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© 2000 The McGraw-Hill Companies, Inc.
Irwin/McGraw-Hill
1
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
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