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  1. 1. LO2: Analysis of the process ofstrategy formulation and examine various strategies adopted by businessesCopyright © Houghton Mifflin Company. All rights reserved. 2|1
  2. 2. LO2_aExamine the framework that managers can use to analyze the external environment of their company.
  3. 3. External Analysis The purpose of external analysis is to identify the strategic opportunities and threats in the organization’s operating environment. External Analysis requires an assessment of:  Industry environment in which company operates • Competitive structure of industry • Competitive position of the company • Competitiveness and position of major rivals  The country or national environments in which company competes  The wider socioeconomic or macroenvironment that may affect the company and its industry • Social • Legal • Technological • Government • • International MacroeconomicCopyright © Houghton Mifflin Company. All rights reserved. 2|3
  4. 4. External Analysis: Opportunities and Threats Analyzing the dynamics of the industry in which an organization competes to help identify: Opportunities Threats Conditions in the Conditions in the environment that a environment that company can take endanger the integrity advantage of to and profitability of become more the company’s profitable businessCopyright © Houghton Mifflin Company. All rights reserved. 2|4
  5. 5. Industry Analysis: Defining an Industry Industry • A group of companies offering products or services that are close substitutes for each other and that satisfy the same basic customer needs • Industry boundaries may change as customer needs evolve and technology changes Sector • A group of closely related industries (eg. Computer Hardware, component, and software industries) Market Segments • Distinct groups of customers within an industry • Can be differentiated from each other with distinct attributes and specific demands Industry analysis begins by focusing on the overall industry – before considering market segment or sector-level issuesCopyright © Houghton Mifflin Company. All rights reserved. 2|5
  6. 6. The Computer Sector: Industries and Segments Figure 2.1Copyright © Houghton Mifflin Company. All rights reserved. 2|6
  7. 7. Porter’s Five Forces Model Risk of Entry by Potential Competitors Industry Rivalry Bargaining Power of Buyers Bargaining Power of Suppliers Threat of SubstitutesCopyright © Houghton Mifflin Company. All rights reserved. 2|7
  8. 8. How the Five Forces Shape Competition within an Industry The stronger that each of these five forces is, the more limited is the ability of established companies to raise prices and earn greater profits within their industry. • A weak competitive force » may be viewed as an opportunity as it allows company to earn greater profits • A strong competitive force » may be viewed as a threat as it depresses industry profits • Strength of forces may change as industry conditions changeCopyright © Houghton Mifflin Company. All rights reserved. 2|8
  9. 9.  Risk of Entry by Potential Competitors Potential Competitors are companies that are not currently competing in an industry but have the capability to do so if they choose. Barriers to new entrants include: 1. Economies of Scale – as firms expand output unit costs fall via:  Cost reductions – through mass production  Discounts on bulk purchases – of raw material and standard parts  Cost advantages/savings – of spreading costs over large volume 2. Brand Loyalty  Achieved by creating well-established customer preferences  Difficult for new entrants to take market share from established brands 3. Absolute Cost Advantages – relative to new entrants  Accumulated experience – in production and key business processes  Control of particular inputs required for production  Lower financial risks – access to cheaper funds 4. Customer Switching Costs for Buyers – where significant 5. Government Regulation  May be a barrier to enter certain industriesCopyright © Houghton Mifflin Company. All rights reserved. 2|9
  10. 10.  Rivalry Among Established Companies Competitive Rivalry refers to the competitive struggle between companies in the same industry to gain market share from each other. Intensity of rivalry is a function of: 1. Industry Competitive Structure  Number and size distribution of companies  Consolidated (high entry barrier) versus fragmented industries (low entry barrier) 2. Demand Conditions  Growing demand – tends to moderate competition and reduce rivalry  Declining demand – encourages rivalry for market share and revenue 3. Cost Conditions  High fixed costs – profitability leveraged by sales volume  Slow demand and growth – can result in intense rivalry and lower profits 4. Height of Exit Barriers – prevents companies from leaving industry  Write-off of investment in assets  High fixed costs of exit  Economic dependence on industry  Emotional attachment to industry  Maintain assets  Bankruptcy regulationsCopyright © Houghton Mifflin Company. All rights reserved. 2 | 10
