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BUSINESS LEVEL STRATEGY THERE USES...ppt
1.
McGraw-Hill/Irwin Copyright ©
2005 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT Creating and Sustaining Competitive Advantages Strategic Management (BA 491) Strategic Formulation
2.
2 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Porter’s “What Is Strategy?” • Operational effectiveness is not strategy: • Operational effectiveness means performing similar activities better than rivals. It is necessary, but not sufficient, for competitive advantage. • Strategic positioning means performing different activities from rivals’ or performing similar activities in different ways: Variety-based positioning (producing a subset of products/services) Needs-based positioning (serving needs of particular group of customers) Access-based positioning (using different ways to reach customers) • Strategy involves trade-offs, choosing what not to do.
3.
3 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Types of Competitive Advantage and Sustainability • Three generic strategies to overcome the five forces and achieve competitive advantage • Overall cost leadership Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain • Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium • Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership
4.
4 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Three Generic Strategies Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. Competitive Advantage Uniqueness Perceived by the Customer Low Cost Position Strategic Target Particular Segment Only Industrywide
5.
5 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Creating Value Through Human Capital, Social Capital, and Technology Performance Competitive Advantage Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64. Return on investment (%) 35.5 32.9 30.2 17.0 23.7 17.8 Sales Growth (%)15.1 13.5 13.5 16.4 17.5 12.2 Gain in Market Share (%) 5.3 5.3 5.5 6.1 6.3 4.4 Sample Size 123 160 100 141 86 105 Differentiation and Cost Differentiation Cost Differentiation Focus Cost Focus Stuck in the Middle
6.
6 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Overall Cost Leadership • Integrated tactics • Aggressive construction of efficient-scale facilities • Vigorous pursuit of cost reductions from experience • Tight cost and overhead control • Avoidance of marginal customer accounts • Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising
7.
7 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Value-Chain Activities Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter. Shared purchasing operations with other business units Effective policy guidelines to ensure low cost raw materials (with acceptable quality levels) Expertise in process engineering to reduce manufacturing costs Effective use of automated technology to reduce scrappage rates Effective orientation and training programs to maxi- mize employee productivity Minimize costs associated with employee turnover through effective policies Standardized account- ing practices to minimize personnel required Few management layers to reduce overhead costs Effective layout of receiving dock operation Effective use of quality control inspectors to minimize rework on the final product Effective utilization of delivery fleets Purchase of media in large blocks Sales force utilization is maximized by territory management Thorough service repair guidelines to minimize repeat maintenance calls Use of single type of repair vehicle to minimize costs Firm infrastructure Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service
8.
8 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Overall Cost Leadership (Cont.) • A firm following an overall cost leadership position • Must attain parity on the basis of differentiation relative to competitors • Parity on the basis of differentiation Permits a cost leader to translate cost advantages directly into higher profits than competitors Allows firm to earn above-average profits
9.
9 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Comparing Experience Curve Effects
10.
10 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces • An overall low-cost position • Protects a firm against rivalry from competitors • Protects a firm against powerful buyers • Provides more flexibility to cope with demands from powerful suppliers for input cost increases • Provides substantial entry barriers from economies of scale and cost advantages • Puts the firm in a favorable position with respect to substitute products
11.
11 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Pitfalls of Overall Cost Leadership Strategies • Too much focus on one or a few value-chain activities • All rivals share a common input or raw material • The strategy is initiated too easily • A lack of parity on differentiation • Erosion of cost advantages when the pricing information available to customers increases
12.
12 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Differentiation • Differentiation can take many forms • Prestige or brand image • Technology • Innovation • Features • Customer service • Dealer network
13.
13 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Value-Chain Activities: Examples of Differentiation Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter. Facilities that promote firm image Superior MIS—To integrate value-creating activities to improve quality Widely respected CEO enhances firm reputation Provide training and incentives to ensure a strong customer service orientation Programs to attract talented engineers and scientists Excellent applications engineering support Superior material handling and sorting technology Use of most prestigious outlets Purchase of high-quality components to enhance product image Superior material handling operations to minimize damage Quick transfer of inputs to manufactur- ing process Flexibility and speed in responding to changes in manu- facturing specs Low defect rates to improve quality Accurate and responsive order processing Effective product replenish- ment to reduce customer’s inventory Creative and innovative advertising programs Fostering of personal relation- ship with key customers Rapid response to customer service requests Complete inventory of replacement parts and supplies Firm infrastructure Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service
14.
14 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Differentiation • Firms may differentiate along several dimensions at once • Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique • Successful differentiation requires integration with all parts of a firm’s value chain • An important aspect of differentiation is speed or quick response
15.
15 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Differentiation: Improving Competitive Position vis-à-vis the Five Forces • Differentiation • Creates higher entry barriers due to customer loyalty • Provides higher margins that enable the firm to deal with supplier power • Reduces buyer power because buyers lack suitable alternative • Reduces supplier power due to prestige associated with supplying to highly differentiated products • Establishes customer loyalty and hence less threat from substitutes
16.
