Tailoring Strategy to Fit

Specific Industry and

Company Situations

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

“In a turbulent age, the

only dependable

advantage is reinventing

your business model

before circumstances

force you to.Gary Hamel and Liisa

Valikangas

Matching Strategy toa Company’s Situation

Most important drivers shaping a firm’s strategic

options fall into two categories

Firm’s competitive capabilities, market

position, best opportunities

Nature of industry and competitive

conditions

Industry Transformation

Porter & Rivkin, HBSP 7-10-2000

Industry Transformation

• System change occurs in two modes:– Evolution– Revolution

• Periods of transformation give companies latitude to influence future industry structure

• Phases of transformation:– The trigger– Experimentation– Convergence

Industry Transformation

• Structural analysis is an important tool in setting strategy.

• New emphasis on:– Substitution– Shaping competition– Addressing uncertainty– Developing a posture

The Leader’s Disadvantage

Coughlin, HBSP, 2-11-2002

The Leader’s (Dis)advantage

Size Advantages• Scale economies• Scope economies• Network effects• Learning effects

Timing Advantages• Preemption• Reputation effects• Buyer switching

costs• Patents or

institutional barriers

• Pioneering costs• Demand uncertainty• Technology uncertainty

“Only the paranoid survive” Andy Grove

The Leader’s (Dis)advantage

• Little historical data for projections• Competing and/or proprietary technology• Desired product attributes are unknown• Buyers need a great deal of information to

purchase• Relatively low entry barriers• Experience curve effects

Characteristics of an Emerging Industry

Strategy Options for Competing in Emerging Industries

• Rapid and continuous innovation• Pursue mergers and acquisitions• Take a first-mover position• Seek new markets: customer; geographic• Reduce adoption costs for the buyer• Shift from building awareness to increasing frequency of

purchase or use• Perform value chain analysis• Reduce price

Strategic Hurdles for Companiesin Emerging Industries

• Raising capital to finance initial operations until– Sales and revenues take off– Profits appear– Cash flows turn positive

• Developing a strategy to ride the wave of industry growth– What market segments to pursue– What competitive advantages to go after

• Managing the rapid expansion of facilities and sales to position a company to contend for industry leadership

• Defending against competitors trying to horn in on the company’s success

Characteristics of Rapidly Growing Markets

• Increase in the number of competitors• Increase in price sensitivity• Importance of distribution networks• Creation of buyer loyalty

Strategy Options for Competing in Rapidly Growing Markets

• Drive down costs per unit• Pursue rapid product innovation • Gain access to additional distribution

channels and sales outlets• Expand a company’s geographic coverage• Expand product line to add models/styles to

appeal to a wider range of buyers

• Slowing demand breeds stiffer competition• More sophisticated buyers demand bargains• Greater emphasis on cost and service• “Topping out” problem in adding

production capacity• Product innovation and new

end uses harder to come by• International competition increases• Industry profitability falls• Mergers and acquisitions reduce number of rivals

Characteristics of a Mature Industry

Strategy Options for Competingin a Mature Industry

• Prune marginal products and models

• Emphasize innovation in the value chain

• Strong focus on cost reduction

• Increase sales to present customers

• Purchase rivals at bargain prices

• Expand internationally

• Build new, more flexible competitive capabilities

Strategic Pitfalls in a Maturing Industry

• Employing a ho-hum strategy with no distinctive features thus leaving firm “stuck in the middle”

• Being slow to mount a defense against stiffening competitive pressures

• Concentrating on short-term profits rather than strengthening long-term competitiveness

• Being slow to respond to price-cutting• Having too much excess capacity• Overspending on marketing• Failing to aggressively pursue cost reductions

Characteristics of Declining Industries

• Demand grows more slowly than economy as whole (or even declines)

• Advancing technology gives rise to better-performing substitute products

• Customer group shrinks

• Changing lifestyles and buyer tastes

• Rising costs of complementary products

• Competitive battle ensues among industry members for the available business

• Pursue focus strategy aimed atfastest growing market segments

• Stress differentiation based on qualityimprovement or product innovation

• Work diligently to drive costs down– Cut marginal activities from value chain – Use outsourcing– Redesign internal processes to exploit e-commerce– Consolidate under-utilized production facilities– Add more distribution channels– Close low-volume, high-cost distribution outlets– Prune marginal products

Strategy Options for Competingin a Stagnant or Declining Industry

End-Game Strategiesfor Declining Industries

• An end-game strategy can take either of two paths

– Slow-exit strategy involving

• Gradual phasing down of operations

• Getting the most cash flow from the business

– Fast-exit strategy involving

• Disengaging from an industry during early stages of decline

• Quick recovery of as much of a company’s investment as possible

Characteristics of High-Velocity Markets

• Rapid-fire technological change

• Short product life-cycles

• Entry of important new rivals

• Frequent launches ofnew competitive moves

• Rapidly evolvingcustomer expectations

• Invest aggressively in R&D• Initiate fresh actions every few months• Develop quick response capabilities – Shift resources– Adapt competencies– Create new competitive capabilities– Speed new products to market

