Sm-6

CHAPTER 6 Formulating Long-Term Objectives and Grand Strategies

Chapter Topics • • • • •

Long-Term Objectives Generic Strategies Grand Strategies Corporate Combinations Selection of Long-Term Objectives and Grand Strategy Sets • Sequence of Objectives and Strategy Selection

Types of Long-Term Objectives • • • • • • •

Profitability Productivity Competitive position Employee development Employee relations Technological leadership Public responsibility

Qualities of Long-Term Objectives

Achievable Understandable

Acceptable Criteria used in preparing objectives

Flexible Measurable

Suitable Motivating

What is the Balanced Scorecard?

The Balanced Scorecard is a set of measures that are directly linked to the company’s strategy. It directs a company to link its own long-term strategy with tangible goals and actions.

The Four Perspectives in a Balanced Scorecard  Financial performance  Customer knowledge  Internal business processes  Learning and growth

Exhibit 6-2: The Balanced Scorecard Financial ‘To succeed financially, how should we appear to our shareholders?” Customer “To achieve our vision, how should we appear to our customers?”

Vision and Strategy Learning and Growth ‘To achieve our vision, how will we sustain our ability to change and improve?”

Internal Business Process “To satisfy our shareholders and customers, what business processes must we excel at?”

The Value Disciplines • Strategies must center on delivering superior customer value through one of three value disciplines:  Operational excellence  Customer intimacy  Product leadership

• Companies that specialize in one of these disciplines, while simultaneously meeting industry standards in the other two, gain a sustainable lead in their markets.

Generic Strategies

Low-cost Leadership

Differentiation

Focus

Ex. 6-3: Requirements for Generic Competitive Strategies Generic Strategy

Commonly Required Skills and Resources

Overall Cost Leadership

•Sustained capital investment and access to capital •Process engineering skills •Intense supervision of labor •Products designed for ease in manufacture •Low-cost distribution system

Common Organizational Requirements

•Tight cost control •Frequent, detailed control reports •Structured organization and responsibilities •Incentives based on meeting strict quantitative targets

Ex. 6-3 (contd.) Generic Strategy

Differentiation

Focus

Commonly Required Skills and resources

Common Organizational Requirements

•Product engineering •Creative flare •Strong capability in basic research •Corporate reputation for quality or technological leadership •Unique combination of skills •Strong cooperation from channels •Strong marketing abilities

•Strong coordination

Combination of above policies directed at the particular strategic target

Combination of above policies directed at the particular strategic target

among functions in R&D, product development, and marketing •Subjective measurement and incentives instead of quantitative measures •Amenities to attract highly skilled labor, scientists, or creative people

Ex. 6-4: Risks of the Generic Strategies Risks of Cost Leadership

Risks of Differentiation

Risks of Focus

Cost leadership is not sustained •Competitors imitate •Technology changes •Other bases for cost leadership erode Proximity in differentiation is lost Cost focusers achieve even lower cost in segments

Differentiation is not sustained •Competitors imitate •Bases for differentiation become less important to buyers Cost proximity is lost Differentiation focusers achieve greater differentiation in segments

Focus strategy is imitated Target segment becomes unattractive •Structure erodes •Demand disappears Broadly target competitors overwhelm segments •Segment’s differences from others narrow •Advantages of broad line increase

Types of Grand Strategies • • • • • • •

Concentrated growth Market development Product development Innovation Horizontal integration Vertical integration Concentric diversification

• Conglomerate diversification • Turnaround • Divestiture • Liquidation • Bankruptcy • Joint ventures • Strategic alliances • Consortia

Characteristics of a Concentrated Growth Strategy • Involves focusing resources on the profitable growth of a single product, in a single market, with a single dominant technology • Rationale – Firm develops and exploits its expertise in a delimited competitive arena • Determinants of competitive market success • • • •

Ability to assess market needs Knowledge of buyer behavior Customer price sensitivity Effectiveness of promotion

Conditions Favoring a Concentrated Growth Strategy  Firm’s industry is resistant to major technological advancements  Firm’s target markets are not product saturated  Firm’s markets are sufficiently distinctive to dissuade competitors in adjacent markets from entering firm’s segment  Firm’s inputs are stable in price and quantity and available in the amounts and at the times needed  Firm’s industry is stable  Firm’s competitive advantages are based on efficient production or distribution channels  Success of market generalists

Strategies of Market and Product Development • Market development • Consists of marketing present products, often with only cosmetic modifications to customers in related market areas by • Adding channels of distribution or • Changing content of advertising or promotion

• Product development • Involves substantial modification of existing products or creation of new but related products • Based on penetrating existing market by • Incorporating product modifications into existing items or • Developing new products connected to existing products

Exhibit 6-4: Specific Options for Selected Grand Strategies 2.

