Strategy: A view from the Top Team 4

 Forecasting the effectiveness of strategy.  Six types of industry settings.  Three contexts that relate to evolutionary stages of industry:  Emerging, Growth, Mature and Declining.  Three industry environments that pose strategic challenges:  Fragmented, Deregulating, and Hypercompetitive industries.  Two critical attributes of successful firms in dynamic industries:  Speed and Innovation

 New industries present new opportunities.  Immature technologies.  Costs are high and unpredictable.  Entry barriers are low.  Supplier relationships are underdeveloped.  Distribution channels just emerging.

 Timing is critical  First mover advantage  Can shape customer expectations  Define competitive rules of the game.  Brief window of opportunity to establish themselves as industry leaders.

 Reducing risk  Utilizing strategic leadership  Leadership opportunities:  Ability to control product and process development through:  superior technology  quality  customer knowledge  leveraging relationships with suppliers and distributors  leverage early loyal customers

 Many challenges in growth.  Buyers can distinguish between competitive offerings.  Segmentation often occurs.  Cost control is important.  International markets become important.

 Follower Advantages:  Time to evaluate alternative technologies.  Can delay investment in risky projects.  Can imitate or leapfrog superior products and technologies.  Take advantage of existing market segments.  Internal Development or Acquisition?  Internal Development  Creating a new business  Slow and expensive  Joint Ventures, Alliances, and Acquisitions

 Two major issues to consider when entering a new market:  What are the structural barriers to entry?  Level of investment  Access to production and distribution facilities  Threat of overcapacity  How will incumbent firms react to intrusion?  Potential retaliation by incumbent firms  More likely if growth is low  Should focus on industries in flux where incumbents may be slow to react

 Important issues:  Balance between differentiation and low cost.  Compete in multiple or single industry segments.  Growth masks strategic errors and lets companies survive.  To earn profits:  Concentrate on segments that offer higher growth and return.  Differentiate, reduce cost and rejuvenate segment growth with regards to product and process innovation.

 To earn profits:  Streamline production and delivery.  Gradually “harvest” the business for more promising products and industries.  Strategic pitfalls to avoid:  Too optimistic about the industry or company position.  Inability to choose between a broad or focused competitive approach.  Investing too much with too little return.  Trading market share for profitability in short term pressures.

 Strategic pitfalls to avoid:  Not competing on price.  Resisting industry changes.  Too much emphasis on new product development as opposed to improving existing products.  Retaining excess capacity.  Exit Decisions  Difficult  Government restrictions, labor obligations, contracts.  Effects on customers, suppliers and distributors.

 Early development of a product market characterized by:  Slow growth in sales  R&D emphasis  Technological change  Operating losses  Need for resources  Success at the emerging stage:  Technical skill  First in new markets  Marketing advantage to create awareness

 Rapid growth success:  Brand recognition  Product differentiation  Financial resources for marketing and price competition  Maturity stage characteristics:  Continued sales growth at decreasing rate  Industry segments increase  Slow change in product design  Intense competition  Decline stage success:  Cost advantages  Superior supplier and customer relationships  Financial control

 Fragmented Industries are those in which no single company or small group of firms has a large enough market share to strongly affect the industry structure or outcomes.  Many Areas of Economy share this trait including:  Retail stores  Distribution businesses  Professional services  Small manufacturing

 In order to do well in fragmented markets, strategies should be focused on:  Product  Customer  Type of order/service  Geographic area  Creative Strategy (such as technological breakthroughs) can unlock hidden sources of advantage and dramatically change the dynamics of the industry.  Entrepreneurial ventures of Wayne Huizinga are prime exlamples.

 Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces.  How did it effect the U.S?  California Pacific Gas and Electric

1. Broad-based distribution companies- take early pricing actions, eliminate cross subsidies between products or segments, and conserve resources. EX: AT&T - quickly reduced their prices to high-volume business customers to counter MCI and Sprint’s aggressive marketing efforts.

