Module 6

Matching Strategy to a Companys Situation

Module Outline
Strategies for Competing in Emerging Industries Strategies for Competing in a Maturing Industry Strategies for Firms in Declining Industries Strategies for Firms in Fragmented Industries Strategies for Competing in International Markets Strategies for Industry Leaders Strategies for Runner-Up Firms Strategies for Weak Businesses Thirteen Commandments for Crafting strategies

Overview: Matching Strategy to a Companys Situation

The most important drivers shaping a firms strategic options falls into 2 categories:
1. Nature on industry and competitive conditions 2. Firms own competitive capabilities market position, and best opportunities

Matching strategy to a companys situation can be examine via

5 classic types of industry environments 3 classic types of company situations

What is an Emerging Industry?

Market is new and unproven Buyers first-time users Companies in grow-and-build mode Technological know-how emerging Information about customers and market conditions hard to get Uncertainty about how fast demand for product will grow and how big market will get First-generation product improved rapidly

Features of an Emerging Industry

No rules of the game Technological know-how is proprietary Entry barriers tend to be low Experience curve effects often permit significant cost reductions as volume builds Marketing task involves inducing initial purchase and overcoming customer concerns Difficulties in securing raw materials Firms run short of funds for R&D and start-up

Strategy Options: Competing in Emerging Industries

Try to win early race for industry leadership by employing a bold, creative strategy Push hard to
Perfect technology Improve product quality Develop attractive performance features Shape rules of competition

Try to capture potential first-mover advantages Pursue new

Customer and user applications Geographical areas to enter

Strategy Options: Competing in Emerging Industries

Shift advertising focus from building product awareness to
increasing frequency of use, and Creating brand loyalty

Move quickly when technological uncertainty clears and a dominant technology emerges Use price cuts to attract price-sensitive buyers Expect established firms looking for growth opportunities to enter market when risk lessens

Strategy Options: Competing in Emerging Industries

Strategic success in an emerging industry calls for
Bold entrepreneurship Willingness to pioneer and take risks Intuitive feel for what buyer will like and how they will use product Quick response to new developments Opportunistic strategy-making

Features: Transitioning to Industry Maturity

Slowing demand generates head-to-head competition for market share Buyers are more sophisticated, driving harder bargain on repeat purchases Greater emphasis on cost and service Firms have topping out problem in adding production capacity Product innovation and new end-use applications harder to come by International competition increases Industry profitability falls

Transition to Industry Maturity

Principle Slower rates of market growth cause competition pressures to intensify, often producing a
Shake-out of weaker competitors, and Slimmer profit margins industry-wide

Strategy Options: Competing in a Maturing Industry

Prune product line Emphasize process innovation Push hard for cost reduction Find ways to increase sales to present customers Purchase rival firms at bargain prices Expand internationally

Strategic Mistakes in a Maturing Industry

Not pursuing a strategy which gives firm strong image with buyers Stuck in the Middle! Putting more emphasize on boosting short-term profits than on strengthening long-term competitive position Waiting too long to respond to price-cutting by aggressive rivals Getting caught with too much excess capacity Failing to aggressively pursue cost reductions

Strategic Management Principle

One of the greatest strategic mistakes firm can make in a maturing industry is pursuing a compromise between low-cost, differentiation, and focusing such that it ends up Stuck in the Middle with little chance of attaining industry leadership!

Features of Mature Industries

Demand grows slower than economy-wide average or begins declining Competitive pressures intensify, resulting in heated battle for market share To grow and prosper, firm must take market share away from rivals Industry consolidates to smaller number of key players

Strategic Options: Competing in a Mature / Declining Industry

Pursue focus strategy by exploiting growth segments within industry Pursue differentiation strategy Work diligently to drive costs down by
Outsourcing activities Redesigning internal business processes Consolidating under-utilized production facilities Closing low-volume, high-cost distribution outlets Cutting marginal activities out of value chain

Strategic Pitfalls of Competing in a Stagnant Industry

Getting trapped in profitless war of attrition Diverting too much cash out of firm too quickly, accelerating its demise Over-optimism about industrys future

Competitive Features of Fragmented Industries

Absence of visible market leaders Low entry barriers and absence of scale economies Market for product is local Small quantities of customized products required Market is so large and diverse it takes numerous firms to accommodate buyer needs High transportation costs prevent serving large market area Local regulatory requirements make each geographic area unique Newness of industry

Examples: Fragmented Industries

Book publishing Landscaping and plant nurseries Auto repair Restaurant industry Public accounting Womens dresses Meat packing Paperboard boxes Hotels and motels furniture

Strategic Options: Competing in a Fragmented Industry

Construct and operate formula facilities Become a low-cost producer Increase customer value via vertical integration Specialized by product type Specialized by customer type Focus on limited geographic area

Strategic Management Principle

In fragmented industries, competitors usually have strategic latitude to
1. Compete broadly or to focus 2. Pursue either a low-cost or differentiationbased competitive advantage

What is the Motivation for Competing Internationally?