  11. 11.  Bargaining Power of Buyers Industry Buyers may be the consumers or end-users who ultimately use the product or intermediaries that distribute or retail the products. These buyers are most powerful when: 1. Buyers are dominant.  Buyers are large and few in number.  The industry supplying the product is composed of many small companies. 2. Buyers purchase in large quantities.  Buyers have purchasing power as leverage for price reductions. 3. The industry is dependant on the buyers.  Buyers purchase a large percentage of a company’s total orders. 4. Switching costs for buyers are low.  Buyers can play off the supplying companies against each other. 5. Buyers can purchase from several supplying companies at once. 6. Buyers can threaten to enter the industry themselves.  Buyers produce themselves and supply their own product.  Buyers can use threat of entry as a tactic to drive prices down.Copyright © Houghton Mifflin Company. All rights reserved. 2 | 11
  12. 12.  Bargaining Power of Suppliers Suppliers are organizations that provide inputs such as material and labor into the industry. These suppliers are most powerful when: 1. The product supplied is vital to the industry and has few substitutes. 2. The industry is not an important customer to suppliers.  Suppliers are not significantly affected by the industry. 3. Switching costs for companies in the industry are significant.  Companies in the industry cannot play suppliers against each other. 4. Suppliers can threaten to enter their customers’ industry.  Suppliers can use their inputs to produce and compete with companies already in the industry. 5. Companies in the industry cannot threaten to enter their suppliers’ industry by making their own inputs.Copyright © Houghton Mifflin Company. All rights reserved. 2 | 12
  13. 13.  Substitute Products Substitute Products are the products from different businesses or industries that can satisfy similar customer needs. 1. The existence of close substitutes is a strong competitive threat.  Substitutes limit the price that companies can charge for their product. 2. Substitutes are a weak competitive force if an industry’s products have few close substitutes.  Other things being equal, companies in the industry have the opportunity to raise prices and earn additional profits.Copyright © Houghton Mifflin Company. All rights reserved. 2 | 13
  14. 14. Group Assignment 2• Identify the industry of your chosen company• Perform Porter’s 5 forces model analysis• List the main threats and opportunities in the external environment
  15. 15. LO2_bExamine the competitive advantage of business firms by analyzing whysome companies outperform others. Internal Analysis
  16. 16. Internal Analysis: Strengths and Weaknesses Internal analysis, along with the external analysis of the company’s environment, gives managers theinformation to choose the strategies and businessmodel to attain a sustained competitive advantage. Strengths Weaknesses Assets that boost Liabilities that profitability depress profitabilityCopyright © Houghton Mifflin Company. All rights reserved. 3 | 16
  17. 17. Internal AnalysisThe purpose of internal analysis is to pinpoint thestrengths and weaknesses of the organization.It includes assessments of:  The firm’s resources (tangible [land, buildings, equipments, etc] and intangible [brand name, reputation, knowledge, skills, intellectual property) and capabilities (skills at coordinating resources) Distinctive competencies (e.g. Toyota Manufacturing) Building and sustaining a competitive advantage requires a company to achieve superior: • Efficiency • Innovations • Quality • Responsiveness to customersCopyright © Houghton Mifflin Company. All rights reserved. 3 | 17
  18. 18. Strategy, Resources, Capabilities, and Competencies Figure 3.1Copyright © Houghton Mifflin Company. All rights reserved. 3 | 18
  19. 19. Competitive Advantage, Value Creation, and ProfitabilityHow profitable a company becomesdepends on three basic factors: 1. Value or utility the customer gets from owning the product 2. Price that a company charges for its products 3. Costs of creating that product  Consumer surplus is the “excess” utility a consumer captures beyond the price paid Basic Principle: the more utility that consumers get from a company’s products or services, the more pricing options the company has.Copyright © Houghton Mifflin Company. All rights reserved. 3 | 19
  20. 20. The Value Chain Figure 3.5 A company is a chain of activities for transforming inputs into outputs that customers value – including the primary and support activities.Copyright © Houghton Mifflin Company. All rights reserved. 3 | 20
  21. 21. Building Blocks of Competitive Advantage Figure 3.6Copyright © Houghton Mifflin Company. All rights reserved. 3 | 21
  22. 22. Efficiency Measured by the quantity of inputs it takes to produce a given output: Efficiency = Outputs / Inputs Productivity leads to greater efficiency and lower costs: • Employee productivity • Capital productivity Superior efficiency helps a company attain a competitive advantage through a lower cost structure.Copyright © Houghton Mifflin Company. All rights reserved. 3 | 22
  23. 23. Quality Quality products are goods and services that are: • Reliable and • Differentiated by attributes that customers perceive to have higher value A perception of quality allows a firm to differentiate its products in the eyes of its customers. Superior quality = customer perception of greater value in a product’s attributes Form, features, performance, durability, reliability, style, design Copyright © Houghton Mifflin Company. All rights reserved. 3 | 23
