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“Management’s job is not to see the company as it is… But as it can become.

”(John
W.Teets)

“A strategy is a commitment to undertake one set of actions rather than another”


(Sharon M.Oster)

CHAPTER OUTLINE
• developing a strategic vision/mission
• establishing financial and strategic objectives
• crafting a strategy
• factors shaping a company’s strategy
• linking strategy with ethics
• approaches to performing the strategy-making task

DEVELOPING A VISION OR MISSION


• A vision indicates the long term course management has charted for the
organization. These include the following:

- business activities to pursued


- future market position
- future customer focus
- kind of company to become

WHY HAVE A MISSION OR STRATEGIC VISION


• A well conceived strategic vision has power to:
- guide managerial decision making
- arouse employee buy in and commitment
- prepare a company for the future

A GOOD STRATEGIC VISION HAS THE FOLLOWING CHARACTERISTICS:


• charts a company’s future strategic course
- defines the business make up 10 years
• company specific, not generic
- provides a company with its own identity and path to follow
• the vision is not to make profit
- the real mission/vision is we do to make a profit
• requires the exercise of management foresight

ELEMENTS OF A STRATEGIC VISION


- defines present and future business make-up of company
- charts a long-term path to follow
- communicated in an inspiring and exciting manner

DEFINING A COMPANY’S BUSINESS


• A good business definition incorporates three factors
- customer needs—what is being satisfied
- customer groups—who is being satisfied
- technologies used and functions performed -- how customer needs are
satisfied.
BROAD – NARROW MISSION STATEMENTS?
• A vision should be narrow enough to specify real arena of interest
• serves as
- boundary for what to do and not do
- beacon of where top management intends to take firm
• For diversified companies they should employ a broader vision statement

COMMUNICATING THE VISION

• An exciting, inspirational vision


- inspires, challenges, and motivates workforce
- arouses strong sense of organizational purpose and induces employee
buy-in
- brings workforce together and galvanizes people to live the business

PURPOSE OF OBJECTIVES
• substitutes results-oriented decision-making for aimlessness over what to
accomplish
• provides benchmarks for judging organizational performance

STRATEGIC MANAGEMENT PRINCIPLE


Companies whose managers set objectives for each key result area and then press
forward with actions aimed directly at achieving those performance outcomes typically
outperform companies whose managers exhibit good intentions try hard, and hope for
the best

TYPES OF OBJECTIVES REQUIRED


• Financial objectives
- outcomes that improve a firm’s financial performance
• Strategic objectives
- outcomes that strengthen a firm’s competitiveness and long –term market
position

STRATEGIC MANAGEMENT PRINCIPLE


• every company needs both strategic and financial objectives

EXAMPLES: FINANCIAL OBJECTIVES


• achieve revenue growth of 10% per year
• increase earnings by 15% annually
• increase dividends per share by 5 % per year
• increase net profit margins from 2% to 4%
• attractive EVA performance
• stronger bond and credit ratings
• a risk stock price (outperform the S&P 500)
• attractive increases in MVA
• recognition as a “blue chip” company
• a more diversified revenue base
EXAMPLES: STRATEGIC OBJECTIVES
• a bigger market share
• quicker design-to market times than rivals
• higher product quality than rivals
• lower cost relative to key competitors
• broader product line than rivals
• a stronger reputation with customers than rivals
• better customer service than rivals
• recognition as a leader in technology
• wider geographic coverage than rivals

STRATEGIC OR FINANCIAL OBJECTIVES – WHICH TAKE PRECEDENCE


• pressures for better short-term financial performance become pronounced when
- firm is struggling financially
- resource commitments for new strategic initiatives ,may hurt bottom-line
for several years
- proposed strategic moves are risky
• a firm that consistently loses opportunities to strengthen its long-term competitive
position will:
- risks diluting its competitiveness
- risk losing momentum in its markets
- can hurt its ability to fend off rivals’ challenges

STARTEGIC MANAGEMENT PRINCIPLE


• Building a stronger long-term competitive position benefits shareholders more
lastingly than improving short-term profitability!

THE CONCEPT OF STRATEGIC INTENT


A company exhibits strategic intent when it relentlessly pursues an ambitious strategic
objective and concentrates its competitive

THE CONCEPT OF STRATEGIC INTENT


• A strategic intent indicates firm’s intent to stake out a particular position over the
long-term
• It serves as a rallying cry for employees to do their very best
• It signals deep-seated commitment to winning

OBJECTIVES ARE NEEDED AT ALL LEVELS


• The process is top-down, not bottom-up
• Steps to develop Objectives

1. first, establish organization-wide objectives


2. next, set business and product line objectives
3. then, establish functional and departmental objectives
4. individual objectives come last

STRATEGIC MANAGEMENT PRINCIPLE


• Objective setting to be more of a top-down than a bottom-up process in order to
guide lower-level managers and organizational units toward outcomes that
support the achievement of overall business and company objectives

CRAFTING A STRATEGY
Third Direction –Setting Task
• an organization’s strategy deals with
- how to make management’s strategic vision a reality
- This is a game plan for :
i) moving the company into an attractive business position
ii) building a sustainable competitive advantage

STRATEGIZING IS HOW TO:

• achieve performance targets


• out-compete rivals
• achieve sustainable competitive position
• strengthen firm’s long-term competitive position
• make the strategic vision a reality

LEVELS OF STRATEGY-MAKING

A Diversified Company

Corporate-Level
Corporate
Strategy

Two-way influence
Business-Level
Managers Business Strategies

Two-way influence

Functional Functional Strategies


Managers

Two-way influence

Operating
Operating Strategies
Managers
LEVELS OF STRATEGY-MAKING:

A Single-Business Company

Business
Executive-Level
Strategy
Managers

Two-way influence

Functional Functional Strategies


Managers

Two-way influence

Ting Managers Operating Strategies

CORPORATE STRATEGY FOR A DIVERSIFIED COMPANY

Kind of diversification

How much Responses to changing


Diversification conditions

Approach to capital Corporate of efforts to build


Allocation Strategy Competitive advantage
Via Diversification

Moves to divest Moves to strengthen


Weak unit’s positions and profits
in present businesses

Moves to add
New business
TASKS OF CORPORATE STRATEGY
• moves to achieve diversification
• actions to boost performance of individual businesses
• capturing synergy among business units
• establishing investment priorities and steering corporate resources into the most
attractive business units

STRATEGIC COMPONENTS OF A SINGLE BUSINESS COMPANY

Responses to changing conditions


strategic alliances
and collaborative Basic competitive
partnerships approach

Manufacturing Moves to secure


Business
Strategy competitive
Strategy
advantage
Marketing
Strategy Geographic coverage,
Approach to vertical
R& D integration
Strategy
Human resources Finance Strategy
Strategy

WHAT BUSINESS STRATEGY INVOLVES


• forming responses to changes in industry and competitive conditions, buyer
needs and preferences, economy, regulations etc
• crafting competitive moves leading to sustainable competitive advantage
• building competitively valuable competitive capabilities
• uniting strategic initiatives of functional areas
• addressing strategic issues facing the company

FUNCTIONAL STRATEGIES
• game plan for a strategically-relevant function, activity, or business
• details how key activities will be managed
• provide support for business strategy
• specify how functional objectives are to be achieved

OPERATING STRATEGIES
• concern narrower strategies for managing grassroots activities and strategically-
relevant operating units
• add detail to business and functional strategies but of lesser scope

EXAMPLE: OPERATING STRATEGY


Boosting Worker Productivity
T boost productivity by 10%, managers of firm with low- price, high-volume strategy take
following actions:
- recruitment manager develops selection process designed to weed out all
but best-qualified candidates
- information systems manager devises way to use technology to boost
productivity of office workers
- compensation manager devises improved incentive compensation plan
- purchasing manager obtains new efficiency-increasing tools and
equipment

Improving Delivery & Order-Filling


Manufacturer of plumbing equipment emphasizes quick delivery and accurate order-
filling as keystones of its customer service approach. Warehouse manager took
following approaches:
- inventory stocking strategy allowing 99% of all orders to be completely filled without
backordering any item
- Staffing strategy of maintaining workforce capability to ship any order within 24hours.

NETWORKING OF MISSIONS, OBJECTIVES AND STRATEGIES

Level 1
Corporate-level Overall Scope & Corporate level Corporate level
Managers strategic vision objectives strategy

Two way influence Two way influence Two way influence

Level 2 Business level Business level Business level


Business-level Strategic vision Objectives Strategies
Managers

Two way influence Two way influence Two way influence

Level 3 Financial Financial Financial


Functional Missions Objectives Strategies
Managers

Two way influence Two way influence Two way influence


Level 4
Plant Managers,
Lower level Operating Operating Operating
Supervisors Missions Objectives Objectives
CORPERATE GOVERNANCE AND SOCIAL RESPONSIBILITY

Corporate governance is about good governance of an organization. It’s about aligning


the interest of senior management and the shareholders.

