CHAPTER 7BUSINESS UNIT STRATEGY STRATEGY: A VIEW FROM THE TOPKelly Bredensteiner

Christine Cox

Caitlin Greenwood

Michele Haynes

BUSINESS UNIT STRATEGY

To forecast the relative effectiveness of a strategy a company must analyze the industry characteristics in which it will be competing

First, we look at 3 contexts that relate to the evolutionary stages of an industry: emerging, growth, and mature and declining

Next, we discuss 3 industry environments that pose strategic challenges: fragmented, deregulating, and hypercompetitive

STRATEGY IN EMERGING INDUSTRIES New industries provide new opportunities:

Technologies are typically immature meaning competitors will try to improve existing designs and processes or leapfrog them altogether with next generation technology

Costs are typically high, entry barriers are low, supplier relationships are underdeveloped and distribution channels are just emerging

Timing can be crucial in determining success: First mover advantage

opportunity to shape customer expectations and set the competitive rules of the game

Exercising leadership can be an effective way to reduce risk: Ability to control product and process development through

superior technology, quality, or customer knowledge Ability to leverage existing relationships with suppliers and

distributors Ability to leverage access to a core group of customers

STRATEGY IN GROWTH INDUSTRIES Growth presents several challenges:

Competitors tend to focus on expanding their market shares Cost control becomes an important element of strategy as unit margins shrink

and new products and applications are harder to find International markets must be considered as globalization of competition

continues to arise During the early growth stage, companies tend to add more products,

models, and sizes to appeal an increasingly segmented market Toward the end of the growth phase cost considerations become the

priority Process innovation and redefinitions of supplier and distributor relations

become important dimensions of cost control Finally, horizontal integration becomes attractive as a way of increasing

a firm’s international presence or consolidating a company’s market position

New companies that enter the market during the final stages of growth are known as followers Benefits:

Opportunity to evaluate alternative technologies Delay investment in risky projects Initiate superior product and technology offerings

NEW ENTRANTS IN GROWING INDUSTRIES

Must decide to enter into a market through internal development or acquisition

Two major issues must be analyzed as part of the decision process to enter a market: What are the structural barriers to entry?

Structural barriers may include the level of investment required, access to production or distribution facilities, and threat of overcapacity

How will incumbent firms react? Retaliation of competitors is lower in industries where growth

is low, products are highly differentiated, and fixed costs are high

New entrants should focus on industries where the reaction may be slow in which the firm can influence the industry structure, and where the benefits of entry exceed the costs

STRATEGY IN MATURE AND DECLINING INDUSTRIES Important issues as maturity sets in and threat

declines: Choosing a balance between differentiation and low cost

postures Deciding whether to compete in multiple or single

industry segments Firms earn profits during the long maturity

stage of an industries growth if: Concentrate on segments that offer chances for higher

growth or higher return Manage product and process innovation aimed at further

differentiation, cost reduction, or rejuvenating segment growth

Streamline production and delivery to cut costs Gradually “harvest” the business in preparation for a

strategic shift to better product or industries

INDUSTRY EVOLUTION AND FUNCTIONAL PRIORITIES Early development of a product usually entails:

Slow growth in sales Major R&D Rapid technological change in the product Operating losses Need for slack to support temporarily unprofitable operations Factors of success :

Technical skills Being 1st in new markets Marketing advantage that creates widespread awareness

Rapid growth Brings more competitors Factors of success:

Brand awareness Product differentiation Financial resources support:

Heavy marketing expenses Price competition

INDUSTRY EVOLUTION AND FUNCTIONAL PRIORITIES CONTINUED

Maturity Stage Sales growth continues but at a decreasing rate # of industry segments increases, but change in

product design slows Result: competition becomes more intense and

promotional and pricing advantages become key strengths

Decline Stage Strengths center on:

Cost advantages Superior supplier relationships Customer relationships Financial control

Competitive advantage can exist if a firm serves gradually shrinking markets that competitors choose to leave

