Chapter Eight

Business Strategy
Dr. LE THANH LONG

Contents
Decision on a low-cost, differentiation, or speedbased strategy The nature and value of a market focus strategy Requirements for business success at different stages of industry evolution Determine good business strategies in fragmented and global industries Diversity strategy consideration

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Choosing Business Strategies

Strategic analysis and choice is the phase of the strategic management process in which business managers examine and choose a business strategy that allows their business to maintain or create a sustainable competitive advantage

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Choosing Business Strategies

Strategic analysis and choice in single- or dominantproduct/service businesses can be addressed with two basic issues:
What strategies are most effective at building sustainable competitive advantages for single business units? Should dominant-product/service businesses diversify to build value and competitive advantage?

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Evaluating and Choosing Business Strategies

The two most prominent sources of competitive advantage can be found in the businesss cost structure and its ability to differentiate the business from competitors Businesses that create competitive advantages from one or both of these sources usually experience above-average profitability within their industry

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Evaluating and Choosing Business Strategies

The highest profitability levels are found in businesses that possess both types of competitive advantage at the same time to evaluate and choose business strategies based on core competencies and value chain activities that sustain both types of competitive advantage simultaneously

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Evaluating Cost Leadership Opportunities

Business success built on cost leadership requires the business to be able to provide its product or service at a cost below what its competitors can achieve

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Evaluating a Businesss Cost Leadership Opportunities

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Sustainable Low-Cost Activities

Some low-cost advantages reduce the likelihood of buyers pricing pressure Truly sustained low-cost advantages may push rivals into other areas New entrants competing on price must face an entrenched cost leader Low-cost advantages should lessen the attractiveness of substitute products Higher margins allow low-cost producers to withstand supplier cost increases
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Risks of a Cost Leadership Strategy

Many cost-saving activities are easily duplicated Exclusive cost leadership can be a trap Obsessive cost cutting can shrink other competitive advantages Cost differences often decline over time

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Evaluating Differentiation
Differentiation requires that the business have sustainable advantages that allow it to provide buyers with something uniquely valuable to them Differentiation usually arises from one or more activities in the value chain that create a unique value important to buyers Strategists use benchmarking and consider the 5 forces in considering differentiation

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Evaluating a Businesss Differentiation Opportunities

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Advantages of 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

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Risks of 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

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Evaluating Speed as a Competitive Advantage

Speed-based strategies, or rapid response to customer requests or market and technological changes, have become a major source of competitive advantage for numerous firms in todays intensely competitive global economy Speed involves the availability of a rapid response to a customer by providing current products quicker, accelerating new-product development or improvement, quickly adjusting production processes, and making decisions quickly.
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Evaluating a Businesss Rapid Response (Speed) Opportunities

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Speed can be created by

Customer responsiveness Product development cycles Product or service improvements Speed in delivery or distribution Information Sharing and Technology

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Risks of Speed-based Strategy

Speeding up activities that havent been conducted in a fashion that prioritizes rapid response should only be done after considerable attention to training, reorganization, and/or reengineering Some industries may not offer much advantage to the firm that introduces some forms of rapid response Customers in such settings may prefer the slower pace or the lower costs currently available, or they may have long time frames in purchasing
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Evaluating Market Focus as a Way to Competitive Advantage

Market focus: the extent to which a business concentrates on a narrowly defined market Small companies, at least the better ones, usually thrive because they serve narrow market niches Market focus allows some businesses to compete on the basis of low cost, differentiation, and rapid response against much larger businesses with greater resources

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Advantages of Market Focus

Focus lets a business learn its target customers and establish personal relationships in ways that differentiate the smaller firm or make it more valuable to the target customer. Low costs can also be achieved The greatest competitive weapon that can arise is rapid response.

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Risks of Market Focus

The risk of focus is that you attract major competitors who have waited for your business to prove the market Publicly traded companies built around focus strategies become takeover targets for large firms seeking to fill out a product portfolio Slipping into the illusion that it is focus itself, and not low cost, etc. that is creating the businesss success.

