Chapter 8 - Business Strategy


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Chapter 8 - Business Strategy

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