2. Low-cost competitors- catalysts for change in a deregulating environment.  Most become successful off finding their niche players over time.  Key is to find the right segment to target. 3. Focused segment marketers- target value added segments from the outset.  Their staying power depends on the strength of their relationship relationships with their customers.  By developing customer information systems  Upgrading products or services to lock in their customers.

4. Share utilities- provide low-cost competitors with economies of scale by sharing costs among many companies.  Sharing utilities are essential to the evolution of an industry  EX:  Battle among different airline reservation systems. At most few will ultimately survive, and likely one will become the leading industry standard.

 When new competitors enter, the market demands reduced prices, which can result from efficiencies and competitive effects.  Research by Florissen, Maurer, Schmidt, and Vahlenkamp identifies four factors that incumbents should use to adjust their prices correctly after deregulation takes effect.

1. Competitors’ prices-  Plan to measure up the most relevant competitor.  Competitors with well known brands, often have the best chance of luring away an incumbent ‘s customers. 2. Switching rates-  Incumbent (company already in place before deregulation) should adjust prices downward as necessary to stay competitive and not allow a price gap to encourage customer to leave, however they do not need to become the cheapest priced company to retain the bulk of their customers.

3. Customer value-  There are 2 types of customers.  Those who are willing to pay greater premiums.  Produce more revenue from cross-selling initiatives.  Those who look for the best price available throughout their market area.  Their defection result in small profit losses.  High margin customers are usually less price sensitive, and are more concerned with quality and service.  Lowering prices for these type of customers is costly and does little good.

4. Cost to serve-  New competitors are unprepared to price services effectively meaning competitively and profitability.  Incumbents are in far better position, because they understand the true cost of their service.  Therefore, rather then reducing their prices to levels they cannot afford, they can moderate their profit margins and still keep majority of their customers.

Hypercompetitive strategies- designed to enable the company to gain an advantage over their competitors by disrupting the market with quick and innovative change.  The intense rivalry in a hypercompetitive environment often results in:  Short product life cycles  Emergence of new technologies  Competition from unexpected players  Major shift in market boundaries  EX: Telecommunication Companies  Bundling options.

 Speed and Innovation are the foremost requirements for success in a hypercompetitive environment.  Without speed, a company is at a severe disadvantage because competitors will capitalize on market opportunities first.  It is crucial that hypercompetitive companies be able to innovate rapidly and then follow up on that innovation with equally quick manufacturing, marketing, and distribution of their products.

 The final requirement for success in a hypercompetitive environment is strong market awareness.  Having strong customer focus allows firms to identify a customer’s needs while uncovering new and previously untapped markets for their products.  Over the long term, sustainable profits are possible only when entry to barriers restrict competition.

6 actions established companies can use to counter current and new competitors:  Retool strategy and restore its importance  Manage transition economics  Fight aggregation with disaggregation  Seek out new demand and new growth  Use a portfolio of initiatives to increase speed and flexibility  Count on a strategic risk

 Speed  Newest, least understood of critical success factors  Pace of progress that company displays in responding to current or anticipated business needs  Response times in meeting customer expectations  Innovating and commercializing new products and services  Changing strategy to benefit from emerging market and technological realities  Continuously upgrading its transformation processes to improve customer satisfaction and financial returns

 Speed Merchants  Respond to industry challenges to increase their customer responsiveness  Build strategies based on rapid pace of their operations  Examples: AAA, Dell, Domino’s, CyberGate  Distinct, identifiable sources of pressure  Emphases on speed places new cost, cultural, and change process requirements on company  Several implementation methods to accelerate firm’s speed of operations

 4 Principal Sources of Pressure:  Customers  Demand responsiveness, want quality products/services quickly  Need for creating a new basis for competitive advantage  Increasing speed w/ which products are innovated, developed, manufactured, and distributed is associated with success of firms in establishing new competitive advantage and important cost benefits  Competitive pressures  When facing intense competitive pressures, speed is often one of the few options for a company to choose to differentiate its offering  Industry shifts  Global competition, exponential advancements in technology, shifting customer demands combine to produce shorter life cycles and the need for faster product development

