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Unit: 5 Evaluating Company Resources and Competitive capabilities
Identifying company strengths and resource capabilities
A strength is something a company is good at doing or a characteristic that gives it enhanced
competitiveness.
• A skill or important expertise: Low cost manufacturing capabilities, strong e commerce
expertise, unique advertising and promotional talents.
• Valuable physical assets: Attractive location, worldwide distribution network,
ownership of valuable natural resources.
• Valuable organizational assets: an experienced and capable workforce, talented
employees in key areas, motivated and energetic employees, entrepreneurship and
managerial know how
• Valuable organizational assets: Proven quality control system, key patents, computer
assisted design system, well supply chain management system
• Valuable intangible assets: brand name image, company reputation, buyer goodwill
• Competitive capabilities: short development time in bringing new product, strong
partnerships with key suppliers, R and D capabilities
• Alliances and cooperative ventures: fruitful collaborative partnership with suppliers
and distribution system
Determining the competitive value of a company resource:
• Is the resource hard to copy?
• How long does the resource last? The longer a resource lasts, the greater the value.
• Is the resource really competitively superior to competitors?
Identifying company weaknesses and resources deficiencies
A weakness is something a company lacks or does poorly or a condition that puts it at a
disadvantage. A company internal weaknesses can relate to
• Deficiencies in competitively important skill or expertise or intellectual capital
• Lack of physical organizational or intangible assets.
• Missing competitive capabilities in key areas
• Deficiencies in above mentioned competitiveness
Identifying a company's market opportunities
The market opportunities most relevant to a company are those that offer important avenues for
profitable growth those where a company has the most potential for competitive advantage and
those that match up well with the company's financial and organization resource capabilities.
Evaluate the opportunities based on
• attractiveness
• Match of with company's financial and organizational resources
• Situation and circumances
Identifying the threats to a company's future profitability
A threats is unfavorable condition that put it disadvantages for the company
 Emergence of cheaper/better technologies
 Introduction of better products by rivals
 Onerous (burden) regulations
 Rise in interest rates
 Potential of a hostile takeover
 Unfavorable demographic shifts
 Adverse shifts in foreign exchange rates
 Political upheaval in a country
Are the company's prices and costs competitive?
1. Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of
company analysis
2. Key analytical tools
• Strategic cost analysis
• Value chain analysis
• Benchmarking
Why rival companies have different costs?
Companies do not have the same costs because of differences in
1. Prices paid for raw materials, component parts, energy, and other supplier
resources
2. Basic technology and age of plant & equipment
3. Economies of scale and experience curve effects
4. Wage rates and productivity levels
5. Marketing, promotion, and administration costs
6. Inbound and outbound shipping costs
7. Forward channel distribution costs
What is strategic cost analysis?
1. Focuses on a firm’s costs relative to its rivals
2. Compares a firm’s costs activity by activity against costs of key rivals
a. From raw materials purchase to
b. Price paid by ultimate customer
3. Pinpoints which internal activities are a source of cost advantage or
disadvantage
Concept of company value chain
1. A company consists of all the activities and functions
it performs in trying to deliver value to its customers.
2. A company’s value chain shows the linked set
of activities, functions, and business processes
that it performs in the course of designing, producing,
marketing, delivering, and supporting its
product / service and thereby creating value for its customers.
3. A company’s value chain consists of two types of
activities
 Primary activities (where most of the value
for customers is created)
 Support activities that are undertaken to
aid the individuals ands groups engaged in
doing the primary activities
32McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 4.2: Typical Company Value Chain
Distribution
And
Outbound
Logistics
Operations
Purchased
Supplies
and
Inbound
Logistics
Sales and
Marketing
Service
Profit
Margin
Product R&D, Technology, Systems Development
Human Resources Management
General Administration
Primary Activities and Costs
Support
Activities
and Costs
41McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Benchmarking Costs of
Key Value Chain Activities
 Focuses on cross-company comparisons of how
certain activities are performed and the costs
associated with these activities
 Purchase of materials
 Payment of suppliers
 Management of inventories
 Training of employees
 Processing of payrolls
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders
42McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Objectives of Benchmarking
 Determine whether a company is performing particular
value chain activities efficiently by studying the practices
and procedures used by other companies
 Understand the best practices in performing an activity—
learn what is the “best” way to do a particular activity from
those who have demonstrated they are “best-in-industry” or
“best-in-world”
 Assess if company’s costs of performing particular value
chain activities are in line with competitors
 Learn how other firms achieve lower costs
 Take action to improve company’s cost competitiveness
Characteristics of Benchmarking
 Involves determining how well a firm performs
particular activities and processes against
 “Best in industry” and/or
“Best in world” performers
 Represents a solid methodology
to identify options to improve
 Caution - Exact duplication of best practices of
other firms is not feasible due to differences in
implementation situations
 Best approach - Best practices of other firms
need to be modified or adapted to a firm’s own
specific situation
44McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
What Determines Whether a
Company is Cost Competitive?