  24. 24. InnovationInnovation is the act of creatingnew products or new processes • Product innovation » Creates products that customers perceive as more valuable and » Increases the company’s pricing options • Process innovation » Creates value by lowering production costs Successful innovation can be a major source of competitive advantage – by giving a company something unique.Copyright © Houghton Mifflin Company. All rights reserved. 3 | 24
  25. 25. Customer ResponsivenessIdentifying and satisfying customers’needs – better than the competitors do. Enhanced customer responsiveness: Customer response time, design, service, after-sales service and supportSuperior responsiveness tocustomers differentiates a company’sproducts and services and leads tobrand loyalty and premium pricing.Copyright © Houghton Mifflin Company. All rights reserved. 3 | 25
  26. 26. Company’s Business Model Utilize company’s distinctive competencies to differentiate its products and/or lower its cost structureA business model encompasses how the company will:•Select its customers • Deliver those goods and•Define and differentiate its services to the market • Organize activities within•Create value for its customers the company•Acquire and keep customers • Configure its resources•Produce goods or services • Achieve and sustain a high•Lower costs level of profitability • Grow the business over timeCopyright © Houghton Mifflin Company. All rights reserved. 1 | 26
  27. 27. Competitive Advantage Competitive Advantage • A firm’s profitability is greater than the average profitability for all firms in its industry. • Excellent business model, distinctive competencies, and excellent strategies lead to competitive advantage and superior profitability Sustained Competitive Advantage • A firm maintains above average and superior profitability and profit growth for a number of years.Copyright © Houghton Mifflin Company. All rights reserved. 3 | 27
  28. 28. Analyzing Competitive Advantage and ProfitabilityTo identify strengths and weaknesses effectively, a company needs to compare, or benchmark, the performance of their company with respect to historic performance and competitors. This helps determine whether1. They are more or less profitable than competitors and whether performance has been improving or deteriorating over time2. Their company’s strategies are maximizing the value being created3. Their cost structure is out of line with those of competitors4. They are using the resources of the company to the greatest effectCopyright © Houghton Mifflin Company. All rights reserved. 3 | 28
  29. 29. Why Companies Fail Inertia • Companies find it difficult to change their strategies and structures Prior Strategic Commitments • Limit a company’s ability to imitate and cause competitive disadvantage The Icarus Paradox • A company can become so specialized and inner-directed based on past success that it loses sight of market realities When a company loses its competitive advantage, its profitability falls below that of the industry.  It loses the ability to attract and generate resources.  Profit margins and invested capital shrink rapidly.Copyright © Houghton Mifflin Company. All rights reserved. 3 | 29
  30. 30. Avoiding Failure:Sustaining Competitive Advantage1. Focus on the Building Blocks of Competitive Advantage Develop distinctive competencies and superior performance in:  Efficiency  Quality  Innovation  Responsiveness to Customers2. Institute Continuous Improvement and Learning3. Track Best Practice and Use Benchmarking4. Overcome InertiaLuck may play a role in success, so always exploit a lucky break - but remember: “The harder I work, the luckier I seem to get.” J P MorganCopyright © Houghton Mifflin Company. All rights reserved. 3 | 30
  31. 31. Differences in Industry and Company Performance A Company’s Profitability and Profit Growth are determined by two main factors: The overall performance of its industry relative to other industries Its relative success in its industry as compared to the competitorsCopyright © Houghton Mifflin Company. All rights reserved. 1 | 31
  32. 32. Performance in Nonprofit Enterprises Nonprofit entities such as government agencies, universities, and charities: • Are not in business to make a profit • BUT…still need to use their resources efficiently and effectively • Must meet goals • Set strategies to achieve goals and compete with other nonprofits for scarce resources A successful strategy gives potential donors a compelling message as to why they should contribute.Copyright © Houghton Mifflin Company. All rights reserved. 1 | 32
  33. 33. Group Assignment 3• Perform internal analysis of reviewing the resources, capabilities, and competencies of a company. Then evaluate the building blocks of competitive advantage• List all the strengths and weaknesses of each of the items above (resources, capabilities, quality, innovation, efficiency, customer responsiveness)
  34. 34. LO2_c Examine how functional level strategies can help to achieveefficiency, innovation and customer responsiveness.
