Tailoring Strategy to Fit Specific Industry and Company Situations McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Gary Hamel and Liisa Valikangas “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 to a Company’s Situation Nature of industry and competitive conditions Most important drivers shaping a firm’s strategic options fall into two categories Firm’s competitive capabilities, market position, best opportunities

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 Timing Advantages Scale economies Scope economies Network effects Learning effects Preemption Reputation effects Buyer switching costs Patents or institutional barriers

The Leader’s (Dis)advantage Pioneering costs Demand uncertainty Technology uncertainty “Only the paranoid survive” Andy Grove

Characteristics of an Emerging Industry 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

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 Companies in 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

Characteristics of a Mature Industry 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

Strategy Options for Competing in 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

Strategy Options for Competing in a Stagnant or Declining Industry Pursue focus strategy aimed at fastest growing market segments Stress differentiation based on quality improvement 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

End-Game Strategies for 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 of new competitive moves Rapidly evolving customer expectations

Strategy Options for Competing in High-Velocity Markets 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 develop specialized expertise and capabilities Keep products/services fresh and exciting

Keys to Success in Competing in High Velocity Markets Cutting-edge expertise Speed in responding to new developments Collaboration with others Agility Innovativeness Opportunism Resource flexibility First-to-market capabilities

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 publishing Landscaping and plant nurseries Auto repair Restaurant industry Public accounting Women’s dresses Meat packing Paperboard boxes Hotels 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 sustain dominant 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 a limited portion of market Perennial runners-up Lack competitive strength to do more than continue in trailing position I’m trying!

Characteristics of Runner-Up Firms When big size is a competitive asset, firms with 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 Options for 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 position in return for bigger near-term cash flow/profit Objectives Short-term - Generate largest feasible 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