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Stages of Industry Evolution and Business Strategy Choices

The requirements for success in industry segments change over time Strategists can use these changing requirements, which are associated with different stages of industry evolution, as a way to isolate key competitive advantages and shape strategic choices around them

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Emerging Industries
Emerging industries are newly formed or reformed industries that typically are created by technological innovation, newly emerging customer needs, or other economic or sociological changes Emerging industries of the last decade have been the Internet browser, fiber optics, solar heating, cellular telephone, and online service industries.

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Business Strategies in Emerging Industries

Technologies that are most proprietary to the pioneering firms and technological uncertainty will unfold Competitor uncertainty because of inadequate information about competitors, buyers, and the timing of demand High initial costs but steep cost declines Few entry barriers

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Business Strategies in Emerging Industries

First-time buyers requiring initial inducement to purchase Inability to obtain raw materials and components until suppliers gear up to meet the industrys needs Need for high-risk capital because of the industrys uncertain prospects

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Emerging Industries
For success in this industry setting, business strategies require one or more of these features:
The ability to shape the industrys structure The ability to rapidly improve product quality and performance features Advantageous relationships with key suppliers and promising distribution channels The ability to establish the firms technology as the dominant one The early acquisition of a core group of loyal customers and then the expansion of that customer base The ability to forecast future competitors
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Competitive Advantages and Strategic Choices in Growing Industries

Rapid growth brings new competitors into the industry At this stage, growth industry strategies that emphasize brand recognition, product differentiation, and the financial resources to support both heavy marketing expenses and the effect of price competition on cash flow can be key strengths

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Growth Industries
For success in this industry setting, business strategies require one or more of the following features:
The ability to establish strong brand recognition The ability and resources to scale up to meet increasing demand Strong product design skills to be able to adapt products and services The ability to differentiate the firms product[s] from competitors entering the market R&D resources and skills to create product variations The ability to build repeat buying from established customers Strong capabilities in sales and marketing
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Competitive Advantages and Strategic Choices in Mature Industries

As an industry evolves, its rate of growth eventually declines Firms working with the mature industry strategies sell increasingly to experienced, repeat buyers who are now making choices among known alternatives Competition becomes more oriented to cost and service as knowledgeable buyers expect similar price and features
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Mature Industries
Strategy elements of successful firms in maturing industries often include the following:
Product line pricing Emphasis on process innovation that permits low-cost product design, manufacturing methods, and distribution synergy Emphasis on cost reduction Careful buyer selection to focus on buyers who are less aggressive, more closely tied to the firm, and able to buy more from the firm Horizontal integration to acquire rival firms whose weaknesses can be used to gain a bargain price International expansion to markets where attractive growth and limited competition still exist
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Competitive Advantages and Strategic Choices in Declining Industries

Declining industries are those that make products or services for which demand is growing slower than demand in the economy as a whole or is actually declining Focus on higher growth or a higher return Emphasize product innovation and quality improvement Emphasize production and distribution efficiency Gradually harvest the business
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Competitive Advantage in Fragmented Industries

A fragmented industry is one in which no firm has a significant market share and can strongly influence industry outcomes Tightly managed decentralization Formula facilities Increased value added Specialization Bare bones/no frills

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Competitive Advantage in Global Industries

A global industry is one that comprises firms whose competitive positions in major geographic or national markets are fundamentally affected by their overall global competitive positions
License foreign firms to produce and distribute the firms products Maintain a domestic production base and export products to foreign countries Establish foreign-based plants and distribution to compete directly in the markets of one or more foreign countries
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Four Generic Global Competitive Strategies

Broad-line global competitiondirected at competing worldwide in the full product line of the industry, often with plants in many countries, to achieve differentiation or an overall low-cost position. Global focus strategytargeting a particular segment of the industry for competition on a worldwide basis.

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Four Generic Global Competitive Strategies

National focus strategytaking advantage of differences in national markets that give the firm an edge over global competitors on a nation-by-nation basis. Protected niche strategyseeking out countries in which governmental restraints exclude or inhibit global competitors or allow concessions, or both, that are advantageous to localized firms.

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Grand Strategy Selection Matrix

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Model of Grand Strategy Clusters

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Building Value as a Basis for Choosing Diversification or Integration

The grand strategy selection matrix and model of grand strategy clusters are useful tools to help dominant product company managers evaluate and narrow their choices among alternative grand strategies Dominant product company managers who choose diversification or integration eventually create another management challenge

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