Shana Hartford April Miller Brittany Snethkamp Brian Cote Carly Buell Ryan Buell Austin Stewart Business Unit Strategy: Contexts and Special Dimensions Strategy: A View from the Top Chapter 7

Business Unit Strategy: In order to identify a clear business unit strategy a company must analyze the industry characteristics in which it will be competing. First, we look at three contexts that relate to the various evolutionary stages of an industry: emerging, growth, and mature and declining. Next we discuss three industry environments that pose a unique strategic challenges: fragmented, deregulating, and hypercompetitive. Speed and innovation are also discussed as hypercompetitive characteristics continue to increase in many industries.

Strategy in Emerging Industries New industries emerge in a number of ways. For example, technological breakthroughs developed a new industry for the telephone industry with cellular devices. Improvements: Technologies are typically immature meaning competitors will seek to improve existing designs and processes or even leapfrog them altogether with next generation technology Costs are typically high and unpredictable, entry barriers are low, supplier relationships are underdeveloped, and distribution channels are just emerging making a lot of room for improvement and market share increases.

Strategy in Emerging Industries (cont.) First Mover Advantage: The first company to come out with a new product or service has the “first mover advantage”. Timing is critical! Opportunity to shape customer standards and set the competitive rules of the game. Reduce Risk: Ability to control product and process development through superior technology, quality, or customer knowledge Ability to leverage existing relationships with suppliers and distributors Ability the leverage access to a core group of early, loyal customers

Strategy in Growth Industries Competitors tend to focus on expanding their market shares which creates a host of challenges in growing industries. Cost control becomes an important element of strategy as unit margins shrink and new products and applications are harder to find International markets must be considered as globalization of competition continues to arise.

Strategy in Growth Industries (cont.) During the early growth stages companies tend to add more products, models, sizes, and flavors to appeal to an increasingly segmented market Toward the end of the growth stages cost considerations become a priority. Process innovation and redefinitions of supplier and distributor relations are important dimensions of cost control. Finally horizontal integration becomes attractive as a way of consolidating a company’s market position

New Entrants in Growing Industries New companies that enter the market during the final stages of growth are known as “followers” Advantages: Opportunity to evaluate alternative technologies Delay investment in risky projects Initiate or leapfrog superior product and technology offerings

New Entrants in Growing Industries (cont.) Entrants must decide to enter into a market either through internal development or acquisition. In order to make this decision companies must analyze what the structural barriers to entry are as well as how existing firms will react to the intrusion into the market Structural barriers may include the level of investment required, access to production or distribution facilities, and the threat of overcapacity Retaliation of competitors is lower in industries where growth is low, products are highly differentiated, and fixed costs are high New entrants should focus on industries where the reaction may be slow and therefore the firm can influence the industry structure and where the benefits of entry exceed costs.

Important issues as maturity sets and decline threatens: Carefully choosing balance between differentiation and low cost postures Deciding whether to compete in multiple or single industry segments

Strategy in Mature and Declining Industries Firms earn profits during the long maturity stage of an industry’s growth if: 1. Concentrate on segments that offer chances for higher growth or higher return 2. Manage product and process innovation aimed at further differentiation, cost reduction, or rejuvenating segment growth 3. Streamline production and delivery to cut costs 4. Gradually “harvest” the business in preparation for a strategic shift to better products or industries

Mature and declining industries contain strategic pitfalls that should be avoided: 1. An overly optimistic view of the industry or the company’s position within it 2. Lack of strategic clarity shown by a failure to choose between a broad-based and a focused competitive approach 3. Investing too much for too little return = “cash trap” 4. Trading market share for profitability in response to short- term performance pressures 5. Unwillingness to compete on price 6. Resistance to industry structural changes or new practices 7. Placing too much emphasis on new product development compared with improving existing ones 8. Retaining excess capacity

Industry Evolution and Functional Priorities Early development of a product market typically Has slow growth in sales Emphasis on R&D Rapid technological change in the product Operating losses and Need for slack to support temporarily unprofitable operations Success at this stage is associated with Technical skills Being the1st in the new markets Marketing advantage that creates widespread awareness

Rapid Growth brings new competitors Success factors Brand awareness Product differentiation Financial resources to support: Heavy marketing expenses Price competition Sales growth continues at a decreasing rate into Maturity stage: - # of industry segments increases, but change in production design slows considerably - Promotional or pricing advantages & differentiation become key strengths - Efficient production is crucial in this stage

When industry moves into the Decline stage… Strengths center on Cost advantages Superior supplier Customer relationships Financial control Competitive advantage can exist if a firm serves gradually shrinking markets that competitors choose to leave.