Concentration (Increasing use of present products in present markets) Increasing present customers’ rate of use a. b. c. d.

3.

Attracting competitors’ customers a. b. c.

4.

Increasing size of purchase Increasing the rate of product obsolescence Advertising other uses Giving price incentives for increased use Establishing sharper brand recognition Increasing promotional effort Initiating price cuts

Attracting nonusers to buy the product a. b. c.

Introducing trial use thru’ sampling, price incentives, etc. Pricing up or down Advertising new uses

Ex. 6-4 (contd.)

2.

Market Development (Selling present products in new markets.) Opening additional geographic markets a. b. c.

3.

Regional expansion National expansion International expansion

Attracting other market segments a. b. c.

Developing product versions to appeal to other segments Entering other channels of distribution Advertising in other media

Ex. 6-4 (contd.)

2.

Product Development (Developing new products for present markets) Developing new product features a. b. c. d. e. f. g. h.

3. 4.

Adapt (to other ideas, developments) Modify (change color, motion, sound, odor, form, shape) Magnify (stronger, longer, thicker, extra value) Minify (smaller, shorter, lighter) Substitute (other ingredients, process, power) Rearrange (other patterns, layout, sequence, components) Reverse (inside out) Combine (blend, alloy, assortment, ensemble, combine units, etc.)

Developing quality variations Developing additional models and sizes (product proliferation)

Innovation Strategy

Involves creating a new product life cycle, thereby making similar existing products obsolete

Horizontal and Vertical Integration Strategies Horizontal Integration • Based on growth via acquisition of one or more similar firms operating at the same stage of the production-marketing chain Vertical Integration • Involves acquiring firms • That supply acquiring firm with inputs (backward integration) or • Are customers for firm’s outputs (forward integration)

Ex. 6-7: Vertical and Horizontal Integrations

Textile producer

Textile producer

Shirt manufacturer

Shirt manufacturer

Clothing store

Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration Acquisitions or mergers of competing businesses are horizontal integrations

Motivations for Diversification  Increase firm’s stock value  Increase growth rate of firm  Investment is better use of funds than using them for internal growth  Improves stability of earnings and sales  Balance or fill out product line  Diversify product line  Acquire a needed resource quickly  Achieve tax savings  Increase efficiency and profitability

Diversification Strategies Concentric Diversification • Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products Conglomerate Diversification • Involves acquisition of a business because it represents a promising investment opportunity • Primary motivation is profit pattern of venture

• Difference between the approaches • Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit

Turnaround Strategy

Involves a concerted effort over a period of time to fortify a firm’s distinctive competencies, returning it to profitability

Turnaround Strategy

A turnaround strategy is done through

Cost reduction

Asset reduction

Terms Used in Turnaround Strategy • A turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions • The immediacy of the resulting threat to company survival posed by the turnaround situation is known as situation severity • Turnaround responses typically include two stages of strategic activities – Retrenchment – Recovery response

Divestiture and Liquidation Strategies Divestiture Strategy • Involves selling a firm or a major component of a firm • Reasons for divestiture • Partial mismatches between acquired firm and parent firm • Corporate financial needs • Government antitrust action

Liquidation Strategy • Involves selling parts of a firm, usually for its tangible asset value and not as a going concern

The Strategy of Bankruptcy • Two approaches • Liquidation – Involves complete distribution of a firm’s assets to creditors, most of whom receive a small fraction of amount owed • Reorganization – Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably

• Advantage of a reorganization bankruptcy • Proactive option offering maximum repayment of a firm’s debt in the future if a recovery strategy is successful

Corporate Combination Strategies Joint Ventures • Involves establishing a third company (child), operated for the benefit of the co-owners (parents) Strategic Alliance • Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project • Exists for a defined period • Does not involve the exchange of equity

Corporate Combination Strategies (contd.)

