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MANAGEMENT POLICY AND STRATEGYSESSION - VII

Strategic Analysis and Choice in

Single Product Businesses

Prof. SushilDepartment of Management

StudiesIndian Institute of Technology,

DelhiINDIA

Email: sushil@dms.iitd.ernet.in

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Key Issues: Strategic Choice in Single Businesses

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

Sources of competitiv

e advantage

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Evaluating A Business’s 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 or delivery

•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 targets

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Advantages of a Cost Leadership Strategy

Low-cost advantages reduce likelihood of pricing pressure from buyers

Low-cost advantages reduce likelihood of pricing pressure from buyers

Sustained low-cost advantages may push rivals into other areas, lessening price competition

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

New entrants must face an entrenched cost leader without experience to replicate cost advantages

Low-cost advantages should lessen attractiveness of substitutes

Low-cost advantages should lessen attractiveness of substitutes

Higher margins allow low-cost producers to withstand supplier cost increases

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

Many cost-saving activities are easily duplicated

Exclusive cost leadership can become a trapExclusive cost leadership can become a trap

Obsessive cost cutting can shrink other competitive advantages involving key product attributes

Obsessive cost cutting can shrink other competitive advantages involving key product attributes

Cost differences often decline over timeCost differences often decline over time

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Evaluating A Business’s Differentiation Opportunities

A. 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

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Evaluating A Business’s Differentiation Opportunities

Contd….

B. Organizational Requirements Supporting Differentiation

•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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Advantages of a Differentiation Strategy

Rivalry is reduced when a business successful differentiates itself

Rivalry is reduced when a business successful differentiates itself

Buyers are less sensitive to prices for effectively differentiated products

Buyers are less sensitive to prices for effectively differentiated products

Brand loyalty is hard for new entrants to overcome

Brand loyalty is hard for new entrants to overcome

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Key Risks of Differentiation

Imitation narrows perceived differentiation, rendering differentiation meaningless

Imitation narrows perceived differentiation, rendering differentiation meaningless

Technological changes that nullify past investments or learning

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

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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Evaluating A Business’s Rapid Response Opportunities

A. 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

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Evaluating A Business’s Rapid Response Opportunities Contd….

B. Organizational Requirements Supporting Rapid Response

•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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Activities Conducive to Building Speed-Based Competitive Advantages

Customer responsiveness

Product development

cycles

Speed in delivery or distribution

Information sharing and technology

Product or service

improvements

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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

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

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

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

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

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

Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response

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Creating a 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 strategy, by itself, creates

success, rather than a form of low cost, differentiation, or speed

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Industry Environments and Strategy Choices

Emerging IndustriesEmerging Industries

Industries Transitioning to MaturityIndustries Transitioning to Maturity

Mature and Declining IndustriesMature and Declining Industries

Fragmented IndustriesFragmented Industries

Global 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 inducement 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 1. Ability to shape industry’s structure

2. Ability to rapidly improve product quality

2. Ability to rapidly improve product quality

3. Establish favorable relations with key suppliers

3. Establish favorable relations with key suppliers

4. Ability to establish technology as dominant force

4. Ability to establish technology as dominant force

5. Acquire a core group of loyal customers 5. Acquire a core group of loyal customers

6. Ability to forecast future competitors 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 buyers

Greater emphasis on cost and service

Declining profitability

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Strategic Options for Maturing Industries

1. Prune the product line1. Prune the product line

2. Emphasize process innovation2. Emphasize process innovation

3. Emphasize cost reductions3. Emphasize cost reductions

4. Focus on selecting loyal buyers4. Focus on selecting loyal buyers

5. Pursue horizontal integration5. Pursue horizontal integration

6. Expand internationally6. 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 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 by

Technological substitution

Demographic shifts

Shifts in consumer needs

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Strategic Options for Mature/Declining Industries

1. Focus on key market segments offering growth opportunities

1. Focus on key market segments offering growth opportunities

2. Emphasize product innovation and quality improvement

2. Emphasize product innovation and quality improvement

3. Emphasize production and distribution efficiency

3. Emphasize production and distribution efficiency

4. Gradually harvest the business4. Gradually harvest the business

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Pitfalls to Avoid in Competing in Mature/Declining Industries

Being overly optimistic about prospects for an industry revival

Getting trapped in a profitless war of attrition

Harvesting from a weak position

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Characteristics 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

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Strategic Options for Fragmented Industries

1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy

1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy

2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations

2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations

3. Increased value added - Difficult to differentiate products/services

3. Increased value added - Difficult to differentiate products/services

4. Specialization - Product type, customer type, type of order, geographic areas

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)