 Every aspect of an organization should be focused on the pace at which work is accomplished  Executives must create “fast” culture within their organizations  Action must be taken to: refocus business mission, create a speed-compatible culture, upgrade communications within business, focus business process reengineering, commit to new performance metrics

 Refocusing the Business Mission  Articulate a long-term vision for a speed-oriented company  Provides basis for shared expectations, planning, and performance evaluation regarding the increase in speed throughout the organization  Creating a Speed-Compatible Culture  Company can facilitate speed by nurturing an organizational culture that is conducive to speed and by adopting an evaluation system that rewards those who can increase aspects of organizational speed  Change management techniques: includes TQM, benchmarking, time-based competition, outsourcing, and partnering

 Upgrading Communication  Increase in speed requires dramatically upgraded methods for clear and timely communication  All parties expect instantaneous communication between customers, manufacturers, suppliers, and service providers  Refocusing Business Process Reengineering  BPR is undertaken to reorganize a company to eliminate barriers that create distance between employees and customers  Involves fundamentally rethinking and redesigning a process to enable a customer focus to permeate all phases of business activity

 Committing to New Performance Metrics  Specific set of metrics has proven valuable in gauging a firm’s progress in improving performance from its investments in speed  Includes sales volume, innovation rate, customer satisfaction, processing time, cost controls, and marketing specifics  Innovation support, learning, and initiatives

 Streamlining Operations  Speed-enhanced ability to obtain quick post- implementation feedback from the marketplace  Respond with unparalleled speed in making adjustments  Upgrading Technology  Companies able to roll out new product information faster  Common goal is to connect manufacturers with retailers to enhance information sharing and to streamline and accelerate product distribution  Forming Partnerships  Sharing business burdens is a proven way to shorten time needed to improve market responsiveness  Example: Ford Motor Company with GM & DaimlerChrysler

 Value creation greatly depends on innovation  Innovation is a major strategic challenge for most companies  “Innovators’ Dilemma”  Disruptive Innovation  Launching product s that are not as good as existing products, but they are simple and more affordable Sustaining Innovation Innovation that just focuses on “better products

 Creating a culture of innovation eludes many companies because it transcends traditional strategic planning practices.  Strategic planning often centers on closely related products rather than on opportunities to drive demand.  Contrasting that, Innovation is being creative when anticipating and fulfilling customer needs

 Fostering a culture of innovation takes time and effort. (5 steps to take)  A business needs a top-level commitment to innovation  A business needs a long-term focus  A business needs a flexible organization structure  They also need a combination of loose and tight planning and control  Finally they need a system of appropriate incentives

 The Global Innovation study in 2006 found no significant statistical relationship between R&D spending, innovation, and measures of financial success.  This study identified the 1,000 companies worldwide that spent the most on R&D BCG also held a survey in 2006 that contrasted the previous one. They found that innovation translates into superior stock-market performance

 Forrester Research study  67% from manufacturing firms considered themselves more innovative than competitors  Only 7% identified themselves as very successful in meeting their innovation performance goals Respondents in the BCG survey questioned the effectiveness of their R&D spending 48% of those surveyed were unsatisfied with the financial returns on their investments in innovation

 The reason for the lack of success in translating innovation into profitable performance surfaced in a growth study of the Fortune 50.  They concluded that the single biggest growth inhibitor for large companies was “mismanagement of the innovation process

 R&D investments fail to generate successful products and financial gains for three main reasons.  Failure to develop truly innovative products  Failure to successfully commercialize innovative products once on the market  Failure to market innovative products in a timely manner

 Recommendations of Improving performance through Innovation  Plan synergy between strategy and innovation  Areas where new opportunities exist provide for a firm’s best chances to profit from innovation  Look outside for the company’s internal environment  Profits from innovation in business systems can match those from product development  Alliances and VC programs help to share risks  Involve customers early and often