Copyright © 2012 Pearson Canada Inc. 0 Chapter 5 Creating Business Strategies

Copyright © 2012 Pearson Canada Inc. 1 LEARNING OBJECTIVES 1. Define generic strategies and explain how they relate to a company’s strategic position. 2. Describe the drivers of low-cost, differentiation, and focused strategic positions. 3. Identify and explain the risks associated with each generic strategic position. 4. Show how different strategic positions fit with stages of the industry life cycle. 5. Evaluate the quality of a company’s strategy.

Copyright © 2012 Pearson Canada Inc. 2 An Introduction to Business Strategies – Chapter Overview Framework for strategic positioning Conditions under which strategic positions are viable Strategic positions and the industry life cycle Testing the quality of a strategy

Copyright © 2012 Pearson Canada Inc. 3 Types of Strategies - Finding a Position that Works Strategic Positioning – How to situate a company relative to its rivals? A firm can gain advantage over rivals in two ways: 1) Differentiation 2) Low Cost

Copyright © 2012 Pearson Canada Inc. 4 No advantage over rivals Advantage over rivals Low-cost Differentiation Description Produce an essentially equivalent product at a lower cost Produce a differentiated product and charge suffici- ently higher prices to more than off-set the added costs of differentiation Types of Strategies - Finding a Position that Works

Copyright © 2012 Pearson Canada Inc. 5 Types of Strategies - Finding a Position that Works Examples Benefits Low-Cost Leadership Differentiation Ciram Gerdau AmeriSteel Wal-Mart Home Depot Coca-Cola and Pepsi CAE Maple Leaf Foods Honda, Yamaha, and Suzuki motorcycles Capture market share by offering lower-price or Earn higher margins by maintaining price parity Capture market share by offering higher quality at same price or Earn higher margins by raising prices over competitors Low-cost leadership and differentiation offer greater market share and profits.

Copyright © 2012 Pearson Canada Inc. 6 Low-costDifferentiation Strategic advantage Strategic target Narrow Broad Maple Leaf Foods Coca-Cola Dollarama Menu Foods Zellers Holt Renfrew Mechtronix Porter Airlines Wal-Mart Ciram Types of Strategies - Finding a Position that Works Strategic Positioning Examples

Copyright © 2012 Pearson Canada Inc. 7 Types of Strategies - Finding a Position that Works Chosen strategic position depends on: 1. Company resources and capabilities 2. Condition of industry environment

Copyright © 2012 Pearson Canada Inc. 8 Economic Drivers of Strategic Positioning Key Drivers of Low-Cost Advantage: Economies of Scale Learning Economies of Scope Production Technology Product Design Location advantages of sourcing inputs

Copyright © 2012 Pearson Canada Inc. 9 Economic Drivers of Strategic Positioning Economies of scale Learning Economies of scope Production technology Product design Location Economies of scale exist during a period of time if the average total cost for a unit of production is lower at higher levels of output You must review costs to assess whether economies of scale exist: –Fixed costs remain the same for different levels of production –Variable costs are the costs of variable inputs (such as raw materials and labour) and vary directly with output –Marginal cost is the cost of the last unit of production –Total cost is the sum of all production costs and always increases as output goes up –Average cost is the mean cost of total production during a given period (e.g., a year)

Copyright © 2012 Pearson Canada Inc. 10 Economic Drivers of Strategic Positioning Learning Economies of scope Production technology Product design Location Some sources of economies Specialization Spreading fixed costs Technological scale Better use of joint products Some sources of diseconomies Bureaucracy High labour costs Inefficient operations Economies of scale Diseconomies of Scale – Size Does Not Ensure Economies of Scale

Copyright © 2012 Pearson Canada Inc. 11 Economic Drivers of Strategic Positioning Economies of scale Learning Economies of scope Production technology Product design Location Costs decrease … as the scale of operation increases during any given period of time Economies of scale with the cumulative level of production since the production of the first unit Learning curve How Learning Differs from Scale

Copyright © 2012 Pearson Canada Inc. 12 Economic Drivers of Strategic Positioning Economies of scale Learning Economies of scope Production technology Product design Location If a firm produces two or more products and can share resources among two or more of these (e.g., share manufacturing machines) – thereby lowering the costs of each product – it benefits from economies of scope.