16 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Potential Pitfalls of Differentiation Strategies • Uniqueness that is not valuable • Too much differentiation • Too high a price premium • Differentiation that is easily imitated • Dilution of brand identification through product-line extensions • Perceptions of differentiation may vary between buyers and sellers
17.
17 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Focus • Focus is based on the choice of a narrow competitive scope within an industry • Firm selects a segment or group of segments (niche) and tailors its strategy to serve them • Firm achieves competitive advantages by dedicating itself to these segments exclusively • Two variants • Cost focus • Differentiation focus
18.
18 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Focus: Improving Competitive Position vis-à-vis the Five Forces • Focus • Creates barriers of either cost leadership or differentiation, or both • Also focus is used to select niches that are least vulnerable to substitutes or where competitors are weakest
19.
19 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Pitfalls of Focus Strategies • Erosion of cost advantages within the narrow segment • Focused products and services still subject to competition from new entrants and from imitation • Focusers can become too focused to satisfy buyer needs
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20 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Combination Strategies: Integrating Overall Low Cost and Differentiation • Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy • Goal of combination strategy is to provide unique value in an efficient manner
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21 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Combination Approaches • Automated and flexible manufacturing systems (e.g., “mass customization”) • Exploiting the profit pool concept for competitive advantage • Coordinating the “extended” value chain by way of information technology • Best-cost provider strategies – incorporating attractive attributes at a lower cost than rivals
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22 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. The U.S. Auto Industry’s Profit Pool Source: Adapted from “A Fresh Look at Strategy” by O. Gadiesh and J. L. Gilbert, Harvard Business Review 76, no. 3 (1998), pp. 139-48. Copyright © 1998 by the Harvard Business School Publishing Corporation, all rights reserved.
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23 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Combination Strategies: Improving Competitive Position vis-à-vis the Five Forces • Firms that successfully integrate differentiation and cost strategies obtain advantages of competition from both approaches • High entry barriers • Bargaining power over suppliers • Reduces power of buyers (fewer competitors) • Value position reduces threat from substitute products • Reduces the possibility of head-to-head rivalry
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24 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Pitfalls of Combination Strategies • Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” • Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain • Miscalculating sources of revenue and profit pools in the firm’s industry
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25 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Industry Life-Cycle States: Strategic Implications • Life cycle of an industry • Introduction • Growth • Maturity • Decline • Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle
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26 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Stages of the Industry Life Cycle
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27 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Stages of the Industry Life Cycle Generic strategies Differentiation Differentiation Differentiation Overall cost Overall cost leadership leadership Focus Market growth rate Low Very large Low to Negative moderate Number of segments Very few Some Many Few Intensity of competition Low Increasing Very intense Changing Emphasis on product design Very high High Low to Low moderate Stage Introduction Growth Maturity Decline Factor
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28 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Stages of the Industry Life Cycle Emphasis on process design Low Low to High Low moderate Major functional area(s) of concern Research and Sales and Production General Development marketing management and finance Overall objective Increase Create Defend Consolidate, market share consumer market share maintain, awareness demand and extend harvest, or product life exit cycles Stage Factor Introduction Growth Maturity Decline
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29 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Strategies in the Introduction Stage • Products are unfamiliar to consumers • Market segments not well defined • Product features not clearly specified • Competition tends to be limited Strategies • Develop product and get users to try it • Generate exposure so product becomes “standard
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30 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Strategies in the Growth Stage • Characterized by strong increases in sales • Attractive to potential competitors • Primary key to success is to build consumer preferences for specific brands Strategies • Brand recognition • Differentiated products • Financial resources to support value-chain activities
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31 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Strategies in the Maturity Stage • Aggregate industry demand slows • Market becomes saturated, few new adopters • Direct competition becomes predominant • Marginal competitors begin to exit Strategies • Efficient manufacturing operations and process engineering • Low costs (customers become price sensitive)
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32 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Strategies in the Decline Stage • Industry sales and profits begin to fall • Strategic options become dependent on the actions of rivals Strategies • Maintaining • Exiting the market • Harvesting • Consolidation
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33 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Turnaround Strategies in the Life Cycle • Asset and cost surgery • Selective product and market pruning • Piecemeal productivity improvements
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34 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Grand Strategies • Concentrated Growth • Market Development • Product Development • Innovation • Cooperative Strategies • Joint Ventures • Strategic Alliances • Merger and Acquisition Strategies • Horizontal Integration • Vertical Integration (forward and backward) • Related Diversification • Unrelated Diversification
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35 Copyright © 2005
by The McGraw-Hill Companies, Inc. All rights reserved. Grand Strategies (cont.) • Unbundling and Outsourcing Strategies • Offensive Strategies • Defensive Strategies • First-Mover, Rapid-Follower, and Late-Mover Strategies • Strategies for Industry Leaders • Strategies for Runner-Up Firms • Turnaround
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