When a Low-Cost Provider Strategy Works Best Price competition among rival sellers is vigorous. Products are readily available from many sellers. Industry products are not easily differentiated. Most buyers use the product in the same ways. Buyers incur low costs in switching among sellers. Large buyers have the power to bargain down prices. New entrants can use introductory low prices to attract buyers and build a customer base.

When a Differentiation Strategy Works Best Diversity of buyer needs and uses for the product Many ways that differentiation can have value to buyers Few rival firms follow a similar differentiation approach Rapid change in technology and product features Market Circumstances Favoring Differentiation

Best-Cost Provider Strategy The Big Risk of a Best-Cost Provider Strategy—Getting Squeezed on Both Sides Best-Cost Provider Strategy High-End Differentiators Low-Cost Providers

Conditions That Lead to First-Mover Advantages When pioneering helps build a firm’s reputation with buyers and creates brand loyalty. When a first mover’s customers will thereafter face significant switching costs. When property rights protections thwart rapid imitation of the initial move. When an early lead enables movement down the learning curve ahead of rivals. When a first mover can set the technical standard for the industry.

The Dimensions Of Firm Scope Horizontal Scope Is the range of product and service segments that a firm serves within its focal market. Vertical Scope Is the extent to which a firm’s internal activities encompass one, some, many, or all of the activities that make up an industry’s entire value chain system, ranging from raw material production to final sales and service activities.

VERTICAL INTEGRATION STRATEGIES Vertically Integrated Firm Is one that participates in multiple segments or stages of an industry’s overall value chain. Vertical Integration Strategy Can expand the firm’s range of activities backward into its sources of supply and/or forward toward end users of its products.

Backwards Integration Towards Suppliers Integrating Backwards By: Achieving the same scale economies as outside suppliers—low-cost based competitive advantage. Matching or beating suppliers’ production efficiency with no drop-off in quality—differentiation-based competitive advantage. Reasons for Integrating Backwards: Reduction of supplier power Reduction in costs of major inputs Assurance of the supply and flow of critical inputs Protection of proprietary know-how

Integrating Forward to Enhance Competitiveness Reasons for Integrating Forward: To lower overall costs by increasing channel activity efficiencies relative to competitors. To increase bargaining power through control of channel activities. To gain better access to end users. To strengthen and reinforce brand awareness. To increase product differentiation.

Testing Whether Diversification Will Add Value for Shareholders The Attractiveness Test: Are the industry’s returns on investment as good or better than present business(es)? The Cost of Entry Test: Is the cost of overcoming entry barriers so great that profitability is too long delayed? The Better-Off Test: How much synergy will be gained by diversifying into the industry?

Better Performance through Synergy Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own. No Synergy (1+1=2) Evaluating the Potential for Synergy through Diversification Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own. Synergy (1+1=3)

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES Have competitively valuable cross-business value chain and resource matchups. Unrelated Businesses Have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level.

Strategic Fit, Economies of Scope, and Competitive Advantage Using Economies of Scope to Convert Strategic Fit into Competitive Advantage Transferring specialized and generalized skills and\or knowledge Combining related value chain activities to achieve lower costs Leveraging brand names and other differentiation resources Using cross-business collaboration and knowledge sharing

Economies of Scope Differ from Economies of Scale Are cost reductions that flow from cross-business resource sharing in the activities of the multiple businesses of a firm. Economies of Scale Accrue when unit costs are reduced due to the increased output of larger-size operations of a firm.

Key Indicators of Industry Attractiveness Social, political, regulatory, environmental factors Seasonal and cyclical factors Industry uncertainty and business risk Market size and projected growth rate Industry profitability The intensity of competition among market rivals Emerging opportunities and threats

Step 2: Evaluating Business-Unit Competitive Strength Relative market share Costs relative to competitors’ costs. Ability to match or beat rivals on key product attributes. Brand image and reputation. Other competitively valuable resources and capabilities. Strategic fit with the firm’s other businesses. Bargaining leverage with key suppliers or customers. Alliances and partnerships with suppliers and/or buyers. Profitability relative to competitors

8.3 A Nine-Cell Industry Attractiveness–Competitive Strength Matrix Star Cash cow Note: Circle sizes are scaled to reflect the percentage of companywide revenues generated by the business unit.

8.4 Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit

Evaluating strategy Is it contributing to the achievement of strategic intent? Fit with the external environment Internal consistency of the components of strategy Is there evidence that it is working? Financial metrics Strategic measures of performance

Porter’s tests of a good strategy Five tests of a good strategy (business level): a unique value proposition compared to other organizations a different, tailored, value chain clear tradeoffs and choosing what not to do (sets limits) activities that fit together and reinforce each other strategic continuity with continued improvement in realization

Course Learning Goals At the end of this course you will: Understand the concept of strategy and be able to identify the strategies of an organization. Be able to identify the competitive structure and major driving forces of an industry Understand the importance of strategic intent and visioning Have the ability to determine if a business has a competitive advantage Understand the importance of core competencies and be able to identify the core competencies of an organization Be able to analytically evaluate strategic options