Chapter 7 Business unit strategy: contexts and special dimensions

Chapter 7Business unit strategy: contexts and special dimensions Strategy: A view from the Top Team 4

Introduction • Forecasting the effectiveness of strategy. • Six types of industry settings. • Three contexts that relate to evolutionary stages of industry: • Emerging, Growth, Mature and Declining. • Three industry environments that pose strategic challenges: • Fragmented, Deregulating, and Hypercompetitive industries. • Two critical attributes of successful firms in dynamic industries: • Speed and Innovation

Strategy in Emerging Industries • New industries present new opportunities. • Immature technologies. • Costs are high and unpredictable. • Entry barriers are low. • Supplier relationships are underdeveloped. • Distribution channels just emerging.

Strategy in Emerging Industries • Timing is critical • First mover advantage • Can shape customer expectations • Define competitive rules of the game. • Brief window of opportunity to establish themselves as industry leaders.

Strategy in Emerging Industries • Reducing risk • Utilizing strategic leadership • Leadership opportunities: • Ability to control product and process development through: • superior technology • quality • customer knowledge • leveraging relationships with suppliers and distributors • leverage early loyal customers

Strategy in Growth Industries • Many challenges in growth. • Buyers can distinguish between competitive offerings. • Segmentation often occurs. • Cost control is important. • International markets become important.

Strategy in Growth Industries • Follower Advantages: • Time to evaluate alternative technologies. • Can delay investment in risky projects. • Can imitate or leapfrog superior products and technologies. • Take advantage of existing market segments. • Internal Development or Acquisition? • Internal Development • Creating a new business • Slow and expensive • Joint Ventures, Alliances, and Acquisitions

Strategy in Growth Industries • Two major issues to consider when entering a new market: • What are the structural barriers to entry? • Level of investment • Access to production and distribution facilities • Threat of overcapacity • How will incumbent firms react to intrusion? • Potential retaliation by incumbent firms • More likely if growth is low • Should focus on industries in flux where incumbents may be slow to react

Strategy in Mature and Declining Industries • Important issues: • Balance between differentiation and low cost. • Compete in multiple or single industry segments. • Growth masks strategic errors and lets companies survive. • To earn profits: • Concentrate on segments that offer higher growth and return. • Differentiate, reduce cost and rejuvenate segment growth with regards to product and process innovation.

Strategy in Mature and Declining Industries • To earn profits: • Streamline production and delivery. • Gradually “harvest” the business for more promising products and industries. • Strategic pitfalls to avoid: • Too optimistic about the industry or company position. • Inability to choose between a broad or focused competitive approach. • Investing too much with too little return. • Trading market share for profitability in short term pressures.

Strategy in Mature and Declining Industries • Strategic pitfalls to avoid: • Not competing on price. • Resisting industry changes. • Too much emphasis on new product development as opposed to improving existing products. • Retaining excess capacity. • Exit Decisions • Difficult • Government restrictions, labor obligations, contracts. • Effects on customers, suppliers and distributors.

Industry Evolution and Functional Priorities • Early development of a product market characterized by: • Slow growth in sales • R&D emphasis • Technological change • Operating losses • Need for resources • Success at the emerging stage: • Technical skill • First in new markets • Marketing advantage to create awareness

Industry Evolution and Functional Priorities • Rapid growth success: • Brand recognition • Product differentiation • Financial resources for marketing and price competition • Maturity stage characteristics: • Continued sales growth at decreasing rate • Industry segments increase • Slow change in product design • Intense competition • Decline stage success: • Cost advantages • Superior supplier and customer relationships • Financial control

Fragmented, Deregulating, and Hypercompetitive Industries • Fragmented Industries are those in which no single company or small group of firms has a large enough market share to strongly affect the industry structure or outcomes. • Many Areas of Economy share this trait including: • Retail stores • Distribution businesses • Professional services • Small manufacturing

Strategies in Fragmented Industries • In order to do well in fragmented markets, strategies should be focused on: • Product • Customer • Type of order/service • Geographic area • Creative Strategy (such as technological breakthroughs) can unlock hidden sources of advantage and dramatically change the dynamics of the industry. • Entrepreneurial ventures of Wayne Huizinga are prime exlamples.

Strategy in Deregulating Industries • Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces. • How did it effect the U.S? • California Pacific Gas and Electric

Four Distinct strategic postures that are successful in coping with turmoil after deregulation. • Broad-based distribution companies- take early pricing actions, eliminate cross subsidies between products or segments, and conserve resources. EX: AT&T- quickly reduced their prices to high-volume business customers to counter MCI and Sprint’s aggressive marketing efforts.