Agency theory

This looks at the problems that can arise in a business relationship when one person
delegates decision making authority to another. This theory tries to explain why
managers as agency may fail to act in the best interest of their principal i.e. the
shareholder.

The shareholders provide capital to the management so that the management employs
such capital in the best interest of shareholders. Due to information Asymmetry between
the principal (shareholders) and Agency, senior management, Unscrupulous Agency
(Management) can take advantage of any lack of information by the shareholders to
mislead them and maximize their own interest at the expense of principals.

Asymmetry of information in this case means management has more information than
shareholders. Management like any human beings has their own personal needs i.e.
they are motivated by desires for status, power, job security and income. By virtue of
their position within the company, the CEO’s can use their authority and control over
cooperate funds to satisfy their personal desires at the expense of the shareholders.
This can be achieved through:

A. On the Job consumption i.e. through increasing their income, buying executive jets,
having lavish offices and going for expensive paid trips to exotic locations.

B. Engage in empire building through acquisition of new businesses although such


growth may add little enhance the companies profitability. The expansion will increase
executives’ power and status.

GOVERNANCE MECHANISMS

These are mechanisms that are put in place by the shareholder to try to align the interest
of the top management and the shareholder interest.

A. Board of Directors

These are people who are chosen by shareholders to run the company on their behalf.
Their responsibilities include the following:

1. Setting corporate strategy, overall direction, mission or vision


2. Succession – hiring and firing the CEO and top management.
3. Controlling, monitoring, or supervising top management.
4. Reviewing and approving the use of resources
5. Caring for stockholder interest.
The Board of Directors could either be Executive or non Executive Directors. Executive
Directors are insiders Directors and non –Executive Directors are outside Directors.
Challenges of this mechanism

1. The Executive Directors should not dominate the Board because they are also
employees
2. All Board sub-committees should be chaired by non – Executive Directors .
3. The CEO of the company must not chair the board (no need for an Executive
Chairperson).
4. The system of appointing board members must not be delegated to senior
management as they will choose their friends.

B. Share based compensation (Stock options)

This is a right given to the Top Management to by company shares at a pre-determined


price at some point in future. This system forces management to work hard now so that
when they exercise their right to buy the shares, they will yield a lot of profits. When the
share price is going up, the shareholder is also benefiting. The problem with this
mechanism is that the share price might go up/ down due to other reasons beyond the
control of Senior Management.

C. Pay for Performance

This is where senior management is paid on the basis what they would have achieved
e.g. introducing profit sharing skills

D. Auditors

These are independent firms whose role is to check on whether the accounts have been
prepared in accordance to the accounting guidelines. This independent checking
provides some form of control on the behaviour of management. The problem on this
mechanism is that at times the senior management might have a lot of influence on the
appointment of auditors thus catering the independency of auditors.

CORPORATE SOCIAL RESPONSIBILITY

What is corporate social responsibility (CRS)?

The CRS concept state that companies give to society or communities in recognition of
the business they get from them. This can be done through giving the less advantaged
towards the case of society, assisting in community projects, assisting when there are
natural disasters, contributing towards arts, sport, education, the environment and so on.

Argument for Corporate Social Responsibility

Arguments which have been advanced for companies to exercise their CRS are:
• That it helps to enhance the name of the company and its products as a result of
the publicity which often follows whenever a company performs an act of
corporate social responsibility, when the media carry the news.
• That companies have the resources, and being citizens, through corporate, they
should give whatever they can afford to promote the well-being of society or
communities.
• It is good for business in general because happy communities will provide
clientele.
• It can be instrumental in preventing external regulation of business by central
government, local authorities and professional associations. The rationale is that
self –regulation is better than being externally regulated – corporate social
responsibility acts make companies look responsible.

Arguments against Corporate Social Responsibility

Several arguments have been advanced against corporate social responsibility. Among
the arguments are;

• It gives organizations a lot of power relative to the rest of society. That is,
authorities are more likely to listen to the problems of companies than
communities.
• It can be abused by companies which might act in a way which is unethical.
• Companies should concentrate on doing business and leave the task of
improving the welfare of society to government; after all they pay taxes to enable
governments to finance their budgets.
• Company profits are owed to shareholders

Stakeholder Concept

Definition
The stake holder concept states that companies should be aware of all the individuals
and organizations that have an interest in what they do. The reason for this are:

• They should know the expectations of all the stakeholders and find ways to cater
for them in their objectives, strategies and activities.
• Stakeholders also have power to determine what an organization can or cannot
do so they cannot be ignored.

There are both internal and external stakeholders. Internal stakeholders are members of
the organization while external stakeholders are found outside the organization.

Internal stakeholders

This relates to stakeholders within the organization. These stakeholders have their
expectations and power. Their power comes from:

• Exchange processes i.e. organizations need them for their skills and knowledge.
They manage the operations of the organization and are therefore responsible
for its performance. That is the survival and growth of the organization depends
on them, While on the other hand, they depend on the income they get from their
efforts for their material and social well-being therefore creating a dependant
relationship.
• Their position in the managerial hierarchy i.e. the level of management they are
found
• Personal qualities i.e. their attributes as individuals and the social influence they
wield.
• Ability to give or deny rewards i.e. this closely relates to position in the
managerial hierarchy although it might also relate to social rewards outside the
organization.
• Perceived power i.e. the power which someone is seen as having. Whether the
power is real or not does not count).
• Boundary management function i.e. the ability by a member to help an
organization to maintain beneficial relations with stakeholders such as
government, suppliers and financiers. In this way, such members are able to add
value to their presence in an organization.
• Control over resources i.e. those members of the organization who control
resources, which others need tend to have a lot of power. Examples are IT
personnel, Human resources personnel who grant loans and the transport
supervisor who issues vehicles.

STAKEHOLDERS EXPECTATIONS
STAKEHOLDERS - Size of dividend
- Increase in value of investments
- Company growth
- Growth in profit
MANAGERS - Good remuneration
- Attractive perks
- Status from working in the company
- Level of responsibility
- Job security
- Amount of challenge
EMPLOYEES - Job security
- Conditions of work
- Take home pay
- Level of representation
- Level of job satisfaction

External Stakeholders

External stakeholders are individuals, groups or organizations outside the company.

There power comes from:


• Creating dependency relations i.e. organization can hardly do without them. An
example being the sole supplier of vital inputs
• Specialist knowledge and skills i.e. having knowledge and skills an organization
needs, as would be the case with consultants.
• Links with internal stakeholders’ i.e. knowing a key person inside the
organization.
• Concentration of Stakeholders i.e. if they are concentrated they build high
bargaining power
• Involvement in the management process i.e. the extent to which they get involved
in internal matters

STAKEHOLDERS EXPECTATIONS
CUSTOMERS - Respect
- Fair prices
- Desirable and quality product
- Soft products
- Choice
- New products
DISTRIBUTORS -After sale service
timely delivery
High after sales service
Quality products
High service levels
Profitable , mutual relations
SUPPLIIERS - Mutual , profitable relations
- Timely payment
- Adherence to terms
- Consistent orders
- Reasonable lead time

External stakeholders and their Expectations

FINANCES Good -
management of
company finances
- Payment of both interest and
principal
- Timely payment
- Correct information
- Complying with terms
INSTITUTIONAL INVESTORS - A balanced portfolio
- High returns
PRESSURE/CIVIC GROUPS - Socially responsible actions
- Ethical conduct
- Professionalism
- Concern for the
environment
- To be listed to
- Meeting legal and
regulatory requirements
GOVERNMENT (INCLUDING LOCAL - Provision of employment
AUTHORITIES
Factors which determine the influence of stakeholders

As an organization analyses stakeholders, it is important to understand the extent of their


power and expectations. Generally, the extent of the influence of a stakeholder will
depend on such factors as:
• The power, which a stakeholder is able to demonstrate
• The determination of the stakeholder to exert influence and achieve objectives
• The power position of an organization
• The tactics used by the stakeholder

Strategies which can be used to manage stakeholders in conflict with an


organization

It will often happen that an organization fails to agree with some stakeholders. In such a
case, several strategies can be used for example:
• Seeking agreement on basic issues
• Using persuasion by appealing to reason
• Forming alliances with other stakeholders
• Making demands of the stakeholder i.e. showing them that they have obligations
towards the company
• Cooperating with them so that they change their demands
• Destroying them

Ethics

What is Ethics?
Ethics involves acceptable behavior, relating to such questions as what is wrong or right,
fair or unfair, professional or unprofessional, legal or illegal, conscience etc.

The criteria for judging acceptable behaviour derived from social values, professional
codes of conduct, religion, natural justice, laws, regulations, corporate codes of conduct,
social good etc.

Ethics therefore has the following elements;


• It is defined in the context of the individual
• What constitutes ethical behaviour can vary from one person to another
• Ethics is relative, not absolute.

