Chapter Five Crafting Business Strategy
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Transcript of Chapter Five Crafting Business Strategy
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Chapter Five
Crafting Business Strategy
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OBJECTIVES
Define generic strategies and show how they relate to a firm’s strategic position
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Describe the drivers of low-cost, differentiation, and focus strategic positions
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Identify and explain the risks associated with each generic strategy position
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Show how different positions fit with various stages of the industry life cycle
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Evaluate the quality of the firm’s strategy5
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JUDO STRATEGY
“At its heart, judo strategy is about developing a deep understanding of your competition and the moves that will turn your competitors’ strength to your advantage.”
– David Yoffie and Mary Kwak
From Judo Strategy
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TOWS MATRIX
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STRATEGIC POSITIONING SHOULD IMPROVE PROFITABILITY
Where managers of a company situate that company relative to its rivals along important competitive dimensions
Definition
Purpose
To reduce the effects of rivalry and thereby improve profitability
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No advantage overrivals
Advantage over rivals
Low-cost
Differentiation
Description
Produce an essentially equivalent product at a lower cost
Produce a differentiated product and charge suffici-ently higher prices to more than offset the added costs of differentiation
A FIRM CAN GAIN ADVANTAGE OVER RIVALS IN TWO WAYS
7Adapted from poster, M.1980. Competitive strategy, 1980.
Low-cost Differentiation
Strategic advantage
Strategictarget
Narrow(i.e., particular segment only)
Broad(i.e., industry wide)
Broaddifferentiation
Focused costleadership
Focuseddifferentiation
Broad low-costleadership
THE STRATEGIC POSITIONING MODEL
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LOW-COST LEADERSHIP AND DIFFERENTIATION OFFER GREATER MARKET SHARE AND/OR PROFITS
Examples
Benefits
Low-cost leadership Differentiation
• Pacific Cycle
• Gallo Wines
• Wal-Mart
• Southwest Airlines
• Home Depot
• Trek Bicycles
• Coca-Cola and Pepsi
• Mercedez Benz
• Honda, Yamaha, and Suzuki motorcycles
• Stouffers (frozen foods)
• Capture market share by offering lower-price or
• Earn higher by maintaining price parity
• Capture market share by
offering higher quality at same price or
• Earn higher margins by raising prices over competitors
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Low-cost Differentiation
Strategic advantage
Strategictarget
Narrow
Broad• Trek Bicycles
• Coca-cola
• Jet Blue
• Ikea
• Godiva
• Montague
• Wal-Mart
• Gallo Wines
STRATEGIC POSITIONING EXAMPLES
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KEY DRIVERS OF COST ADVANTAGE
• Economies of scale
• Learning
• Product technology
• Product design
• Location advantages for sourcing inputs
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ECONOMIES OF SCALE
Economiesof scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
• Economies of scale exist during a period of time if the average total cost for a unit of production is lower at higher levels of output
• You must review cost to assess whether economies of scale exist:
–Fixed costs remain the same for different levels of production
–Variable costs are the costs of variable inputs (such as raw materials and labor) and vary directly with output
–Marginal cost is the cost of the last unit of production
–Total cost is the sum of all production costs and always increases as output goes up
–Average cost is the mean cost of total production during a given period (say, a year)
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DISECONOMIES OF SCALE – SIZE DOES NOT ENSURE ECONOMIES OF SCALE
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
Some sourcesof economies
• R&D spend
• Advertising spend
• Specialization of specific production processes
• Superior inventory management
• Purchasing power
Some sourcesof diseconomies
• Bureaucracy
• High labor costs
• Inefficient operations
• Technology
Economiesof scale
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LEARNING CURVE AS A SOURCE OF COST ADVANTAGE
Economiesof scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
Costs decrease …
as the scale of operation increases during any given period of time
Economiesof scale
with the cumulative level of production since the production of the first unit
Learning curve
How Learning Differs from Scale
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Learning/Experience Curve Effects
Exhibit 5.4 Comparing Experience Curve Effects
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ECONOMIES OF SCOPE AS A SOURCE OF COST ADVANTAGE
Economiesof scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
