1. 1Session 14 Strategic Analysis and Choicein Single- or Dominant-Product Businesses:Building SustainableCompetitive Advantages Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc.

2. 2Session Topics Evaluating and Choosing Selected IndustryBusiness Strategies: Environments andSeeking SustainedBusiness Strategy ChoicesCompetitive Advantage Emerging Industries Evaluating Cost Industries Transitioning toLeadership Opportunities Maturity Mature and Declining Evaluating Differentiation IndustriesOpportunities Fragmented Industries Evaluating Speed as a Global IndustriesCompetitive Advantage Dominant Product/Service Evaluating Market FocusBusinesses:as a Way to Win Diversification to BuildCompetitive Advantage Value Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 3. 3Key Issues: Strategic Choice in Single Businesses1. What strategies are most effective at buildingsustainable competitive advantages for singlebusiness units? 2. Should dominant-product/service businessesdiversify to build value and competitiveadvantage? What grand strategies are mostappropriate? Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 4. 4Prominent Sources of Competitive Advantage Cost leadership Sources ofDifferentiationcompetitive advantageSpeedMarket focus Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 5. 5 Evaluating A Businesss 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 ordelivery Low-cost distribution systemB. 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 targetsIrwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 6. 6Evaluating A Businesss Cost Leadership Opportunities -- C. Examples of Ways Businesses Achieve Competitive Advantage Process innovations Product redesign to reduceTechnologylowering production costs number of componentsdevelopment Safety training for all employees reduces absenteeism, Humanresourcedowntime, and accidentsmanagement Reduced levels of management Computerized, integrated information Generalcuts corporate overheadsystem reduces errors and costsadministration Favorable long-term contracts; captive suppliers or key customerfor supplierProcurement Subcontracted serviceGlobal, onlineEconomy of Computerized Cooperativetechnicianssuppliers scale in plant routing lowers advertisingrepairprovide reducestransportation with productdistributors correctlyautomatic equipmentexpense first timecreates localor bearrestocking of costs and cost advantage costsorders baseddepreciationin buyingon salesmedia spaceand timeInbound logisticsOperationsOutbound logistics Marketing & sales Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 7. 7Advantages of a Cost Leadership Strategy Low-cost advantages reduce likelihood of pricingpressure from buyersSustained low-cost advantages may push rivals intoother areas, lessening price competitionNew entrants must face an entrenched cost leaderwithout experience to replicate cost advantagesLow-cost advantages should lessen attractiveness ofsubstitutesHigher margins allow low-cost producers towithstand supplier cost increases Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 8. 8Key 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 9. 9 Evaluating A Businesss Differentiation OpportunitiesA. 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, andmarketing 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 10. 10Evaluating A Businesss Differentiation Opportunities -- C. Examples of Ways Businesses Achieve Competitive Advantage Cutting edge production technology and product Technologyfeatures to maintain a distinct image and actual product development Programs to ensure technical competence of sales staffHuman resourceand marketing orientation of service personnelmanagement Comprehensive, personalized database to build knowledge of customers Generalto be used in customizing how products are sold, serviced, and replaced administrationQuality control presence at key supplier facilities; work withsuppliers new product development activitiesProcurementAllowing servicepersonnelPurchaseCareful JITExpensive, considerablesuperiorinspection of coordination informativediscretion toquality, well-products at with buyers; advertisingcrediteach step inuse of own or customersknownand promotionforproduction to captive repairscomponents, improve transportation to build brandraising quality performance service to imageand image ofand lower ensurefinal productsdefect ratestimelinessInbound logisticsOperations Outbound logistics Marketing & sales Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 11. 11Advantages of a Differentiation StrategyRivalry is reduced when a business successfuldifferentiates itselfBuyers are less sensitive to prices for effectivelydifferentiated productsBrand loyalty is hard for new entrants toovercome Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 12. 12Key Risks of Differentiation Imitation narrows perceived differentiation,rendering differentiation meaninglessTechnological changes that nullify pastinvestments or learning Cost difference between low-cost competitors andthe differentiated business becomes too great fordifferentiation to hold brand loyalty Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 13. 13Creating 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 14. 14 Evaluating A Businesss Rapid Response OpportunitiesA. 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, andmarketing 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 15. 