chapter 6 Strategy McGraw-Hill/Irwin Principles of Management © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

7 - 3 Learning Objectives 1.Define strategy. 2.Explain why the goal of strategy is to attain superior performance. 3.Describe what is meant by competitive advantage. 4.Explain how business-level strategy can lead to competitive advantage. 5.Explain how operations strategy can lead to competitive advantage. 6.Explain how corporate-level strategy can lead to competitive advantage.

7 - 4 Strategy An action managers take to attain a goal of an organization.

7 - 5 Superior Performance Superior performance requires … High profitability Growth in profits over time

7 - 6 Wal-Mart First year of operation – 1962 – Rogers, Arkansas 1960s – 15 Wal-Mart stores – 276 stores with $1 billion in sales 1989 – 1,400 stores with $26 billion in sales 1983 – SAM’s Club 1988 – Supercenters Today -- More than 1.8 million associates worldwide, nearly 6,500 stores and wholesale clubs across 15 countries, and over $312 billion in sales. Source:

7 - 7 Competitive Advantage Competitive advantage: Advantage obtained when a firm outperforms its rivals. Distinctive competency: A unique strength that rivals lack. Sustainable competitive advantage: A distinctive competency that rivals cannot easily match or imitate. Barrier to imitation: Factors that make it difficult for a firm to imitate the competitive position of a rival. Legacy constraints: Prior investments in a particular way of doing business that are difficult to change and limit a firm’s ability to imitate a successful rival.

7 - 8 Competitive Advantage Distinctive competencies Competitive advantage Low costs Product differentiation Superior performance If protected from copying by barriers to imitation and legacy constraints competitive advantage will be sustained

7 - 9 U.S. Hospitals In the 20 th Century, U.S. Hospitals were considered as the premier, top-notch facilities for healthcare 21 st Century has brought the competitive pressures from focused providers Result: Competitive disadvantage and the need for change Source: US Hospitals for the 21 st Century, The McKinsey Quarterly, August 2006

Business-Level Strategy Business-level strategy: Strategy concerned with deciding how a firm should compete in the industries in which it has elected to participate. Low-cost strategy: Focusing managerial energy and attention on doing everything possible to lower the costs of the organization. Economies of scale: Cost advantage derived from a large sales volume. Differentiation strategy: Increasing the value of a product offering in the eyes of consumers.

Question What type of business level strategy does Wal- Mart employ? Would Wal-Mart be successful, if it were to change its business-level strategy? Explain.

The Low-Cost Value Cycles Lower costs Economies of scale Lower prices Increased demand Higher profitability and profit growth

Options for Exploiting Differentiation Increase prices more than costs Higher profitability and profit growth Option 1 Successful differentiation Moderate or no price increase Increased demand Economies of scale and lower costs Option 2

Segmenting the Market Markets are characterized by different types of consumers. Some are wealthy, some are not. Some are old, some are not. Some are influenced by popular culture, some never watch TV. Some care deeply about status symbols, others do not. Some place a high value on luxury, some on value of money.

Consumer Markets Consumer markets segmentation characteristics: Geographic Demographic Psychographic Behavioralistic Source:

Choosing Segments to Serve Focus Strategy: Serving a limited number of segments. Broad market strategy: Serving the entire market.

Types of Business-Level Strategy Broad low costBroad differentiation Focused low costFocused differentiation Many Segments served Few Low costDifferentiation Competitive theme

Question In the retail industry sector, Wal-Mart could be described as following ________ strategy, whereas Nordstrom could be described as following _________ strategy. a.broad low cost; broad differentiation b.focused low cost; broad low cost c.broad differentiation; broad low cost d.focused differentiation; focused low cost

Configuring the Value Chain Primary activities: Activities having to do with the design, creation, and delivery of the product; its marketing; and its support and after sales services. Support activities: Activities that provide inputs that allow the primary activities to occur. Organization architecture: The operations of the firm are embedded within the internal organization architecture of the enterprise, which includes the organization structure, incentives, control systems, people, and culture of the firm.

Strategic Fit Operations strategy Internal organization architecture Business- level strategy Industry conditions Supports Fits Supports

Competitive Tactics Competitive tactics: Actions that managers take to try to outmaneuver rivals in the market. Tactical pricing decisions: - Price war - Price signaling - Razor and razor blade pricing Tactical Product decisions: - Product proliferation - Bundling

Price Wars and Signaling Pepsi vs. Coca-cola Cellular phones Internet services Long distance call rates

Corporate-Level Strategy Corporate-level strategy: Strategy concerned with deciding which industries a firm should compete in and how the firm should enter or exit industries. Vertical integration: Moving upstream into businesses that supply inputs to a firm’s core business or downstream into businesses that use the outputs of the firm’s core business.

Disney Is Disney (a diversified entertainment company) vertically integrated? -Domestic and international cable networks -TV production and distribution -Internet and mobile operations -Theme parks, hotels, restaurants, and cruise line -Animated motion pictures and licensing -Disney Stores and Web sites Source: finance.yahoo.com

Diversification Diversification: Entry into new business areas. Related diversity: Diversification into a business related to the existing business activities of an enterprise by distinct similarities in one or more activities in the value chain. Unrelated diversity: Diversification into a business not related to the existing business activities of an enterprise by distinct similarities in one or more activities in the value chain.