 A company’s cost competitiveness depends on how
well it manages its value chain relative to how well
competitors manage their value chains
 When a company’s costs are “out-of-line”, the “high-
cost” activities can exist in any of three areas in the
industry value chain
1. Suppliers’ activities
2. The company’s own internal activities
3. Forward channel activities
Activities,
Costs, &
Margins of
Forward
Channel
Allies &
Strategic
Partners
Internally
Performed
Activities,
Costs, &
Margins
Activities,
Costs, &
Margins of
Suppliers
Buyer/User
Value
Chains
Unit 6: Strategic Options
Two types of strategic options
1. Generic strategy ( A core idea about how a firm can best compete in the marketplace.)
2. Grand strategy (A master long term plan that provides basic direction for major actions
directed towards achieving long-term business objectives.)
Generic strategies
7McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Figure 5.1: The Five Generic
Competitive Strategies
MarketTarget
Type of Advantage Sought
Overall Low-Cost
Provider
Strategy
Broad
Differentiation
Strategy
Focused
Low-Cost
Strategy
Focused
Differentiation
Strategy
Best-Cost
Provider
Strategy
Lower Cost Differentiation
Broad
Range of
Buyers
Narrow
Buyer
Segment
or Niche
Low cost Provider strategy: Appealing to a broad spectrum of customer based on being the
overall low cost provider of a product or service. A low cost leader's basis for competitive
advantage is lower overall costs than competitors. The cost leadership strategy tries to attract
price sensitive buyer and get competitive advantage.
Ways to achieve cost advantage
1. Controlling the cost driver
Economies of scale: Economies of scale arises whenever activities can be performed more
cheaply at larger volumes. Scale of economies and diseconomies also arises in how company
manages its value chain activities of marketing, distribution etc.
Learning and experience curve: Enhance operating efficiency through learning and experience
and minimize the cost. Example minimization of wastage.
The cost of key resource inputs: Bargaining power to supplier, location variable costs etc.
Link with other activities in the company or industry value chain: when the cost of one activity
is affected by how other activities are performed, costs can be managed downward by making
sure that linked activities are performed in cooperative and coordinated fashion.
The percentage of capacity utilization: higher rate of percentage use, getting more cost
advantage and vice versa
2. Revamping value chain: Dramatic cost advantage can emerge from finding innovative
ways to restructure process. The primary ways to achieve cost advantage by
reconfiguring their value chain include
Shifting to e business technologies: Use of the internet can enable online shopping and
purchases, online order processing and bill payment online data sharing. For example Amazon.
com
Using direct to end user sales and marketing approach
Simplifying product design: Unitizing computer assisted design technique, standardize parts and
components
Reengineering of business process and layout system
Dropping the "something for everyone" aproach
Pitfalls of Low-Cost Strategies
 Being overly aggressive in cutting price
 Low cost methods are easily imitated by rivals
 Becoming too fixated on reducing costs
and ignoring
 Buyer interest in additional features
 Declining buyer sensitivity to price
 Changes in how the product is used
 Buyer may believe product or services are low quality
Differentiation strategy
The essence of a differentiation strategy is to be unique in ways that are valuable to customer
and can be sustained. Differentiation strategy are an attractive competitive approach
whenever buyer needs and preference are standardized product or by seller with identical
capabilities. Incorporate differentiating features that cause buyers to prefer firm’s product or
service over brands of rivals. It also refer to find out the ways for differentiation that create
value for buyers and that are not easily matched or cheaply copied by rivals
21McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Appeal of Differentiation Strategies
 A powerful competitive approach when
uniqueness can be achieved in ways that
 Buyers perceive as valuable and are
willing to pay for
 Rivals find hard to match or copy
 Can be incorporated
at a cost well below
the price premium
that buyers will pay
Which hat
is unique?
