session 12 business strategy:building sustainable competitive
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Session 12Session 12
Business Strategy:Building Sustainable Competitive
Advantages
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Session TopicsSession Topics
Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage Evaluating Cost
Leadership Opportunities Evaluating Differentiation
Opportunities Evaluating Speed as a
Competitive Advantage Evaluating Market Focus
as a Way to Win Competitive Advantage
Selected Industry Environments and Business Strategy Choices Emerging Industries Growth Industries Mature Declining Industries Fragmented Industries Global Industries
Dominant Product/Service Businesses: Diversification to Build Value
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Key Issues: Strategic Choice in Single BusinessesKey Issues: Strategic Choice in Single Businesses
1. What strategies are most effective at building sustainable competitive advantages for single business units?
2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?
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Prominent Sources of Competitive AdvantageProminent Sources of Competitive Advantage
Cost leadership
Differentiation
Speed
Market focus
Sources of competitive advantage
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Evaluating A Business’s Evaluating A Business’s Cost LeadershipCost Leadership Opportunities Opportunities
A. Skills and Resources Fostering Cost Leadership• Sustained capital investment and access to capital• Process engineering skills• Intense supervision of labor or core technical operations• Products or services designed for ease of manufacture or
delivery• Low-cost distribution system
B. Organizational Requirements Supporting Cost Leadership• Tight cost control• Frequent, detailed control reports• Continuous improvement and benchmarking orientation• Structured organization and responsibilities• Incentives based on meeting strict, usually quantitative targets
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Evaluating A Business’s Evaluating A Business’s Cost LeadershipCost Leadership Opportunities -- Opportunities --C. Examples of Ways Businesses Achieve Competitive AdvantageC. Examples of Ways Businesses Achieve Competitive Advantage
Technology development
Process innovations lowering production costs
Product redesign to reduce number of components
Global, online suppliers provide automatic restocking of orders based on sales
Inbound logistics Operations Outbound logistics Marketing & sales
Serv
iceEconomy of
scale in plant reduces equipment costs and depreciation
Computerized routing lowers transportation expense
Cooperative advertising with distributors creates local cost advantage in buying media space and time
Subcontractedservicetechniciansrepairproductcorrectlyfirst timeor bearcosts
Reduced levels of management cuts corporate overhead
Computerized, integrated information system reduces errors and costs
Safety training for all employees reduces absenteeism, downtime, and accidents
Human resource
management
General administration
Favorable long-term contracts; captive suppliers or key customer for supplier Procurement
margin
Profit
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Advantages of a Cost Leadership StrategyAdvantages of a Cost Leadership Strategy
Low-cost advantages reduce likelihood of pricing pressure from buyers
Low-cost advantages reduce likelihood of pricing pressure from buyers
Sustained low-cost advantages may push rivals into other areas, lessening price competition
Sustained low-cost advantages may push rivals into other areas, lessening price competition
New entrants must face an entrenched cost leader without experience to replicate cost advantages
New entrants must face an entrenched cost leader without experience to replicate cost advantages
Low-cost advantages should lessen attractiveness of substitutes
Low-cost advantages should lessen attractiveness of substitutes
Higher margins allow low-cost producers to withstand supplier cost increases
Higher margins allow low-cost producers to withstand supplier cost increases
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Key Risks of Cost LeadershipKey Risks of Cost Leadership
Many cost-saving activities are easily duplicated Many cost-saving activities are easily duplicated
Exclusive cost leadership can become a trapExclusive cost leadership can become a trap
Obsessive cost cutting can shrink other competitive advantages involving key product attributes
Obsessive cost cutting can shrink other competitive advantages involving key product attributes
Cost differences often decline over timeCost differences often decline over time
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Evaluating A Business’s Evaluating A Business’s DifferentiationDifferentiation Opportunities Opportunities
A. Skills and Resources Fostering Differentiation• Strong marketing abilities• Product engineering• Creative talent and flair• Strong capabilities in basic research• Corporate reputation for quality or technological leadership• Long tradition in an industry or unique combination of skills• Strong cooperation from channels and suppliers of major components
B. Organizational Requirements Supporting Differentiation• Strong coordination among functions in R&D, product development, and
marketing• Subjective measurement and incentives instead of quantitative measures• Amenities to attract highly skilled labor, scientists, and creative people• Tradition of closeness to key customers• Some personnel skilled in sales and operations - technical and marketing
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Evaluating A Business’s Evaluating A Business’s DifferentiationDifferentiation Opportunities -- Opportunities --C. Examples of Ways Businesses Achieve Competitive AdvantageC. Examples of Ways Businesses Achieve Competitive Advantage
Technology development
Cutting edge production technology and product features to maintain a distinct image and actual product
Purchase superior quality, well-known components, raising quality and image of final products
Inbound logistics Operations Outbound logistics Marketing & sales
Serv
ice
Careful inspection of products at each step in production to improve performance and lower defect rates
JIT coordination with buyers; use of own or captive transportation service to ensure timeliness