If a firm produces two or more products and can share resources among two or more of these (e.g., share manufacturing machines) – thereby lowering the costs of each product – it benefits from economies of scope (Coca Cola/Snapple example)
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PRODUCTION TECHNOLOGY AS A SOURCE OF COST ADVANTAGE
Economiesof scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
Often, a new entrant who wants to compete against industry incumbents with significant scale and experience advantages, tries to match or beat incumbents’ costs by introducing a production technology that is subject to different economics (e.g., Jet Blue, Nucor Steel)
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PRODUCTION DESIGN AS A SOURCE OF COST ADVANTAGE
Economiesof scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
Product design can sometimes be altered to lower a firm’s production costs (e.g., Canon vs. Xerox)
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LOCATION AS A SOURCE OF COST ADVANTAGE
Economiesof scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
Sometimes firms try to attain lower production costs by locating their operations in cheaper labor markets (e.g., Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek who manufactures in the US)
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KEY DRIVERS OF DIFFERENTIATION ADVANTAGES
• Premium brand image
• Customization
• Unique styling
• Speed
• More convenient access
• Unusually high-quality
To drive up customer’s willingness to pay and generate demand sufficient to
(1) Recoup added costs and
(2) Generate enough profits to make strategy worthwhile
Key Drivers Purpose
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DRIVERS AND THREATS TO DIFFERENTIATION AND LOW-COST ADVANTAGE
Low-cost
Differentiation
• Economies of scale
• Learning
• Economies of scope
• Superior technology
• Product design
• Location
Drivers Threats
• New technology
• Too low-quality
• Social, political, and economic risks of outsourcing
• Premium brand image
• Customization
• Unique styling
• Speed
• Convenient access
• Unusually high-quality
• Failure to increase buyer’s willingness to pay higher prices
• Under estimating cost of differentiation
• Over fulfillment of buyer’s needs
• Lower cost imitation
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STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE
Decline
Mature
Embryonic
Growth
Phases of in-dustry life cycle
Arenas Vehicles Differentiators Staging Economic LogicLocal Internal
developmentAlliances to secure missing inputs or distribution access
Target basic needs, minimal differentiation
Tactics to gain early footholds
Prices tend to be high. Costs are also high Focus is on securing additional capital to fund growth phase.
Penetration into adjacent markets
Alliances for cooperationAcquisitions in targeted markets
Increased efforts toward differentiationLow cost leaders emerge through gaining experience advantages and scale
Integrated positions require choice of focusing first on cost or differentiation
Margins can improve rapidly because of experience and scalePrice premiums accrue to successful differentiators
GlobalizationDiversification
Mergers and acquisitions result in consolidation
More stable positions emerge across competitors
Choosing international markets and new industry diversification; need rational sequencing
Consolidation results in fewer competitors (favoring higher margins) but declining growth demands cost containment and rationalization of operations.
Some arenas may be abandoned if decline is severeFocus on segments which provide most profitability
Acquisitions for diversifying movesDivestitures to exit for some competitors
Rationalizing cost
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TESTING THE QUALITY OF A STRATEGY
Key Evaluation Criteria Sub-questions1. Does your strategy exploit your key
resources?• With your particular mix of resources, does this strategy give you
an advantageous position relative to your competitors?• Can you pursue this strategy more economically than
competitors?• Do you have the capital and managerial talent to do all you
envision? • Are you spread too thin?
2. Does your strategy fit with current industry conditions?
• Is there healthy profit potential where you're headed? • Are you aligned with the key success factors of your industry?
3. Will your differentiators be sustainable?
• Will competitors have difficulty imitating you? • If imitation cannot be foreclosed, does your strategy include a
ceaseless regimen of innovation and opportunity creation to keep distance between you and the competition?
4. Are the elements of your strategy consistent and aligned with your strategic position?
• Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic?
• Do they all fit and mutually reinforce each other?6. Can your strategy be implemented? • Will your stakeholders allow you to pursue this strategy?
• Do you have the proper complement of implementation levers in place?
• Is the management team able and willing to lead the required changes?