Types of Differentiation
 Multiple features -- Microsoft Windows and Office
 Wide selection and one-stop shopping -- Amazon.com
 Superior service -- FedEx,
 Spare parts availability -- Caterpillar
 More for your money -- McDonald’s, Wal-Mart
 Prestige -- Rolex
 Quality manufacture -- Honda, Toyota
 Technological leadership -- 3M Corporation, Intel
28McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
When Does a Differentiation
Strategy Work Best?
 There are many ways to differentiate a
product that have value and please
customers
 Buyer needs and uses are diverse
 Few rivals are following a similar
differentiation approach
 Technological change and product
innovation are fast-paced
Pitfalls of Differentiation Strategies
 Trying to differentiate on a feature buyers do not perceive as lowering their cost or
enhancing their well-being
 Over-differentiating such that product features exceed buyers’ needs
 Charging a price premium that buyers perceive is too high
 Failing to signal value
Best cost provider strategy
Best cost provider strategy aim at giving customer more value for the money. Deliver superior
value by meeting or exceeding buyer expectations on product attributes and beating their price
expectations. A company achieve best cost from an ability to incorporate attractive attributes at
lower cost than rivals. It is hybrid concept of low cost and differentiation strategy. Combine a
strategic emphasis on low-cost with a strategic emphasis on differentiation
 Make an upscale product at a lower cost
 Give customers more value for the money
How a Best-Cost Strategy differs from a Low-Cost Strategy?
Aim of a low-cost strategy--Achieve lower costs than any other competitor in the industry
Intent of a best-cost strategy--Make a more upscale product at lower costs than the makers of
other brands with comparable features and attributes
Pitfalls of a Best-Cost Provider Strategy
Risk – A best-cost provider may get squeezed between strategies of firms using low-cost and
differentiation strategies
High-end differentiators may be able to steal customers away with better product attributes
Focus strategy
This strategy is concentrated attention on a narrow piece of the total market. The target segment
can be defined by geographic uniqueness, by specialized requirements, special produce attributes
than appeal only to niche members. Choose a market niche where buyers have distinctive
preferences, special requirements, or unique needs. Develop unique capabilities to serve needs of
target buyer segment
37McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
Examples of Focus Strategies
 eBay
 Online auctions
 Porsche
 Sports cars
 Horizon and Comair (commuter airlines)
 Link major airports with small cities
 Jiffy Lube International
 Maintenance for motor vehicles
 Bandag
 Specialist in truck tire recapping
When focus strategy is attractive?
 Big enough to be profitable and offers good growth potential
 Not crucial to success of industry leaders
 Costly or difficult for multi-segment competitors to meet specialized needs of niche
members
 Focuser has resources and capabilities to effectively serve an attractive niche
 Few other rivals are specializing in same niche
 Focuser can defend against challengers via superior ability to serve niche members
Pitfalls of a Focus Strategy
 Competitors find effective ways to match a focuser’s capabilities in serving niche
 Niche buyers’ preferences shift towards product attributes desired by majority of buyers -
niche becomes part of overall market
 Segment becomes so attractive it becomes crowded with rivals, causing segment profits
to be splintered
Grand strategy
1. Market Development
This grand strategy basically related with market related activities and tries to develop
competitive advantage through
• Cosmetic modification of the product and service
• Adding different channels of distribution
• By changing the content of advertising and promotional media
• By opening additional geographic market
• Attractive other market segment
When to pursue?
• When product life cycle stage reach to growth stage
• When Company able to attract new customer
• When favorable brand strategy
2. Product development
Product development involves substantial modification of existing products or creation of new
but related items that can be marketed to current customers through established channel. A
company can get competitive advantage through
• Developing new product feature (color, change sound shape stronger)
• Developing quality variation
• Developing additional model and size
When is best?
• When company's initial offering response positively by the customer
• When product reach to decline stage
• When customer prefer modified product
3. Growth and expansion
This strategy is recommend when a company in best position. In such condition company have
relatively high competitive position and high market growth rate as well. In such situation the
company is getting rapidly markets and require substantial investment to expand.
When is best?