STRATEGY IN FRAGMENTED INDUSTRIES Fragmented industries are those in which no single

company or small group of firms has a large enough market share to strongly affect industry structure or outcomes Includes: retail sectors, distribution businesses, professional

services, and small manufacturing Most prevalent when:

Entry/exit barriers are low Few economies of scale Cost structures unattractive Products and services highly diverse

Fragmented markets require creative strategies Example: 1971 H. Wayne Huizinga took Waste Management

Corporation Public Hundreds of “mom and pop” garbage companies acquired through

stock Gained capitalization of $5 million, and after Huizinga’s departure in

1984 market value was $3 billion

STRATEGY IN DEREGULATING INDUSTRIES

1975 Securities and Exchange Commissions abolished fixed rates for U.S. securities brokers Airlines, trucking, railroads, banking, and

telecommunications followed The pattern that followed was as such

Large # of new entrants, most failing quickly Industry profitability decreased rapidly Pattern of segment profitability altered Variance in profitability Two waves - Merger and Acquisition Consolidation

DEREGULATION OF ENERGY

1996 saw the Deregulation in Energy markets.

California endured hardships in many of their electric power companies the biggest being PG&E

Two reasons for bankruptcy First: Couldn’t pay bills, high rates, and lower

prices Second: Couldn’t expand power generators

4 PROVEN SUCCESSFUL COPING STRATEGIC POSTURES

1. Broad-based distributors that offer wide range of products and services

1. Example AT&T

2. Low-cost entrants that become niche players

3. Focused segment marketers to emphasize the company’s value added specific customer groups

1. Identify the new2. Leveraging3. Upgrading

4. Shared utilities focus on making economies of scale available to smaller competitors

PRICING IN NEWLY DEREGULATED INDUSTRY

Four Factors that Incumbents should use to adjust their prices correctly after deregulation takes effect

1. Competitor’s prices2. Switching rates3. Customer value4. Cost to serve

STRATEGY IN HYPERCOMPETITIVE INDUSTRIES

Hypercompetitive industries Intense rivalry

Successful Strategies Take competitor by surprise Then move on when competition tries to recover

Designed to enable the company to gain an advantage over competitors by disrupting the market with quick innovative change.

Has short product life cycles

Make sure to Strong Market Awareness

COMPETITIVE REACTIONS UNDER EXTREME COMPETITION Six actions that established companies can consider to

counter the fresh, aggressive, and innovative moves of competitors:

1. Retool strategy and restore its importance

2. Manage transition economics

3. Fight aggregation with disaggregation

4. Seek out new demand and new growth

5. Use a portfolio of initiatives to increase speed and flexibility

6. Count on strategic risk

SPEED

pace of progress that a company displays in responding to current or anticipated business needs

Newest and least understood of the critical success factors

Internet business applications led to the elevation of speed

Speed merchants Build their strategies on the rapid pace of their

operations AAA, Dell, Domino’s

PRESSURES TO SPEED

Come from

Customers

Need for creating a new basis for competitive advantage

Competitive pressures

Industry shifts

REQUIREMENTS OF SPEED

every aspect of an organization needs to be focused on the pace of work

Refocusing the Business Mission

Creating a Speed Compatible Culture

Upgrading Communication

Refocusing Business Process Reengineering

Committing to New Performance Metrics

Methods to Speed

METHODS OF SPEED

Companies first analyze determine where speed exist and where it does not. Then they look to eliminate speed gaps by:

Streamlining Operations

Upgrading Technology

Forming Partnerships

FORMING PARTNERSHIPS

Proven way to shorten time needed to improve market responsiveness

Ex: Ford + GM + Daimler Chrysler

Shares business burden

CREATING VALUE THROUGH INNOVATION

Value creation greatly depends on innovation Companies recognize that they need to

generate more value from core businesses and leverage their core

Innovators’ Dilemma Innovation is a major strategic challenge for most

companies “Innovators’ Dilemma”- describes how successful

companies with established products can keep from being pushed aside by competitors with newer, cheaper products, that will, over time, get better and become a serious threat.