• Use strategic partnerships to developspecialized expertise and capabilities

• Keep products/services fresh and exciting

Strategy Options for Competingin High-Velocity Markets

• Cutting-edge expertise

• Speed in responding to new developments

• Collaboration with others

• Agility

• Innovativeness

• Opportunism

• Resource flexibility

• First-to-market capabilities

Keys to Success in Competingin High Velocity Markets

Characteristics of a Fragmented Industry

• Absence of market leaders• Product/service is delivered to neighborhood

locations• Buyer demand is diverse• Low entry barriers • Absence of scale economies• Market for industry’s product/service may be globalizing• Exploding technologies• Industry is young and crowded with aspiring contenders

Examples of Fragmented Industries

Book publishingLandscaping and plant nurseries

Auto repairRestaurant industryPublic accountingWomen’s dresses

Meat packingPaperboard boxesHotels and motels

Furniture

Competing in a Fragmented Industry: The Strategy Options

• Construct and operate “formula” facilities

• Become a low-cost operator

• Specialize by product type

• Specialize by customer type

• Focus on limited geographic area

Fig. 8.2: Three Strategy Horizons for Sustaining Rapid Growth

Strategies Based on a Company’s Market Position

• Industry leaders

• Runner-up firms

• Weak or crisis-ridden firms

Industry Leaders:The Defining Characteristics

• Strong to powerful market position

• Well-known reputation

• Proven strategy

• Key strategic concern – How to sustaindominant leadership position

Strategy Options: Industry Leaders

Stay-on-the-offensive strategy

Fortify-and-defend strategy

Muscle-flexing strategy

Types of Runner-up Firms

• Market challengers

– Use offensive strategies to gain market share

• Focusers

– Concentrate on serving alimited portion of market

• Perennial runners-up

– Lack competitive strength to domore than continue in trailing position

I’m trying!

Characteristics of Runner-UpFirms

• When big size is a competitive asset, firmswith small market share face obstacles in trying to strengthen their positions

– Less access to economies of scale

– Difficulty in gaining customer recognition

– Inability to afford mass media advertising

– Difficulty in funding capital requirements

Strategic Optionsfor Runner-Up Firms

• When big size provides larger rivals with a cost advantage, runner-up firms have two options

– Build market share

• Lower costs and prices to grow sales or

• Out-differentiate rivals in ways to grow sales

– Withdraw from market

Strategic Approaches for Runner-Up Firms

1. Vacant niche strategy

2. Specialist strategy

3. Superior product strategy

4. Distinctive image strategy

5. Content follower strategy

Weak Businesses: Strategic Options

• Launch an offensive turnaround strategy (if resources permit)

• Employ a fortify-and-defend strategy(to the extent resources permit)

• Pursue a fast-exit strategy

• Adopt a harvest strategy (a slow-exit type of end-game strategy)

Achieving a Turnaround: The Strategic Options

• Sell off assets to generate cash and/or reduce debt

• Revise existing strategy

• Launch efforts to boost revenues

• Cut costs

• Combination of efforts

What Is a Harvest Strategy?

• Steers middle course between status quo and exiting quickly

• Involves gradually sacrificing market positionin return for bigger near-term cash flow/profit

• Objectives

– Short-term - Generate largestfeasible cash flow

– Long-term - Exit market

10 Commandments for Crafting Successful Business Strategies

1. Always put top priority on crafting and executing strategic moves that enhance a firm’s competitive position for the long-term and that serve to establish it as an industry leader.

2. Be prompt in adapting and responding to changing market conditions, unmet customer needs and buyer wishes for something better, emerging technological alternatives, and new initiatives of rivals. Responding late or with too little often puts a firm in the precarious position of playing catch-up.

10 Commandments for Crafting Successful Business Strategies

3. Invest in creating a sustainable competitive advantage, for it is a most dependable contributor to above-average profitability.

4. Avoid strategies capable of succeeding only in the best of circumstances.

5. Don’t underestimate the reactions and the commitment of rival firms.

6. Consider that attacking competitive weakness is usually more profitable than attacking competitive strength.

7. Be judicious in cutting prices without an established cost advantage.

10 Commandments for Crafting Successful Business Strategies

8. Employ bold strategic moves in pursuing differentiation strategies so as to open up very meaningful gaps in quality or service or advertising or other product attributes.

9. Endeavor not to get “stuck back in the pack” with no coherent long-term strategy or distinctive competitive position, and little prospect of climbing into the ranks of the industry leaders.

10. Be aware that aggressive strategic moves to wrest crucial market share away from rivals often provoke aggressive retaliation in the form of a marketing “arms race” and/or price wars.

Competition in the Video Game Console Industry