1. When the product reach growth stage of PLC
2. When the product highly saleable and favorable
3. When both market growth rate and competitive position is relatively high
4. When company has numerous environmental opportunities and internally in strength
position.
4. Horizontal integration
This is long term strategy of a firm is based on growth through the acquisition of one or more
similar businesses operating at the same stage of the production marketing chain.
When it pursue?
• When integration provides access to new markets for the acquiring firm and eliminated
competitors
• When integrated makes organization more strong.
• When integrated will be benefited in regarding with resource availability market change
• When weakness of company will be fulfilled by integration
• When company is able to greatly expand its operation thereby achieving grater market
share, improving economies of scale, increase efficiency.
5. Vertical integration
This is long term strategy of a firm involves the acquisition of business that supply the firm with
inputs or serve as a customer for the firms output. For example if a shirt manufacturer acquire a
textile producer by purchasing its common stock and assets. It may be either backward or
forward integration.
When it pursue?
• When a company face different problems while distribution of final product to customer
or supply raw material from supplier.
• When integration is beneficial to the company
• Desire to decrease dependability of supply of raw material (backward integration)
• When the firm can better control its cost and thereby improve the profit margin.
6. Concentric diversification
When diversification involves related the existing business in terms of technology, markets and
products it is called concentric diversification. In such diversification the new business will be
selected on the basis of high degree of compatibility with current business.
When it pursue?
• When diversification increase strength and opportunities as well as decrease weakness
and risk
• When synergic effects increase the efficiency and capabilities of the company
• When existing technology, market and resource can be used even after diversification and
get competitive advantage.
• Better use of available resources.
7. Conglomerate diversification
When diversification is made for acquiring the most profitable business area in unrelated field.
The principal and often sole concern of the acquiring firm is the profit pattern.
(The principal difference between two types of diversification is that concentric acquisitions
emphasize some commonality in markets, products or technology whereas conglomerate
acquisition are based on profit consideration)
When to pursue?
• when company's available resources are mismatch for related diversification
• When unrelated diversification have high growth potentiality
• When current business is unsuccessful
• When current business is highly success (product mix concept)
8. Stability strategy
When company continues the previous strategy the strategy adopted is called Stability strategy.
When to pursue?
• When managers are risk avoider
• Incorporation of new things does not have significant impact for company's progress.
• Less volatile condition
• When company is getting advantage and profit from current strategy.
9 Retrenchment strategy
Large number of reasons a business can find itself with declining profit. The causes of declining
profit are different reasons. Because of this problem company can't continue their business. In
such condition the company faces maximum threats to continue their business and difficult to
sustain. Since the company faces threats and difficulties in the market, they reduce their business
activities. When company reduces their business activities it is called retrenchment. Such kind of
reduction is in two ways
Cost reduction: Decreasing the work force, leasing rather than purchasing equipment, extending
life of machinery
Assets reduction: sale of land, building, and equipment
When to pursue?
• If the country is facing economic recessions condition
• If the company is facing production inefficiency problem
• A innovative breakthrough by competitors
• When company continuously facing loss from long time and less chances to recoup
again.
10. Turnaround strategy
This is also almost similar to retrenchment strategy. This strategy again recommend when the
company is facing maximum threats and difficulties in existing business. The turnaround
commonly associated with change in management position. Here we change the leader top
management role.
When to pursue?
• Bringing new manager introduces needed new perspectives and raise employee morale
for the company.
• Facilitate to change drastic actions which lead to potential growth of the company.
• Refer (turnaround strategy)
11. Defensive strategy
Current scenario shows that the company is facing difficulties and little chance to revive. But in
coming years, there is chance to grow in future by the company. In such condition, this year the
company try to survive and will take necessary step in coming year. This is called defensive
strategy.
When to pursue?
• When the company have critical internal weakness and externally major environmental
threats
• When the company currently facing threats but there is chance to grow in future.
12. Liquidation strategy
When the grand strategy is that of liquidation, t6he business is typically sold in parts. In such
condition the strategic managers of a business are admitting failure and recognize that this action
is likely to result in great hardships to themselves and their employees.
When is it best?
• When firms face severe loss for long time and there is difficult to cope such loss.