The important of ethics lies in that it regulates behavioral on the basis of which managers
and organizations are judged. Judgment passed will determine the image relevant
stakeholders will have with regard to the manager or organization. Unethical behaviour
can have negative impact on the organization in addition to that on the affected party.

Levels of ethics
There are four levels or areas at which ethics are most significant:
• The relations of the organization and its employees; in relation too hiring,
termination of employment, wages, working conditions, confidentiality of
employee information, respect for religious beliefs, ETC.
• The relations of the employee to the employer: in relation to conflict of interest,
secrecy, honesty, integrity, diligence theft, embezzlement, abuse of property etc.
• The relations of the organization to society i.e. individuals, organizations, wider
society, communities, environment, and other organization.
• The relations of the organization with other organizations; in relation to stealing
secretes, undercutting prices, negative promotional messages.

Ethics issues can arise in all aspects of the managerial task in all the functional areas.

Roles of Organizations in promoting ethics

Organizations should make deliberate efforts to promote ethical behaviour by:


• Having senior or management act as role models in relation to ethical behaviour
• Establishing a culture that clearly defines what is acceptable and unacceptable
behaviour
• Including issues of ethics in all training programmes
• Guiding employees on how to deal with all stakeholders
• Developing codes of ethics

Codes of Ethics

The aspect of developing a code of ethics deserves to be explored further. A code of ethic
is a document that spells out the ethical standards an organization has committed itself to
abide by.

Benefits of a code of ethics are it:


• Is an indication of an organization’s commitment to high ethical standards
• Lays the parameters within which individuals must behave
• Provides the employees with basis to inform senior management of unethical
behaviour
• Helps employees to deal with ethical dilemmas

There are limitations with a code of ethics in that it may:


• Be ignored by key people in the organization
• Not be followed because following it may have unpleasant results e.g. loss of
friends, loss of income etc
• Not cover all possible situations that might arise
• Might not be successfully communicated to employers
• Mot assist managers in making ethical choices
STRATEGIC MANAGEMENT PRINCIPLE
• a company ‘s strategy cant produce real market success unless it is well-
matched to industry and competitive conditions

COMPANY OPPORTUNITIES AND THREATS


• for strategy to be successful, it has to be well matched to
- a company’s best opportunities
- threats to the company’s well-being

COMPANY STRENGTHS, COMPETENCIES, AND COMPETITIVE CAPABILITIES


• a company must have or be able to acquire the resources, competencies, and
competitive capabilities needed to execute the chosen strategy
• resource deficiencies, gaps in skills, and weaknesses in competitive position
make pursuit of certain strategies risky or altogether unwise

STRATEGIC MANAGEMENT PRINCIPLE


• a company’s strategy ought to be grounded in its resource strengths and in what
is good at doing (its competencies and competitive capabilities) it is perilous to
craft a strategy whose success is dependent on resources and capabilities that a
company lacks.

ETHICAL RESPONSIBILITIES OF FIRM TO STAKE HOLDERS


• owners/shareholders- expect some form of return on their investment
• employees –expect respect for their worth and devoting their energies to firm
• customers – expect reliable, safe product or service
• suppliers – expect equitable relationship with firm
• community – expect businesses to be good citizens in their community.

TESTS OF A WINNING STRATEGY


• goodness of fit test
- how well is strategy matched to firm’s situation?
• competitive advantage test
- does strategy lead to sustainable competitive advantage?
• performance test
- does strategy boost firm performance?

STRATEGIC MANAGEMENT PRINCIPLE


To be a real winner, a strategy must
1) fit the enterprise’s situation
2) build sustainable competitive advantage
3) improve company performance
INDUSTRY AND COMPETITIVE ANALYSIS
“Analysis is the critical starting point of strategic thinking”

CHAPTER OUTLINE
• role of situation analysis in strategy making
• methods of industry and competitive analysis
- industry’s dominant economic traits
- industry’s competitive forces
- drivers of industry change
- competitive positions of rivals
- competitive moves of rivals
- key success factors
- conclusions: overall industry attractiveness
• conducting an industry and competitive analysis

WHAT IS SITUATION ANALYSIS?


• focuses on two considerations
-a company’s external or macro-environment
• its competencies, capabilities, resource strengths and weaknesses, and
competitiveness

GOOD SITUATION ANALYSIS LEADS TO CHOICES


Assess industry & competitive conditions
1. industry’s dominant economic traits
2. nature of competition and strength of competitive focus
3. drivers of industry change
4. competitive position of rivals
5. strategic moves of rivals
6. key success factors
7. conclusions about industry attractiveness

ASSESS COMPANY SITUATION


1. Assessment of company’s present strategy.
2. Strengths, weaknesses, opportunities and threats.
3. Company’s cost compared to rivals
4. strength of company’s competitive position
5. strategic issues to be addressed
• identify strategic options for the company
• select the best strategy for the company

QUESTION 1: WHAT ARE THE INDUSTRY’S DOMINANT ECONOMIC TRAITS?


• market size and growth rate
• scope of competitive rivalry
• number of competitors and their sizes
• prevalence of backward/forward integration
• entry/exit barriers
• nature and pace of technological change
• product and customer characteristics
• scale economies and experience curve effects
• capacity utilization and resource requirements
• industry profitability

SCANNING THE EXTERNAL ENVIRONMENT

The purpose of scanning the external environment is to identify threats and


opportunities. The eternal environment is made up of two environments i.e the Macro
environment and the Micro environment. To understand the Macro environment we use
the PESTLEG, and to understand the Micro environment we use PORTER’S FICE
FORCES MODEL. An organization has no influence over the PESTLEG environment
but can influence the Micro environment.

Macro Environment

Political
Economic
Social
Technological
Legal
Ecology
Globalization

Some of the variables in the macro environment

Economic Technological Political-Legal Sociocultural

GDP Trends Total government Antitrust regulations Lifestyle changes


Interest rates spending for R&D Environmental Careen expectations
Money supply Total industry protection laws Consumer activism
Inflation rates spending for R&D Tax laws Rate of family
Unemployment Focus of technological Special incentives formation
Levels efforts Foreign trade Growth rate of
Wage/price controls Patent protection regulations population
Devaluation/ New products Attitudes toward Age distribution of
Revaluation New developments foreign companies population
Energy availability in technology Laws on hiring and Regional shifts in
And cost transfer from lab to promotion population
Disposable and market place Stability of Life expectations
Discretionary Productivity government Birth rates
Income improvements Terrorism and
Through automation privacy issues

DETERMINING THE COMPETITIVE VALUE OF A COMPANY RESOURCE


• there are 4 questions of whether a “ has real potential for producing sustainable
competitive advantage
1. is the resource hard to copy
2. does the resource have staying power – is it durable
3. is the resource really competitively superior
4. can the resource be trumped by the different capabilities of
rivals

QUESTION 2: WHAT IS COMPETITION LIKE & HOW STRONG ARE THE


COMPETITIVE FORCES?
Objective
• to identify
- main sources of competitive force
- strength of these forces
• key analytical tool
- five forces model competition

FIVE FORCES MODEL OF

Substitute
products

Rivalry among competing sellers


Suppliers of buyers
key iputs

Potential new
entrants

ANALYZING THE FIVE COMPETITIVE FORCES: HOW TO DO IT


• assess strength of each competitive force (strong? Moderate? Weak
- rivalry among competitors
- substitute products
- potential entry
- bargaining power of suppliers
- bargaining power of buyers
• explain how each force acts to create competitive pressure
• decide whether overall competitions is brutal, fierce,strong, normal/moderate, or
weak

RIVALRY AMONG COMPETING SELLERS


• usually the most power of the five forces
• check with weapons of competitive rivalry are most actively used by rivals
injockeying for position
- price
- quality
- performance features offered
- customer service
- warranties/guarantees
- advertising/promotions
- dealer networks
- product innovation
What Causes Rivalry to be strong?
• lost of firms, more equal in size and capability
• slow market growth
• industry condition tempt some firms to go on the offensive to boost volume and
market share
• customers have low costs in switching brands
• one or more firms initiates moves to bolster their standing at expense of rivals
• a successful strategic move carries a big payoff
• costs more to get out of business than to stay in
• firms have diverse strategies, corporate priorities, resources, and countries of
origin

PRINCIPLE OF COMPETITIVE MARKETS


• competitive jockeying among rival firms is dynamic and ever-changing
- as industry members initiate new offensive moves
- as emphasis swings from one mix of competitive weapons to another
-
COMPETITIVE FORCE OF POTENTIAL ENTRY
• seriousness of threat depends on
- barriers to entry
- reaction of existing firms to
• barriers exist when
- newcomers confront obstacles
- economic factors put potential entrant at a disadvantage relative to
incumbent firms

COMMON BARRIERS TO ENTRY


• economies of scale
• inability to gain access to specialized technology
• existence of learning/experience curve effects
• strong band preferences and customer loyalt
• capital requirements/ and or other specialized resource requirements
• cost advantages independent of size
• access to distribution channels
• regulatory policies, tariffs, trade restrictions