Expensive, informative advertising and promotion to build brand image
Allowing servicepersonnelconsiderablediscretion tocreditcustomersforrepairs
Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, and replaced
Programs to ensure technical competence of sales staff and marketing orientation of service personnel
Human resource
management
General administration
Quality control presence at key supplier facilities; work with suppliers’ new product development activities Procurement
margin
Profit
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Advantages of a Differentiation StrategyAdvantages of a Differentiation Strategy
Rivalry is reduced when a business successful differentiates itself
Rivalry is reduced when a business successful differentiates itself
Buyers are less sensitive to prices for effectively differentiated products
Buyers are less sensitive to prices for effectively differentiated products
Brand loyalty is hard for new entrants to overcome
Brand loyalty is hard for new entrants to overcome
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Key Risks of DifferentiationKey Risks of Differentiation
Imitation narrows perceived differentiation, rendering differentiation meaningless
Imitation narrows perceived differentiation, rendering differentiation meaningless
Technological changes that nullify past investments or learning
Technological changes that nullify past investments or learning
Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty
Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty
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Creating a Competitive Advantage Based on SpeedCreating a Competitive Advantage Based on Speed
Has become a major source of competitive advantage for many firms
Involves the availability of a rapid response to customers by Providing current products quicker
Accelerating new product development or improvement
Quickly adjusting production processes
Making decisions quickly
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Evaluating A Business’s Evaluating A Business’s Rapid Response Rapid Response OpportunitiesOpportunities
A. Skills and Resources Fostering Speed• Process engineering skills• Excellent inbound and outbound logistics• Technical people in sales and customer service• High levels of automation• Corporate reputation for quality or technical leadership• Flexible manufacturing capabilities• Strong downstream partners• Strong cooperation from suppliers of major components
B. Organizational Requirements Supporting Rapid Response• Strong coordination among functions in R&D, product development, and
marketing• Major emphasis on customer satisfaction in incentive programs• Strong delegation to operating personnel• Tradition of closeness to key customers• Some personnel skilled in sales and operations - technical and marketing• Empowered customer service personnel
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Evaluating A Business’s Evaluating A Business’s Rapid ResponseRapid Response Opportunities -- Opportunities --C. Examples of Ways Businesses Achieve Competitive AdvantageC. Examples of Ways Businesses Achieve Competitive Advantage
Technology development
Use of companywide technology sharing activities and autonomous product development teams to speed new product development
Working very closely with suppliers to include their choice of warehouse location to minimize delivery time
Inbound logistics Operations Outbound logistics Marketing & sales
Serv
iceStandardize
dies, components, and production equipment to allow quick changeover to new or special orders
JIT delivery plus partnering with express mail services to ensure very rapid delivery
Use of laptops linked directly to operations to speed the order process and shorten the sales cycle
Locate servicetechniciansat customerfacilities thataregeograph-icallyclose
Highly automated and integrated information processing system; include major buyers in the systems on a real-time basis
Develop self-managed work teams and decision making at lowest levels to increase responsiveness
Human resource
management
General administration
Preapproved, online suppliers integrated into productionProcurement
margin
Profit
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Advantages of a Speed-Based StrategyAdvantages of a Speed-Based Strategy
Creates a way to lessen rivalry because firm has the availability of something a rival may not
Creates a way to lessen rivalry because firm has the availability of something a rival may not
Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers
Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers
Generates cooperation and concessions from suppliers since they benefit from increased revenues
Generates cooperation and concessions from suppliers since they benefit from increased revenues
Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them
Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them
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Key Risks of a Speed-Based Strategy Key Risks of a Speed-Based Strategy
Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering
Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering
Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response
Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response
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Creating a Competitive Advantage Based on Market FocusCreating a Competitive Advantage Based on Market Focus
Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche
Allows a firm to “Learn” its target customers Build up organizational knowledge of ways to satisfy
its target market better than larger rivalsRisks of focus strategies
Can attract major competitors to the segment Believing a focus strategy, by itself, creates success,
rather than a form of low cost, differentiation, or speed
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Industry Environments and Strategy ChoicesIndustry Environments and Strategy Choices
Emerging IndustriesGrowth IndustriesMature IndustriesDeclining IndustriesFragmented IndustriesGlobal Industries
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Break Out Group ExerciseBreak Out Group Exercise20
For Your Case Company:
1.What CA strategy seems most appropriate? Why?2. At which stage of the industry life cycle do you find your primary industry?3.Is your primary industry fragmented or not?4.Is your primary industry global or not?