  35. 35. SWOT Analysis SWOT analyses help to identify strategies that align a company’s resources and capabilities to its environment – in order to create and sustain a competitive advantage.  Analyze all internal strength  Analyze all internal weaknesses  Analyze all external opportunities  Analyze all external threats Copyright © Houghton Mifflin Company. All rights reserved. 1 | 35
  36. 36. Functional-Level StrategiesFunctional-level strategies are strategies aimedat improving the effectiveness of a company’soperations. Functional-level strategies aim to give a firm superior: • Efficiency • Quality • Innovation • Customer responsiveness This leads to a competitive advantage and superior profitability and profit growth.Copyright © Houghton Mifflin Company. All rights reserved. 4 | 36
  37. 37. Achieving Superior Efficiency Economies of scale Unit cost reductions associated with a large scale of output • Ability to spread fixed costs over a large production volume • Ability of companies producing in large volumes to achieve a greater division of labor and specialization • Specialization has favorable impact on productivity by enabling employees to become very skilled at performing a particular task Diseconomies of scale Unit cost increases associated with a large scale of output • Increased bureaucracy associated with large-scale enterprises • Resulting managerial inefficienciesCopyright © Houghton Mifflin Company. All rights reserved. 4 | 37
  38. 38. Economies and Diseconomies of Scale Figure 4.2Copyright © Houghton Mifflin Company. All rights reserved. 4 | 38
  39. 39. Learning Effects Learning Effects are cost savings that come from learning by doing. • Labor productivity Learn by repetition how to best carry out the task • Management efficiency Learn over time how to best run the operation • Realization of learning effects implies a downward shift of the entire unit cost curve As labor and management become more efficient over time at every level of outputThe Experience Curve is the systematic lowering of the coststructure and consequent unit cost reductions that occur over the life of a productCopyright © Houghton Mifflin Company. All rights reserved. 4 | 39
  40. 40. Flexible Manufacturingand Mass Customization (Response) Flexible Manufacturing Technology “Lean Production” technology that: • Reduces setup times for complex equipment • Improves scheduling to increase use of individual machines • Improves quality control at all stages of the manufacturing process • Increases efficiency and lowers unit costs Mass Customization Ability to use flexible manufacturing technology to reconcile two goals that were once thought incompatible: • Low cost and • Differentiation through product customizationCopyright © Houghton Mifflin Company. All rights reserved. 4 | 40
  41. 41. Materials Management and Supply Chain Materials Management encompasses the activities necessary to get inputs and components to a production facility, through the production process, and through the distribution system to the end-user • Many sources of cost in this process • Significant opportunities for cost reduction through more efficient materials management • Just-in-Time (JIT) Inventory System to economize holding costs: » Have components arrive to manufacturing just prior to need in production process » Have finished goods arrive at retail just prior to stock out Supply Chain Management is the task of managing the flow of inputs to a company’s processes to minimize inventory holding and maximize inventory turnoverCopyright © Houghton Mifflin Company. All rights reserved. 4 | 41
  42. 42. Achieving Superior InnovationBuilding distinctive competencies that result ininnovation is the most important source ofcompetitive advantage. Innovation can: • Result in new products that better satisfy customer needs • Differentiate products and charge a premium price and lower cost structure • Improve the quality of existing products • Reduce costs Innovation can be imitated - Successful new product So it must be continuous launches are major drivers of superior profitability.Copyright © Houghton Mifflin Company. All rights reserved. 4 | 42
  43. 43. Marketing • Marketing strategy refers to the position that a company takes regarding: Pricing, Promotion, Advertising, Product Design, Distribution • Marketing strategy can reduce costs by lowering customer defection rates and increasing loyalty Quality • TQM (Continuous Improvement) • Six SigmaCopyright © Houghton Mifflin Company. All rights reserved. 4 | 43
  44. 44. R&D Strategy Research and Development (R&D) Roles of R&D in helping a company achieve greater efficiency and lower cost structure: 1. Boost efficiency by designing products that are easy to manufacture • Reduce the number of parts that make up a product – reduces assembly time • Design for manufacturing – requires close coordination with production and R&D 1. Help a company have a lower cost structure by pioneering process innovations • Reduce process setup times • Flexible manufacturing • An important source of competitive advantageCopyright © Houghton Mifflin Company. All rights reserved. 4 | 44
  45. 45. Human Resource Strategy Goal: to improve employee productivity. Hiring strategy Assures that the people a company hires have the attributes that match the strategic objectives of the company Employee training Upgrades employee skills to perform tasks faster and more accurately Self-managing teams Members coordinate their own activities and make their own hiring, training, work, and reward decisions Pay for performance Linking pay to individual and team performance can help to increase employee productivityCopyright © Houghton Mifflin Company. All rights reserved. 4 | 45
  46. 46. Materials Management and Supply Chain Materials Management encompasses the activities necessary to get inputs and components to a production facility, through the production process, and through the distribution system to the end-user (Significant opportunities for cost reduction through more efficient materials management ) • Just-in-Time (JIT) Inventory System to economize holding costs: » Have components arrive to manufacturing just prior to need in production process » Have finished goods arrive at retail just prior to stock out Supply Chain Management Information Systems Information systems’ impact on productivity is wide- ranging:  Web-based information systems can automate many activities and Automates interactions between – Company and customers – Company and suppliers Copyright © Houghton Mifflin Company. All rights reserved. 4 | 46
  47. 47. Group Assignment 4• Perform SWOT Analysis• Pick the best opportunity that capitalizes on your strengths, eliminate weaknesses, and limit your threats• Suggest what your company should do in terms of functional level strategies
  48. 48. LO2_dAnalyze the factors that facilitatebusiness level strategy to enable afirm to compete effectively in the market place.