• Consortia are defined as large interlocking relationships between businesses of an industry. In Japan such consortia are known as keiretsus, in South Korea as chaebols • A Japanese keiretsu is an undertaking involving up to 50 different firms that are joined around a large trading company or bank and are coordinated through interlocking directories and stock exchanges • Chaebols are typically financed through government banking groups and largely are run by professional managers trained by participating firms expressly for the job

Ex. 6-13: The Top Five Strategic Reasons for Outsourcing 1. 2. 3. 4. 5.

Improve business focus Access to world-class capabilities Accelerated reengineering benefits Shared risks Free resources for other purposes

Basic Issues: Strategic Analysis and Choice

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

Prominent Sources of Competitive Advantage Cost leadership

Speed

Market focus

Differentiation

Ex. 7-2: Evaluating a Business’s Cost Leadership Opportunities A. Skills and Resources • Sustained capital investment and access to capital • Process engineering skills • Intense supervision of labor or core technical operations • Products or services designed for ease of manufacture or delivery • Low-cost distribution systems

B. Organizational Requirements • Tight cost control • Frequent, detailed control reports • Continuous improvement and benchmarking orientation • Structured organization and responsibilities • Incentives based on meeting strict, usually quantitative targets

Ex. 7-2 (contd.)

ar M

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

gi

n

Inbound logistics

Operations

Outbound logistics Mkt & sales

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

Key Risks of Cost Leadership • Many cost-saving activities are easily duplicated • Exclusive cost leadership can become a trap • Obsessive cost cutting can shrink other competitive advantages involving key product attributes • Cost differences often decline over time

Ex. 7-3: Evaluating a Business’s Differentiation Opportunities A. Skills and Resources • Strong marketing abilities • Product engineering • Creative talent and flair • Strong capabilities in basic research • Corporate reputation for quality or technological leadership • Long tradition in an industry or unique combination of skills • Strong cooperation from channels/suppliers

B. Organizational Requirements • Strong coordination among functions in R&D, product development, and marketing • Subjective measurement and incentives instead of quantitative measures • Amenities to attract highly skilled labor, scientists, and creative people • Tradition of closeness to key customers • Some personnel skilled in sales and operations – technical and marketing

Ex. 7-3 (contd.)

ar M

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

gi

n

Advantages of a Differentiation Strategy  Rivalry is reduced when a business successfully differentiates itself  Buyers are less sensitive to prices for effectively differentiated products  Brand loyalty is hard for new entrants to overcome

Key Risks of Differentiation

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

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

Ex. 7-4: Evaluating a Business’s Rapid Response Opportunities A. Skills and resources • Process engineering skills • Excellent inbound and outbound logistics • Technical people in sales and customer service • High levels of automation • Corporate reputation for quality or technical leadership • Flexible manufacturing capabilities • Strong downstream partners • Strong cooperation from suppliers of major components

B. Organizational Requirements

• • • • • •

Strong coordination among functions in R&D, product development, and marketing Major emphasis on customer satisfaction in incentive programs Strong delegation to operating personnel Tradition of closeness to key customers Some personnel skilled in sales and operations – technical and marketing Empowered customer service personnel

Ex. 7-4 (contd.)

Operations

JIT delivery plus partnering with express mail services to ensure very rapid delivery

General administration

Procurement

Use of laptops linked directly to operations to speed order process Outbound logistics Mkt & sales

Pr

of

it

Locate service Service technicians at customer facilities that are geographically close

n

Standardize dies, etc. and prod. equipment to allow quick changeover to new or special order

Include

gi

Working very closely with suppliers to include their choice of warehouse to minimize delivery time Inbound logistics

Technology development HRM

ar M

Use of companywide technology sharing activities and autonomous product dev. teams to speed new product dev. Develop self-managed work teams and decisionmaking at the lowest levels to increase responsiveness Highly automated and integrated information processing system. major buyers in the system on a real-time basis Preapproved, online suppliers integrated into production

Activities Conducive to Building Speed-Based Competitive Advantage Customer responsiveness

Information sharing and technology

Product or service improvements

Product development cycles Speed in delivery or distribution

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

Key Risks of a Speed-Based Strategy

Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering

Some industries – stable, mature ones – may not offer much advantage to a firm introducing some forms of rapid response

Creating Competitive Advantage Based on Market Focus • Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche • Allows a firm to – “Learn” its target customers – Build up organizational knowledge of ways to satisfy its target market better than larger rivals

• Risks of focus strategies – Can attract major competitors to the segment – Believing a focus, by itself, creates success, rather than a form of low cost, differentiation, or speed

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

Characteristics of Markets in Emerging Industries • • • • • • •

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

Strategic Options for Emerging Industries 1. 2. 3. 4.