Strategy in Fragmented Industries Fragmented Industries Retail sectors, Distribution businesses, Professional service, Small manufacturing Work best when: Entry/exit barriers are low Few economies of scale Cost structures unattractive Product services highly diverse Local control

Entrepreneurial Venture H. Wayne Huizinga Waste Management Corporation went public in 1971 Hundreds of “Mom-and-Pop” garbage companies acquired through stock Gained capitalization of $5 million, and after Huizinga’s departure in 1984, market share was $3 billion

Strategy in Deregulating Industries Deregulation- shaped many industries, important dynamic is strategic move timing Developed Pattern: – 1. Large number of entrants rush in – 2. industry profitability deteriorated – 3. pattern of segmented profitability altered – 4. Variance in profitability – 5. 2 waves of merges and acquisitions – 6. few competitors remained

Deregulation of Energy Markets Competitors faced loss and opportunities Deregulation began in 1996 – Destroyed most California electrical power companies Pacific Gas and Electric – Reported $9 billion worth in debt and filed chapter 11 bankruptcy – 2 primary reasons: » 1. PG&E incurred billion in debt and weren’t able to pass it along to customers » 2. provision of deregulation disallowed company from expanding power generators to other regions of US, making power travel further and costs increased

Deregulation Challenges 4 distinct strategic postures: 1. broad based distribution companies 2. low cost entrants 3. focused segment marketers 4. shared utilities

Pricing in Newly Deregulated Industries Research by Florissen, Maurer, Schmidt, Vahlenkamp Found 4 factors Incumbents should use to adjust prices correctly after deregulation 1. Competitors Prices 2. Switching Rates 3. Customer Value 4. Cost to Serve

Strategy in Hypercompetitive Industries Hypercompetitive industries are characterized by intense rivalry. Hypercompetitive strategies are designed to enable the company to gain a quick advantage over competitors by disrupting the market with quick and innovative change.

Strategy in Hypercompetitive Industries The intense rivalry in a hypercompetitive environment often results in short product life cycles, the emergence of new technologies, competition from unexpected players, repositioning by current players, and major shifts in market boundaries. In a hypercompetitive market, successful companies are able to manipulate competitive conditions to create advantage for themselves and destroy the advantages enjoyed by others.

Success in a Hypercompetitive Environment Three major qualities: Speed and innovation Superior short-term strategic focus Strong market awareness Over the long term, sustainable profits are possible only when entry barriers restrict competition.

Competitive Reactions Under Extreme Competition Six actions that established companies can consider to counter the fresh, aggressive, and innovative moves of competitors. 1. Retool strategy and restore its importance 2. Manage transition economics 3. Fight aggregation with disaggregation 4. Seek out new demand and new growth 5. Use a portfolio of initiatives to increase speed and flexibility 6. Count on strategic risk

Speed Speed is emerging as a key success factor in a growing number of industries The pace of progress that a company displays in responding to current or anticipated business needs Newest and least understood of the critical success factors Multiplying business applications of the Internet have led to the elevation of speed Speed merchants- Merchants who built their strategies on the rapid pace of their operations AAA, Dell, Domino’s

Pressures to Speed Pressures come from: Customers- Demand responsiveness. New emphasis on getting products quickly Need for creating a new basis for competitive advantage- Increasing the speed on which products are innovated, developed, manufactured, and distributed Competitive pressures- Competitive viability often mandates changes for the acceleration of speed Industry shifts- Speed is important to survival in industries with short product life cycles

Requirements of Speed A speed initiative requires that every aspect of an organization be focused on the pace at which work is accomplished Refocusing the Business Mission- Articulate a long-term vision for a speed-oriented company Creating a Speed Compatible Culture- A company can facilitate speed by adopting an evaluation system that rewards those that can increase the organizations speed Upgrading Communication- All parties expect instantaneous communication between everyone