  49. 49. Business-Level StrategyA successful business model (company’sconception of how various strategies pursuedby company fit together into a whole) resultsfrom business-level strategies that create acompetitive advantage over its rivals.Firms must decide/evaluate:1. Customer needs – WHAT is to be satisfied2. Customer groups – WHO is to be satisfied3. Distinctive competencies – HOW customers are to be satisfiedCopyright © Houghton Mifflin Company. All rights reserved. 5 | 49
  50. 50. Formulating the Business Model: Customer Needs and Product Differentiation Customer needs The desires, wants, or cravings that can be satisfied through product attributes  Customers choose a product based on: 1. The way the product is differentiated from other products of its type 2. The price of the product Product differentiation Designing products to satisfy customers’ needs in ways that competing products cannot.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 50
  51. 51. Formulating the Business Model: Customer Groups and Market Segmentation Market Segmentation The way customers can be grouped based on important differences in their needs or preferences Main Approaches to Segmenting Markets 1. Ignore differences in customer segments – Make a product for the typical or average customer (company decides to not differentiate its product but compete on cost) 2. Recognize differences between customer groups – Make products that meet the needs of all or most customer groups (customer responsiveness is high and customization is important) 3. Target specific segments – Choose to focus on and serve just one or two selected segments (focus on low price or differentiation)Copyright © Houghton Mifflin Company. All rights reserved. 5 | 51
  52. 52. Identifying Customer Groups and Market Segments Figure 5.1Copyright © Houghton Mifflin Company. All rights reserved. 5 | 52
  53. 53. Implementing the Business Model Building Distinctive Competencies To develop a successful business model, strategic managers must devise a set of strategies that determine: • How to DIFFERENTIATE their product • How to PRICE their product • How to SEGMENT their markets • How WIDE A RANGE of products to develop A profitable business model depends onproviding the customer with the most value while keeping cost structures viable.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 53
  54. 54. Wal-Mart’s Business Model Figure 5.3Copyright © Houghton Mifflin Company. All rights reserved. 5 | 54
  55. 55. Competitive Positioning at the Business Level Maximizing the profitability of the company’s business model is about makingthe right choices with regard to value creation through differentiation, costs, and pricing. Choose pricing option that compensate for extra cost of differentiation but not too high that it chokes increases in expected demand Figure 5.4 Source: Copyright © C. W. L. Hill & G. R. Jones, “The Dynamics of Business-Level Strategy,” (unpublished manuscript, 2002).Copyright © Houghton Mifflin Company. All rights reserved. 5 | 55
  56. 56. Cost LeadershipCost leaders establish a cost structure thatallows them to provide goods and servicesat lower unit costs than competitors. (can useChaining and Franchising to obtain advantage of cost leadership)Strategic Choices • The cost leader does not try to be the industry innovator. • The cost leader positions its products to appeal to the “average” or typical customer. • The overriding goal of the cost leader is to increase efficiency and lower its costs relative to industry rivals.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 56
  57. 57. Advantages of Cost Leadership Strategies  Protected from industry competitors by cost advantage  Less affected by increased prices of inputs if there are powerful suppliers  Less affected by a fall in price of inputs if there are powerful buyers  Purchases in large quantities increase bargaining power over suppliers  Ability to reduce price to compete with substitute products  Low costs and prices are a barrier to entry Cost leaders are able to charge a lower price or are able to achieve superior profitability than their competitors at the same price.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 57
  58. 58. Disadvantages of Cost Leadership Strategies Competitors may lower their cost structures.  Competitors may imitate the cost leader’s methods.  Cost reductions may affect demand (example reducing costs on warranty and customer service might lead customers to leave).Copyright © Houghton Mifflin Company. All rights reserved. 5 | 58
  59. 59. DifferentiationCompanies with a differentiation strategycreate a product that is different or distinctfrom its competitors in an important way.Strategic Choices • A differentiator: » Stives to differentiate itself on as many dimensions as possible. » Focuses on quality, innovation, and responsiveness to customer needs. » May segment the market in many niches. » Concentrates on the organizational functions that provide a source of distinct advantages.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 59