• When firms position lies on low industry attractiveness and low business strength in GE 9
cell matrix
• When firms position lies on Low market share and low market growth in BCG matrix
and there is difficult survive from that position
13.Joint venture/Merger/Strategic alliance
Joint venture : A joint venture is a partnership in which the domestic firm and foreign firm
negotiate tie ups involving one or mere of the following: equity, transfer of technology,
investment, production and marketing. Joint venture is a strategic alliance in which two or more
firms create a legally independent company to share some of their resources and capabilities to
develop a competitive advantage.
Mergers: The most extensive form of participation in global markets is 100 percent ownership;
which may be achieved by startup merger or acquisition.
Strategic alliance: A Strategic Alliance is a formal relationship between two or more parties to
pursue a set of agreed upon goals or to meet a critical business need while remaining
independent organizations.
When is it best?
1. When the each partners to concentrate on activities that best match their capabilities.
2. When the firm learning from partners & developing competences that may be more
widely exploited elsewhere
3. Adequacy a suitability of the resources & competencies of an organization for it to
survive.

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Strategic management chapter 5 and 6 note for bba vii

  • 1. Unit: 5 Evaluating Company Resources and Competitive capabilities Identifying company strengths and resource capabilities A strength is something a company is good at doing or a characteristic that gives it enhanced competitiveness. • A skill or important expertise: Low cost manufacturing capabilities, strong e commerce expertise, unique advertising and promotional talents. • Valuable physical assets: Attractive location, worldwide distribution network, ownership of valuable natural resources. • Valuable organizational assets: an experienced and capable workforce, talented employees in key areas, motivated and energetic employees, entrepreneurship and managerial know how • Valuable organizational assets: Proven quality control system, key patents, computer assisted design system, well supply chain management system • Valuable intangible assets: brand name image, company reputation, buyer goodwill • Competitive capabilities: short development time in bringing new product, strong partnerships with key suppliers, R and D capabilities • Alliances and cooperative ventures: fruitful collaborative partnership with suppliers and distribution system Determining the competitive value of a company resource: • Is the resource hard to copy? • How long does the resource last? The longer a resource lasts, the greater the value. • Is the resource really competitively superior to competitors? Identifying company weaknesses and resources deficiencies A weakness is something a company lacks or does poorly or a condition that puts it at a disadvantage. A company internal weaknesses can relate to • Deficiencies in competitively important skill or expertise or intellectual capital • Lack of physical organizational or intangible assets. • Missing competitive capabilities in key areas • Deficiencies in above mentioned competitiveness Identifying a company's market opportunities The market opportunities most relevant to a company are those that offer important avenues for profitable growth those where a company has the most potential for competitive advantage and those that match up well with the company's financial and organization resource capabilities.
  • 2. Evaluate the opportunities based on • attractiveness • Match of with company's financial and organizational resources • Situation and circumances Identifying the threats to a company's future profitability A threats is unfavorable condition that put it disadvantages for the company  Emergence of cheaper/better technologies  Introduction of better products by rivals  Onerous (burden) regulations  Rise in interest rates  Potential of a hostile takeover  Unfavorable demographic shifts  Adverse shifts in foreign exchange rates  Political upheaval in a country Are the company's prices and costs competitive? 1. Assessing whether a firm’s costs are competitive with those of rivals is a crucial part of company analysis 2. Key analytical tools • Strategic cost analysis • Value chain analysis • Benchmarking Why rival companies have different costs? Companies do not have the same costs because of differences in 1. Prices paid for raw materials, component parts, energy, and other supplier resources 2. Basic technology and age of plant & equipment 3. Economies of scale and experience curve effects 4. Wage rates and productivity levels 5. Marketing, promotion, and administration costs 6. Inbound and outbound shipping costs 7. Forward channel distribution costs What is strategic cost analysis? 1. Focuses on a firm’s costs relative to its rivals 2. Compares a firm’s costs activity by activity against costs of key rivals