PRINCIPLES OF COMPETITIVE
Threat of entry is stronger when:
• entry barriers are low
• sizable pool of entry candidates exists
• incumbents are unwilling or unable to contest a newcomer’s entry efforts
• newcomer can expect to earn attractive profits

COMPETITIVE FORCE OF SUBSTITUTE PRODUCTS


Concept
Substitutes matter when customers are attracted to the products of firms in other
industries
Examples
• eyeglasses vs contact lens
• sugar vs artificial sweeteners
• plastic vs glass vs metal
• newspapers vs TV vs internet

HOW TO TELL WHETHER SUBSTITUTE PRODUCTS ARE A STRONG FORCE


• sales of substitutes are growing rapidly
• producers of substitutes are planning to add new capacity
• their profits are up

PRINCIPLE OF COMPETITIVE MARKETS


The competitive threat of substitutes is stronger when they are:
- readily available
- attractively priced
- believed to have comparable or better performance features
- customer switching costs are low

COMPETITIVE FORCE OF SUPPLIERS


• suppliers are a strong competitive force when:
- item makes up large portion of product costs, is crucial to production
process, and/ or significant affects product quality
- it is costly for buyers to switch suppliers
- they have good reputations and demand
- they can supply a component cheaper than industry members can make
it themselves
- they do not have to contend with substitutes
- buying firms are not important customers

PRINCIPLE OF COMPETITIVE MARKETS


• suppliers are a strong force the more they can exercise power over.
- prices charged
- quality/performance of items supplied
- amounts and delivery times

COMPETITIVE FORCE OF BUYERS


• buyers are a strong competitive force when:
- they are large and purchase a sizable percentage industry’s product
- they buy in volume quantities
- they can intergrate backward
- industry’s product is standardized
- their costs in switching to substitutes or other brands are low
- they can purchase from several sellers
- product purchased does not save buyer money

PRINCIPLE OF COMPETITIVE MARKETS


• buyers are a stronger competitive force the more they have leverage to bargain:
- price
- quality
- service
- other terms and sale
STRATEGIC IMPLICATIONS OF THE FIVE COMPETITIVE FORCES
• competitive environment is unattractive when:
- rivalry is strong
- entry barriers are low
- competition from substitutes is strong
- suppliers and customers have considerable bargaining power
• competitive environment is ideal when:
- rivalry is moderate
- entry barriers are high
- good substitutes do not exist
- suppliers and customers are in a weak bargaining position

ANALYZING DRIVING FORCES


1. identify those forces likely to exert greatest influence over next 1-3 years

2. assess impact
- what difference will the make (favorable? Unfavorable

QUESTION 3: WHAT FORCES ARE AT WORK TO CHANGE INDUSTRY


CONDITIONS
- industries change because forces are driving industry alter their actions
- driving forces are the major underlying causes of changing industry and
competitive conditions.

COPING WITH THE FIVE COMPETITIVE FORCES


• objective is to craft a strategy that will:
- insulate firm from competitive forces
- influence competitive pressures in ways that favor company
- build a sustainable competitive advantage

COMMON TYPES OF DRIVING FORCES


• increasing globalization of industry
• changes in cost and efficiency
• market shift from standardized to differentiated products (or vice versa)
• new regulatory policies and/or government legislation
• changing societal concerns, attitudes, and lifestyles
• changes in degree of certainty and risk
• changes in long-term growth rate
• changes in who buys the product and how they use it
• product innovation
• technological change/process innovation
• marketing innovation
• entry or exit of major firms
• diffusion of technical knowledge
ENVIRONMENTAL SCANNING
Definition
Monitoring and interpreting of social, political, economic, ecological, and technological
events to spot budding trends that could even

Purpose
• raise consciousness of managers about potential developments that could
- have important impact on industry conditions
- pose new opportunities and threats

QUESTION 4: WHICH COMPANIES ARE IN STRONGEST/WEAKEST POSITIONS

• one technique for revealing the different competitive positions of industry rivals is
strategic group mapping

STRATEGIC GROUP MAPPING


• firms in same strategic group have two or more competitive characteristics in
common…..
- sell in same price/quality range
- cover same geographic areas
- be vertically integrated to same degree
- have comparable product line breadth
- emphasise same types of distribution channels
- offer buyers similar services
- use identical technological approaches

PROCEDURE: CONSTRUCTING A STRATEGIC GROUP MAP


Step 1: identify competitive characteristics that differentiate firms in an industry from one
another
Step 2: plot firms on a two-variable map using pairs of these differentiating
characteristics
Step 3: assign firms that fall in about the same strategy space to same strategic group
Step 4: draw circles around each group, making circles proportional to size of group’s
respective share of total industry sales

GUIDELINES: STRATEGIC GROUP MAPS

• variables selected as axes should not be highly correlated


• variables chosen as axes should expose big differences in how rivals compete
• variables do not have to be either quantitative or continuous
• drawing sizes of circles proportional to combined sales of firms in each strategic
group allows map to reflect relative sizes of each strategic group
• If more than two good competitive variables can

INTERPRETING STRATEGIC GROUP MAPS


• driving forces and competitive pressures often favor some strategic groups and
hurt others
• profit potential of different strategic groups varies due to strengths and
weaknesses in each group’s market position
• the closer strategic groups are on map, the stronger the competitive rivalry
among member firms tends to be

QUESTION 5: WHAT STRATEGIC MOVES ARE RIVALS LIKELY TO MAKE NEXT

• a firm’s own best strategic moves are affected by


- current strategies of competitors
- actions competitors are likely to take next
• profiling key rivals involves studying
- current position in industry
- strategic objectives
- basic competitive approaches

COMPETITOR ANALYSIS

Successful strategists take great pains in scouting competitors through the following
means:
- understanding their strategies
- watching their actions
- evaluating their vulnerability to driving forces and competitive pressures
- sizing up their resource strengths and weaknesses and their capabilities
- trying to anticipate rivals next moves

PREDICTING MOVES OF RIVALS


• predicting rivals’ next moves involves
- analyzing their current competitive positions
- examining public pronouncements about what it will take to be successful
in industry
- gathering information from grapevine about current activities and potential
changes
- studying past actions and leadership
- determining who has flexibility to make major strategic changes and who
is locked into pursuing same basic strategy

THE KEY SUCCESS FACTORS


• KSFs are those elements that make an industry tick. These include:

- specific strategy companies take


- product attributes
- resources
- competencies
- competitive capabilities
• KSFs spell difference between
- profit and loss
- competitive success or failure

IDENTIFYING INDUSTRY KEY SUCCESS FACTORS


• answers to three questions pinpoint KSFs
- on what basis do customers choose between competing brands of sellers
- what must a seller do to be competitively successful
- what resources and competitive capabilities does it need
- what does it take for sellers to achieve a sustainable competitive
advantage
- KSFs consist of the 3-5 really major determinants of financial and
competitive success in an industry

COMMON TYPES OF KEY SUCCESS FACTORS

Technology related Scientific research expertise, product


innovation capability, expertise in a given
technology, capability to use internet to
conduct various business activities
Manufacturing –related Low-cost production efficiency, quality of
manufacture, high use of fixed assets, low-
cost plant locations, high labour
productivity, low-cost product design,
flexibility to make a range of products
Distribution related Strong network of wholesale
distributors/dealers, gaining ampie space
on retailer shelves, having company
owned retail outlets, low distribution costs,
fast delivery
Marketing related Fast, accurate technical
assistance,courteous customer service,
accurate filling of orders, breadth of
product line, merchandising skills,
attractive styling, customer guarantees,
clever advertising
Skills related Superior workforce talent, quality control
know-how, design expertise, expertise in a
particular technology, ability to develop
innovative products,ability to get new
products to market quickly
Organizational Superior information systems, ability to
respond quickly to shifting market
conditions, superior ability to employ
internet to conduct business, more
experience & managerial know-how
Other types Favourable image/reputation with buyers,
overall low-cost, convenient locations,
pleasant courteous employee, access to
financial capital, patent protection

STRATEGIC MANAGEMENT PRINCIPLE


A sound strategy incorporates efforts to be competent on all industry keys success
factors and to excel on at least one factor

QUESTION 7: IS THE INDUSTRY ATTRACTIVE OR UNATTRACTIVE AND WHY


Objective
Develop conclusions about whether the industry and competitive environment is
attractive or unattractive, both near-and long-term, for

Principle
A firm uniquely well-suited in an otherwise unattractive industry can, under certain
circumstances, still earn unusually good profits.

THINGS TO CONSIDER IN ASSESSING INDUSTRY


* industry’s market size and growth potential
• whether competitive conditions conducive to rising/falling industry profitability
• will competitive forces become stronger or weaker
• whether industry will be favorably or unfavorably impacted by driving forces
• potential for entry/ exit of major firms
• stability/dependability of demand
• severity of problems facing industry
• degree of risk and uncertainty in industry’s future

CONDUCTING AN INDUSTRY AND COMPETITIVE SITUATION ANALYSIS


• two things to keep in mind:

2. evaluating industry and competitive conditions cannot be reduced to a formula-


like exercise.. thoughtful analysis is essential
3. sweeping industry and competitive analyses need to done every 1 to 3 years.