Copyright © 2012 Pearson Canada Inc. 13 Economic Drivers of Strategic Positioning Economies of scale Learning Economies of scope Production technology Product design Location Often, a new entrant who wants to compete against industry incumbents with significant scale and experience advantages, tries to match or beat incumbents’ costs by introducing a production technology that is subject to different economics (e.g., Co- Steel, EarthRenew Organics).

Copyright © 2012 Pearson Canada Inc. 14 Economic Drivers of Strategic Positioning Economies of scale Learning Economies of scope Production technology Product design Location Product design can sometimes be altered to lower a firm’s production costs (e.g., Canon vs. Xerox).

Copyright © 2012 Pearson Canada Inc. 15 Economic Drivers of Strategic Positioning Economies of scale Learning Economies of scope Production technology Product design Location Sometimes firms try to attain lower production costs by locating their operations in cheaper labour markets (e.g., Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek who manufactures in the US).

Copyright © 2012 Pearson Canada Inc. 16 Economic Drivers of Strategic Positioning Premium brand image Customization Convenience Unique styling Speed Unusually high-quality To drive up customer’s willingness to pay and generate demand sufficient to (1)Recoup added costs and (2)Generate enough profits to make strategy worthwhile Key DriversPurpose Key Drivers of Differentiation Advantage:

Copyright © 2012 Pearson Canada Inc. 17 Threats to Successful Strategic Positioning Low-cost Differentiation Economies of scale Learning Economies of scope Superior technology Product design Location DriversThreats New technology Inferior quality Social, political, and economic risks of outsourcing Premium brand image Customization Unique styling Speed Convenient access Unusually high-quality Failure to increase buyers’ willingness to pay higher prices Underestimating costs of differentiation Overfulfilling buyers’ needs Lower-cost imitation

Copyright © 2012 Pearson Canada Inc. 18 Threats to Successful Strategic Positioning Threats to Focus Positions: all of the above also being outfocused by competitors Threats to Integrated Positions: Straddling – unsuccessful attempt to integrate both low-cost and differentiation positions

Copyright © 2012 Pearson Canada Inc. 19 Strategies and Fit with Industry Conditions Phases of Industry Life Cycle 1. Embryonic 2. Growth 3. Mature 4. Decline

Copyright © 2012 Pearson Canada Inc. 20 Strategies and Fit with Industry Conditions Decline Mature Embryonic Growth Phases of industry life cycle ArenasVehiclesDifferentiatorsStagingEconomic Logic LocalInternal development Alliances to secure missing inputs or distribution access Target basic needs, minimal differentiation Tactics to gain early footholds Prices tend to be high Costs are high; focus is on securing additional capital to fund growth phase Penetrating adjacent markets Alliances for cooperation Acquisitions in targeted markets Increased efforts toward differentiation Low-cost leaders emerge through experience and scale advantages Integrated positions require choice of focusing first on cost or differentiation Margins can improve rapidly because of experience and scale Price premiums accrue to successful differentiators Globalizing Diversifying Mergers and acquisitions for consolidation More stable positions emerge across competitors Choices of international markets and new industry diversification need rational sequencing Consolidation results in fewer competitors (favouring higher margins) but declining growth demands cost containment and rationalization of operations Abandoning some arenas if decline is severe Focus on segments that provide most profitability Acquisitions for diversifying Divestitures to exit for some competitors Fewer competitors, less pressure for differentiation; declining sales, more pressure for cost savings Timing of exit from selected segments or businesses Rationalizing cost

Copyright © 2012 Pearson Canada Inc. 21 Testing the Quality of a Strategy Key Evaluation CriteriaSub-questions 1. Does your strategy exploit your key resources? With your particular mix of resources, does this strategy give you an advantageous position relative to your competitors? Can you pursue this strategy more economically than your competitors? Do you have the capital and managerial talent to do all you plan to do? Are you spread too thin? 2. Does your strategy fit with current industry conditions? Is there healthy profit potential where you're headed? Are you aligned with the key success factors of your industry? 3. Will your differentiators be sustainable? Will competitors have difficulty imitating you? If imitation cannot be foreclosed, does your strategy include a ceaseless regimen of innovation and opportunity creation to keep distance between you and the competition? 4. Are the elements of your strategy consistent and aligned with your strategic position? Have you made choices of arenas, vehicles, differentiators, staging, and economic logic? Do they fit and mutually reinforce each other? 5. Can your strategy be implemented?Will your stakeholders allow you to pursue this strategy? Do you have the proper complement of implementation levers in place? Is the management team able and willing to lead the required changes?