Strategy Formulation

Generic Strategies

Internal Analysis

Competitive Advantage

Why Do An Internal Analysis?

To

Determine Strengths & Weaknesses

Seven Key Internal Forces Seven Key Internal Forces

Management Marketing Manufacturing

Research & Development

Finance/Accounting

Purchasing

Information Systems

Introduction
Why

do firms in the same industry pursuing the same strategies vary by performance?
Ebay versus Ubid Walmart versus Kmart Best Buy versus Radio Shack

Often

the top performing firm(s) possesses a Competitive Advantage over its rivals

What is Competitive Advantage?

Set

of resources or capabilities that allows firms to consistently outperform their rivals.

A Test of Competitive Advantage

Valuable? Rare Costly to NonCompetitive Imitate? Substitutable Consequence ? ? Performance Implications

No Yes Yes Yes

No No

No No

No Yes/no Yes/no Yes

Competitive Below average Disadvantage returns Competitive Average Parity Returns Temporary Average to Competitive Above average Advantage Sustainable Above average Competitive returns Advantage

Yes No Yes Yes

A Test of Competitive Advantage

Valuable? Rare Costly to NonCompetitive Imitate? Substitutable Consequence ? ? Performance Implications

No Yes Yes Yes

No No

No No

No Yes/no Yes/no Yes

Competitive Below average Disadvantage returns Competitive Average Parity Returns Temporary Average to Competitive Above average Advantage Sustainable Above average Competitive returns Advantage

Yes No Yes Yes

A Test of Competitive Advantage

Valuable? Rare Costly to NonCompetitive Imitate? Substitutable Consequence ? ? Performance Implications

No Yes Yes Yes

No No

No No

No Yes/no Yes/no Yes

Competitive Below average Disadvantage returns Competitive Average Parity Returns Temporary Average to Competitive Above average Advantage Sustainable Above average Competitive returns Advantage

Yes No Yes Yes

A Test of Competitive Advantage

Valuable? Rare Costly to NonCompetitive Imitate? Substitutable Consequence ? ? Performance Implications

No Yes Yes Yes

No No

No No

No Yes/no Yes/no Yes

Competitive Below average Disadvantage returns Competitive Average Parity Returns Temporary Average to Competitive Above average Advantage Sustainable Above average Competitive returns Advantage

Yes No Yes Yes

For Long Run Profits

You

must sustain the competitive advantage

Barriers & Long Run Competitive Advantage

A

resource will only contribute to sustained competitive advantage if it is associated with barriers
that

prevent resource acquisition or replication by competitors.

These Barriers Are

Patents.
Exclusive

rights for 17 years.

Exclusive

access to key resources or

assets. Superior R&D Brand name/ loyalty/ goodwill

Continuum of Resource Sustainability (and Firm Profitability)

High (Hard to imitate) Slow Cycle Resources Strongly shielded Patents, brand name Gillette: Track III Searle: Nutrasweet Eli Lilly: Prozac Standard- Cycle Resources Standardized mass production Economies of scale or complicated processes Chrysler: Minvan Low (Easy to Imitate) Fast Cycle Resources Easily Duplicated Idea Driven Sony: Walkman TI: Calculators Rio: MP3 players

Strategy & Competitive Advantage

Competitive advantage = an edge over ones rivals (it is relative, not absolute) The edge: low cost, quality, service, location, technology, unique features or performance, etc. In short SUPERIOR VALUE (as determined by the customer)

Competitive Strategy
Approaches & moves taken to: ** Attract customers ** Withstand competitive pressures ** Strengthen market position Consists of offensive &/or defensive actions

Generic Competitive Strategies

Type of Competitive Advantage
Low Cost Differentiation

Broad

Overall Cost Leadership Strategy

Differentiation Strategy Stuck in the Middle Focus Differentiation Strategy

Target Market
Narrow
Focus Cost Strategy

Overall Low-Cost Leadership

Efficiency Cost reduction throughout the value chain (requires identification & management of cost drivers) Tight budget control Basis of competitive advantage: become & remain the low cost leader Usually requires big market share