“Understand what really makes a company ‘tick’ “.

“I f a company is not best in world’ at a critical activity, it is sacrificing competitive


advantage by performing that activity with its existing technique”

COMPANY SITUATION ANALYSIS: THE KEY QUESTIONS


1. How well is firm’s present strategy working?
2. What are the firm’s resource strengths and weakness and its external opportunities
and threats?
3. Are firm’s prices and costs competitive?
4. How strong is firm’s competitive position relative to rivals?

QUESTION 1: HOW WELL IS THE PRESENT STRATEGY WORKING


• two steps involved
- determine current strategy of a company
- examine key indicators of strategic and financial performance

WHAT IS THE STRATEGY


• identify competitive approach
- low-cost leadership
- differentiation
- focus on a particular market niche
• determine competitive scope
- stages of industry’s production/distribution chain
- geographic coverage
- customer base
• identify functional strategies
• examine recent strategic moves

KEY INDICATORS OF HOW WELL THE STRATEGY IS WORKING


- trend in market share
- trend in profit margins
- trend in net profit, return on investment, and EAV
- trend in sales growth
- credit ranking
- trend in stock price and stockholder value
- image and reputation with customers
- leadership role (s) .. technology, quality, etc
- competitive advantages or disadvantages

QUESTION 2: WHAT ARE THE FIRM’S


STRENGTH,WEAKNESSES,OPPPORTUNITIES AND THREATS
• SWOT represents the first letter in
- strength
- weakness
- opportunities
- threats
• strategy making must be well-matched to both
- a firm’s resources strengths and weaknesses
- a firm’s best market opportunities and external threats to its well-being

IDENTIFY RESOURCE STRENGTHS AND COMPETITIVE CAPABILITIES


• a strategy is something a firm does well or a characteristic that enhances its
competitiveness
- valuable competencies or know-how
- valuable physical assets
- valuable human assets
- valuable organisational assets
- valuable intangible assets
- important competitive capabilities
- an attribute that places a company in a position of market advantage
- alliance or cooperative ventures
IDENTIFYING RESOURCE WEAKNESSES AND COMPETITIVE DEFICIENCIES
• a weakness is something a firm lacks, does poorly, or a condition placing it at a
disadvantage
• resources weakness relate to
- deficiencies in know-how or expertise or competencies
- lake of important physical, organisational, or intangible assets
- missing capabilities in key areas

SWOT ANALYSIS … WHAT TO

S W O T

- powerful - no clear - Serving - entry of potent


strategy strategic additional new competitors
- strong financial direction customer - loss of sales to
condition - obsolete groups substitutes
- strong brand facilities - Expanding to - slowing market
name/image/ - weak balance knew growth
reputation sheet, excess geographic - advertise shifts
- widely debt areas in exchange
recognised - higher overall - Expanding rates & trade
market leader costs than rivals product line polices
- propriatary - missing some - Transferring - costly new
technology key skills to new regulations
- cost advantages skills/competenc products - vulnerability to
- strong ies - Vertical business cycle
advertising - subpar profits.. integration - growing
- product - internal - Openings to the leverage of
innovation skills operating Market Share customers or
- good customer problems for rivals suppliers
service - falling behind in - Acquisition of - shift in buyer
- better product R&D rivals needs for
quality - too narrow - Alliancies or JVs product
- alliances or JVs products line to expand - demographic
- weak marketing coverage changes
skills - Openings to
exploit new
technologies
- Openings to
extend band
name/image

COMPETENCIES VS CORE
COMPETENCIES VS DISTINCTIVE COMPETENCIES
• a competence is an internal activity that a company performs better than other
internal activities
• a core competence is a well performed internal activity that is central, not
peripheral, to a company’s strategy, competitiveness, and profitability
• a distinctive competence is a competitively valuable activity that a company
performs better than its rivals

CORE COMPETENCIES: A VALUABLE COMPANY RESOURCE


- a core competence becomes valuable when the well-performed activity is central to
the company’s strategy, competitiveness and profitability
- often, a core competence results from collaboration among different parts of an
organisation
- typically, core competencies reside in company’s people, not in its assets on the
balance sheet
- a core competence gives a company a potentially valuable competitive capability

TYPES OF CORE COMPETENCIES


• skills in manufacturing a high quality product
• system to fill customer orders accurately and swiftly
• fast development of new products
• better after-sale service capability
• superior know-how in selecting good retail out lets
• innovativeness in developing popular products features
• merchandising and product display skills
• expertise in an important technology
• expertise in an important technology
• expertise in integrating multiple technologies to create whole families of new
products

A DISTINCTIVE COMPETENCE .. A COMPETITIVE SUPERIOR RESOURCE


• a distinctive competence is a competitively significant activity that a company
performs better than its competitors
• a distinctive competence represents a competitively superior resource strength
• a distinctive competence
- represents a competitively valuable capability that rivals do not have
- has potential for being a corner stone of strategy
- can provide a competitive edge in the marketplace

EXAMPLES: DISTINCTIVE COMPETENCIES


• sharp corporation
- expertise in flat panel display technology
• toyota , honda, nissan
- low cost, high quality manufacturing capability and short design to market cycles
• intel
- ability to design and manufacture ever more powerful microprocessors for PCs
• motorola
- defect free manufacture (six-sigma quality) of cell phones

DETERMINING THE COMPETITIVE VALUE OF A COMPANY RESOURCE


• there are 4 questions of whether a “ has real potential for producing sustainable
competitive advantage
1. is the resource hard to copy
2. does the resource have staying power – is it durable
3. is the resource really competitively superior
4. can the resource be trumped by the different capabilities of
rivals

IDENTIFYING A COMPAN’S MARKET OPPORTUNITIES


• the market opportunities most relevant to a company are those offering
- the best prospects for profitable long term growth
- competitive advantage
- good match with its financial and organisational resource capabilities

IDENTIFYING EXTERNAL THREATS


• emergence of cheaper/better technologies
• introduction of better products by rivals
• intensifying competitive pressure
• onerous regulations
• a rise in interest rates
• potential of a hostile takeover
• unfavourable demographic shifts
• adverse shifts in foreign exchange rates
• political upheaval in a country

QUESTION 3: ARE THE COMPANY’S PRICES AND COSTS COMPETITIVE


• assessing whether a firm’s costs are competitive with those of rivals a crucial part
of company analysis
• key analytical tools
- strategic cost analysis
- value chain analysis
- bench marking

WHY RIVAL COMPANIES HAVE DIFFERENT COSTS


• companies do not have the same costs because of difference in
- prices paid for raw materials, component parts, energy, and other supplier resources
- basic technology and age of plant & equipment
- economies of scale and experience curve effects
- wage rates and productivity levels
- marketing, promotion and administration costs
- inbound and outbound shipping costs
- forward channel distribution costs

PRINCIPLES OF COMPETITIVE MARKETS


• the higher a company’s costs are above those of rivals, the more competitively
vulnerable it becomes

WHAT IS STRATEGIC COST ANALYSIS


• focuses on a firm’s cots relative to its rivals
• compares a firm’s costs activity by activity against costs of key rivals
- from raw materials purchase to
- price paid by ultimate customer
• pinpoints which internal activities are a source of cost advantage /disadvantage
A TYPICAL COMPANY VALUE CHAIN
Primary Activities and Costs
Inbound operations outbound sales & service profit
Logistics logistics marketing margin

Product R&D, Technology,Systems Development


Human resources management support activities
General administration and costs

THE VALUE CHAIN SYSTEM


Upstream a company’s downstream
Value chains own chain value chains

Activities, Internally Activities, costs, & Buyer/user


Costs, & Performed Margins of Value chains
margins of Activities, Forward channel
suppliers Costs & Allies & strategic
margins partners

THE VALUE CHAIN SYSTEM


• assessing a company’s cost competitiveness involves comparing costs all along
the industry’s value chain
• suppliers’ value chains are relevant because
- costs, quality and performance provided by suppliers influence a firm’s own costs
and product performance
- forward channel allies’ costs and margins are part of price paid by ultimate end-user
- activities performed affect end-user satisfaction

EXAMPLE: KEY VALUE CHAIN ACTIVITIES OF SOFT DRINKS

Soft Drink Industry


• processing of basic ingredients
• syrup manufacture
• bottling and can filling
• wholesale distribution
• retailing

TRADING COST ACCOUNTING VS ABC

A traditional cost accounting departmental activities


categories in department budget using activity-based
cost accounting
BENCHMARKING THE COSTS OF KEY VALUE CHAIN ACTIVITIES
• focuses on cross-company comparisons of how well activities are performed
- purchase of materials
- payment of suppliers
- management of inventories
- training of employees
- processing of payrolls
- getting new products to market
- performance of quality control
- filing and shipping of customer orders