Ability to shape industry’s structure Ability to rapidly improve product quality Establish favorable relations with key suppliers Ability to establish technology as dominant force 5. Acquire a core group of loyal customers 6. Ability to forecast future competitors

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

Strategic Options for Maturing Industries • • • • • •

Prune the product line Emphasize process innovation Emphasize cost reductions Focus on selecting loyal buyers Pursue horizontal integration Expand internationally

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

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

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

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

Strategic Options for Fragmented Industries • Tightly managed decentralization – Intense local coordination, high personal service, local autonomy

• “Formula” facilities – Standardized, efficient, low-cost facilities at multiple locations

• Increased value added – Difficult to differentiate products/services

• Specialization – Product type, customer type, type of order, geographic areas

• Bare bones/no frills – Intense low margin competition (low overhead, minimum wage)

Characteristics of Global Industries  Differences in prices and costs among countries due to  Currency exchange fluctuations  Differences in wage and inflation rates  Other economic factors

 Differences in buyer needs across countries  Differences in competitors and ways of competing among countries  Differences in trade rules and governmental regulations across countries

Key Components of Competing in Global Industries

Approach to gain global market coverage

Generic competitive strategy

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

Strategic Options: Choosing a Generic Competitive Strategy 1. 2. 3. 4.

Broad-line global competition Global focus strategy National focus strategy Protected niche strategy

Ex. 7-8: Grand Strategy Selection Matrix Overcome weaknesses

Internal (redirected resources within the firm)

Vertical integration Conglomerate diversification

Turnaround or retrenchment Divestiture Liquidation

Concentrated growth Mkt. Development Prod. Development Innovation

II

I

III

IV Horizontal integration Concentric diversification Joint venture

Maximize strengths

External (acquisition or merger for resource capability)

Ex. 7-9: Model of Grand Strategy Clusters Rapid market growth 1. 2. 3.

Strong competitive position 1. 2. 3.

Concentrated growth Vertical Integration Concentric diversification

Concentric diversification Conglomerate diversification Joint venture

1. 2. 3. 4.

I

II

IV

III

Reformulation of concentrated growth Horizontal integration Divestiture Liquidation

Weak competitive position 1. 2. 3. 4. 5.

Slow market growth

Turnaround or retrenchment Concentric diversification Conglomerate diversification Divestiture Liquidation

Opportunities to Build Value

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

The Portfolio Approach

BCG GrowthShare Matrix Industry AttractivenessBusiness Strength Matrix

Life CycleCompetitive Strength Matrix

BCG’s Strategic Environments Matrix

Ex. 8-1: The BCG Growth-Share Matrix Cash Generation (Market Share)

Cash Use (Growth Rate)

High High

Low

Star

Cash Cow

Low

Problem Child Dog

Description of Dimensions Market share: sales relative to those of other competitors in the market (dividing point is usually selected to have only the two-three largest competitors in any market fall into the high market share region)

Description of Dimensions Growth Rate: Industry growth rate in constant dollars (diving point is usually the GNP’s growth rate)

Ex. 8-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (Industry Attractiveness)

Nature of Competitive Rivalry •Number of competitors •Size of competitors •Strength of competitors’ corporate parents •Price wars •Competition on multiple dimensions

Bargaining Power of Suppliers/Customers •Relative size of typical players •Numbers of each •Importance of purchases from or sales to •Ability to vertically integrate

Threat of Substitutes/New Entrants •Technological maturity/stability •Diversity of the market •Barriers to entry •Flexibility of distribution system

Ex. 8-3 (contd.) Economic Factors

Financial Norms

Sociopolitical Considerations

•Sales volatility •Average profitability •Cyclicality of demand •Typical leverage •Market growth •Credit practices •Capital intensity

•Government regulation •Community support •Ethical standards

Ex. 8-3 (contd.) (Business Strength)