  60. 60. Advantages of Differentiation Strategies Customers develop brand loyalty. Powerful suppliers are not a problem because the company is geared more toward the price it can charge than its costs. Differentiators can pass price increases on to customers. Powerful buyers are not a problem because the product is distinct. Differentiation and brand loyalty are barriers to entry. The threat of substitute products depends on competitors’ ability to meet customer needs. Differentiators can create demand for their distinct products and charge a premium price, resulting in greater revenue and higher profitability.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 60
  61. 61. Disadvantages of Differentiation Strategies Difficulty maintaining long-term distinctiveness in customers’ eyes. • Agile competitors can quickly imitate. • Patents and first-mover advantage are limited in their duration. Difficulty maintaining premium price.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 61
  62. 62. Focus The focuser strives to serve the need of a targeted niche market segment where it has either a low-cost or differentiated competitive advantage.Strategic Choices • The focuser selects a specific market niche that may be based on:  Geography  Type of customer  Segment of product line • Focused company positions itself as either:  Low-Cost or  DifferentiatorCopyright © Houghton Mifflin Company. All rights reserved. 5 | 62
  63. 63. Advantages of Focus Strategies The focuser is protected from rivals to the extent it can provide a product or service they cannot. The focuser has power over buyers because they cannot get the same thing from anyone else. The threat of new entrants is limited by customer loyalty to the focuser. Customer loyalty lessens the threat from substitutes. The focuser stays close to its customers and their changing needs.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 63
  64. 64. Disadvantages of Focus Strategies The focuser is at a disadvantage with regard to powerful suppliers because it buys in small volume (but it may be able to pass costs along to loyal customers). Because of low volume, a focuser may have higher costs than a low-cost company. The focuser’s niche may disappear because of technological change or changes in customers’ tastes. Differentiators will compete for a focuser’s niche.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 64
  65. 65. Competitive Positioning: Strategic Groups Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group (eg. LuLu, Coop and Carrefour all compete on low cost, they become a strategic group), but are different from that of other companies in other strategic groups. Implications of Strategic Groups for Competitive Positioning • Strategic managers must: 1. Map their competitors 2. Better understand changes in the industry 3. Determine which strategies are successful 4. Fine tune or radically alter business models and strategies to improve competitive positionCopyright © Houghton Mifflin Company. All rights reserved. 5 | 65
  66. 66. Failures in Competitive Positioning Many companies, through neglect, ignorance or error: • Do not work continually to improve their business model • Do not perform strategic group analysis • Often fail to identify and respond to changing opportunities and threats in the industry environment Companies lose their position on the value frontier when: • They have lost their source of competitive advantage • Their rivals have found ways to push out the value creation frontier and leave them behind There is no more important task than ensuring that the company is optimally positioned against its rivals to compete for customers.Copyright © Houghton Mifflin Company. All rights reserved. 5 | 66
  67. 67. Group Assignment 5• Draft a Business Model figure similar to Wal- Mart’s figure 5.3• Discuss how you will position yourself in the market place in term of positioning strategies discussed (cost leadership, differentiation, focus) Copyright © Houghton Mifflin Company. 2 | 67 All rights reserved.
  68. 68. LO2_e Examine various ways in whichcompanies can profit from global expansion
  69. 69. Global Strategy: Pressures for Cost Reductions and Local Responsiveness Figure 8.2 Company A: Global Standardization Strategy Company B: Localization Strategy Company C: Transnational Strategy Company D: International Strategy Company D As Competitors emerge Company D and B strategies become less viable and •Company B would seek Company C strategy •Company D would eitherCopyright © Houghton Mifflin 8 | 69 seek A or C strategyCompany. All rights reserved.