WHAT DETERMINES WHETHER A COMPANY IS COST COMPETITIVE


• a company’s cost competitiveness depends on how well it manages its value
chain relative to competitors
• three areas contribute to cost differences
1. suppliers’ activities
2. the company’s own internal activities
3. forward channel activities

CORRECTING SUPPLIER-RELATED
COST DISADVANTAGES: THE OPTIONS
• negotiate more favorable prices with suppliers
• work with suppliers to help substitute inputs
• do a better job of managing linkages between suppliers’ value chains and firm’s
own chain
• make up differences by initiating cost savings in other areas of value chain

CORECTING FORWARD CHARNNEL COST DISADVANTAGES: THE OPTIONS


• push more favorable terms with distributors and other forwarded channel allies
• work closely with forward channel allies and customers to identify win-win
opportunities to reduce costs
• change to a more economical distribution strategy
• make up difference by initiating cost savings earlier in value chain

CORRECTING INTERNAL COST DISADVANTAGES: THE OPTIONS


• reengineer on the high cost activities or business processes are performed
• eliminate some cost-producing activities altogether by revamping value chain
system
• relocate high cost activities to lower cost geographic areas
• see if high cost activities can be performed cheaper by outside vendors/suppliers
• invest in cost saving technology
• simplify product design

FROM VALUE CHAIN ANALYSIS TO COMPETITIVE ADVANTAGE


• a company can create competitive advantage by managing its value chain so as
to
- integrate the knowledge and skills of employees in competitively valuable ways
- leverage economies of learning/ experience
- coordinate related activities in ways that build valuable capabilities
- building dominating expertise in a value chain activity critical to customer satisfaction
or market success

QUESTION 4: HOW STRONG IS THE COMPANY’S COMPETITIVE POSITION


• can the firm’s position be expected to improve or deteriorate if present strategy is
continued
• how the firm ranks relative to key rivals on each industry KSF and relevant
measure of competitive strength
• whether the firm has a sustainable competitive advantage or disadvantage
• ability of firm to defend its position in light of
- industry driving forces
- competitive pressures
- anticipated moves of rivals

ASSESSING A COMPANY’S COMPETITIVE STRENGTH VERSUS KEY RIVALS


1. list industry key success factors and other relevant
measures of competitive strength
2. rate firm and key rivals on each factor using rating scale 1-
10 (1 = weak; 10 = strong)
3. decide whether to use a weighted or unweighted rating
system
4. sum individual ratings to get overall measure of
competitive strength for each rival
5. determine whether the firm enjoys a competitive advantage
of suffers from competitive disadvantage

QUESTION 5: WHAT STRATEGIC ISSUES DOES THE COMPANY NEED TO


ADDRESS
• what should management be worried about … what items should be on the
company’s “worry list”
• requires thinking strategically about
- the pulses and minuses in the industry and competitive situation
- the company’s resource strengths and weaknesses and the attractiveness of its
competitive position
“ a good strategy must address each and every strategic issue”

IDENTIFYING THE STRATEGIC ISSUES


• is present strategy adequate in light of competitive pressures and driving forces
• is the strategy well-matched to the industry’s key success factors
• does the company need new or different resource strengths and competitive
capabilities
• does present strategy adequately protect against external threats and resources
deficiencies
• is firm vulnerable to competitive attack by rivals
• where are strong/weak spots in present strategy
STATING THE ISSUES CLEARLY AND PRICISELY
• a well-stated issue involves such phrases as
- what should be done about
- how to
- whether to
- should we
• issues need to be precise, specific, “cut straight to the chase”
• issues raise questions about
- what actions need to be considered

CORPORATE CULUTRE
Corporate Culture is a collection of beliefs, expectations and values learned and shared
by the cooperative members and transmitted from one generation to the next.
• corporate culture reflects the values of the founding members. It gives a
company a sense of identity
• corporate culture has two attributes i.e. intensity and integration
- cultural intensity is the extent to which members accept the noms, values. It shows
the cultural depth
- cultural integration is the extent to which various units throughout the organization
share a common culture

IMPORTANCE OF CORPORATE CULTURE


• conveys a sense of identity for employees.
• Helps generate employee commitment to something greater than them
• Adds to the stability of the organisation as a social system
• It shapes the behavior of employees in the organisation
• A strong culture can shape the future of the organisation
• An organisation must have both a strong and adaptable culture. It must adapt to
changing environment.
RESOURCE BASED APPROACH AND THE FINANCIAL APPROACH COMBINED

R&D Manufacturing Marketing Finance Management


Engineering
Conceive/De Produce Distribute/ Finance Plan/Organize/
sign/Develop Sell/Service Control
-$ for basic -$ for plant -$ for sales -$ for S.T. -$ for planning
research -$ for & promotion cash system
-$ for new equipment -$ for manageme -$ for control
product -$ for inventory distribution nt system
Focus of development -$ for labour -$ service -$ for -$ for
Financial -$ for product -$ for raising management
Deployments improvement market L.T.Funds development
s research -$ for
-$ for allocating
process L.T funds
improvement -$ for
s manageme
nt
developme
nt
-Size, age N, location, size N and N of lock -location of
and location and age of location of boxes corporate
Physical of R&D plants sales offices N of major headquarters
Resources facilities -degree of N and lenders
- Size, age automation location of dispersion
and location degree of warehouses of stock
of integration N and ownership
development -type of location of N and
facilities equipment service types of
facilities computers
Ns, types Ns, types and Ns, types Ns, types Ns, types and
and age of age of key staff and age of and age of age of key
Human key scientists personnel and key key managers and
Resources and foreman salesmen financial corporate staff
engineers -turnover of key -marketing and turnover of key
-turnover of personnel staff accounting personnel
key -turnover of personnel
personnel key -turnover of
personnel key
personnel
Organizational -system to Nature and Nature and type and -nature of
Systems monitor sophistication of sophisticatio sophisticati organizational
technological -purchasing n of on of culture and
development system -distribution -cash values
s production system manageme -sophistication
-system to scheduling and -service nt system of planning and
control control system system -financial control systems
conceptual/d -quality control -pricing & markets -delegation of
esign/develo system credit staff forecasting authority
pment -market system -measurement
process research -corporate of reward
staff financial systems
models
-
accounting
system

- patents -raw materials Raw -Credit Corporate


N new availability materials in rating image prestige
products -trends in total total -credit influence with
% of sales constant $ per constant $ availability regulatory and
from new unit costs for: per unit -leverage governmental
products • raw costs for: - agencies
relative material • sale price/earni -quality of
product s and s& ngs ratio corporate staff
Technological quality purchas prom -stock price organizational
Capabilities ed parts otion -cash flow synergies
• direct • distri -dividend
labour & butio payout
equipme n&
nt servi
producti ce
vity %
• capacity retail
utilizatio outle
n t
unioniza cove
tion rage
• key
acco
unt
adva
ntag
es
• price
com
petiti
vene
ss
• brea
dth
of
prod
uct
line
bran
d
loyal
ty
• servi
ce
effec
tiven
ess

CHAPTER OUTLINE
• generic competitive strategies
- low-cost leadership strategy
- broad differentiation strategies
- best cost provider strategies
- focused low-cost strategies
- focused differentiation strategies
• vertical integration strategies
• cooperative strategies
• offensive and defensive strategies
• first-mover advantages and disadvantages

STRATEGY AND COMPETITIVE ADVANTAGE


• competitive advantage exists when a firm’s strategy gives it an edge in
- defending against competitive forces and
- securing

KEY TO SUCCESS
• convince customers firm’s product/service offers superior value
- offer buyers a good product at a lower price

WHAT IS COMPETITIVE STRATEGY


• consists of business approaches to
- attract customers, fulfilling their expectations
- withstand competitive pressures
- strengthen market position
• includes offensive and defensive moves to
- counter actions of key rivals
- shift resources to improve long-term market position
- respond to prevailing market conditions

THE FIVE GENERIC COMPETITIVE STRATEGIES

Type of advantage sought

Lower cost differentiation

Broad Range Overall low-cost Broad differentiation


Of buyers leadership strategy strategy
Best-cost
Provider
strategy

Narrow buyer Focused Focused


Segment Low-cost differentiation
strategy strategy
Or niche

A LOW –COST LEADERSHIP STARTEGY


Objective
• open up a sustainable cost advantage over rivals, using lower-cost edge as a basis
either to
- under-price rivals and reap market share gains OR
- earn higher profit margin selling at going price
LOW COST LEADERSHIP STRATEGY
Key to success
• make achievement of low-cost relative to rivals the THEME of firm’s business
strategy
• find ways to drive costs out of business year after year
• low cost leadership means low OVERALL costs, not just low manufacturing or
production costs

APPROACHES TO SECURING COST ADVANTAGE


Approach 1
- do a better job than rivals of performing value chain activities efficiently and cost
effectively

Approach 2
- revamp value chain to bypass some cost-producing activities

APPROACH 1: CONTROLLING THE COST DRIVERS


• capture scale economies, avoid scale diseconomies
• capture learning and experience curve effects
• manage costs of key resources inputs
• consider linkages with other activities in value chain
• find sharing opportunities with other business units
• compare vertical integration vs outsourcing
• assess first-mover advantages vs disadvantages
• control percentage of capacity utilization
• make prudent strategic choices related to operations

APPROACH 2: REVAMPING THE VALUE CHAIN


• simplify product design
• offer basic, no-fills product/service
• shift to a simpler, less capital –intensive , or more streamlined technological process
• find ways to bypass use of high-cost raw materials
• use direct-to-end user sales/marketing approaches
• relocate facilities closer to supplier or customers
• reengineer core business processes… be creative in finding ways eliminate value
chain activities
• use PC technology to delete works steps, modify processes, cut out cost-producing
activities

CHARECTERISTICS OF A LOW-COST PROVIDER


• cost conscious corporate culture
• employee participation in cost-control efforts
• ongoing efforts to benchmark costs
• intensive scrutiny of budget requests
• programs promoting continuos cost
- successful low-cost producers champion frugality but wisely and aggressively invest
in cost-saving improvements!