Cost Position •Economies of scale •Manufacturing costs •Overhead •Scrap/waste/rework •Experience effects •Labor rates •Proprietary processes

Level of Differentiation •Promotion effectiveness •Product quality •Company image •Patented products •Brand awareness

Response Time •Manufacturing flexibility •Time needed to introduce new products •Delivery times •Organizational flexibility

Ex. 8-3 (contd.) Financial Strength •Solvency •Liquidity •Break-even point •Cash flows •Profitability •Growth in revenues

Human Assets •Turnover •Skill level •Relative wage/salary •Morale •Managerial commitment •Unionization

Public Approval •Goodwill •Reputation •Image

Ex. 8-4: The Industry Attractiveness-Business Strength Matrix High

Business Strength

High

Medium

Low

Industry Attractiveness Medium Low

Selective Growth

Grow or Let Go

Selective Growth

Grow or Let Go

Harvest

Grow or Let Go

Harvest

Divest

Invest

Description of Dimensions Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond the strict control of management Business Strength: Subjective assessment of how strong a competitive advantage is created by a broad range of the firm’s internal strengths and weaknesses

Advantages of the Industry AttractivenessBusiness Strength Matrix Over the BCG Matrix

 Terminology is less offensive and more understandable  Multiple measures associated with each dimension tap many factors relevant to business strength and market attractiveness  Allows for broader assessment during both strategy formulation and implementation for a multibusiness company

Ex. 8-5: The Market Life CycleCompetitive Strength Matrix

Competitive Strength

Stage of Market Life Cycle

ly

High In

e : sh esiv u P gr Ag t s ve

n: vely o i ut ecti a C el S st e Inv

Low

Introduction

Growth

Maturity

er: g n st Da arve H

Decline

Description of Dimensions Stage of Market Life Cycle: See p. 146 Competitive Strength: Overall subjective rating, based on a wide range of factors regarding the likelihood of gaining and maintaining a competitive advantage

Sources of Advantage

Ex. 8-6: BCG’s Strategic Environments Matrix

Many

Fragmented

Specialization

apparel, house building, jewelry retailing, sawmills

pharmaceuticals, luxury cars, chocolate confectionery

Volume

Stalemate Few

basic chemicals, volume-grade paper, ship owning, wholesale banking

Small

jet engines, supermarkets, motorcycles, standard microprocessors

Size of Advantage

Big

Contributions of Portfolio Approaches  Convey large amounts of information about diverse businesses and corporate plans in a simplified format  Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business  Simplify priorities for sharing corporate resources across diverse businesses  Provide a simple prescription of what should be accomplished – a balanced portfolio of businesses

Limitations of Portfolio Approaches • • • • • •

Does not address how value is created across business units Accurate measurement for matrix classification not as easy as matrices implied Underlying assumption about relationship between market share and profits varies across different industries and market segments Limited strategic options viewed as basic strategic missions Portrays notion that firms need to be self-sufficient in capital Fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it

Ex. 8-7: Value Building in Multibusiness Companies (Market-Related Opportunities)

Opportunities to Build Value or Sharing Shared sales force activities or shared sales office, or both

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Lower selling costs Better market coverage Stronger technical advice to buyers Enhanced convenience for buyers Improved access to buyers

•Buyers have different purchasing habits toward the products •Different salespersons are more effective in representing the product •Some products get more attention than others •Buyers prefer to multiplesource rather than singlesource their purchases

Ex. 8-7 (contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Shared after-sales service and repair work

Low servicing costs Better utilization of service personnel Faster servicing of customer calls

•Different equipment or different labor skills, or both, are needed to handle repairs •Buyers may do some inhouse repairs

Shared brand name

Stronger brand image and company reputation Increased buyer confidence in the brand

•Company reputation is hurt if quality of one product is lower

Shared advertising and promotional activities

Lower costs Greater clout in purchasing ads

•Appropriate forms of messages are different •Appropriate timing of promotions is different

Ex. 8-7 (contd.) Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Common distribution channels

Lower distribution costs Enhanced bargaining power with distributors and retailers to gain shelf space, shelf positioning, stronger push and more dealer attention, and better profit margins

•Dealers resist being dominated by a single supplier and turn to multiple sources and lines •Heavy use of the shared channel erodes willingness of other channels to carry or push the firm’s products

