Session 11

1. Session 11 Business Strategy:Building Sustainable Competitive Advantages

2. Session Topics: Three Items • 1. Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage • Evaluating Cost Leadership Opportunities • Evaluating Differentiation Opportunities • Evaluating Speed as a Competitive Advantage • Evaluating Market Focus as a Way to Win Competitive Advantage • 2. Selected Industry Environments and Business Strategy Choices • Emerging Industries • Growth Industries • Mature • Declining Industries • Fragmented Industries • Global Industries • 3. Dominant Product/Service Businesses: Diversification to Build Value

3. Key Issues: Strategic Choice in Single Businesses 1. What strategies are most effective at building sustainable competitive advantages for single business units? 2. When should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

4. How should you choose among competitive advantage strategies?

5. Sources of competitive advantage Prominent Sources of Competitive Advantage Cost leadership Differentiation Speed Market focus

6. For Each of the Four: CL, Diff, Speed/RR, MF Skills and Resource Requirements Structural/Organizational Requirements Value Chain Examples Advantages Risks

7. Evaluating A Business’s Cost Leadership Opportunities • A. Skills and Resources Fostering Cost Leadership • Sustained capital investment and access to capital • Process engineering skills • Intense supervision of labor or core technical operations • Products or services designed for ease of manufacture or delivery • Low-cost distribution system • B. Organizational Requirements Supporting Cost Leadership • Tight cost control • Frequent, detailed control reports • Continuous improvement and benchmarking orientation • Structured organization and responsibilities • Incentives based on meeting strict, usually quantitative targets

8. Process innovations lowering production costs Product redesign to reduce number of components Technology development Safety training for all employees reduces absenteeism, downtime, and accidents Human resource management Reduced levels of management cuts corporate overhead Computerized, integrated information system reduces errors and costs General administration Profit Favorable long-term contracts; captive suppliers or key customer for supplier Procurement Subcontracted service technicians repair product correctly first time or bear costs Global, online suppliers provide automatic restocking of orders based on sales Economy of scale in plant reduces equipment costs and depreciation Computerized routing lowers transportation expense Cooperative advertising with distributors creates local cost advantage in buying media space and time Service margin Inbound logistics Operations Outbound logistics Marketing & sales Evaluating A Business’s Cost Leadership Opportunities --C. Examples of Ways Businesses Achieve Competitive Advantage

9. Advantages of a Cost Leadership Strategy Low-cost advantages reduce likelihood of pricing pressure from buyers Sustained low-cost advantages may push rivals into other areas, lessening price competition New entrants must face an entrenched cost leader without experience to replicate cost advantages Low-cost advantages should lessen attractiveness of substitutes Higher margins allow low-cost producers to withstand supplier cost increases

10. Key Risks of Cost Leadership Many cost-saving activities are easily duplicated Exclusive cost leadership can become a trap Obsessive cost cutting can shrink other competitive advantages involving key product attributes Cost differences often decline over time

11. Evaluating A Business’s Differentiation Opportunities • A. Skills and Resources Fostering Differentiation • Strong marketing abilities • Product engineering • Creative talent and flair • Strong capabilities in basic research • Corporate reputation for quality or technological leadership • Long tradition in an industry or unique combination of skills • Strong cooperation from channels and suppliers of major components • B. Organizational Requirements Supporting Differentiation • Strong coordination among functions in R&D, product development, and marketing • Subjective measurement and incentives instead of quantitative measures • Amenities to attract highly skilled labor, scientists, and creative people • Tradition of closeness to key customers • Some personnel skilled in sales and operations - technical and marketing

12. Cutting edge production technology and product features to maintain a distinct image and actual product Technology development Programs to ensure technical competence of sales staff and marketing orientation of service personnel Human resource management Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, and replaced General administration Profit Quality control presence at key supplier facilities; work with suppliers’ new product development activities Procurement Allowing service personnel considerable discretion to credit customers for repairs Purchase superior quality, well-known components, raising quality and image of final products Careful inspection of products at each step in production to improve performance and lower defect rates JIT coordination with buyers; use of own or captive transportation service to ensure timeliness Expensive, informative advertising and promotion to build brand image Service margin Inbound logistics Operations Outbound logistics Marketing & sales Evaluating A Business’s Differentiation Opportunities --C. Examples of Ways Businesses Achieve Competitive Advantage

13. Advantages of a Differentiation Strategy Rivalry is reduced when a business successful differentiates itself Buyers are less sensitive to prices for effectively differentiated products Brand loyalty is hard for new entrants to overcome

14. Key Risks of Differentiation Imitation narrows perceived differentiation, rendering differentiation meaningless Technological changes that nullify past investments or learning Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

15. Creating a Competitive Advantage Based on Speed • Has become a major source of competitive advantage for many firms • Involves the availability of a rapid response to customers by • Providing current products quicker • Accelerating new product development or improvement • Quickly adjusting production processes • Making decisions quickly

16. Evaluating A Business’s Rapid Response Opportunities • A. Skills and Resources Fostering Speed • Process engineering skills • Excellent inbound and outbound logistics • Technical people in sales and customer service • High levels of automation • Corporate reputation for quality or technical leadership • Flexible manufacturing capabilities • Strong downstream partners • Strong cooperation from suppliers of major components • B. Organizational Requirements Supporting Rapid Response • Strong coordination among functions in R&D, product development, and marketing • Major emphasis on customer satisfaction in incentive programs • Strong delegation to operating personnel • Tradition of closeness to key customers • Some personnel skilled in sales and operations - technical and marketing • Empowered customer service personnel