Desire to seek out new markets to sustain growth in sales and profits Desire to achieve lower costs to strengthen firms long-term competitive position Desire to access natural resource deposits in other countries

Strategic Management Principle

Competing in international markets posses a bigger strategy-making challenge than competing in only the companys home market!

Competitive Features of International Markets

Market differences among countries Cost differences among countries Differences in host government trade policies

Competitive Features of International Markets

Market differences among countries
Buyer needs and habits Distribution channels Long-run growth potential Driving forces Competitive pressures

Competitive Features of International Markets

Cost differences among countries
Wage rates Worker productivity Natural resource availability Inflation rates Energy costs Tax rates Fluctuation currency exchange rates

Competitive Features of International Markets

Differences in host government trade policies
Import tariffs or quotas Local content requirements Price control policies Other regulations
Technical standards Product certification Minority ownership by local citizens Prior approval of capital spending projects Withdrawal of funds from country

Manufacturing Vs. Brand Share

Firm with biggest manufacturing share best positioned to be
The global low-cost producer

A firms manufacturing share can be bigger than its own branded share since it makes brands for other sellers
Extra manufacturing volume may open door to achieving lower costs

Types of International Competition

Multi-country Competition Global Competition

Characteristics of Multi-Country Competition

Competition in each national market is independent of competition in other national markets No international market Rivals compete for market leadership country by country

Characteristics of Global Competition

Competitive conditions across national markets are linked to form an international market A firms competitive position in one country affects and is affected by its position in other countries Leading competitors compete head-to-head in numerous countries

Strategy Options for Competing Internationally

License foreign firm to use ones technology or to produce and distribute ones products Maintain a national production base and export goods to foreign markets Multi-country strategy Global low-cost strategy Global differentiation strategy Global focus strategy

Multi-Country Strategy
Matches strategy to host country circumstances Works best when
Market conditions are diverse among countries Buyers insist on highly customized products Buyer demand for product exists in few markets Host government regulations preclude uniform global approach

Two drawbacks:
1. Entails little coordination across countries 2. Not tightly based on competitive advantage

Global Strategy
Works best when
Great similarities in products and buyer requirements exist among countries

Involves
Coordinating firms strategic moves worldwide Selling in many, if not all, nations where significant buyer demand exists

Allows firm to concentrate on securing competitive advantage over

Both international and domestic rivals

Competitive Strategy Principle

A multi-country strategy is appropriate for industries where multi-country competition dominates! A global strategy works best in markets that are globally competitive or beginning to globalize!

Global Strategy and Competitive Advantage

A global strategy provides two avenues to gain competitive advantage
1. Locating activities among nations in ways that lower costs or helps achieve greater product differentiation 2. Coordinating dispersed activities in ways domestic-only competitor cannot

Principle of Competitive Markets

With a global strategy, an international competitor can pursue sustainable competitive advantage by locating activities in the most advantageous countries and coordinating strategic actions worldwide. A domestic-only competitor forfeits such opportunities!

Locating Activities to Build a Global Advantage

To build competitive advantage via location, firm must consider
Whether to concentrate each activity In one or two countries, or Disperse performance of activity to many nations In which countries to locate activities

Locating Activities to Build a Global Advantage

Activities tend to be concentrated when
Scale economies / experience curve effects exist Coordination of related activities is enhanced

Dispersing activities works best when

Buyer-related activities must take place close to buyers Transportation costs, scale diseconomies, and trade barriers make centralization expensive It buffers fluctuating exchange rates, supply interruptions, and adverse political developments

Coordinating Activities and Strategic Moves

Competitive advantage can be built via
Knowledge and expertise accumulated at one location can be transferred to other locations Production can be shifted from one location to another to take advantage of most favorable cast or trade conditions Brand reputation can be enhanced by positioning products with same differentiating attribute on a worldwide basis Global competitor can choose where and how to challenge rivals

Strategic Alliances
Concept Agreements between firms to do business together in ways that go beyond normal firto-firm dealings but fall short of merger or full partnership Competitive Strategy Principle More effective in combating competitive disadvantage than in gaining competitive advantage!