WHAT IS INNOVATION?

Innovation is a product of anticipating, assessing, and fulfilling potential customer needs in a creative manner.

Ex: 3M succeeded because its business model is based on a culture that is geared toward producing innovative products

HOW 3M SUCCEEDED

Six mandates that drove innovation for 3M:1. Support innovation from research and

development to customer sales and support.2. Understand the future by trying to anticipate

and analyze future trends. 3. Establish stretch goals. It is a measure that

encourages growth.4. Empower employees to meet goals.5. Support broad networking across the company.6. Recognize and reward innovative people.

SUSTAINING AND DISRUPTIVE INNOVATION Industry leaders and competitors mostly engage in

sustaining innovation- innovation that focuses on “better” products. Private companies often have better opportunities to

invest for the long term and pursue disruptive innovations, which require a long time to develop and mature and might produce short-term losses in the early stages of the development

New entrants and challengers have greater freedom to engage in disruptive innovation- launching products that may not be as good as the existing products and, therefore, not attractive to current customers, but that are simple, and often more affordable. Ex: Wireless handheld devices, such as blackberries and

iPhones, disrupted notebook computers.

CREATING A CULTURE OF INNOVATION Strategic planning too often centers on existing or

closely related products and services rather than on opportunity to drive future demand.

Fostering a culture of innovation takes time and effort.

There are five common characteristics to creating a culture of innovation: First, a business needs a top-level commitment to

innovation Second, they need a long-term focus Third, a business needs a flexible organization structure Fourth, a business needs a combination of loose and

tight planning and control Last, they need to create an environment for innovation

and appropriate incentives

RELATIONSHIP BETWEEN INNOVATION AND PERFORMANCE

Evidence on the relationship between research and development (R&D), innovation, and financial performance is inconsistent.

Research has been done by: Booz Allen Hamilton (“The Global Innovation

1000” study)

Boston Consulting Group (“Innovation 2006” study)

Monitor Group (“The Innovation Premium Study”)

RESULTS OF THE STUDIES Booz Allen Hamilton

Study done in 2006 Study analyzed 1,000 public companies that spent the

most on R&D There was no correspondence between R&D and financial

gain Boston Consulting Group (BCG)

Study done in 2006 Analyzed the 25 most innovative companies Found that innovation translates into superior long-term

stock market performance Monitor Group

Published in 1999 Demonstrated a strong positive correlation between a

company’s effective focus on innovation and organic growth, and its future shareholder returns.

INNOVATION AND PROFITABILITY

Research suggests that executives lack confidence in their companies’ ability to use innovation to drive profit.

The reason for the lack of success in translating innovation into profitable performance surfaced in a study of the growth records of the Fortune 50. The study concluded that the single biggest growth

inhibitor for large companies was “mismanagement of the innovation process.”

Another explanation for the lack of success in innovation is the lack of measurement metrics or the failure to implement the metrics effectively. Half of all companies do not closely track the

efficiency of their innovation process

INNOVATION AND PROFITABILITY CONT.

R&D investments fail to generate successful products and financial gains for three main reasons:

1. Failure to develop truly innovative products

2. Failure to successfully commercialize innovative products once they are on the market

3. Failure to market innovative products in a timely manner

RECOMMENDATIONS FOR IMPROVING PERFORMANCE THROUGH INNOVATION

Six recommendations for strategic managers to improve performance through innovation:1. Plan synergy between strategy and innovation2. Areas where new opportunities and competitive

advantage exist provide a firm’s best chances to profit from innovative

3. Profits from innovation in business systems can match those from product development

4. Look outside of the company’s internal environment to increase the likelihood of success and reduce the risk of innovation

5. Alliances and corporate venture capital programs allow a firm to share the risks associated with exploration investments.

6. Involve customers early and often in the innovation process