Strategy Formulation: Situation Analysis and Business Strategy

Strategy Formulation: Situation Analysis and Business Strategy Gain competitive advantage by exploiting core competencies in specific, individual product markets (Strategic Business Unit). Success depends on “O’s” and “T’s” in external environment and leveraging of resources, capabilities – distinctive competencies – to meet the “O’s” and “T’s”. Cost Leadership Perform value chain activities cost effectively Differentiation Perform value chain activities in unique manner.

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage - Cost Leadership Drivers for Controlling Costs Economies of Scale (longer production runs for fewer products, geographically organized sales forces, multiple product promotions, etc.) Learning and experience curve effects (modify product design to enhance manufacturing efficiencies, on-going discussion with suppliers, responsiveness to changes in customer preferences, etc.) Cost of key resource inputs (locational input factors, bargaining power vs. suppliers)

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage - Cost Leadership Revamping Makeup of Value Chain Simplifying product design Offering stripped down versions Shifting to streamlined or flexible manufacturing processes Using direct to end use approaches Relocating facilities close to suppliers, buyers, or both

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage - Cost Leadership Implications for Pursing Cost Leadership Strategy Low-cost advantages that reduce the likelihood of pricing pressures from buyers Truly sustained low-cost advantage may push rivals into other areas. New entrants competing on price must face an entrenched cost leader without the experience to replicate every cost advantage Low-cost advantages should lessen the attractiveness of substitute products. Higher margins allow low-cost producers to withstand supplier cost increases and often gain supplier loyalty over time.

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage - Cost Leadership Risks of Cost Leadership Strategy 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 (or firm may fail to detect consumer or competitor changes to differentiate in traditionally undifferentiated market). Cost differences often decline over time (obsolescence of technology providing original advantage)

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage - Differentiation Reminder: Acceptable cost – higher quality; Unique Performance of Value Chain Activities Purchasing and procurement activities (McDonald’s specifications on potatoes) Product R & D activities (greater recycling in Japanese electronics products) Production R & D activities (flexible manufacturing in automobile plants) Outbound logistics activities (faster and more accurate delivery in express services) Marketing and sales activities (number of technical sales reps available by phone in PC companies)

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage - Differentiation Implications of Pursing Differentiation Strategy Rivalry is reduced when a business successfully differentiates itself. Buyers are less sensitive to prices for effectively differentiated products. Brand loyalty is hard for new entrants to overcome. Risks of Pursing Differentiation Strategy Imitation narrows perceived differentiation, rendering differentiation meaningless. Technological changes that nullify past investments or learning. The cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty.

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage - Speed Can be created around: Product development cycles Product or service improvements Speed in delivery or distribution Information sharing and technology.

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage in Emerging Industries Business strategies require one or more of these features. 1) Ability to shape industry’s structure based on a) Timing of entry b) Reputation c) success in related industries or technologies d) role in industry associations 2) Ability to rapidly improve product quality and performance features 3) Advantageous relationships with key suppliers and promising distribution channels

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage in Emerging Industries Business strategies require one or more of these features. 4) The ability to establish the firm’s technology as the dominant one before technological uncertainty decreases. 5) The early acquisition of a core group of loyal customers and then expansion of that customer base through model changes, alternative pricing, and advertising. 6) The ability to forecast future competitors and the strategies they are likely to employ.

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage in the Transition to Industry Maturity Business strategies require one or more of these features. 1. Pruning product line by dropping unprofitable product models, sizes, and options from the firm’s product mix. 2. Emphasis on process innovation that permits low-cost product design, manufacturing methods, and distribution synergy. 3. Emphasis on cost reduction through exerting pressure on suppliers for lower prices, switching to cheaper components, introducing operational efficiencies, and lowering administrative and sales overhead. 4. Careful buyer selection to focus on buyers that are less aggressive, more closely tied to the firm, and able to buy more from the firm.

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage in the Transition to Industry Maturity Business strategies require one or more of these features. 5. Horizontal integration to acquire rival firms whose weaknesses can be used to gain a bargain price and are correctable by the acquiring firm. 6. International expansion to markets where attractive growth and limited competition still exist and the opportunity for lower-cost manufacturing can influence both domestic and international costs.

Strategy Formulation: Situation Analysis and Business Strategy Competitive Advantage in Mature and Declining Industries Business strategies require one or more of these features: Focus on segments within the industry that offer a chance for higher growth or a higher return. Emphasize product innovation and quality improvement, where this can be done cost effectively, to differentiate the firm from rivals and to spur growth. Emphasize production and distribution efficiency by streamlining production, closing marginal production facilities, and costly distribution outlets, and adding effective new facilities and outlets. Gradually harvest the business – generate cash by cutting down on maintenance, reducing models, and shrinking channels and make no new investments.

Strategy Formulation: Situation Analysis and Business Strategy Offensive Tactics Frontal Assault (Head-to-Head) Key to Success: need superior resources and/or capabilities to persevere Example: Sprint and MCI/WorldComm versus AT&T Flanking Maneuver Key to Success: attack competitor’s weakness Example: Cyrix introduced math coprocessor for Intel’s 386 chip that would run 20 times faster than Intel’s microprocessor.

Strategy Formulation: Situation Analysis and Business Strategy Offensive Tactics Bypass Attack Key to Success: change the rules of the game Example: Netscape chose to use Java “applets” in its Internet browser so that an operating system and specialized programs were no longer necessary to run applications on a PC.

Strategy Formulation: Situation Analysis and Business Strategy Defensive Tactics: used to lower probability of attack, or lessen intensity of attack. Raise Structural Barriers Offer full line of products in every profitable market segment to close off entry points Block channel access by signing exclusive agreements with distributors Raise buyer switching costs by offering low-cost training to users. Raise the cost of gaining trial users by keeping prices low on items new users are most likely to purchase.

Strategy Formulation: Situation Analysis and Business Strategy Defensive Tactics: used to lower probability of attack, or lessen intensity of attack. Increase Expected Retaliation Defend any possible erosion of market share through Price cuts or Matching competitor’s promotional activities Lower the Inducement for Attack Keep industry profits low (Southwest Airlines)

TOWS Matrix Internal Factors External Strengths (list key strengths) Weaknesses (list key weaknesses) Opportunities (list key opportunities) SO Strategies: strategies that use strengths to take advantage of opportunities WO Strategies: strategies that alleviate weaknesses and take advantage of opportunities Threats (list key threats) ST Strategies: strategies that use strengths to overcome threats WT Strategies: strategies that alleviate weaknesses and overcome threats

TOWS Matrix Internal Factors External Strengths * Distribution channels in Europe Weaknesses * Manufacturing inefficiency Opportunities * Economic integration in Europe SO Strategies: Push products through existing exclusive distribution channels SW Strategies: Increase market presence through price cuts gained through mfg cost reductions Threats * New product advances ST Strategies: Acquire new startup businesses creating innovative product solutions WT Strategies: Sell off product lines in low growth markets