Strategic Alliances
An alliance can take form of
Joint research efforts Technology-sharing Joint use of production facilities Marketing one anothers products Jointly manufacturing components of assembling finished products

Alliances enable firms in same industry based in different countries to compete on a

More global scale, while Preserving their independence

Benefits of Strategic Alliances

Allies may gain economies scale in production and / or marketing Allies can share and / or transfer technical and manufacturing expertise Alliances may allow access to markets previously blocked by governmental barriers Allies can direct combines competitive energies into building competitive advantage and defeating mutual rivals

Pitfalls of Strategic Alliances

Effective coordinating is challenging and time consuming Language and cultural barriers and problems of mistrust may exist Relationships may cool and benefits never realized Collaboration in competitively sensitive areas can be difficult Clash of egos and company cultures may occur One firm may become too dependent on another firms capabilities

Guidelines: Forming Strategic Alliances

Pick a compatible partner Choose an ally whose products and market strongholds complement firms own products and customers Learn thoroughly and rapidly about partners technology and management Be careful not to divulge competitively sensitive information to a partner View alliances as temporary

How Strategic Intent Varies Among Industry Competitors

Global Dominance
Long-term strategic intent is pursuing a global strategy

Dominance in Home Market

Primary strategic objective is defending home country market

Host Country Responsiveness

Primary strategic orientation is pursuing a multi-country strategy

Domestic-Only
Strategic intent is focused on home country market

Concept: Profit Sanctuaries

Profit Sanctuaries are country markets where a firm
Has strong or protected market position, and Derives substantial profits

A country is a firms profit sanctuary when it derives a substantial fraction of total profits from sales in that country Generally, a firms most strategically crucial sanctuary is its home market

Competitive Strategy Principle

A global competitor with multiple profit sanctuaries can wage and generally win a competitive offensive against a domestic competitor whose only profit sanctuary is its home market!

Concept: Critical Markets

Critical markets are in countries that
Are profit sanctuaries of key competitors Have big sales volume Include prestigious customers whose business it is strategically important to have Offer exceptionally good profit margines

Competitive Strategy Principle

Building a defense against global competitors does not require competing in all foreign markets, but it does mean competing in all critical markets!

Competitive Power of CrossSubsidization

Involves using profits earned in a country market to
Support offensive against key rivals, or Gain increased penetration of a critical market

Most powerful when global firm with multiple profit sanctuaries is intent on
Achieving global market dominance

A global firm can use lower prices to siphon a domestic firms customer while
Gaining market share, and Covering losses with profit earned in another critical market

Competitive Strategy Principle

To defend against aggressive multinational competitors intent on global dominance, a domestic-only competitor usually has to
Abandon its domestic focus Become a multinational competitor, and Craft a multinational competitive strategy

Why a Global Competitor Can Defeat a Domestic-Only Firm?

A one-country firm cannot effectively defend its market share in the long-term against a global firm because
Global multi-country rival can use profits earned elsewhere to subsidize price cutting in domestic firms profit sanctuary If domestic firm retaliates with matching price cuts
It erodes it own profitability in its only profit sanctuary

Situation of Industry Leaders

Characteristics of industry leaders
Competitive position ranges from stronger-than average to powerful Well-known reputation Leadership position is usually keyed to a proven strategy Main strategic concern is how to sustain the dominant leadership position

Strategy Options: Industry Leaders

1. Stay-on-the-offensive strategy 2. Fortify and defend strategy 3. Follow-the-leader strategy

Stay-On-The-Offensive Strategy
Best defense is a good offense Be a first-mover Relentlessly pursue continuous improvement and innovation Force rivals to scramble to keep up Launch initiatives that keep rivals off balance Try to grow faster than industry and to wrest market share from rivals

Fortify and Defend Strategy

Basic Objectives Make it harder for new firms to enter and for challengers to gain ground Hold onto present market share Strengthen current market position Protect competitive advantage held by firm

Types of Defensive Actions

Increase advertising spending Provide higher levels of customer service Introduce more brands to match product attributes of rivals brands Broaden product line to close off vacant niches Keep prices reasonable and quality attractive Build new capacity ahead of market demand Invest enough to remain cost competitive Patent feasible alternative technologies Sign exclusive contracts with best suppliers and distributors