Shared order processing

Lower order processing costs One-stop shopping for buyer enhances service and, thus, differentiation

•Differences in ordering cycles disrupt order processing economies

Ex. 8-7 (contd.) (Operating Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Joint procurements of purchased inputs

Lower input costs Improved input quality Improved service from suppliers

•Input needs are different in terms of quality or other specifications •Inputs are needed at different plant locations, and centralized purchasing is not responsive to separate needs of each plant

Shared inbound or outbound shipping and materials handling

Lower freight and handling costs Better delivery reliability More frequent deliveries, such that inventory costs are reduced

•Input sources or plant locations, or both, are in different geographic areas •Needs for frequency and reliability of inbound/outbound delivery differ among the business units

Ex. 8-7 (contd.)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Shared manufacturing and Lower assembly facilities manufacturing/assembly costs Better capacity utilization, because peak demand for one product correlates with valley demand for other Bigger scale of operation improves access to better technology and results in better quality

Impediments to Achieving Enhanced Value •Higher changeover costs in shifting from one product to another •High-cost special tooling or equipment is required to accommodate quality differences or design differences

Ex. 8-7 (contd.) Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Shared product and process technologies or technology development or both

Lower product or process design costs, or both, because of shorter design times and transfers of knowledge from area to area. More innovative ability, owing to scale of effort and attraction of better R&D personnel

•Technologies are the same, but the applications in different business units are different enough to prevent much sharing of value

Shared administrative support activities

Lower administrative and operating overhead costs

•Support activities are not a large proportion of cost, and sharing has little cost impact (and virtually no differentiation impact)

Ex. 8-7 (contd.) (Management Opportunities)

Opportunities to Build Value or Sharing

Potential Competitive Advantage

Impediments to Achieving Enhanced Value

Shared management know-how, operating skills, and proprietary information

Efficient transfer of a distinctive competence – can create cost savings or enhance differentiation. More effective management as concerns strategy formulation, strategy implementation, and understanding of key success factors

•Actual transfer of knowhow is costly or stretches the key skill personnel too thinly, or both. •Increased risks that proprietary information will leak out

Ex. 8-9: Six Critical Questions for Diversification Success • What can our company do better than any of its competitors in its current market(s)? • What core competencies do we need in order to succeed in the new market? • Can we catch up to or leapfrog competitors at their own game? • Will diversification break up our core competencies that need to be kept together? • Will we be simply a player in the new market or will we emerge a winner? • What can our company learn by diversifying, and are we sufficiently organized to learn it?

Places to Look for Parenting Opportunities • Size and age • Management • Business definition • Predictable errors • Linkages

• Common capabilities • Specialized expertise • External relations • Major decisions • Major changes

The Patching Perspective • Patching is the process by which corporate executives routinely remap businesses to match rapidly changing market opportunities. • Patching can be – – – –

Adding Splitting Transferring Exiting, or combining businesses

• Patching is more critical in turbulent and rapidly changing markets, than in stable, unchanging markets

Ex. 8-10: Three Approaches to Strategy

Position

Resources

Strategic logic

Identify an attractive market Locate a defensible position Fortify and defend

Establish a vision Build resources Leverage across markets

Strategic question

Where should we What should we be? be?

Source of advantage

Unique, valuable position with tightly integrated activity system

Simple Rules Jump into the confusion Keep moving Seize opportunities Finish strong How should we proceed?

Unique, valuable, Key processes inimitable and unique resources simple rules

Ex. 8-10 (contd.) Works best in

Slowly changing, well-structured markets

Moderately changing, wellstructured markets

Rapidly changing, ambiguous markets

Duration of advantage

Sustained

Sustained

Unpredictable

Risk

It will be difficult to Company will be alter position as too slow to build conditions change new resources as conditions change

Managers will be too tentative in executing on promising opportunities

Performance goal

Profitability

Growth

Long-term dominance

Ex. 8-11: Simple Rules, Summarized (Adapted)

Type How-to rules

Purpose They spell out key features of how a process is executed – “What makes our process unique?”

Boundary rules They focus managers on which opportunities can be pursued and which are outside the pale.

Priority rules

They help managers rank the accepted opportunities.

Timing rules

They synchronize managers with the pace of emerging opportunities and other parts of the company.

Exit rules

They help managers decide when to pull out of yesterday’s opportunities.