Strategic objective: establish & maintain position that has a significant cost advantage over rivals

Low-Cost Strategy Works Best:

When price competition dominates the industry When industry products/services are standard or commodities When there are few ways to achieve differentiation When buyers have similar needs When buyer switching costs are low When buyers are large & have significant bargaining power

Low-Cost Strategy is Risky:

When potential exists for technological breakthroughs to confer sudden cost reductions to rivals When imitability of low-cost production methods is easy When obsessive focus on efficiency clouds changing market realities When heavy irrevocable investments limit flexibility/responsiveness

Low-Cost Leadership Strategy

Appropriate in industries characterized by price-sensitive buyers Low-cost leaders are in the best position to set the floor on market price How does a low-cost strategy offset industry forces? What are the key strategic value chain activities to support this strategy?

Broad Differentiation Strategy

External focus Unique features or performance Design/brand image are critical Seek to provide products & services that command price premiums Basis of competitive advantage: provide attributes unmatched by rivals

Strategic objective: offer products or services that rivals cannot or will not match, and that are valued for their uniqueness by discriminating customers

Differentiation Strategy Works Best:

When there are many ways to differentiate ones products/services & these differences are perceived by buyers to have value When an industry buyer needs are diverse When few rivals are following a similar type of differentiation approach When buyer loyalty can be earned When products incur switching costs

Differentiation Strategy is Risky:

When

buyers dont recognize or value the uniqueness Products/services are over differentiated -- too expensive &/or too difficult to understand Buyer switching costs are low

Differentiation Strategy
How

does a differentiation strategy offset industry forces? What are the key strategic value chain activities to support this strategy?

Focus Strategies
Concentrate on segment of the overall market (buyer group, geographic region, etc.) Basis of competitive advantage: either overall low-cost or differentiation -- not both

Strategic objective: establish & defend a narrow market niche

Focus Strategies Work Best:

When

industry segments are the right

size When competition is absent When specialization/customization is required & valued When firms resources are limited

Focus Strategies are Risky:

When

competitors can/do intrude When niche buyers preferences shift toward the market as a whole When the segment becomes too attractive Because growth is limited by segment size

First-Mover Advantages Arise:

When pioneering builds a firms image & reputation When early commitments to suppliers & distribution channels locks others out &/or produces cost advantages When first-time buyer loyalty is high When moving first can be a preemptive strike against rivals

First-Mover Disadvantages Arise:

When

pioneering costs are sizeable & first-time buyer loyalty is week When rapid technological change allows followers to leapfrog pioneers When the pioneers skills and know-how are easily imitated by late movers
Conclusion: there are reasons to be a leader (first-mover) as well as a follower (late-mover)

Matching Strategy to a Companys Situation

A complex task
Two broad categories of drivers shaping a companys strategic options: 1. Nature of the industry & competitive conditions 2. The companys own competitive capabilities, market position, & best opportunities

Matching Strategy to a Companys Situation

External drives shaping strategic options: industry & competitive conditions Emerging & growing industries Mature industries Stagnant or declining industries Fragmented industries International markets

Competing in Emerging & Growing Industries

Unproven market First-time buyers Grow-&-build mode Low entry barriers Rapid experience curve effects No technological standards set Information about demand is uncertain Late-adopters or early-adopters?

No rules have been established -uncertainty abounds

Competing in Mature Industries

Growth

slows Buyers become more sophisticated Emphasis shifts to cost & service Competitive shakeout & consolidation Industry profitable shrinks Efficiency becomes critically important

Competing in Declining Industries

Market

share becomes everything Continual cost reduction Product line pruning Divestitures Solidifying distribution channels

Fragmented Industries
Lots

of relatively small companies; no dominant market share leader or oligopolistic group Low entry barriers Absence of scale economies Fragmented buyer groups Profitability tends to be low