Follow-The-Leader Strategy
Basic objectives Leaders strategic posture involves
Using its competitive muscle to encourage runner-up firms to be content followers Signaling smaller rivals that moves to cut into leaders business will be hard fought

Follow-The-Leader Strategy
Strategic Themes Be quick to meet all competitive price cuts Be ready to counter with large-scale promotional campaigns if challengers boosts advertising Offer better deals to major customers of next-in-line firms Use hardball measures to signal aggressive small firms who should lead

Types of Runner-Up Firms

Market Challengers
Willing and able to use offensive strategies to gain market share

Content Followers
Willing to coast along in current position because profits are adequate

Competitive Strategy Principle

rarely can a runner-up firm successfully challenge an industry leader with an imitative strategy regardless of the financial resources or staying power it may have!

Rule of Offensive Strategy

Runner-up firms should avoid attacking a leader head-on with an imitative strategy, regardless of resources and staying power an underdog may have!

Overcoming Obstacles of Small Size

In industries where big size is a competitive asset, firms with low market share are faced with obstacles
Less access to certain economies of scale Difficulty in gaining customer recognition Inability to afford grand-scale mass media advertising Difficulty in funding capital requirements

Overcoming Obstacles of Small Size

Runner-up firms can overcome these obstacles by
Focusing on a few segments where strengths can yield a competitive edge Developing technical expertise highly valued by customers Aggressively pursuing development of new products for customers in target segments Using innovative entrepreneurial approaches to out-manage slow-to-change market leaders

Strategy Options: Weak Business

Launch a strategic offensive Play aggressively defense Pursue immediate abandonment Adopt a harvest strategy

What is a Harvest Strategy?

Steers middle course between maintenance and abandonment Reinvestment in business held to minimum Objectives Short-term
Generate largest feasible cash flow

Long-term
Orderly market exit

Sample Harvesting Options

Operating budget reduced to rock-bottom level Emphasis placed on stringent internal cost control Capital investment in new equipment given minimal financial priority Price gradually raised Promotional expenses trimmed back Quality reduced in not so visible ways Non-essential customer services curtailed Equipment maintenance shaved

When Should Harvesting be Considered?

Industrys long-term prospect are unattractive Building up business would be too costly Market share is increasingly costly to maintain Reduced levels of competitive effort will not trigger immediate fall-off in sales Enterprise can redeploy freed-up resources in higher opportunity areas Business is not a major component of diversified firms portfolio Business does not contribute other desired features to overall business portfolio

Strategy Options for Achieving a Business Turnaround

Revise existing strategy Launch efforts to boost revenues Cut costs Sell off assets to generate cash and / or reduce debt Combination of efforts

13 Commandments for Crafting Successful Business Strategies

1. Always put top priority on crafting and executing strategic moves that enhance a firms competitive position for the long-term and that serve to establish it as an industry leader. 2. Understand that a clear, consistent competitive strategy, when well-crafted and well-executed, builds reputation and recognizable industry position whereas a strategy aimed solely at capturing momentary market opportunities yields fleeting benefits.

13 Commandments for Crafting Successful Business Strategies

3. Endeavor not to get stuck back in the pack with no coherent long-term strategy or distinctive competitive position, and little prospect of climbing into the ranks of the industry leaders. 4. Invest in creating a sustainable competitive advantage, for it is a most dependable contributor to above-average profitability.

13 Commandments for Crafting Successful Business Strategies

5. Play aggressive offense to build competitive advantage and aggressive defense to protect it. 6. Avoid strategies capable of succeeding only in the best of circumstances. 7. Likewise, avoid rigidly prescribed or inflexible strategies changing market condition may render it quickly obsolete.

13 Commandments for Crafting Successful Business Strategies

8. Dont underestimate the reactions and the commitment of rivals firm. 9. Be wary of attacking strong, resourceful rivals without first having solid competitive advantage and ample financial strength. 10. Consider that attacking competitive weakness is usually more profitable than attacking competitive strength.

13 Commandments for Crafting Successful Business Strategies

11. Be judicious in cutting prices without an established cost advantage. 12. Be aware that aggressive strategic moves to wrest crucial market share away from rivals often provoke aggressive retaliation in the form of a marketing arm race and / or price wars. 13. Employ bold strategic moves in pursuing differentiation strategies so as to open up very meaningful gaps in quality or service or advertising or other product attributes.

End of Module 6