1. Chapter 5 Creating Business Strategies

2. 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.

3. An Introduction to Business Strategies – Chapter Overview
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Framework for strategic positioning
Conditions under which strategic positions are
viable
Strategic positions and the industry life cycle
Testing the quality of a strategy

4. 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

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

6. Types of Strategies - Finding a Position that Works
Low-cost leadership and differentiation offer greater market share and profits.
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

7. Types of Strategies - Finding a Position that Works
Strategic Positioning Examples
Wal-Mart
Ciram
Maple Leaf Foods
Coca-Cola
Broad
Strategic target
Holt Renfrew
Mechtronix
Porter Airlines
Dollarama
Menu Foods
Zellers
Narrow
Low-cost
Differentiation
Strategic advantage

8. Types of Strategies - Finding a Position that Works
Chosen strategic position depends on:
1. Company resources and capabilities
2. Condition of industry environment

9. 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

10. Economic Drivers of Strategic Positioning
Economies of scale
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)
Learning
Economies of scope
Production technology
Product design
Location

11. Economic Drivers of Strategic Positioning
Diseconomies of Scale – Size Does Not Ensure Economies of Scale
Economies of scale
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
Learning
Economies of scope
Production technology
Product design
Location

12. Economic Drivers of Strategic Positioning
Economies of scale
How Learning Differs from Scale
Learning
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
Economies of scope
Production technology
Product design
Location

13. Economic Drivers of Strategic Positioning
Economies of scale
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.
Learning
Economies of scope
Production technology
Product design
Location

14. Economic Drivers of Strategic Positioning
Economies of scale
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).
Learning
Economies of scope
Production technology
Product design
Location

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

16. Economic Drivers of Strategic Positioning
Economies of scale
Learning
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).
Economies of scope
Production technology
Product design
Location

17. Economic Drivers of Strategic Positioning
Key Drivers of Differentiation Advantage:
Key Drivers
Purpose
Premium brand image
Customization
Convenience
Unique styling
Speed
Unusually high-quality
To drive up customer’s willingness to pay and generate demand sufficient to
Recoup added costs and
Generate enough profits to make strategy worthwhile

18. Threats to Successful Strategic Positioning
Low-cost
Differentiation
Economies of scale
Learning
Economies of scope
Superior technology
Product design
Location
Drivers
Threats
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

19. 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

20. Strategies and Fit with Industry Conditions
Phases of Industry Life Cycle
1. Embryonic
2. Growth
3. Mature
4. Decline

21. Strategies and Fit with Industry Conditions
Phases of
industry life cycle
Arenas
Vehicles
Differentiators
Staging
Economic Logic
Local
Internal 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
Embryonic
Growth
Mature
Decline

22. Testing the Quality of a Strategy
Key Evaluation Criteria
Sub-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?