1. CHAPTER 7
Strategic Analysis and Choice in Single- or Dominant-Product Businesses: Building Sustainable Competitive Advantages

2. Chapter Topics
Evaluating and Choosing Business Strategies: Seeking Sustained Competitive Advantage
Selected Industry Environments and Business Strategy Choices
Dominant Product/Service Businesses: Evaluating and Choosing to Diversify to Build Value

3. Key Issues: Strategic Analysis and Choice
1. What strategies are most effective at building sustainable competitive advantages for single business units?
2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

4. Prominent Sources of Competitive Advantage
Cost leadership
Speed
Market focus
Differentiation

5. Ex. 7-2: Evaluating a Business’s Cost Leadership Opportunities
A. Skills and Resources
Sustained capital investment and access to capital
Process engineering skills
Intense supervision of labor or core technical operations
Products or services designed for ease of manufacture or delivery
Low-cost distribution systems
B. Organizational Requirements
Tight cost control
Frequent, detailed control reports
Continuous improvement and benchmarking orientation
Structured organization and responsibilities
Incentives based on meeting strict, usually quantitative targets

6. Ex. 7-2 (contd.) Profit Margin Process innovation
Lowering production costs
Product redesign to reduce
number of components
Technology
development
Safety training for all employees reduces absenteeism,
downtime, and accidents
HRM
General
administration
Reduced level of management
cuts corporate overhead
Computerized, integrated info. systems
Reduces errors and costs
Profit
Favorable long-term contracts; captive suppliers or
key customer for supplier
Procurement
Cooperative advtg. creates local cost advantage in buying media space/time
Subcontracted service techs. Repair products correctly first time or bear costs
Service
Global, online suppliers provide automatic restocking of orders based on sales
Economy of scale in plant reduces equipment costs and depreciation
Computerized routing lowers transportation expense
Margin
Inbound logistics
Operations
Outbound logistics
Mkt & sales

7. Advantages of a Cost Leadership Strategy
Low-cost advantages reduce likelihood of pricing pressure from buyers
Sustained low-cost advantages may push rivals into other areas, lessening price competition
New entrants must face an entrenched cost leader without experience to replicate cost advantages
Low-cost advantages should lessen attractiveness of substitutes
Higher margins allow low-cost producers to withstand supplier cost increases

8. Key Risks of Cost Leadership
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
Cost differences often decline over time

9. Ex. 7-3: Evaluating a Business’s Differentiation Opportunities
A. Skills and Resources
Strong marketing abilities
Product engineering
Creative talent and flair
Strong capabilities in basic research
Corporate reputation for quality or technological leadership
Long tradition in an industry or unique combination of skills
Strong cooperation from channels/suppliers
B. Organizational Requirements
Strong coordination among functions in R&D, product development, and marketing
Subjective measurement and incentives instead of quantitative measures
Amenities to attract highly skilled labor, scientists, and creative people
Tradition of closeness to key customers
Some personnel skilled in sales and operations – technical and marketing

10. Ex. 7-3 (contd.) Profit Margin
Cutting-edge production technology and product features to maintain a distinct image and actual product
Technology
development
Programs to ensure technical competence of sales staff and a marketing orientation of service personnel
HRM
General
administration
Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, replaced
Profit
Quality control presence at key supplier facilities; work with suppliers’ new product development activities
Procurement
Purchase superior quality well-known components, raising quality/image of final products
Expensive, informative advertising
and
promotion to build image
Service
personnel have considerable discretion to credit
customers
for repairs
Service
Careful inspection of products at each step to improve product performance and lower defect rate
JIT coordination with buyers; use of own/captive transportation service to ensure timeliness
Margin
Inbound logistics
Operations
Outbound logistics
Mkt & sales

11. Advantages of a 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

12. Key Risks of Differentiation
Imitation narrows perceived differentiation, rendering differentiation meaningless
Technological changes that nullify past investments or learning
Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

13. Creating a Competitive Advantage Based on Speed
Has become a major source of competitive advantage for many firms
Involves the availability of a rapid response to customers by
Providing current products quicker
Accelerating new product development or improvement
Quickly adjusting production processes
Making decisions quickly

14. Ex. 7-4: Evaluating a Business’s Rapid Response Opportunities
A. Skills and resources
Process engineering skills
Excellent inbound and outbound logistics
Technical people in sales and customer service
High levels of automation
Corporate reputation for quality or technical leadership
Flexible manufacturing capabilities
Strong downstream partners
Strong cooperation from suppliers of major components
B. Organizational Requirements
Strong coordination among functions in R&D, product development, and marketing
Major emphasis on customer satisfaction in incentive programs
Strong delegation to operating personnel
Tradition of closeness to key customers
Some personnel skilled in sales and operations – technical and marketing
Empowered customer service personnel

15. Ex. 7-4 (contd.) Profit Margin
Use of companywide technology sharing activities and autonomous product dev. teams to speed new product dev.
Technology
development
Develop self-managed work teams and decision-making at the lowest levels to increase responsiveness
HRM
General
administration
Highly automated and integrated information processing system. Include major buyers in the system on a real-time basis
Profit
Preapproved, online suppliers integrated into production
Procurement
Working very closely with suppliers to include their choice of warehouse to minimize delivery time
Standardize dies, etc. and prod. equipment to allow quick changeover to new or special order
JIT delivery plus partnering with express mail services to ensure very rapid delivery
Use of laptops linked directly to operations to speed order process
Locate service technicians at customer facilities that are geographically close
Service
Margin
Operations
Outbound logistics
Mkt & sales
Inbound logistics