  • 3. a. From raw materials purchase to b. Price paid by ultimate customer 3. Pinpoints which internal activities are a source of cost advantage or disadvantage Concept of company value chain 1. A company consists of all the activities and functions it performs in trying to deliver value to its customers. 2. A company’s value chain shows the linked set of activities, functions, and business processes that it performs in the course of designing, producing, marketing, delivering, and supporting its product / service and thereby creating value for its customers. 3. A company’s value chain consists of two types of activities  Primary activities (where most of the value for customers is created)  Support activities that are undertaken to aid the individuals ands groups engaged in doing the primary activities 32McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Figure 4.2: Typical Company Value Chain Distribution And Outbound Logistics Operations Purchased Supplies and Inbound Logistics Sales and Marketing Service Profit Margin Product R&D, Technology, Systems Development Human Resources Management General Administration Primary Activities and Costs Support Activities and Costs
  • 4. 41McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Benchmarking Costs of Key Value Chain Activities  Focuses on cross-company comparisons of how certain activities are performed and the costs associated with these activities  Purchase of materials  Payment of suppliers  Management of inventories  Training of employees  Processing of payrolls  Getting new products to market  Performance of quality control  Filling and shipping of customer orders 42McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Objectives of Benchmarking  Determine whether a company is performing particular value chain activities efficiently by studying the practices and procedures used by other companies  Understand the best practices in performing an activity— learn what is the “best” way to do a particular activity from those who have demonstrated they are “best-in-industry” or “best-in-world”  Assess if company’s costs of performing particular value chain activities are in line with competitors  Learn how other firms achieve lower costs  Take action to improve company’s cost competitiveness
  • 5. Characteristics of Benchmarking  Involves determining how well a firm performs particular activities and processes against  “Best in industry” and/or “Best in world” performers  Represents a solid methodology to identify options to improve  Caution - Exact duplication of best practices of other firms is not feasible due to differences in implementation situations  Best approach - Best practices of other firms need to be modified or adapted to a firm’s own specific situation 44McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. What Determines Whether a Company is Cost Competitive?  A company’s cost competitiveness depends on how well it manages its value chain relative to how well competitors manage their value chains  When a company’s costs are “out-of-line”, the “high- cost” activities can exist in any of three areas in the industry value chain 1. Suppliers’ activities 2. The company’s own internal activities 3. Forward channel activities Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains
  • 6. Unit 6: Strategic Options Two types of strategic options 1. Generic strategy ( A core idea about how a firm can best compete in the marketplace.) 2. Grand strategy (A master long term plan that provides basic direction for major actions directed towards achieving long-term business objectives.) Generic strategies 7McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Figure 5.1: The Five Generic Competitive Strategies MarketTarget Type of Advantage Sought Overall Low-Cost Provider Strategy Broad Differentiation Strategy Focused Low-Cost Strategy Focused Differentiation Strategy Best-Cost Provider Strategy Lower Cost Differentiation Broad Range of Buyers Narrow Buyer Segment or Niche Low cost Provider strategy: Appealing to a broad spectrum of customer based on being the overall low cost provider of a product or service. A low cost leader's basis for competitive advantage is lower overall costs than competitors. The cost leadership strategy tries to attract price sensitive buyer and get competitive advantage. Ways to achieve cost advantage 1. Controlling the cost driver Economies of scale: Economies of scale arises whenever activities can be performed more cheaply at larger volumes. Scale of economies and diseconomies also arises in how company manages its value chain activities of marketing, distribution etc. Learning and experience curve: Enhance operating efficiency through learning and experience and minimize the cost. Example minimization of wastage. The cost of key resource inputs: Bargaining power to supplier, location variable costs etc.