  70. 70. Choosing a Global Strategy Standard Globalization Strategy • Reaping the cost reductions that come from economies of scale and location economies (marketing, production, R&D) • Business model based on pursuing a low-cost strategy on a global scale Makes the most sense when there are strong pressures for cost reduction and the demand for local responsiveness is minimal Localization Strategy • Customizing the company’s goods or services so that thy provide a good match to tastes and preferences in different national markets Most appropriate when there are substantial differences across nations with regard to consumer tastes and preferences and where cost pressures are not too intenseCopyright © Houghton Mifflin Company. All rights reserved. 8 | 70
  71. 71. Choosing a Global Strategy Transnational Strategy • Company faces both strong cost pressure (Global Strategy) and strong pressure on local responsiveness (Localization Strategy) • Business model that simultaneously: » Achieves low costs » Differentiates across geographic markets » Fosters a flow of skills between subsidiaries Building an organization capable of supporting a transnational strategy is a complex and challenging task. International Strategy • Multinational companies that sell products that serve universal needs (minimal need to differentiate) and do not face significant competitors (low cost pressure). In most international companies the head office retains tight control over marketing and product strategy.Copyright © Houghton Mifflin Company. All rights reserved. 8 | 71
  72. 72. Basic Entry Decisions1. Which overseas markets to enter (WHERE) • Assessment of long-run profit potential • Balancing the benefits, costs, and risks associate with doing business in a country1. Timing of entry (WHEN) • First-mover advantages: preempt and build share • First-mover disadvantages: pioneering costs1. Scale of Entry (HOW) • Entering on a large scale is a major strategic commitment • Benefits and drawbacks of small-scale entryCopyright © Houghton Mifflin Company. All rights reserved. 8 | 72
  73. 73. The Choice of Entry Mode1. Exporting Most manufacturing companies begin their global expansion as exporters and later switch to one of the other modes.2. Licensing A foreign licensee buys the rights to produce a company’s product for a negotiated fee; licensee puts up most of the overseas capital.3. Franchising Franchising is a specialized form of licensing. The franchiser not only sells intangible property, but also insists that franchisee agrees to follow strict rules as to how it does business.4. Joint Ventures Typically a 50/50 venture – a favored mode for entering a new market5. Wholly-Owned Subsidiaries Parent company owns 100% of subsidiary’s stock – setup or acquireCopyright © Houghton Mifflin Company. All rights reserved. 8 | 73
  74. 74. Advantages and Disadvantages of Different Entry Modes Table 8.1Copyright © Houghton Mifflin Company. All rights reserved. 8 | 74
  75. 75. Global Strategic AlliancesGlobal Strategic Alliances are cooperative agreements betweencompanies from different countries that are actual or potentialcompetitors. They range from short-term contractual cooperativearrangements to formal joint ventures with equity participation. Advantages • Facilitate entry into a foreign market • Share fixed costs and associated risks • Bring together complementary skills and assets • Set technological standards for its industry Disadvantages • Give competitors a low-cost route to gain new technology and market access Some alliances benefit the company. Beware, alliances can end up giving away technology and market access with very little gained in return.Copyright © Houghton Mifflin Company. All rights reserved. 8 | 75
  76. 76. Group Assignment 6Suppose you have the opportunity to expand outside the boundaries of the UAE, which strategy would you use and why (Locate your self on the cost pressure-local responsiveness chart)?Copyright © Houghton Mifflin Company. All rights reserved. 2 | 76
  77. 77. LO2_f Analyze the strategies thatcorporations pursue to build and restructure their portfolio of businesses.