16. Activities Conducive to Building Speed-Based Competitive Advantage
Customer responsiveness
Product development cycles
Product or service improvements
Speed in delivery or distribution
Information sharing and technology

17. Advantages of a Speed-Based Strategy
Creates a way to lessen rivalry because firm has the availability of something a rival may not
Allows firm to charge buyers more, engender loyalty, or enhance its position relative to its buyers
Generates cooperation and concessions from suppliers since they benefit from increased revenues
Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

18. Key Risks of a Speed-Based Strategy
Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering
Some industries – stable, mature ones – may not offer much advantage to a firm introducing some forms of rapid response

19. Creating Competitive Advantage Based on Market Focus
Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche
Allows a firm to
“Learn” its target customers
Build up organizational knowledge of ways to satisfy its target market better than larger rivals
Risks of focus strategies
Can attract major competitors to the segment
Believing a focus, by itself, creates success, rather than a form of low cost, differentiation, or speed

20. “Typical” Industry Settings
Emerging Industries
Industries Transitioning to Maturity
Mature and Decline Industries
Fragmented Industries
Global Industries

21. Characteristics of Markets in Emerging Industries
Proprietary technology and technological uncertainty
Competitor uncertainty regarding inadequate information
High initial cost structure
Few entry barriers
First-time buyers require initial inducements
Inability to easily obtain raw materials and components
Need for high-risk capital

22. Strategic Options for Emerging Industries
Ability to shape industry’s structure
Ability to rapidly improve product quality
Establish favorable relations with key suppliers
Ability to establish technology as dominant force
Acquire a core group of loyal customers
Ability to forecast future competitors

23. Characteristics of Industries Transitioning to Maturity
Intense competition for market share
Increased sales to experienced, repeat buyers
Greater emphasis on cost and service
Industry capacity “tops” out
New products and new applications harder to come by
Increase in international competition
Declining profitability

24. Strategic Options for Maturing Industries
Prune the product line
Emphasize process innovation
Emphasize cost reductions
Focus on selecting loyal buyers
Pursue horizontal integration
Expand internationally

25. Pitfalls to Avoid in Competing in Maturing Industries
A middle-ground approach to selecting a generic competitive strategy
Sacrificing market share for short-term profits
Waiting too long to respond to price reductions
Retaining unneeded excess capacity
Engaging in sporadic or irrational efforts to boost sales
Placing hopes on “new” products

26. Characteristics of Mature/Declining Industries
Demand grows more slowly than economy, or even declines
Slowing growth is caused by
Technological substitution
Demographic shifts
Shifts in consumer needs

27. Strategic Options for Mature/Declining Industries
Focus on key market segments offering growth opportunity
Emphasize product innovation and quality improvement
Emphasize production and distribution efficiency
Gradually harvest the business

28. Pitfalls to Avoid in Competing in Mature/Declining Industry
Being overly optimistic about prospects for an industry revival
Harvesting from a weak position
Getting trapped in a profitless war of attrition

29. Characteristics of Fragmented Industries
No firm has a significant market share
No firm can significantly influence industry outcomes
Examples
Professional services
Retailing
Wood and metal fabrication
Agricultural products
Funeral industry

30. Strategic Options for Fragmented Industries
Tightly managed decentralization
Intense local coordination, high personal service, local autonomy
“Formula” facilities
Standardized, efficient, low-cost facilities at multiple locations
Increased value added
Difficult to differentiate products/services
Specialization
Product type, customer type, type of order, geographic areas
Bare bones/no frills
Intense low margin competition (low overhead, minimum wage)

31. Characteristics of Global Industries
Differences in prices and costs among countries due to
Currency exchange fluctuations
Differences in wage and inflation rates
Other economic factors
Differences in buyer needs across countries
Differences in competitors and ways of competing among countries
Differences in trade rules and governmental regulations across countries

32. Key Components of Competing in Global Industries
Generic competitive strategy
Approach to gain global market coverage

33. Strategic Options: Pursuing Global Market Coverage
License foreign firms to produce and distribute a firm’s products
Maintain a domestic production base and export products
Establish foreign-based plants and distribution in foreign countries

34. Strategic Options: Choosing a Generic Competitive Strategy
Broad-line global competition
Global focus strategy
National focus strategy
Protected niche strategy

35. Ex. 7-9: Grand Strategy Selection Matrix
Overcome weaknesses
Turnaround or
retrenchment
Divestiture
Liquidation
Vertical integration
Conglomerate diversification
Internal
(redirected resources within the firm)
External
(acquisition or merger for resource capability) II I
III IV
Concentrated growth
Mkt. Development
Prod. Development
Innovation
Horizontal integration
Concentric diversification
Joint venture
Maximize strengths

36. Ex. 7-10: Model of Grand Strategy Clusters
Rapid market growth
Concentrated growth
Vertical Integration
Concentric diversification
Reformulation of concentrated growth
Horizontal integration
Divestiture
Liquidation
Strong competitive position I II
Weak competitive position IV
III
Turnaround or retrenchment
Concentric diversification
Conglomerate diversification
Divestiture
Liquidation
Concentric diversification
Conglomerate diversification
Joint venture
Slow market growth

37. Opportunities to Build Value
Opportunities to build value via diversification, integration, or joint venture strategies are usually found in market-related, operating-related, and management activities. Such opportunities center around reducing costs, improving margins, or providing access to new revenue sources more cost effectively than traditional internal growth options via concentration, market development, or product development