17. Use of companywide technology sharing activities and autonomous product development teams to speed new product development Technology development Develop self-managed work teams and decision making at lowest levels to increase responsiveness Human resource management Highly automated and integrated information processing system; include major buyers in the systems on a real-time basis General administration Profit Preapproved, online suppliers integrated into production Procurement Locate service technicians at customer facilities that are geograph- ically close Working very closely with suppliers to include their choice of warehouse location to minimize delivery time Standardize dies, components, and production equipment to allow quick changeover to new or special orders JIT delivery plus partnering with express mail services to ensure very rapid delivery Use of laptops linked directly to operations to speed the order process and shorten the sales cycle Service margin Inbound logistics Operations Outbound logistics Marketing & sales Evaluating A Business’s Rapid Response Opportunities --C. Examples of Ways Businesses Achieve Competitive Advantage

18. Advantages of a Speed-Based Strategy Creates a way to lessen rivalry because firm has the availability of something a rival may not Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers Generates cooperation and concessions from suppliers since they benefit from increased revenues Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

19. Key Risks of a Speed-Based Strategy Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response

20. Creating a Competitive Advantage Based on Market Focus • Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche • Allows a firm to • “Learn” its target customers • Build up organizational knowledge of ways to satisfy its target market better than larger rivals • Risks of focus strategies • Can attract major competitors to the segment • Believing a focus strategy, by itself, creates success, rather than a form of low cost, differentiation, or speed

21. Industry Environments and Strategy Choices Emerging Industries Growth Industries Mature Industries Declining Industries Fragmented Industries Global Industries

22. For each Industry Environment … Characteristics Strategic Options

23. Characteristics of Markets in Emerging Industries • Proprietary technology and technological uncertainty • Competitor uncertainty regarding inadequate information • High initial cost structure • Few entry barriers • First-time buyers require initial inducement • Inability to easily obtain raw materials and components • Need for high-risk capital

24. Strategic Options for Emerging Industries 1. Ability to shape industry’s structure 2. Ability to rapidly improve product quality 3. Establish favorable relations with key suppliers 4. Ability to establish technology as dominant force 5. Acquire a core group of loyal customers 6. Ability to forecast future competitors

25. Characteristics of Industries Transitioning to Maturity • Intense competition for market share • Increased sales to experienced, repeat buyers • Greater emphasis on cost and service • Declining profitability

26. Strategic Options for Maturing Industries 1. Prune the product line 2. Emphasize process innovation 3. Emphasize cost reductions 4. Focus on selecting loyal buyers 5. Pursue horizontal integration 6. Expand internationally

27. Pitfalls to Avoid in Competing in Maturing Industries A middle-ground approach to selecting a generic competitive strategy Sacrificing market share for short-term profits Waiting too long to respond to price reductions Retaining unneeded excess capacity Engaging in sporadic efforts to boost sales Placing hopes on new products

28. Characteristics of Mature/Declining Industries • Demand grows more slowly than economy,or even declines • Slowing growth is caused by • Technological substitution • Demographic shifts • Shifts in consumer needs

29. Strategic Options for Mature/Declining Industries 1. Focus on key market segments offering growth opportunities 2. Emphasize product innovation and quality improvement 3. Emphasize production and distribution efficiency 4. Gradually harvest the business

30. Pitfalls to Avoid in Competing in Mature/Declining Industries Being overly optimistic about prospects for an industry revival Getting trapped in a profitless war of attrition Harvesting from a weak position

31. Characteristics of Fragmented Industries • No firm has a significant market share • No firm can significantly influence industry outcomes • Examples • Professional services • Retailing • Wood and metal fabrication • Agricultural products • Funeral industry

32. Strategic Options for Fragmented Industries 1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy 2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations 3. Increased value added - Difficult to differentiate products/services 4. Specialization - Product type, customer type, type of order, geographic areas 5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)

33. Characteristics of Global Industries • Differences in prices and costs among countries due to • Currency exchange fluctuations • Differences in wage and inflation rates • Other economic factors • Differences in buyer needs across countries • Differences in competitors and ways of competing among countries • Differences in trade rules and governmental regulations across countries

34. Strategic Options: Pursuing Global Market Coverage 1. License foreign firms to produce and distribute a firm’s products 2. Maintain a domestic production base and export products 3. Establish foreign-based plants and distribution in foreign countries

35. Strategic Options: Choosing a Generic Competitive Strategy 1. Broad-line global competition 2. Global focus strategy 3. National focus strategy 4. Protected niche strategy

36. Overcome weaknesses Turnaround or retrenchment Divestiture Liquidation Vertical integration Conglomerate diversification Internal (redirected resources within the firm) External (acquisition or merger for resource capability) II I III IV Concentrated growth Market development Product development Innovation Horizontal integration Concentric diversification Joint venture Maximize strengths Grand Strategy Selection Matrix

37. Rapid market growth 1. Concentrated growth 2. Vertical integration 3. Concentric diversification 1. Reformulation of concentrated growth 2. Horizontal integration 3. Divestiture 4. Liquidation Strong competitive position Weak competitive position I II IV III 1. Concentric diversification 2. Conglomerate diversification 3. Joint venture 1. Turnaround or retrenchment 2. Concentric diversification 3. Conglomerate diversification 4. Divestiture 5. Liquidation Slow market growth Model of Grand Strategy Clusters

38. Selection of appropriate business strategie(s) involves Conclusion: Selecting a Business Strategy toAchieve a Competitive Advantage Focusing on key sources of competitive advantage requiring total, consistent commitment Weighing skills, resources, organizational requirements, and risks of each source of competitive advantage Considering unique effects of the generic industry environment on a firm’s value chain activities