Four Distinct strategic postures that are successful in coping with turmoil after deregulation. • Low-cost competitors- catalysts for change in a deregulating environment. • Most become successful off finding their niche players over time. • Key is to find the right segment to target. • Focused segment marketers- target value added segments from the outset. • Their staying power depends on the strength of their relationship relationships with their customers. • By developing customer information systems • Upgrading products or services to lock in their customers.

Four Distinct strategic postures that are successful in coping with turmoil after deregulation. • Share utilities- provide low-cost competitors with economies of scale by sharing costs among many companies. • Sharing utilities are essential to the evolution of an industry • EX: • Battle among different airline reservation systems. At most few will ultimately survive, and likely one will become the leading industry standard.

Pricing in Newly Deregulated Industries • When new competitors enter, the market demands reduced prices, which can result from efficiencies and competitive effects. • Research by Florissen, Maurer, Schmidt, and Vahlenkamp identifies four factors that incumbents should use to adjust their prices correctly after deregulation takes effect.

Four factors incumbents should use to adjust their prices correctly • Competitors’ prices- • Plan to measure up the most relevant competitor. • Competitors with well known brands, often have the best chance of luring away an incumbent ‘s customers. • Switching rates- • Incumbent (company already in place before deregulation) should adjust prices downward as necessary to stay competitive and not allow a price gap to encourage customer to leave, however they do not need to become the cheapest priced company to retain the bulk of their customers.

Four factors incumbents should use to adjust their prices correctly • Customer value- • There are 2 types of customers. • Those who are willing to pay greater premiums. • Produce more revenue from cross-selling initiatives. • Those who look for the best price available throughout their market area. • Their defection result in small profit losses. • High margin customers are usually less price sensitive, and are more concerned with quality and service. • Lowering prices for these type of customers is costly and does little good.

Four factors incumbents should use to adjust their prices correctly • Cost to serve- • New competitors are unprepared to price services effectively meaning competitively and profitability. • Incumbents are in far better position, because they understand the true cost of their service. • Therefore, rather then reducing their prices to levels they cannot afford, they can moderate their profit margins and still keep majority of their customers.

Strategy in Hypercompetitive Industries Hypercompetitive strategies- designed to enable the company to gain an advantage over their competitors by disrupting the market with quick and innovative change. • The intense rivalry in a hypercompetitive environment often results in: • Short product life cycles • Emergence of new technologies • Competition from unexpected players • Major shift in market boundaries • EX: Telecommunication Companies • Bundling options.

Strategy in Hypercompetitive Industries • Speed and Innovation are the foremost requirements for success in a hypercompetitive environment. • Without speed, a company is at a severe disadvantage because competitors will capitalize on market opportunities first. • It is crucial that hypercompetitive companies be able to innovate rapidly and then follow up on that innovation with equally quick manufacturing, marketing, and distribution of their products.

Strategy in Hypercompetitive Industries • The final requirement for success in a hypercompetitive environment is strong market awareness. • Having strong customer focus allows firms to identify a customer’s needs while uncovering new and previously untapped markets for their products. • Over the long term, sustainable profits are possible only when entry to barriers restrict competition.

Competitive Reactions Under Extreme Competition 6 actions established companies can use to counter current and new competitors: • Retool strategy and restore its importance • Manage transition economics • Fight aggregation with disaggregation • Seek out new demand and new growth • Use a portfolio of initiatives to increase speed and flexibility • Count on a strategic risk

Business Unit Strategy • Speed • Newest, least understood of critical success factors • Pace of progress that company displays in responding to current or anticipated business needs • Response times in meeting customer expectations • Innovating and commercializing new products and services • Changing strategy to benefit from emerging market and technological realities • Continuously upgrading its transformation processes to improve customer satisfaction and financial returns

Continued: • Speed Merchants • Respond to industry challenges to increase their customer responsiveness • Build strategies based on rapid pace of their operations • Examples: AAA, Dell, Domino’s, CyberGate • Distinct, identifiable sources of pressure • Emphases on speed places new cost, cultural, and change process requirements on company • Several implementation methods to accelerate firm’s speed of operations