  • 7. Link with other activities in the company or industry value chain: when the cost of one activity is affected by how other activities are performed, costs can be managed downward by making sure that linked activities are performed in cooperative and coordinated fashion. The percentage of capacity utilization: higher rate of percentage use, getting more cost advantage and vice versa 2. Revamping value chain: Dramatic cost advantage can emerge from finding innovative ways to restructure process. The primary ways to achieve cost advantage by reconfiguring their value chain include Shifting to e business technologies: Use of the internet can enable online shopping and purchases, online order processing and bill payment online data sharing. For example Amazon. com Using direct to end user sales and marketing approach Simplifying product design: Unitizing computer assisted design technique, standardize parts and components Reengineering of business process and layout system Dropping the "something for everyone" aproach Pitfalls of Low-Cost Strategies  Being overly aggressive in cutting price  Low cost methods are easily imitated by rivals  Becoming too fixated on reducing costs and ignoring  Buyer interest in additional features  Declining buyer sensitivity to price  Changes in how the product is used  Buyer may believe product or services are low quality Differentiation strategy The essence of a differentiation strategy is to be unique in ways that are valuable to customer and can be sustained. Differentiation strategy are an attractive competitive approach whenever buyer needs and preference are standardized product or by seller with identical capabilities. Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals. It also refer to find out the ways for differentiation that create value for buyers and that are not easily matched or cheaply copied by rivals
  • 8. 21McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Appeal of Differentiation Strategies  A powerful competitive approach when uniqueness can be achieved in ways that  Buyers perceive as valuable and are willing to pay for  Rivals find hard to match or copy  Can be incorporated at a cost well below the price premium that buyers will pay Which hat is unique? Types of Differentiation  Multiple features -- Microsoft Windows and Office  Wide selection and one-stop shopping -- Amazon.com  Superior service -- FedEx,  Spare parts availability -- Caterpillar  More for your money -- McDonald’s, Wal-Mart  Prestige -- Rolex  Quality manufacture -- Honda, Toyota  Technological leadership -- 3M Corporation, Intel
  • 9. 28McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. When Does a Differentiation Strategy Work Best?  There are many ways to differentiate a product that have value and please customers  Buyer needs and uses are diverse  Few rivals are following a similar differentiation approach  Technological change and product innovation are fast-paced Pitfalls of Differentiation Strategies  Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being  Over-differentiating such that product features exceed buyers’ needs  Charging a price premium that buyers perceive is too high  Failing to signal value Best cost provider strategy Best cost provider strategy aim at giving customer more value for the money. Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations. A company achieve best cost from an ability to incorporate attractive attributes at lower cost than rivals. It is hybrid concept of low cost and differentiation strategy. Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation  Make an upscale product at a lower cost  Give customers more value for the money How a Best-Cost Strategy differs from a Low-Cost Strategy? Aim of a low-cost strategy--Achieve lower costs than any other competitor in the industry Intent of a best-cost strategy--Make a more upscale product at lower costs than the makers of other brands with comparable features and attributes Pitfalls of a Best-Cost Provider Strategy Risk – A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies High-end differentiators may be able to steal customers away with better product attributes Focus strategy This strategy is concentrated attention on a narrow piece of the total market. The target segment can be defined by geographic uniqueness, by specialized requirements, special produce attributes
  • 10. than appeal only to niche members. Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs. Develop unique capabilities to serve needs of target buyer segment 37McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Examples of Focus Strategies  eBay  Online auctions  Porsche  Sports cars  Horizon and Comair (commuter airlines)  Link major airports with small cities  Jiffy Lube International  Maintenance for motor vehicles  Bandag  Specialist in truck tire recapping When focus strategy is attractive?  Big enough to be profitable and offers good growth potential  Not crucial to success of industry leaders  Costly or difficult for multi-segment competitors to meet specialized needs of niche members  Focuser has resources and capabilities to effectively serve an attractive niche  Few other rivals are specializing in same niche  Focuser can defend against challengers via superior ability to serve niche members Pitfalls of a Focus Strategy  Competitors find effective ways to match a focuser’s capabilities in serving niche  Niche buyers’ preferences shift towards product attributes desired by majority of buyers - niche becomes part of overall market  Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered Grand strategy 1. Market Development
  • 11. This grand strategy basically related with market related activities and tries to develop competitive advantage through • Cosmetic modification of the product and service • Adding different channels of distribution • By changing the content of advertising and promotional media • By opening additional geographic market • Attractive other market segment When to pursue? • When product life cycle stage reach to growth stage • When Company able to attract new customer • When favorable brand strategy 2. Product development Product development involves substantial modification of existing products or creation of new but related items that can be marketed to current customers through established channel. A company can get competitive advantage through • Developing new product feature (color, change sound shape stronger) • Developing quality variation • Developing additional model and size When is best? • When company's initial offering response positively by the customer • When product reach to decline stage • When customer prefer modified product 3. Growth and expansion This strategy is recommend when a company in best position. In such condition company have relatively high competitive position and high market growth rate as well. In such situation the company is getting rapidly markets and require substantial investment to expand. When is best? 1. When the product reach growth stage of PLC 2. When the product highly saleable and favorable 3. When both market growth rate and competitive position is relatively high 4. When company has numerous environmental opportunities and internally in strength position. 4. Horizontal integration This is long term strategy of a firm is based on growth through the acquisition of one or more similar businesses operating at the same stage of the production marketing chain. When it pursue? • When integration provides access to new markets for the acquiring firm and eliminated competitors
