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CHAPTER 7

Strategic Analysis and Choice in Single- or Dominant-

Product Businesses: Building Sustainable Competitive

Advantages

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Chapter Topics

• Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage

• Selected Industry Environments and Business Strategy Choices

• Dominant Product/Service Businesses: Evaluating and Choosing to Diversify to Build Value

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Basic Issues: Strategic Analysis and Choice

1. What strategies are most effective at building sustainable competitive advantages for single business units?

2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

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Prominent Sources of Competitive Advantage

Cost leadership

Differentiation

Speed Market focus

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Ex. 7-2: Evaluating a Business’s Cost Leadership Opportunities

A. Skills and Resources

• 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 systems

B. Organizational Requirements

• Tight cost control

• Frequent, detailed control reports

• Continuous improvement and benchmarking orientation

• Structured organization and responsibilities

• Incentives based on meeting strict, usually quantitative targets

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Ex. 7-2 (contd.)

Product redesign to reducenumber of components

Technologydevelopment

Safety training for all employees reduces absenteeism,downtime, and accidents

Process innovationLowering production costs HRM

Computerized, integrated info. systemsReduces errors and costs

General administration

Favorable long-term contracts; captive suppliers orkey customer for supplier

Procurement

Global, online suppliers provide automatic restocking of orders based on sales

Inbound logistics

Economy of scale in plant reduces equipment costs and depreciation

Operations

Computerized routing lowers transportation expense

Outbound logistics

Cooperative advtg. creates local cost advantage in buying media space/time

Mkt & sales

Subcontracted service techs. Repair products correctly first time or bear costs

Service

Profit

Margin

Reduced level of managementcuts corporate overhead

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Advantages of a Cost Leadership Strategy

Low-cost advantages reduce likelihood of pricing pressure from buyers

Truly 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

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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

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Ex. 7-3: Evaluating a Business’s Differentiation Opportunities

A. Skills and Resources• 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/suppliers

B. Organizational Requirements• 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

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Ex. 7-3 (contd.)

Cutting-edge production technology and product features to maintain a distinct image and actual product

Technologydevelopment

Programs to ensure technical competence of sales staff and a marketing orientation of service personnel

HRM

Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, replaced

General administration

Quality control presence at key supplier facilities; work with suppliers’ new product development activities

Procurement

Purchase superior quality well-known components, raising quality/image of final products

Inbound logistics

Careful inspection of products at each step to improve product performance and lower defect rate

Operations

JIT coordination with buyers; use of own/captive transportation service to ensure timeliness

Outbound logistics

Expensive, informative advertisingandpromotion to build image

Mkt & sales

Servicepersonnel have considerable discretion to creditcustomers for repairs

Service

Profit

Margin

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Advantages of a Differentiation Strategy

Rivalry is reduced when a business successfully differentiates itself

Buyers are less sensitive to prices for effectively differentiated products

Brand loyalty is hard for new entrants to overcome

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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

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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

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Ex. 7-4: Evaluating a Business’s Rapid Response Opportunities

A. Skills and resources• 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• 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

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Ex. 7-4 (contd.)

Use of companywide technology sharing activities and autonomous product dev. teams to speed new product dev.

Technologydevelopment

Develop self-managed work teams and decision-making at the lowest levels to increase responsiveness

HRM

Highly automated and integrated information processing system. Include major buyers in the system on a real-time basis

General administration

Preapproved, online suppliers integrated into production Procurement

Working very closely with suppliers to include their choice of warehouse to minimize delivery timeInbound logistics

Standardize dies, etc. and prod. equipment to allow quick changeover to new or special order

Operations

JIT delivery plus partnering with express mail services to ensure very rapid delivery

Outbound logistics

Use of laptops linked directly to operations to speed order process Mkt & sales

Locate service technicians at customer facilities that are geographically close

Service

Profit

Margin

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Activities Conducive to Building Speed-Based Competitive Advantage

Product or service

improvements

Customer responsiveness

Product development

cycles

Information sharing and technology

Speed in delivery or distribution

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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

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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

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Creating 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, by itself, creates success, rather than a form of low cost, differentiation, or speed

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“Typical” Industry Settings

Emerging IndustriesIndustries Transitioning to

MaturityMature and Decline IndustriesFragmented IndustriesGlobal Industries

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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 inducements

• Inability to easily obtain raw materials and components

• Need for high-risk capital

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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

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Characteristics of Industries Transitioning to Maturity

Intense competition for market share Increased sales to experienced, repeat

buyersGreater emphasis on cost and service Industry capacity “tops” outNew products and new applications

harder to come by Increase in international competitionDeclining profitability

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Strategic Options for Maturing Industries

• Prune the product line• Emphasize process innovation• Emphasize cost reductions• Focus on selecting loyal buyers• Pursue horizontal integration• Expand internationally

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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 or irrational efforts to boost sales

• Placing hopes on “new” products

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Characteristics of Mature/Declining Industries

Demand grows more slowly than economy, or even declines

Slowing growth is caused byTechnological substitutionDemographic shiftsShifts in consumer needs

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Strategic Options for Mature/Declining Industries

• Focus on key market segments offering growth opportunity

• Emphasize product innovation and quality improvement

• Emphasize production and distribution efficiency• Gradually harvest the business

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Characteristics of Fragmented Industries

No firm has a significant market shareNo firm can significantly influence

industry outcomesExamples

Professional servicesRetailingWood and metal fabricationAgricultural productsFuneral industry

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Strategic Options for Fragmented Industries

• Tightly managed decentralization – Intense local coordination, high personal service, local autonomy

• “Formula” facilities– Standardized, efficient, low-cost facilities at multiple locations

• Increased value added– Difficult to differentiate products/services

• Specialization– Product type, customer type, type of order, geographic areas

• Bare bones/no frills– Intense low margin competition (low overhead, minimum wage)

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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

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Key Components of Competing in Global Industries

Approach to gain global market

coverage

Generic competitive

strategy

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Strategic Options: Pursuing Global Market Coverage

• License foreign firms to produce and distribute a firm’s products

• Maintain a domestic production base and export products

• Establish foreign-based plants and distribution in foreign countries

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Strategic Options: Choosing a Generic Competitive Strategy

1. Broad-line global competition

2. Global focus strategy

3. National focus strategy

4. Protected niche strategy

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Ex. 7-8: Grand Strategy Selection Matrix

III

III IV

Overcome weaknesses

Maximize strengths

Internal (redirected resources within the firm)

External(acquisition or merger for resource capability)

Turnaround or retrenchmentDivestitureLiquidation

Vertical integrationConglomerate diversification

Concentrated growthMkt. DevelopmentProd. DevelopmentInnovation

Horizontal integrationConcentric diversificationJoint venture

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Ex. 7-9: Model of Grand Strategy Clusters

I II

IV III

Rapid market growth

Slow market growth

Strong competitive

position

Weak competitive

position

1. Concentrated growth

2. Vertical Integration

3. Concentric diversification

1. Reformulation of concentrated growth

2. Horizontal integration3. Divestiture4. Liquidation

1. Concentric diversification

2. Conglomerate diversification

3. Joint venture

1. Turnaround or retrenchment

2. Concentric diversification3. Conglomerate

diversification4. Divestiture5. Liquidation

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Opportunities to Build Value

Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operating-related, and management activities. Such opportunities center around reducing costs, improving margins, or providing access to new revenue sources more cost effectively than traditional internal growth options via concentration, market development, or product development