15Evaluating A Businesss Rapid Response Opportunities -- C. Examples of Ways Businesses Achieve Competitive AdvantageUse of companywide technology sharing activities andautonomous product development teams to speed new Technologyproduct development development Develop self-managed work teams and decision makingHumanresourceat lowest levels to increase responsivenessmanagement Highly automated and integrated information processing system;Generalinclude major buyers in the systems on a real-time basisadministration Preapproved, online suppliers integrated into production Procurement Locate service techniciansWorking veryStandardizeJIT delivery Use of laptops at customerclosely withdies,plus linked directlyfacilities thatsuppliers tocomponents,partnering to operationsareinclude their and production geograph- with express to speed thechoice of equipment to icallywarehouse allow quickmail servicesorder processcloselocation to changeover toto ensure very and shortenminimizenew or special rapid delivery the sales cycledelivery time ordersInbound logisticsOperationsOutbound logistics Marketing & sales Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 16. 16Advantages of a Speed-Based Strategy Creates a way to lessen rivalry because firm has theavailability 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 fromsuppliers since they benefit from increased revenues Substitutes and new entrants are trying to keep upwith the rapid changes rather than introducing them Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 17. 17Key Risks of a Speed-Based Strategy Speeding up activities that have not beenconducted in a fashion prioritizing rapidresponse should only be done after attention totraining, reorganization, and/or reengineeringSome industries - stable, mature ones - may notoffer much advantage to a firm introducingsome forms of rapid responseIrwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 18. 18 Creating a Competitive Advantage Based on Market Focus Involves building cost, differentiation, and/or speedcompetitive advantages targeted to a narrow, marketniche Allows a firm toLearn its target customersBuild up organizational knowledge of ways to satisfy its target market better than larger rivalsRisks of focus strategiesCan attract major competitors to the segmentBelieving a focus strategy, by itself, creates success, rather than a form of low cost, differentiation, or speed Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 19. 19Industry Environments and Strategy Choices Emerging IndustriesIndustries Transitioning to Maturity Mature and Declining IndustriesFragmented Industries Global Industries Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 20. 20Characteristics 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 21. 21Strategic Options for Emerging Industries 1. Ability to shape industrys 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 22. 22Characteristics of Industries Transitioning to Maturity Intense competition for market share Increased sales to experienced, repeat buyers Greater emphasis on cost and service Declining profitabilityIrwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 23. 23Strategic 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 24. 24Pitfalls to Avoid in Competing in Maturing IndustriesA middle-ground approach to selecting a generic competitive strategySacrificing market share for short-term profitsWaiting too long to respond to price reductionsRetaining unneeded excess capacityEngaging in sporadic efforts to boost salesPlacing hopes on new products Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 25. 25Characteristics 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 needsIrwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 26. 26Strategic 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 27. 27Pitfalls to Avoid in Competing in Mature/Declining Industries Being overly optimistic about prospects for an industry revival Getting trapped in a profitless war of attritionHarvesting from a weak positionIrwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 28. 28Characteristics 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 29. 29Strategic Options for Fragmented Industries1. 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) Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 30. 30Characteristics 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 Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 31. 31Strategic Options: Pursuing Global Market Coverage1. License foreign firms to produce and distribute a firms products2. Maintain a domestic production base and export products3. Establish foreign-based plants and distribution in foreign countries Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 32. 32Strategic Options: Choosing a Generic Competitive Strategy 1. Broad-line global competition2. Global focus strategy3. National focus strategy4. Protected niche strategy Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 33. 33 Grand Strategy Selection MatrixOvercome weaknessesTurnaround orVertical integration retrenchmentConglomerate diversificationDivestiture Internal Liquidation External (redirectedII I(acquisitionresourcesor merger forwithin the III IV resourcefirm)capability) Concentrated growth Horizontal integration Market developmentConcentric diversification Product development Joint venture Innovation Maximize strengths Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc. 34. 34 Model of Grand Strategy Clusters Rapid market growth1. Concentrated 1. Reformulation of growthconcentrated growth2. Vertical integration 2. Horizontal integration3. Concentric 3. Divestiture diversification4. Liquidation StrongI II Weak competitivecompetitiveposition IV III position 1. Concentric1. Turnaround or retrenchmentdiversification 2. Concentric diversification 2. Conglomerate3. Conglomerate diversificationdiversification4. Divestiture 3. Joint venture5. Liquidation Irwin/McGraw-HillSlow market growth 2000 The McGraw-Hill Companies, Inc. 35. 35Conclusion: Selecting a Business Strategy to Achieve a Competitive Advantage Focusing on key sources of competitive advantage requiring total, consistent commitmentSelection ofappropriateWeighing skills, resources,businessorganizational requirements, andstrategie(s) risks of each source of competitive advantageinvolves Considering unique effects of thegeneric industry environment on a firms value chain activities Irwin/McGraw-Hill 2000 The McGraw-Hill Companies, Inc.