplied is a major cost component

• Resource requirements are easily met

STRATEGIC ADVANTAGESOF BACKWARD INTEGRATION

• Can produce a differentiation-based competitive advantage when it results in a better quality part

• Reduces risk of depending on suppliers of crucial raw materials / parts / components

STRATEGIC ADVANTAGESOF FORWARD INTEGRATION

• To gain better access to endusers and better market visibility

• To compensate for undependable distribution channels which undermine steady operations

• To offset the lack of a broad product line, a firm may sell directly to end users

STRATEGIC ADVANTAGESOF FORWARD INTEGRATION

• To bypass regular distribution channels in favor of direct sales and Internet retailing which may

• Lower distribution costs

• Produce a relative cost advantage over rivals

• Enable lower selling prices to end users

STRATEGIC DISADVANTAGESOF VERTICAL INTEGRATION

• Boosts resource requirements• Locks firm deeper into same industry• Results in fixed sources of supply and

less flexibility in accommodating buyerdemands for product variety

• Poses all types ofcapacity-matching problems

STRATEGIC DISADVANTAGESOF VERTICAL INTEGRATION

• May require radically differentskills / capabilities

• Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

OUTSOURCING STRATEGIES

Outsourcing involves having outsiders perform certain value chain activities rather than performing

them internally

InternallyPerformedActivities

Contract Manufacturers

Vendors with specialized expertise

Distributors or Retailers

Concept

• Activity can be performed better or more cheaply by outside specialists

• Activity is not crucial to achieve a sustainable competitive advantage

• Risk exposure to changing technology and/orchanging buyer preferences is reduced

• It improves firm’s ability to innovate

WHEN DOES OUTSOURCING AN ACTIVITYMAKE STRATEGIC SENSE?

• Operations are streamlined to• Improve flexibility• Cut time to get new products into the market

• It increases firm’s ability to assemble diverse kinds of expertise speedily and efficiently

• Firm can concentrate on “core” value chain activities that best suit its resource strengths

WHEN DOES OUTSOURCING AN ACTIVITYMAKE STRATEGIC SENSE?

• Farming out too many or the wrong activities, thus

• Hollowing out capabilities

• Losing touch with activities and expertise that determine overall long-term success

THE BIG RISK OF OUTSOURCING

MATCHING STRATEGY TOA COMPANY’S SITUATION

Most important drivers

shaping a firm’s

strategic options fall

into two categories Firm’s internal resource strengths and weaknesses

Nature of industry and

competitive conditions

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MATCHING A COMPANY’S STRATEGYTO DIFFERENT MARKET CONDITIONS

Fragmented MarketsFragmented Markets

Turbulent MarketsTurbulent Markets

Freshly Emerging Markets Freshly Emerging Markets

Rapidly Growing MarketsRapidly Growing Markets

Mature, Slow-Growth MarketsMature, Slow-Growth MarketsStagnant or Declining MarketsStagnant or Declining Markets

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• New and unproven market• Proprietary technology• Lack of consensus regarding which of

several competing technologies will win out• Low entry barriers• Experience curve effects may permit

cost reductions as volume builds• Buyers are first-time users and marketing involves

inducing initial purchase and overcoming customer concerns

FEATURES OF AN EMERGING INDUSTRY

• First-generation products are expected to be rapidly improved so buyers delay purchase until technology matures

• Possible difficulties in securing raw materials

• Firms struggle to fund R&D, operations and build resource capabilities for rapid growth

FEATURES OF AN EMERGING INDUSTRY

STRATEGY OPTIONS FOR COMPETING IN EMERGING INDUSTRIES• Win early race for industry leadership by employing

a bold, creative strategy• Push hard to perfect technology,

improve product quality, and developattractive performance features

• Consider merging with oracquiring another firm to• Gain added expertise• Pool resource strengths

STRATEGY OPTIONS FOR COMPETING IN EMERGING INDUSTRIES

• When technological uncertainty clears and a dominant technology emerges, try to capture any first-mover advantages by moving quickly

• Form strategic alliances with• Companies having related technological

expertise or • Key suppliers

STRATEGY OPTIONS FOR COMPETING IN EMERGING INDUSTRIES (CONTINUED)

• Pursue new customers and user applications• Enter new geographical areas• Make it easy and cheap for

first-time buyers to try product• Focus advertising emphasis on

• Increasing frequency of use • Creating brand loyalty

• Use price cuts to attract price-sensitive buyers

WHAT IS THE KEY TO SUCCESS FORCOMPETING IN RAPIDLY GROWING MARKETS?

A company needs a strategypredicated on growing faster than

the market average so it Can boost its market share and Improve its competitive standing vis-à-vis rivals

Strategy Options for Competing in Rapidly Growing Markets• Drive down costs per unit to enable price

reductions that attract droves of new customers

• Pursue rapid product innovation to

• Set a company’s product offering apart from rivals

• Incorporate attributes to appeal togrowing numbers of customers

Strategy Options for Competing in Rapidly Growing Markets

• Gain access to additional distributionchannels and sales outlets

• Expand a company’s geographic coverage

• Expand product line to add models/styles to appeal to a wider range of buyers

• Slowing demand breeds stiffer competition• More sophisticated buyers demand bargains• Greater emphasis on cost and service• “Topping out” problem in adding

production capacity• Product innovation and new

end uses harder to come by• International competition increases

INDUSTRY MATURITY: THE STANDOUT FEATURES

• Industry profitability falls• Mergers and acquisitions reduce

number of rivals

INDUSTRY MATURITY: THE STANDOUT FEATURES

STRATEGY OPTIONS FORCOMPETING IN A MATURE INDUSTRY• Prune marginal products and models• Emphasize innovation in the value chain • Strong focus on cost reduction• Increase sales to present customers• Purchase rivals at bargain prices• Expand internationally• Build new, more flexible

competitive capabilities

STRATEGIC PITFALLS IN A MATURING INDUSTRY• Employing a ho-hum strategy with no

distinctive features thus leaving firm “stuck in the middle”

