© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 1 MANAGEMENT POLICY AND STRATEGY SESSION - VII Strategic Analysis and Choice in Single Product Businesses Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 2 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?

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 3 Prominent Sources of Competitive Advantage Cost leadership Differentiation Speed Market focus Sources of competitive advantage

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 4 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 system B. 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 5 Advantages of a Cost Leadership Strategy Low-cost advantages reduce likelihood of pricing pressure from buyers 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 Low-cost advantages should lessen attractiveness of substitutes Higher margins allow low-cost producers to withstand supplier cost increases

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 6 Key Risks of Cost Leadership Many cost-saving activities are easily duplicated Exclusive cost leadership can become a trap Obsessive cost cutting can shrink other competitive advantages involving key product attributes Cost differences often decline over time

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 7 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 8 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 9 Advantages of a Differentiation Strategy Rivalry is reduced when a business successful differentiates itself Buyers are less sensitive to prices for effectively differentiated products Brand loyalty is hard for new entrants to overcome

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 10 Key Risks of Differentiation Imitation narrows perceived differentiation, rendering differentiation meaningless 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 11 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 12 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 13 Evaluating A Business’s Rapid Response OpportunitiesContd…. 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 14 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 15 Advantages of a Speed-Based Strategy 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 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 16 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 Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 17 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 18 Industry Environments and Strategy Choices Emerging Industries Industries Transitioning to Maturity Mature and Declining Industries Fragmented Industries Global Industries

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 19 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 20 Strategic Options for Emerging Industries 1. Ability to shape industry’s structure 2. Ability to rapidly improve product quality 3. Establish favorable relations with key suppliers 4. Ability to establish technology as dominant force 5. Acquire a core group of loyal customers 6. Ability to forecast future competitors

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 21 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 22 Strategic Options for Maturing Industries 1. Prune the product line 2. Emphasize process innovation 3. Emphasize cost reductions 4. Focus on selecting loyal buyers 5. Pursue horizontal integration 6. Expand internationally

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 23 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 24 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 25 Strategic Options for Mature/Declining Industries 1. Focus on key market segments offering growth opportunities 2. Emphasize product innovation and quality improvement 3. Emphasize production and distribution efficiency 4. Gradually harvest the business

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 26 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 27 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 28 Strategic Options for Fragmented Industries 1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy 2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations 3. Increased value added - Difficult to differentiate products/services 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)

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 29 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

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 30 Key Components of Competing in Global Industries Approach to gain global market coverage Generic competitive strategy

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 31 Strategic Options: Pursuing Global Market Coverage 1. License foreign firms to produce and distribute a firm’s products 2. Maintain a domestic production base and export products 3. Establish foreign-based plants and distribution in foreign countries

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 32 Strategic Options: Choosing a Generic Competitive Strategy 1. Broad-line global competition 2. Global focus strategy 3. National focus strategy 4. Protected niche strategy

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 33 Grand Strategy Selection Matrix Overcome weaknesses Maximize strengths External (acquisition or merger for resource capability) Internal (redirected resources within the firm) Turnaround or retrenchment Divestiture Liquidation Vertical integration Conglomerate diversification Concentrated growth Market development Product development Innovation Horizontal integration Concentric diversification Joint venture III IVIII

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 34 Model of Grand Strategy Clusters Rapid market growth Slow market growth Weak competitive position Strong competitive position 1. Concentrated growth 2. Vertical integration 3. Concentric diversification 1. Reformulation of concentrated growth 2. Horizontal integration 3. Divestiture 4. Liquidation 1. Concentric diversification 2. Conglomerate diversification 3. Joint venture 1. Turnaround or retrenchment 2. Concentric diversification 3. Conglomerate diversification 4. Divestiture 5. Liquidation III IIIIV

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 35 Strategic Factor Analysis Summary (SFAS): Matrix

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 36 TOWS MATRIX

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 37 TOWS MATRIX FOR MAYTAG CORPORATION

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 38 Conclusion: Selecting a Business Strategy to Achieve 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