5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)

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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

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

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

2. Maintain a domestic production base and export products

2. Maintain a domestic production base and export products

3. Establish foreign-based plants and distribution in foreign countries

3. 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 1. Broad-line global competition

2. Global focus strategy 2. Global focus strategy

3. National focus strategy 3. National focus strategy

4. Protected niche strategy 4. Protected niche strategy

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Grand Strategy Selection Matrix

Overcome weaknesses

Maximize strengths

External (acquisitio

n or merger for resource

capability)

Internal (redirecte

d resources

within the firm)

Turnaround or retrenchmentDivestitureLiquidation

Vertical integrationConglomerate diversification

Concentrated growthMarket developmentProduct developmentInnovation

Horizontal integrationConcentric diversificationJoint venture

IIIIVIII

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Model of Grand Strategy Clusters

Rapid market growth

Slow market growth

Weak competiti

ve position

Strong competiti

ve 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 retrenchment2. Concentric diversification3. Conglomerate diversification4. Divestiture5. Liquidation

III

IIIIV

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DurationKey Strategic Factors(Select the most importantopportunities/threats from EFAS,and the most important strengthsand weaknesses from IFAS)

Weight RatingWeightedScore

Short

Intermediate

Long

Comments Quality Maytag Culture (S) .10 5 .50 X Quality key to success Hoover’s international

orientation (S).10 3 .30 X Name recognition

Financial position (W) .10 2 .20 X High debt Global positioning (W) .15 2 .30 X Only in N.A., U.K., and

Australia Economic integration of

European Community (O).10 4 .40 X Acquisition of Hoover

Demographics favour quality (O) .10 5 .50 X Maytag quality Trend to Super Stores (O+T) .10 2 .20 X Weak in this channel Whirlpool and Electrolux (T) .15 3 .45 X Dominate industry Japanese appliance companies

(T).10 2 .20 Asian presence

Total Score 1.00 3.05

Strategic Factor Analysis Summary (SFAS): Matrix

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INTERNAL FACTORS (IFAS)

EXTERNALFACTORS (EFAS)

Strengths (S)List 5-10 internal strengths here

Weaknesses (W)List 5-10 internal weaknesseshere

Opportunities (O)List 5-10 externalopportunities here

SO StrategiesGenerate strategies here that usestrengths to take advantage ofopportunities

WO strategiesGenerate strategies here thattake advantage ofopportunities by overcomingweaknesses

Threats (T)List 5-10 external threats here

ST strategiesGenerate strategies here that usestrengths to avoid threats

WT strategiesGenerate strategies here thatminimize weaknesses andavoid threats

TOWS MATRIX

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INTERNAL FACTORS

EXTERNALFACTORS

Strengths (S)S1 Quality Maytag cultureS2 Experienced top ManagementS3 Vertical integrationS4 Employee relationsS5 Hoover’s international orientation

Weaknesses (W)W1 Process-oriented R&DW2 Distribution channelsW3 Financial positionW4 Global positioningW5 Manufacturing facilities

Opportunities (O)01Economic integration of European Community02 Demographics favour quality03 Economic development of Asia04 Opening of Eastern Europe05 Trend toward super stores

SO Strategies Use worldwide Hoover distribution

channels to sell both Hoover andMaytag major appliances

Find joint venture partners inEastern Europe and Asia

WO strategies Expand Hoover’s presence in

continental Europe byimproving Hoover quality andreducing manufacturing anddistribution costs.

Emphasize superstore channelfor all non-Maytag brands

Threats (T)T1 Increasing government regulationT2 Strong US competitionT3 Whirlpool and Electrolux positioned for global economyT4 New product advancesT5 Japanese appliance companies

ST strategies Acquire Raytheon’s appliance

business to increase US marketshare.

Merge with a Japanese major homeappliance company

Sell off all non-Maytag brands andstrongly defend Maytag’s’ US niche.

WT strategies Sell off Dixie-Narco Division to

reduce debt. Emphasize cost reduction to

reduce break-even point. Sell out to Raytheon or a

Japanese firm.

TOWS MATRIX FOR MAYTAG CORPORATION

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Conclusion: Selecting a Business Strategy toAchieve a Competitive Advantage

Focusing on key sources of competitive advantage

requiring total, consistent commitment

Weighing skills, resources, organizational

requirements, and risks of each source of competitive

advantage

Considering unique effects of the generic industry

environment on a firm’s value chain activities

Selection of appropriate business strategie(s) involves