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Characteristics of Markets in Emerging IndustriesCharacteristics of Markets in Emerging Industries
Proprietary technology and technological uncertainty
Competitor uncertainty regarding inadequate information
High initial cost structureFew entry barriersFirst-time buyers require initial inducement Inability to easily obtain raw materials and
componentsNeed for high-risk capital
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Strategic Options for Emerging IndustriesStrategic Options for Emerging Industries
1. Ability to shape industry’s structure 1. Ability to shape industry’s structure
2. Ability to rapidly improve product quality 2. Ability to rapidly improve product quality
3. Establish favorable relations with key suppliers 3. Establish favorable relations with key suppliers
4. Ability to establish technology as dominant force 4. Ability to establish technology as dominant force
5. Acquire a core group of loyal customers 5. Acquire a core group of loyal customers
6. Ability to forecast future competitors 6. Ability to forecast future competitors
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Characteristics of Industries Transitioning to MaturityCharacteristics of Industries Transitioning to Maturity
Intense competition for market share
Increased sales to experienced, repeat buyers
Greater emphasis on cost and service
Declining profitability
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Strategic Options for Maturing IndustriesStrategic Options for Maturing Industries
1. Prune the product line1. Prune the product line
2. Emphasize process innovation2. Emphasize process innovation
3. Emphasize cost reductions3. Emphasize cost reductions
4. Focus on selecting loyal buyers4. Focus on selecting loyal buyers
5. Pursue horizontal integration5. Pursue horizontal integration
6. Expand internationally6. Expand internationally
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Pitfalls to Avoid in Competing in Maturing Industries Pitfalls to Avoid in Competing in Maturing Industries
A middle-ground approach to selecting a generic competitive strategy
Sacrificing market share for short-term profits
Waiting too long to respond to price reductions
Retaining unneeded excess capacity
Engaging in sporadic efforts to boost sales
Placing hopes on new products
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Characteristics of Mature/Declining IndustriesCharacteristics of Mature/Declining Industries
Demand grows more slowly than economy,or even declines
Slowing growth is caused by
Technological substitution
Demographic shifts
Shifts in consumer needs
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Strategic Options for Mature/Declining IndustriesStrategic Options for Mature/Declining Industries
1. Focus on key market segments offering growth opportunities
1. Focus on key market segments offering growth opportunities
2. Emphasize product innovation and quality improvement
2. Emphasize product innovation and quality improvement
3. Emphasize production and distribution efficiency
3. Emphasize production and distribution efficiency
4. Gradually harvest the business4. Gradually harvest the business
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Pitfalls to Avoid in Competing in Mature/Declining Industries Pitfalls to Avoid in Competing in Mature/Declining Industries
Being overly optimistic about prospects for an industry revival
Getting trapped in a profitless war of attrition
Harvesting from a weak position
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Characteristics of Fragmented IndustriesCharacteristics of Fragmented Industries
No firm has a significant market shareNo firm can significantly influence industry
outcomesExamples
Professional services Retailing Wood and metal fabrication Agricultural products Funeral industry
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Strategic Options for Fragmented IndustriesStrategic Options for Fragmented Industries
1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy
1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy
2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations
2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations
3. Increased value added - Difficult to differentiate products/services
3. Increased value added - Difficult to differentiate products/services
4. Specialization - Product type, customer type, type of order, geographic areas
4. Specialization - Product type, customer type, type of order, geographic areas
5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)
5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)
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Characteristics of Global IndustriesCharacteristics of Global Industries
Differences in prices and costs among countries due to Currency exchange fluctuations Differences in wage and inflation rates Other economic factors
Differences in buyer needs across countriesDifferences in competitors and ways of
competing among countriesDifferences in trade rules and governmental
regulations across countries
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Strategic Options: Pursuing Global Market Coverage Strategic Options: Pursuing Global Market Coverage
1. License foreign firms to produce and distribute a firm’s products
1. License foreign firms to produce and distribute a firm’s products
2. Maintain a domestic production base and export products
2. Maintain a domestic production base and export products
3. Establish foreign-based plants and distribution in foreign countries
3. Establish foreign-based plants and distribution in foreign countries
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Strategic Options: Choosing a Generic Competitive Strategy Strategic Options: Choosing a Generic Competitive Strategy
1. Broad-line global competition 1. Broad-line global competition
2. Global focus strategy 2. Global focus strategy
3. National focus strategy 3. National focus strategy
4. Protected niche strategy 4. Protected niche strategy
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Grand Strategy Selection MatrixGrand Strategy Selection Matrix
Overcome weaknesses
Maximize strengths
External (acquisition
or merger for resource
capability)
Internal (redirected resources within the
firm)
Turnaround or retrenchmentDivestitureLiquidation
Vertical integrationConglomerate diversification
Concentrated growthMarket developmentProduct developmentInnovation
Horizontal integrationConcentric diversificationJoint venture
IIIIVIII
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Model of Grand Strategy ClustersModel of Grand Strategy Clusters
Rapid market growth
Slow market growth
Weak competitive
position
Strong competitive
position
1. Concentrated growth
2. Vertical integration3. Concentric
diversification
1. Reformulation of concentrated growth
2. Horizontal integration3. Divestiture4. Liquidation
1. Concentric diversification
2. Conglomerate diversification
3. Joint venture
1. Turnaround or retrenchment2. Concentric diversification3. Conglomerate diversification4. Divestiture5. Liquidation
IIIIIIIV
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Conclusion: Selecting a Business Strategy toConclusion: Selecting a Business Strategy toAchieve a Competitive AdvantageAchieve a Competitive Advantage
Focusing on key sources of competitive advantage requiring
total, consistent commitment
Weighing skills, resources, organizational requirements, and
risks of each source of competitive advantage
Considering unique effects of the generic industry environment on a
firm’s value chain activities
Selection of appropriate business strategie(s) involves