  78. 78. Corporate-Level StrategyCorporate-Level Strategy: How do we sustain competitiveadvantages in our current business? What new businessesor industries do we wish to enter? Corporate strategy is used to identify: 1. Businesses or industries that the company should compete in 2. Value creation activities that the company should perform in those businesses 3. Methods to enter or leave businesses or industries in order to maximize its long-run profitability Companies must adopt a long-term perspective in formulating a corporate-level strategy.Copyright © Houghton Mifflin Company. All rights reserved. 9 | 78
  79. 79. Corporate-Level Strategy and the Multibusiness ModelA multibusiness company must construct its business model at two levels:1. Business models and strategies for each business unit or division in every industry in which it competes2. Higher-level multibusiness model that justifies its entry into different businesses and industriesCopyright © Houghton Mifflin Company. All rights reserved. 9 | 79
  80. 80. Repositioning and Redefining A Company’s Business ModelCorporate-level strategies are primarily directed towardimproving a company’s competitive advantage and profitabilityin its present business or product line: Horizontal Integration (staying in the same industry) • The process of acquiring or merging with industry competitors Vertical Integration • Expanding operations backward into an industry that produces inputs for the company or forward into an industry that distributes the company’s products Strategic Outsourcing • Letting some value creation activities within a business be performed by an independent entityCopyright © Houghton Mifflin Company. All rights reserved. 9 | 80
  81. 81. Horizontal Integration: Single-Industry StrategyHorizontal Integration: the process of acquiring or mergingwith industry competitors in an effort to achieve thecompetitive advantages that come with large scale and scope.Staying inside a single industry allows acompany to: Focus resources Resources devoted to competing successfully in one area ‘Stick to the knitting’ Company stays focused on what it does bestCopyright © Houghton Mifflin Company. All rights reserved. 9 | 81
  82. 82. Benefits of Horizontal IntegrationProfits and profitability increase when horizontalintegration:1. Lowers the cost structure • Creates increasing economies of scale • Reduces the duplication of resources between two companies2. Increases product differentiation • Product bundling – broader range at single combined price (Vitamin C bottle same price as Vitamin D) • Total solution – saving customers time and money (a company purchases competitors to bring to market a complete set of products (such as Multivitamins) • Cross-selling – leveraging established customer relationships3. Replicates the business model • Replicate the business model success in other market segment within the same industry4. Reduces industry rivalry • Eliminate excess capacity in an industry • Easier to implement tacit price coordination among rivals5. Increases bargaining power • Increased market power over suppliers and buyers • Gain greater controlCopyright © Houghton Mifflin Company. All rights reserved. 9 | 82
  83. 83. Problems with Horizontal IntegrationA wealth of data suggests that the majority of mergersand acquisitions DO NOT create value and that manymay actually DESTROY value. Implementing a horizontal integration is not an easy task • Problems associated with merging very different company cultures • High management turnover in the acquired company when the acquisition is a hostile one • Tendency of managers to overestimate the benefits to be had in the merger • Tendency of managers to underestimate the problems involved in merging their operations The merger may be blocked if merger is perceived to: • Create a dominant competitor • Create too much industry consolidation • Have the potential for future abuse of market powerCopyright © Houghton Mifflin Company. All rights reserved. 9 | 83
  84. 84. Vertical Integration: Entering New Industries Backward Vertical Integration • Company expands its operations into an industry that produces inputs to the company’s products Forward Vertical Integration • Company expands into an industry that uses, distributes, or sells the company’s products Full Integration • Company produces all of a particular input from its own operations • Disposes of all of its completed products through its own outlets Taper Integration • In addition to company-owned suppliers, the company will also use other suppliers for inputs or independent outlets in addition to company-owned outletsCopyright © Houghton Mifflin Company. All rights reserved. 9 | 84
  85. 85. Full and Taper Integration Figure 9.3Copyright © Houghton Mifflin Company. All rights reserved. 9 | 85
  86. 86. Alternative to Vertical IntegrationShort-term contracts with suppliers (competitive bidding) • Suppliers are forced to compete on priceStrategic Alliances (Long-Term Contracting) • Cooperative relationship • Work jointly • Becomes substitute to vertical integrationCopyright © Houghton Mifflin Company. All rights reserved. 2 | 86
  87. 87. Strategic OutsourcingStrategic Outsourcing allows one or more of a company’svalue-chain activities or functions to be performed byindependent specialized companies that focus all theirskills and knowledge on just one kind of activity. Company is choosing to focus on a fewer number of value-creation activities  In order to strengthen its business model Companies typically focus on noncore or nonstrategic activities  In order to determine if they can be performed more effectively and efficiently by independent specialized companies Virtual Corporation  Describes companies that have pursued extensive strategic outsourcingCopyright © Houghton Mifflin Company. All rights reserved. 9 | 87
  88. 88. Strategic Outsourcing of Primary Value Creation Functions Figure 9.4Copyright © Houghton Mifflin Company. All rights reserved. 9 | 88
  89. 89. Group Assignment 7In your newly developed UAE-based company which of the following (you can choose more than one) would you pursue and why • Horizontal Integration • Vertical Integration • Strategic Alliance • OutsourcingCopyright © Houghton Mifflin Company. All rights reserved. 2 | 89