Requirements of Speed Refocusing Business Process Reengineering- Used to eliminate barriers that create distance between employees and customers Committing to New Performance Metrics- Sales volume, innovation rate, customer satisfaction, processing time, cost controls, and marketing specifics Methods to Speed- Three major categories: streamlining operations, upgrading technology, and forming partnerships

Methods to Speed Streamlining Operations Many companies enter new markets with insufficient information With a speed-enhanced ability to obtain post-implementation feedback and to respond with unparalleled speed, successful innovations no longer need to be flawless at introduction Upgrading Technology Using the latest informational technologies to create speed, companies are able to roll out new product information faster Common goal is to connect manufacturers with retailers to enhance information sharing and accelerate product distribution Forming Partnerships Sharing business burdens is a way to shorten the time needed to improve market responsiveness Ford’s partnership with General Motors and DaimlerChrysler

Creating Value Through Innovation Sustaining Innovation-Innovation that focuses on “better” products. Incumbent industry leaders and competitors mostly engage in this. Some sustaining innovations are simple, incremental, year-to- year improvements. Others are dramatic, breakthrough technologies ex. Transition from analog to digital and from digital to optical. These innovations provided a better product and allowed companies to receive higher profit margins through sales.

Creating Value Through Innovation Disruptive Innovation-Launching products that may not be as good as the existing products. They come off not attractive to current customers. Most times these products are simple and affordable. Referred to as disruptive innovation because it disrupts the established basis of competition. Strong evidence suggests that the only way to survive a disruptive attack is by creating a separate unit.

Creating Value Through Innovation IBM is a good example of surviving a disruptive attack. Mainframe computers were disrupted by the minicomputer, so IBM created a separate business unit in Minnesota. PC later disrupted the minicomputer, so IBM set up a separate business unit in Florida.

Creating Value Through Innovation Minnesota Mining & Manufacturing’s (3M) reasons for success. Support innovation from research and development to customer sales and support. Understand the future by trying to anticipate and analyze future trends. Establish stretch goals (a measure that encourages growth). Empower employees to meet goals. Support board networking across the company. Recognize and reward innovative people.

Creating Value Through Innovation Successful companies common characteristics for creating a innovating environment. Top-level commitment to innovation Long-term focus Flexible organization structure Combination of loose and tight planning control A system of appropriate incentives

Relationship Between Innovation and Performance Evidence on the relationship between R&D, innovation, and financial performance is inconsistent. Booz Allen Hamilton: found no significant statistical relationship. Boston’s Consulting Group: found that innovation translates into superior long-term stock market performance. Monitor Group: found a strong positive correlation between innovation and long-term financial performance.

Innovation and Profitability Research suggest that executives lack confidence in their companies‘ ability to use innovation to drive profits. EX: 67% of manufacturing firms considered themselves more innovative than competitors, but Only 7% actually meet their innovative performance goals. Reasons for the lack of success in translating innovation into profitable performance: Study concluded the single biggest growth inhibitor for large companies was “mismanagement of the innovation process.” Another explanation is the lack of measurement metrics or the failure to implement them effectively.

Main Reasons For R&D Failures 1. Failure to develop truly innovative products 2. Failure to successfully commercialize innovative products once they are on the market 3. Failure to market innovative products in a timely manner —Probability of success with innovation is small.

Reasons New Products Fail It is estimated that it takes 125 to 150 new initiatives to generate one marketplace success. Koudal and Coleman found that more than 85% of new product ideas never make it to market—of those that do make it 50% - 70% fail. Stevens and Burley found overall success rate of 60% from 360 industrial firms launching 576 new products. Ogawa and Pillar confirmed problems of new product commercialization—new products suffer failure rates of 50% or greater. Delays in getting product to market can be extremely costly. McKinsey & Co. found a product 6 months late to market misses out on 33% of potential profits for product’s lifetime.

Recommendations for Improving Performance Through Innovation 1. Plan synergy between strategy and innovation. 2. Areas where new opportunities and competitive advantage exist provide a firm’s best chances to profit from innovation. 3. Profits from innovation in business systems can match those from product development. 4. Look outside of the company’s internal environment to increase the likelihood of success and reduce the risks of innovation. 5. Alliances and corporate venture capital programs allow a firm to share risks associated with exploration investments. 6. Involve customers early and often in the innovation process