Document 383019

Business Strategy
Chapter 8
Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
Determine why a business would choose a lowcost, differentiation, or speed-based strategy
Explain the nature and value of a market focus
Illustrate how a firm can pursue both low-cost
and differentiation strategies
Identify requirements for business success at
different stages of industry evolution
Determine good business strategies in
fragmented and global industries
Decide when a business should diversify
Evaluating and Choosing Business Strategies:
Seeking Sustained Competitive Advantage
The two most prominent sources of competitive
advantage can be found in the business’s cost
structure and its ability to differentiate the
business from competitors
Businesses that have one or more
sources/capabilities that let them
operate at a lower cost will
consistently outperform their
rivals that don’t
Evaluating Cost Leadership
Business success built on cost leadership
requires the business to be able to provide
its product or service at a cost below what
its competitors can achieve
Evaluating a Business’s Cost and Leadership
Sustainable Low-Cost Activities
Some low-cost advantages reduce the
likelihood of buyers’ pricing pressure
Truly sustained low-cost advantages may push
rivals into other areas
New entrants competing on price must face an
entrenched cost leader
Low-cost advantages should lessen the
attractiveness of substitute products
Higher margins allow low-cost producers to
withstand supplier cost increases
Risks of a Cost Leadership Strategy
Many cost-saving activities are easily
Exclusive cost leadership can be a trap
Obsessive cost cutting can shrink other
competitive advantages
Cost differences often decline over time
Evaluating Differentiation
Differentiation requires that the
business have sustainable advantages
that allow it to provide buyers with
something uniquely valuable to them
Differentiation usually arises from
one or more activities in the value
chain that create a unique value
important to buyers
Strategists use benchmarking and
consider the 5 forces in considering
Evaluating a Business’s Differentiation
Evaluating Speed as a Competitive
Speed-based strategies, or rapid
response to customer requests or
market and technological changes,
have become a major source of
competitive advantage for numerous
firms in today’s intensely competitive
global economy
Evaluating a Business’s Rapid Response (Speed)
Speed can be created by:
Customer responsiveness
Product development cycles
Product or service improvements
Speed in delivery or distribution
Information Sharing and Technology
Risks of Speed-based Strategy
Speeding up activities that haven’t been
conducted in a fashion that prioritizes rapid
response should only be done after
considerable attention to training,
reorganization, and/or reengineering
Some industries may not offer much
advantage to the firm that introduces some
forms of rapid response
Customers in such settings may prefer the
slower pace or the lower costs currently
available, or they may have long time frames
in purchasing
Evaluating Market Focus as a Way to
Competitive Advantage
Market focus: the extent to which
a business concentrates on a
narrowly defined market
Small companies, at least the better
ones, usually thrive because they
serve narrow market niches
Market focus allows some
businesses to compete on the basis
of low cost, differentiation, and
rapid response against much larger
businesses with greater resources
Risks of Market Focus
The risk of focus is that you attract major
competitors who have waited for your
business to “prove” the market
Managers evaluating opportunities to build
competitive advantage should link
strategies to
Value chain activities that exploit low cost,
differentiation, and rapid response
Stages of Industry Evolution and Business
Strategy Choices
The requirements for success in industry
segments change over time
Strategists can use these changing requirements,
which are associated with different stages of
industry evolution, as a way to isolate key
competitive advantages and shape strategic
choices around them
Emerging Industries
Emerging industries are newly
formed or re-formed industries that
typically are created by technological
innovation, newly emerging
customer needs, or other economic
or sociological changes
There are no “rules of the game”
Business Strategies in Emerging
Technologies that are most proprietary to the pioneering
firms and technological uncertainty will unfold
Competitor uncertainty because of inadequate
information about competitors, buyers, and the timing of
High initial costs but steep cost declines
Few entry barriers
First-time buyers requiring initial inducement to purchase
Inability to obtain raw materials and components until
suppliers gear up to meet the industry’s needs
Need for high-risk capital because of the industry’s
uncertain prospects
Emerging Industries
For success in this industry setting, business strategies
require one or more of these features:
The ability to shape the industry’s structure
The ability to rapidly improve product quality and
performance features
Advantageous relationships with key suppliers and
promising distribution channels
The ability to establish the firm’s technology as the
dominant one
The early acquisition of a core group of loyal customers
and then the expansion of that customer base
The ability to forecast future competitors
Competitive Advantages and Strategic Choices in
Growing Industries
Rapid growth brings new competitors into the
At this stage, growth industry strategies that
emphasize brand recognition, product
differentiation, and the financial resources to
support both heavy marketing expenses and
the effect of price competition on cash flow
can be key strengths
Growth Industries
For success in this industry setting, business strategies
require one or more of the following features:
 The ability to establish strong brand recognition
 The ability and resources to scale up to meet increasing
 Strong product design skills to be able to adapt products
and services
 The ability to differentiate the firm’s product[s] from
competitors entering the market
 R&D resources and skills to create product variations
 The ability to build repeat buying from established
 Strong capabilities in sales and marketing
Competitive Advantages and Strategic Choices in
Mature Industries
As an industry evolves, its rate of growth
eventually declines
Firms working with the mature industry
strategies sell increasingly to experienced,
repeat buyers who are now making choices
among known alternatives
Competition becomes more oriented to cost
and service as knowledgeable buyers
expect similar price and features
Mature Industries
Strategy elements of successful firms in maturing
industries often include the following:
Product line pricing
Emphasis on process innovation that permits low-cost
product design, manufacturing methods, and distribution
Emphasis on cost reduction
Careful buyer selection to focus on buyers who are less
aggressive, more closely tied to the firm, and able to buy
more from the firm
Horizontal integration to acquire rival firms whose
weaknesses can be used to gain a bargain price
International expansion to markets where attractive growth
and limited competition still exist
Competitive Advantages and Strategic Choices in
Declining Industries
Declining industries are those that make
products or services for which demand is
growing slower than demand in the economy as a
whole or is actually declining
Focus on higher growth or a higher return
Emphasize product innovation and quality
Emphasize production and distribution
Gradually harvest the business
Competitive Advantage in
Fragmented Industries
A fragmented industry is one in which no
firm has a significant market share and can
strongly influence industry outcomes
Tightly managed decentralization
“Formula” facilities
Increased value added
Bare bones/no frills
Competitive Advantage in
Global Industries
A global industry is one that comprises
firms whose competitive positions in
major geographic or national markets are
fundamentally affected by their overall
global competitive positions
License foreign firms to produce and distribute the
firm’s products
Maintain a domestic production base and export
products to foreign countries
Establish foreign-based plants and distribution to
compete directly in the markets of one or more foreign
Four Generic Global
Competitive Strategies
Broad-line global competition
Global focus strategy
National focus strategy
Protected niche strategy
Grand Strategy Selection Matrix
Model of Grand Strategy Clusters
Building Value as a Basis for Choosing
Diversification or Integration
The grand strategy selection matrix
and model of grand strategy clusters
are useful tools to help dominant
product company managers evaluate
and narrow their choices among
alternative grand strategies
Dominant product company managers who
choose diversification or integration
eventually create another management