  • 12. • When integrated makes organization more strong. • When integrated will be benefited in regarding with resource availability market change • When weakness of company will be fulfilled by integration • When company is able to greatly expand its operation thereby achieving grater market share, improving economies of scale, increase efficiency. 5. Vertical integration This is long term strategy of a firm involves the acquisition of business that supply the firm with inputs or serve as a customer for the firms output. For example if a shirt manufacturer acquire a textile producer by purchasing its common stock and assets. It may be either backward or forward integration. When it pursue? • When a company face different problems while distribution of final product to customer or supply raw material from supplier. • When integration is beneficial to the company • Desire to decrease dependability of supply of raw material (backward integration) • When the firm can better control its cost and thereby improve the profit margin. 6. Concentric diversification When diversification involves related the existing business in terms of technology, markets and products it is called concentric diversification. In such diversification the new business will be selected on the basis of high degree of compatibility with current business. When it pursue? • When diversification increase strength and opportunities as well as decrease weakness and risk • When synergic effects increase the efficiency and capabilities of the company • When existing technology, market and resource can be used even after diversification and get competitive advantage. • Better use of available resources. 7. Conglomerate diversification When diversification is made for acquiring the most profitable business area in unrelated field. The principal and often sole concern of the acquiring firm is the profit pattern. (The principal difference between two types of diversification is that concentric acquisitions emphasize some commonality in markets, products or technology whereas conglomerate acquisition are based on profit consideration) When to pursue? • when company's available resources are mismatch for related diversification • When unrelated diversification have high growth potentiality • When current business is unsuccessful • When current business is highly success (product mix concept) 8. Stability strategy When company continues the previous strategy the strategy adopted is called Stability strategy.
  • 13. When to pursue? • When managers are risk avoider • Incorporation of new things does not have significant impact for company's progress. • Less volatile condition • When company is getting advantage and profit from current strategy. 9 Retrenchment strategy Large number of reasons a business can find itself with declining profit. The causes of declining profit are different reasons. Because of this problem company can't continue their business. In such condition the company faces maximum threats to continue their business and difficult to sustain. Since the company faces threats and difficulties in the market, they reduce their business activities. When company reduces their business activities it is called retrenchment. Such kind of reduction is in two ways Cost reduction: Decreasing the work force, leasing rather than purchasing equipment, extending life of machinery Assets reduction: sale of land, building, and equipment When to pursue? • If the country is facing economic recessions condition • If the company is facing production inefficiency problem • A innovative breakthrough by competitors • When company continuously facing loss from long time and less chances to recoup again. 10. Turnaround strategy This is also almost similar to retrenchment strategy. This strategy again recommend when the company is facing maximum threats and difficulties in existing business. The turnaround commonly associated with change in management position. Here we change the leader top management role. When to pursue? • Bringing new manager introduces needed new perspectives and raise employee morale for the company. • Facilitate to change drastic actions which lead to potential growth of the company. • Refer (turnaround strategy) 11. Defensive strategy Current scenario shows that the company is facing difficulties and little chance to revive. But in coming years, there is chance to grow in future by the company. In such condition, this year the company try to survive and will take necessary step in coming year. This is called defensive strategy. When to pursue? • When the company have critical internal weakness and externally major environmental threats • When the company currently facing threats but there is chance to grow in future.
  • 14. 12. Liquidation strategy When the grand strategy is that of liquidation, t6he business is typically sold in parts. In such condition the strategic managers of a business are admitting failure and recognize that this action is likely to result in great hardships to themselves and their employees. When is it best? • When firms face severe loss for long time and there is difficult to cope such loss. • When firms position lies on low industry attractiveness and low business strength in GE 9 cell matrix • When firms position lies on Low market share and low market growth in BCG matrix and there is difficult survive from that position 13.Joint venture/Merger/Strategic alliance Joint venture : A joint venture is a partnership in which the domestic firm and foreign firm negotiate tie ups involving one or mere of the following: equity, transfer of technology, investment, production and marketing. Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage. Mergers: The most extensive form of participation in global markets is 100 percent ownership; which may be achieved by startup merger or acquisition. Strategic alliance: A Strategic Alliance is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. When is it best? 1. When the each partners to concentrate on activities that best match their capabilities. 2. When the firm learning from partners & developing competences that may be more widely exploited elsewhere 3. Adequacy a suitability of the resources & competencies of an organization for it to survive.