• Being slow to mount a defense against stiffening competitive pressures

• Concentrating on short-term profits rather than strengthening long-term competitiveness

• Being slow to respond to price-cutting

STRATEGIC PITFALLS IN A MATURING INDUSTRY

• Overspending on marketing efforts• Failing to aggressively

• Invest in product / process innovations• Pursue cost reductions

STAGNANT OR DECLINING INDUSTRIES:THE STANDOUT FEATURES• Demand grows more slowly than economy as a

whole (or even declines)• Advancing technology gives rise to better-

performing substitute products or lower costs• Customer group shrinks• Changing lifestyles and buyer tastes• Rising costs of complementary products• Competitive battle ensues among industry members

for the available business

• Pursue focus strategy aimed atfastest growing market segments

• Stress differentiation based on qualityimprovement or product innovation

STRATEGY OPTIONS FOR COMPETINGIN A STAGNANT OR DECLINING INDUSTRY

• Work diligently to drive costs down• Cut marginal activities from value chain • Use outsourcing• Redesign internal processes to exploit e-

commerce• Consolidate under-utilized production

facilities


• Add more distribution channels• Close low-volume, high-cost distribution

outlets• Prune marginal products


END-GAME STRATEGIESFOR DECLINING INDUSTRIES

• An end-game strategy can take either of two paths• Slow-exit strategy involving

• Gradual phasing down of operations• Getting the most cash flow from the business

• Fast-exit strategy involving• Disengaging from an industry

during early stages of decline• Quick recovery of as much of a

company’s investment as possible

FEATURES OF TURBULENTTURBULENT MARKETS

• Rapid-fire technological change• Short product life-cycles• Entry of important new rivals• Frequent launches of

new competitive moves• Rapidly evolving

customer expectations

• Invest aggressively in R&D• Keep products/services fresh and exciting• Develop quick response capabilities

• Shift resources• Adapt competencies• Create new competitive capabilities• Speed new products to market

• Use strategic partnerships to developspecialized expertise and capabilities

• Initiate fresh actions every few months

Strategy Options for Competingin High-Velocity Markets

• Cutting-edge expertise• Speed in responding to new developments• Collaboration with others• Agility• Innovativeness• Opportunism• Resource flexibility• First-to-market capabilities

Keys to Success in Competingin High Velocity Markets

COMPETITIVE FEATURESOF A FRAGMENTEDFRAGMENTED INDUSTRY

• Absence of market leaders with large market shares or widespread buyer recognition

• Product/service is delivered to neighborhoodlocations to be convenient to local residents

• Buyer demand is so diverse that manyfirms are required to satisfy buyer needs

• Low entry barriers • Absence of scale economies

COMPETITIVE FEATURESOF A FRAGMENTEDFRAGMENTED INDUSTRY

• Market for industry’s product/service may be globalizing, thus putting many companies across the world in same market arena

• Exploding technologies force firms to specialize just to keep up in their area of expertise

• Industry is young and crowded with aspiring contenders, with no firm having yet developed recognition to command a large market share

COMPETING IN A FRAGMENTED INDUSTRY: THE STRATEGY OPTIONS

• Construct and operate “formula” facilities• Become a low-cost operator• Specialize by product type• Specialize by customer type• Focus on limited geographic area

• When to make a strategic move is often as crucial as what move to make

• First-mover advantages arise when• Pioneering helps build firm’s image and

reputation• Early commitments to new technologies,

new-style components, and distributionchannels can produce cost advantage

• Loyalty of first time buyers is high• Moving first can be a preemptive strike

FIRST-MOVER ADVANTAGES

WHAT IS A BLUE OCEAN STRATEGY?

Seeks to gain a dramatic, durablecompetitive advantage by

• Abandoning efforts to beat outcompetitors in existing markets and

• Inventing a new industry or distinctivemarket segment to render existingcompetitors largely irrelevant and

• Allowing a company to create andcapture altogether new demand

What Is Different About a Blue Ocean?

Typical Market Space

Industry boundaries are defined and accepted

Competitive rules are well understood by all rivals

Companies try to outperform rivals by capturing a bigger share of existing demand

Blue Ocean Market Space Industry does not exist yet Industry is untainted

by competition Industry offers wide-open

opportunities if a firm has a product and strategy allowing it to

Create new demand andAvoid fighting over existing

demand

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FIRST-MOVER DISADVANTAGES

• Moving early can be a disadvantage (or fail to produce an advantage) when

• When costs of pioneering are more than being an imitative follower and only negligible learning/experience curve benefits accrue to the leader

• Innovator’s products are primitive, not living up to buyer expectations

• Demand side of the market is skeptical about the benefits of new technology/product of a first-mover

• Rapid technological change allows followers to leapfrog pioneers

TO BE A FIRST-MOVER OR NOT?

• Key issue – Is the race to market leadership in an industry a marathon or a sprint?

TO BE A FIRST-MOVER OR NOT?

• Does market takeoff depend on development of complementary products or services not currently available?

• Is new infrastructure requiredbefore buyer demand can surge?

• Will buyers need to learn newskills or adopt new behaviors?

• Will buyers encounter high switching costs?• Are there influential competitors in a position

to delay or derail the efforts of a first-mover?

3 strategic framework

Documents

pricing rivals

broad differentiation

lower cost

broad spectrum of customers

business organization

lower overall costs

competitive strength

companys productservice