WHAT COMPANY MANAGERS HAVE TO DO TO ACHIEVE LOW-COST


LEADERSHIP
• scrutinize each cost-creating activity, identifying cost drivers
• use knowledge about cost drivers to manage costs of each activity down year after
year
• find ways to reengineer how activities are performed and coordinated … eliminate
unnecessary work steps
• be creative in cutting some activities out of value chain system… re-invent the
industry value chain

THE COMPETITIVE STRAENGTHS OF LOW-COST LEADERSHIP


• better position than rival competitors to compete offensively on basis of price
• low-cost provides some protection from bargaining leverage of powerful buyers
• low-cost provides some protection from bargaining leverage of powerful suppliers
• low-cost provider’s pricing power acts as a significant barrier for potential entrants
• low-cost puts a company in position to use low price as a defense against substitutes

A LOW-COST STRATEGY WORKS BEST WHEN:


• price competition is vigorous
• product is standardized or readily available from many suppliers
• there are few ways to achieve differentiation that have value
• most buyers use product in same ways
• buyers incur low switching costs
• buyers are large and have significant bargaining power

PITFALLS OF LOW-COST STRATEGIES


• being overly aggressive in cutting price (revenue erosion of lower price is not offset
by gains in sales volume—profits go down, not up)
• low cost methods are easily imitated by rivals
• becoming too fixated on reducing costs and ignoring
- buyer interest in additional features
- declining buyer sensitivity to price
- changes in how the product is used
• technological breakthroughs open up cost reductions for rivals

DIFFERENTIATION STRATEGIES
Objective
• incorporate differentiating features that cause buyers to prefer firm’s product or
service over rivals brand

Key to success
• find ways to differentiate that create value for buyers and that are not easily matched
or cheaply copied by rivals not spending more to differentiate than price premium to
be charged

THE APPEAL OF DIFFERENTIATION STRATEGIES


• a powerful competitive approach when uniqueness can be achieved in ways that
- buyers perceive as valuable
- rivals find hard to match
- can be incorporated at a cost well below the price premium that buyers will pay

BENEFITS OF SUCCESSFUL DIFFERENTIATION STRATEGIES


• A product/service with unique and appealing attributes allows a firm to
- command a premium price and/ or
- increase unit sales and/or
- build brand loyalty
= competitive advantage

TYPES OF DIFFERENTIATION THEMES


• unique taste… Dr.Pepper
• special features.. America Online
• superior service.. FedEx, Ritz-Carlton
• spare parts availability..Caterpillar
• more for your money.. Mcdonald’s, Wal-Mart
• engineering design and performance..Mercedes
• prestige..Rolex
• quality manufacture..Honda, Toyota
• technological leadership..3M cprporaton, intel
• top-of-the line image..Ralph Lauren Channel

SUSTAINING DIFFERENTIATION: THE KEY TO COMPETITIVE ADVANTAGE


• most appearing approaches to differentiation
- those hardest for rivals to match or imitate
- those buyers will find most appealing
• best choices for gaining a longer-lasting, more profitable competitive edge:
- new product innovation
- technical superiority
- product quality and reliability
- comprehensive customer service

WHERE TO FIND DIFFERENTIATION OPPORTUNITIES IN THE VALUE CHAIN


• purchasing and procurement activities
• product R&D activities
• product R&D,technology related activities
• manufacturing activities
• outbound logistics and distribution activities
• marketing, sales and customer service activities

HOW TO ACHIEVE A DIFFERENTIATION-BASED ADVANTAGE


Approach 1
• incorporate product features/attributes that lower buyer’s costs in using product

Approach 2
• incorporate product features/attributes that raise the performance a buyer gets out of
the product
Approach 3
• incorporate product features/attributes that enhance buyer satisfaction in non-
economic or intangible ways

Approach 4
• compete on the basis of superior capabilities

SIGNALING VALUE AS WELL AS DELIVERING VALUE


• buyers seldom pay for value that is not perceived
• signals of value may be as important as actual value when:
- nature of differentiation is hard to quantity
- buyers are making first time purchases
- repurchase is infrequent
- buyers are unsophisticated

THE COMPETITIVE STRENGTHS OF A DIFFERENTIATION STRATEGY


• buyers develop loyalty to brand they like best.. can beat rival competitors in the
market place
• mitigates bargaining power of large buyers since other products are less attractive
• differentiation puts a seller in better position to withstand efforts of suppliers to raise
prices
• buyer loyalty acts as a barrier to potential entrants

A DIFFERENTIATION STRATEGY WORKS BEST WHEN:


• there are many ways to differentiate a product that have value and please customers
• buyer needs and uses are diverse
• few rivals are following a similar type of differentiation approach
• technological change is fast-paced and competition is focused on evolving product
features

WHAT CAN MAKE A DIFFERENTIATION STRATEGY FAIL


• trying to differentiate on a feature buyers do not perceive as lowering their cost or
enhancing their well being
• over-differentiating such that product features exceed buyers’ needs
• charging a price premium that buyers perceive is too high
• failing to signal value
• not understanding what buyers want or prefer and differentiating on the wrong things

COMPETITIVE STRATEGY PRINCIPLE


• a low-cost producer strategy can defeat a differentiation strategy when buyers are
satisfied with a standard product and do not see extra attributes as worth paying for.

BEST COST PROVIDER STRATEGIES


• combine a strategic emphasis on low-cost with a strategic emphasis on
differentiation
- make an upscale product at a lower cost
- give customers more value for the money

Objectives
• create superior value by meeting or exceeding buyer expectations on product
attributes and beating their price expectations
• be the low –cost producer of a product with good-to-excellent product attributes then
use cost advantage to underprice comparable brands

THE COMPETITIVE STRENGTH OF A BEST-COST PROVIDED STRATEGY


• competitive advantage comes from matching close rivals on key product attributes
and beating them on price
• success depends on having the skills and capabilities to provide attractive
performance and feature at a lower cost than rivals
• a best cost provider can often out compete both a low cost provider and a
differentiator when
- standardized features/attributes won’t meet the diverse needs of buyers
- many buyers are price and value sensitive

FOCUS/NICHE STRATEGIES
Objective
• do a better job of serving buyers in target market niche than rivals

Key to success
• choose a market niche where buyers have distinctive preferences, special
requirements, or unique needs
• develop unique capabilities to serve needs of target buyer segment

FOCUS/NICHE STRATEGIES AND COMPETITIVE ADVANTAGE


Approach 1
• achieve lower costs than rivals in serving the segment a low cost strategy

Approach 2
* offer niche buyers a low cost strategy .. something different from rivals.. a
differentiation strategy

EXAMPLES OF FOCUS STRATEGIES


• netscape
- software to browse world wide web
• porsche
- sports cars
• cannondale
- mountain bikes
• horizon and comair-commuter airlines
- link major air ports with small cities
• jiffy lube international
- maintenance for motor vehicles

WHAT MAKES A NICHE ATTRACTIVE FOR FOCUSING


• big enough to be profitable
• good growth potential
• not crucial to success of major competitors (making it unlikely they will compete hard
in niche)
• focuser has resources to effectively serve segment
• focuser can defend against challengers via superior ability to serve buyers in
segment

THE COMPETITIVE STRENGTH OF FOCUS/NICHE STRATEGIES


• rival competitors do not have matching capabilities to meet specialised needs of
niche members
• focuser’s competencies/capabilities act as a barrier to potential entrants
• focuser’s competencies/capabilities pose obstacles to sellers of substitutes
• focuser’s unique ability to meet niche buyers’ needs can blunt bargaining leverage of
powerful buyers

WHEN DOES A FOCUS STRATEGY WORK BEST


• costly or difficult for multi-segment rivals to serve specialised needs of target niche
• no other rivals are concentrating on same segment
• firm’s resources do not allow it to go after a bigger piece of market
• industry has many different segments, creating more focusing opportunities

