Unit 5 Strategy Discussion Outline

1. Unit 5 StrategyDiscussion Outline • We look at sustainable competitive advantage, defined here as a competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate. • We answer the questions of how a company can establish such an advantage against competitors and the significant benefits of doing so. • We then move into the steps involved in the strategy-making process. This is followed by a discussion of three different kinds of strategies: corporate-level strategies, business-level strategies, and operational strategies.

2. Strategy is an Action Managerstake to achieve Superior Performance High profitability Superior performance requires … Growth in profits over time

3. Competitive Advantage • Competitive advantage – an advantage obtained when a firm outperforms its rivals, and it helps a firm to provide greater value for customers than its competitors can. • Distinctive competency – a unique strength (S) that rivals lack and helps a firm attain a competitive advantage. Core capabilities are those that produce distinctive competencies and are less visible. • A sustained competitive advantage – when a distinctive competency that rivals cannot easily match or imitate.

4. Things that Protect Distinctive Competencies of a company: Examples • Barriers to imitation - factors that make it difficult for a firm to imitate the competitive position of a rival. • Legacy constraints - prior investments in a particular way of doing business that are difficult to change and limit a firm’s ability to imitate a successful rival.

5. Competitive Advantage Competitive advantage Low costs Distinctive competencies Superior performance Product differentiation If protected from copying by barriers to imitation and legacy constraints competitive advantage will be sustained

6. Characteristics of the “Distinctive” Resources Resources (e.g., assets, capabilities, processes, employee time, information, and knowledge that a firm controls) that help a firm to outperform its rivals are characterized as follows: • Owned • Valuable • Rare • Imperfectly imitable • Non-substitutable

7. Strategy-Making The strategy-making typically involves three steps: • Assessing need for strategic change • Conducting a situational analysis • Choosing strategic alternatives

8. Assess • The need assessment is difficult because there is a lot of uncertainty in business. • Top managers should avoid competitive inertia, since they are often slow to recognize the need for strategic change. • Managers must be aware of strategic dissonance.

9. U.S. Hospitals: An Example • In the 20th Century, U.S. Hospitals were considered as the premier, top-notch facilities for healthcare • 21st Century has brought the competitive pressures from focused providers • Result: Competitive disadvantage and the need for change

10. Situational Analysis • Strengths • Weaknesses • Opportunities • Threats

11. Internal Analysis • An analysis of a company’s strengths (S) and weaknesses (W), often begins with an assessment of its distinctive competencies and core capabilities. • A distinctive competence is something that a company can make, do, or perform better than competitors and is tangible – for example, a product or service is cheaper, better, or faster. • A core capability is something that is less visible, such as internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs.

12. External Analysis • Environmental scanning • Strategic group - group of companies within an industry that top managers choose to compare, evaluate, and benchmark strategic threats and opportunities • Competitive intelligence

13. Choosing Strategic Alternatives According to strategic reference point theory, managers choose between two basic alternative strategies: • Conservative risk-avoiding strategy • Aggressive risk-taking strategy

14. Strategic Reference Points

15. Risk tolerance and StrategicAlternatives: Examples • In responding to changes in the external environment, managers can choose between aggressive risk-taking strategy or a conservative risk-avoiding strategy: • Prospector • Analyzer • Defender • In terms of your emphasis on growth, managers can choose between: • Growth-oriented strategies • Stability-oriented strategies

16. Corporate-Level Strategy Corporate-level strategy concerned with deciding which industries a firm should compete in and how the firm should enter or exit industries. • Portfolio strategy and BCG Matrix • Diversification • Vertical integration • International expansion

17. BCG Matrix

18. Diversification • Diversification – Entry into new business areas. • Related diversity – Diversification into a business related to the existing business activities of an enterprise. • Unrelated diversity – Diversification into a business not related to the existing business activities of an enterprise. • Vertical integration – either a backward (upstream) integration or a forward (downstream) integration.

19. U-Shaped Relationship between Diversification and Risk

20. Business-Level Strategy • Cost leadership • Differentiation • Focus

21. The Low-Cost Value Cycles Lower costs Higher profitability and profit growth Economies of scale Lower prices Increased demand

22. Options for Exploiting Differentiation Increase prices more than costs Option 1 Successful differentiation Higher profitability and profit growth Option 2 Increased demand Moderate or no price increase Economies of scale and lower costs

23. Choosing Segments to Serve: Focus Strategies • Markets are characterized by different types of consumers. • Focus Strategy: Serving a limited number of segments. • Broad market strategy: Serving the entire market.

24. Configuring the Value Chain: Operational Strategy • Primary activities: Activities having to do with the design, creation, and delivery of the product; its marketing; and its support and after sales services. • Support activities: Activities that provide inputs that allow the primary activities to occur. • Organization architecture: The operations of the firm are embedded within the internal organization architecture of the enterprise, which includes the organization structure, incentives, control systems, people, and culture of the firm.

25. Competitive Tactics • Competitive tactics: Actions that managers take to try to outmaneuver rivals in the market. • Tactical pricing Decisions • Razor and razor blade pricing • Price war • Tactical Product decisions: • Product proliferation • Bundling