Pressures to Speed • 4 Principal Sources of Pressure: • Customers • Demand responsiveness, want quality products/services quickly • Need for creating a new basis for competitive advantage • Increasing speed w/ which products are innovated, developed, manufactured, and distributed is associated with success of firms in establishing new competitive advantage and important cost benefits • Competitive pressures • When facing intense competitive pressures, speed is often one of the few options for a company to choose to differentiate its offering • Industry shifts • Global competition, exponential advancements in technology, shifting customer demands combine to produce shorter life cycles and the need for faster product development

Requirements of Speed • Every aspect of an organization should be focused on the pace at which work is accomplished • Executives must create “fast” culture within their organizations • Action must be taken to: refocus business mission, create a speed-compatible culture, upgrade communications within business, focus business process reengineering, commit to new performance metrics

Refocusing the Business Mission • Articulate a long-term vision for a speed-oriented company • Provides basis for shared expectations, planning, and performance evaluation regarding the increase in speed throughout the organization • Creating a Speed-Compatible Culture • Company can facilitate speed by nurturing an organizational culture that is conducive to speed and by adopting an evaluation system that rewards those who can increase aspects of organizational speed • Change management techniques: includes TQM, benchmarking, time-based competition, outsourcing, and partnering

Upgrading Communication • Increase in speed requires dramatically upgraded methods for clear and timely communication • All parties expect instantaneous communication between customers, manufacturers, suppliers, and service providers • Refocusing Business Process Reengineering • BPR is undertaken to reorganize a company to eliminate barriers that create distance between employees and customers • Involves fundamentally rethinking and redesigning a process to enable a customer focus to permeate all phases of business activity

Committing to New Performance Metrics • Specific set of metrics has proven valuable in gauging a firm’s progress in improving performance from its investments in speed • Includes sales volume, innovation rate, customer satisfaction, processing time, cost controls, and marketing specifics • Innovation support, learning, and initiatives

Methods of Speed • Streamlining Operations • Speed-enhanced ability to obtain quick post-implementation feedback from the marketplace • Respond with unparalleled speed in making adjustments • Upgrading Technology • Companies able to roll out new product information faster • Common goal is to connect manufacturers with retailers to enhance information sharing and to streamline and accelerate product distribution • Forming Partnerships • Sharing business burdens is a proven way to shorten time needed to improve market responsiveness • Example: Ford Motor Company with GM & DaimlerChrysler

Creating Value Through Innovation • Value creation greatly depends on innovation • Innovation is a major strategic challenge for most companies • “Innovators’ Dilemma” • Disruptive Innovation • Launching product s that are not as good as existing products, but they are simple and more affordable Sustaining Innovation Innovation that just focuses on “better products

Innovation • Creating a culture of innovation eludes many companies because it transcends traditional strategic planning practices. • Strategic planning often centers on closely related products rather than on opportunities to drive demand. • Contrasting that, Innovation is being creative when anticipating and fulfilling customer needs

Innovation Cont. • Fostering a culture of innovation takes time and effort. (5 steps to take) • A business needs a top-level commitment to innovation • A business needs a long-term focus • A business needs a flexible organization structure • They also need a combination of loose and tight planning and control • Finally they need a system of appropriate incentives

Innovation and Performance • The Global Innovation study in 2006 found no significant statistical relationship between R&D spending, innovation, and measures of financial success. • This study identified the 1,000 companies worldwide that spent the most on R&D BCG also held a survey in 2006 that contrasted the previous one. They found that innovation translates into superior stock-market performance

Innovation and Profitability • Forrester Research study • 67% from manufacturing firms considered themselves more innovative than competitors • Only 7% identified themselves as very successful in meeting their innovation performance goals Respondents in the BCG survey questioned the effectiveness of their R&D spending 48% of those surveyed were unsatisfied with the financial returns on their investments in innovation

Innovation & Profitability Cont. • The reason for the lack of success in translating innovation into profitable performance surfaced in a growth study of the Fortune 50. • They concluded that the single biggest growth inhibitor for large companies was “mismanagement of the innovation process

Innovation & Performance Cont. • R&D investments fail to generate successful products and financial gains for three main reasons. • Failure to develop truly innovative products • Failure to successfully commercialize innovative products once on the market • Failure to market innovative products in a timely manner

Recommendations • Recommendations of Improving performance through Innovation • Plan synergy between strategy and innovation • Areas where new opportunities exist provide for a firm’s best chances to profit from innovation • Look outside for the company’s internal environment • Profits from innovation in business systems can match those from product development • Alliances and VC programs help to share risks • Involve customers early and often

Chapter 7 Business unit strategy: contexts and special dimensions