RISK OF A FOCUS STRATEGY


• competitors find effective ways to match a focuser’s capabilities in serving niche
• niche buyers preferences shift towards product attributes desired by majority of
buyers .. niche becomes part of the overall market
• segment becomes so attractive it becomes crowded with rivals causing segment
profits to be splintered

VERTICAL INTEGRATION STRATEGIES


• vertical integration extends a firm’s competitive scope within same industry
- backward into sources of supply
- forward toward end-users of final product
• can aim at either full or partial integration

COMPETITIVE STRATEGY PRINCIPLE


• a vertical integration strategy has appeal only if it significantly strengthen a firm’s
competitive position

APPEAL OF BACKWARD INTEGRATION


• generate cost savings only if volume needed is big enough to capture efficiencies of
suppliers
• potential to reduce costs exists when
- suppliers have sizable profit margins
- item supplied is a major cost component
- resource requirements are easily met
• can provide a differentiation based competitive advantage when it results in a better
quality part
• reduces risk of depending on suppliers of crucial raw materials/parts/components
• advantageous for a firm to establish its own distribution network if
- undependable distribution channels undermine steady production operations
• integrating forward into distribution and retailing
- may be cheaper than going through independent distributors
- may help achieve stronger product differentiation, allowing escape from price
competition
- may provide better access to users

STRATEGIC DISADVANTAGES OF VERTICAL INTEGRATION


• boosts resource requirements
• locks firm deeper into same industry
• results in fixed sources of supply and less flexibility in accommodating buyer
demands for product variety
• poses problems of balancing capacity at each stage of value chain
• may require radically different skills/capabilities
• can reduce firm’s manufacturing flexibility lengthening design time and ability to
introduce new products

UNBUNDLING AND OUTSOURCINGSTRATEGIES


• involves not performing certain value chain activities internally and relying on outside
vendors to perform needed activities and services

ADVANTAGES OF OUTSOURCING STRATEGIES


• outside socialists can perform the activity better or more cheaply
• activity is not crucial to achieving competitive advantage
• reduces risk exposure to changing technology and/or changing buyer preferences
• streamlines operations to
- cut cycle time
- speed decision making
- reduce coordination costs
• allows firm to concentrate on its core business

PROS AND CONS OF VERTICAL INTEGRATION


• appeal of a vertical integration strategy depends on
- its ability to enhance performance of strategy critical activities by
• lowering costs
• increasing differentiation
- its impact on
• resource requirements
• flexibility and response times
• administrative overhead of coordination
- its ability to create a competitive advantage

COOPERATIVE STRATEGIES
• companies sometimes use strategic alliances or strategic partnerships or
collaborative
agreements to complement their own strategic initiativeness. Such cooperative
strategies go beyond normal company –to-company dealings but fall.

WHY ARE STRATEGIC ALLIANCES FORMED


• to collaborate on technology development or new product development
• to improve supply chain efficiency
• to gain economies of scale in production and/or marketing
• to fill gasps in technical or manufacturing expertise
• to speed new products to market

OFFENSIVE AND DEFENSIVE STRATEGIES


Offensive strategies
• are undertaken to build new or stronger market positions and/or create competitive
advantage

Defensive Strategies
• can protect competitive advantage, but rarely are the basis for creating advantage

THE BUILDING AND ERODING OF COMPETITIVE ADVANTAGE

Build up period benefit period erosion period

Size of competitive
Advantage
Strategic size of
Moves competitive moves by
Produce advantage rivals
Competitive achieved competitive
Advantage advantage

Time

OPTIONS FOR MOUNTING STRATEGIC OFFENSIVES


1. initiatives to match or exceed rivals’ strengths
2. initiatives to capitalize on rivals’ weakness
3. simultaneous initiatives on many fronts
4. end run offensives
5. guerrilla warfare tactics
6. preemptive strikes

ATTACKING COMPETITOR STRANGTHS


Appeal
• gain market share by out-matching strengths of weaker rivals
• whittle away at a rival’s competitive advantage
• challenging strong competitors with a lower price is foolhardy unless the aggressor
has a cost advantage or advantage of greater financial strength
ATTACKING COMPETITOR STRANGTHS
Possible Offensive Options
• under-price rivals
• boost advertising
• introduce new features to appeal to rivals’ customers

Best Options
• attack with equally good product & lower price

OPTIONS FOR ATTACKING A COMPETITOR’S STRENGTHS


• offer equally good product at a lower price
• offer a better product at the same price
• leapfrog into next-generation technologies
• add appealing new features
• run comparison ads
• construct new plant capacity
• offer a wider production line
• develop better customer service capabilities

ATTACKING COMPETITOR WEAKNESSES


Basic approach
• concentrate company strengths and resources directly against a rival’s weaknesses

Weaknesses to attack
• geographic regions where rival is weak
• segments rival in neglecting
• go after those customers a rival is least equipped to serve
• rivals with weaker marketing skills
• introduce new models exploiting gaps in rivals’ product lines

LAUNCHING SIMULTANEOUS OFFENSIVES ON MANY FRONTS


Objective
• launch several major initiatives to
- throw rivals off-balance
- splinter their attention
- force them to use substantial resources to defend their position

Appeal
• a challenger with superior resources can overpower weaker rivals by out-competing
them across-the board long enough to become a market leader

END-RUN OFFENSIVES
Objectives
• dodge head-to-head confrontations that escalate competitive intensity or risk
cutthroat competition
• attempt to maneuver around areas of strong competition

OPTIONAL APPROACHES FOR END-RUN OFFENSIVES


• build presence in geographic areas where rivals have little presence or exposure
• introduce products with different attributes and features to better meet buyer needs
• introduce next-generation technologies and leapfrog rivals
• add more support services for customers

GUERRILLA OFFENSES
Approach
• use principles of surprise and hit-and-run to attack in locations and at times where
conditions are most favorable to initiator

Appeal
• well-suited to small challengers with limited resources

OPTIONS FOR GUERRILLA OFFENSES


• focus on narrow target weakly defended defended by rivals
• challenge rivals where they are over extended and when they are encountering
problems
• make random scattered raids on leaders
- occasional low-balling on price
- intense bursts of promotional activity
- legal actions charging antitrust violations, patent infringements, or unfair advertising

PREEMPTIVE STRIKES
Approach
• involve first to secure an advantageous position that rivals are fore closed or
discouraged duplicating
• expand capacity ahead of demand in hopes of discouraging rivals from following suit
• tie up best or cheapest sources of essential raw materials
• move to secure best geographic locations
• obtain business of prestigious customers
• build an image in buyers’ minds that is unique & hard to copy
• secure exclusive or dominant access to best distributors
• acquire desirable, but struggling, competitor

CHOOSING WHOM TO ATTACK


• four types of firms can be the target of offensive
- market leaders
- runner-up firms
- struggling rivals on verge of going under
- small local or regional firms not doing a good job for their customers

OFFENSIVE STRATEGY AND COMPETITIVE ADVANTAGE


• strategic offensive options offering strongest basis for competitive advantage
- develop lower-cost product design
- make changes in production operations that lower costs or enhance differentiation
- develop product features that deliver superior performance or lower users’ costs
- give more responsive customer service
- escalate market effort
- pioneer new distribution channel
- sell direct to end-users

DEFENSIVE STRATEGY
• fortify firm’s present position
• help sustain any competitive advantage held
• lessen risk of being attacked
• blunt impact of any attack that occurs
• influence challengers to aim attacks at other rivals

SIGNALING DEFENSIVE TOUGHNESS


• Publicly announce management’s strong commitment to maintain present market
share
• Publicly announce plans to construct new production capacity to meet forecasted
demand
• Give out advance information about new products, technological breakthroughs, and
other moves
• Publicly commit firm to policy of matching prices and terms offered by rivals
• Maintain war chest of cash reserves
• Make occasional counter-response to rivals’ moves

FIRST-MOVER ADVANTAGES
• when to make a strategic move is often as crucial as what move to make
• first-mover advantages arise when:
- pioneering helps build firm’s image and reputation
- early commitments to raw material suppliers, new technologies & distribution
channels can produce cost advantage
- loyalty of first time buyers is high
- moving first can be a preemptive strike

FIRST-MOVER DISADVANTAGES
• moving early can be a disadvantage (or fail to produce an advantage) when
- costs of pioneering are sizeable and loyalty of first time buyers is weak
- rapid technological change allows followers to leapfrog pioneers
- achievements of pioneers are easily and quickly imitated by late movers
- it is relatively easy for latecomers to crack the market

TIMING AND COMPETITIVE ADVANTAGE


Principle 1
• being a first-mover holds potential for competitive advantage in some cases but not
in others

Principle 2
• being a fast-mover follower can sometimes yield as good a result as being a first-
mover

Principle 3
• being a late-mover may or may not be fatal.. it varies with the situation