Chapter 8

Business Strategy

McGraw-Hill/Irwin
Strategic Management, 10/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
 8-2

Key Elements Chapter 8

1. Low-cost, differentiation, and speed-based
strategies
2. Characteristics and value of a market focus
strategy
3. Requirements for business success at
different stages of industry evolution
4. Good business strategies in fragmented and
global industries
5. Decide when a business should diversify
 8-3
Evaluating and Choosing Business Strategies:
Seeking Sustained Competitive Advantage
• The two most prominent sources of
competitive advantage:
– business’s cost structure
– and its ability to differentiate the business from
competitors
• Businesses that have one or more
sources/capabilities that let them operate at a
lower cost will consistently outperform their
rivals that don’t
 8-4
Evaluating Cost Leadership
Opportunities

• Business success built on cost leadership

requires the business to be able to provide its
product or service at a cost below what its
competitors can achieve
 8-5

Sustainable Low-Cost Activities

Benefits
1. Some low-cost advantages reduce the likelihood
of buyers’ pricing pressure
2. Truly sustained low-cost advantages may push
rivals into other areas
3. New entrants competing on price must face an
entrenched cost leader
4. Low-cost advantages should lessen the
attractiveness of substitute products
5. Higher margins allow low-cost producers to
withstand supplier cost increases
 8-6

Sustainable Low-Cost Activities

Limitations
1. Many cost-saving activities are easily duplicated
2. Exclusive cost leadership can be a trap
3. Obsessive cost cutting can shrink other
competitive advantages
4. Cost differences often decline over time
Evaluating a Business’s Cost and Leadership Opportunities 8-7
 8-8

Evaluating Differentiation
• Differentiation requires that the business
have sustainable advantages that allow it to
provide buyers with something uniquely
valuable to them
• Arises from one or more activities in the value
chain that create a unique value important to
buyers
• Strategists use benchmarking and consider
the 5 forces in considering differentiation
Evaluating a Business’s Differentiation Opportunities 8-9
 8-10
Evaluating Speed as a Competitive
Advantage
• Speed-based strategies, or rapid
response to customer requests or market
and technological changes, have
become a major source of competitive
advantage for numerous firms in today’s
intensely competitive global economy
 8-11
Evaluating a Business’s Rapid
Response (Speed) Opportunities
 8-12

Speed can be created by:

• Customer responsiveness
• Product development cycles
• Product or service improvements
• Speed in delivery or distribution
• Information Sharing and Technology
 8-13

Risks of Speed-based Strategy

• Speeding up activities requires considerable
attention to training, reorganization, and/or
reengineering
• Some industries may not offer much
advantage to the firm that introduces some
forms of rapid response
• Customers in such settings may prefer the
slower pace or the lower costs currently
available, or they may have long time frames
in purchasing
 Evaluating Market Focus as a
8-14

Way to Competitive Advantage

• Market focus: the extent to which a business
concentrates on a narrowly defined market
• Better small companies thrive because they
serve narrow market niches
• Market focus allows some businesses to
compete on the basis of low cost,
differentiation, and rapid response against
much larger businesses with greater
resources
 8-15

Risks of Market Focus

• Can attract major competitors who have
waited for your business to “prove” the market
• Managers evaluating opportunities to build
competitive advantage should link strategies
to
• Resources
• Capabilities
• Value chain activities that exploit low cost,
differentiation, and rapid response
 8-16
Stages of Industry Evolution and
Business Strategy Choices
• The requirements for success in industry
segments change over time
• Strategists can use these changing
requirements, which are associated with
different stages of industry evolution, as a way
to isolate key competitive advantages and
shape strategic choices around them
 8-17

Emerging Industries
• Emerging industries are newly formed
or re-formed industries that typically are
created by technological innovation,
newly emerging customer needs, or
other economic or sociological changes
• There are no “rules of the game”
 Conditions in
8-18

Emerging Industries
• Technologies mostly proprietary to the pioneering firms
• Technological uncertainty continuously unfolding
• Competitive uncertainty due to inadequate information
about competitors, buyers, and the timing of demand
• High initial costs but steep cost declines
• Few entry barriers
• First-time buyers requiring initial inducement to
purchase
• Inability to obtain raw materials and components until
suppliers gear up to meet the industry’s needs
• Need for high-risk capital because of the industry’s
uncertain prospects
 Business Strategies in
8-19

Emerging Industries
• For success in emerging industries, business strategies
require one or more of these features:
– Ability to shape the industry’s structure
– Ability to rapidly improve product quality and
performance features
– Advantageous relationships with key suppliers
and promising distribution channels
– Ability to establish the firm’s technology as the
dominant one
– Early acquisition of a core group of loyal
customers and then the expansion of that
customer base
– Ability to forecast future competitors
 8-20
Competitive Advantages and Strategic
Choices in Growing Industries
• Rapid growth brings new competitors into the
industry
• Growth industry strategies need to
emphasize
– brand recognition
– product differentiation
– financial resources to support both heavy
marketing expenses and the effect of price
competition on cash flow
 Business Strategies in
8-21

Growth Industries
• For success business strategies in growth industries
require one or more of the following features:
– Establishing strong brand recognition
– Ability and resources to meet increasing demand
– Strong product design skills to adapt products and
services
– Ability to differentiate the firm’s product[s] from
competitors entering the market
– R&D resources and skills to create product variations
– Ability to build repeat buying from established
customers
– Strong capabilities in sales and marketing
 8-22
Competitive Advantages and Strategic
Choices in Mature Industries
• As an industry evolves, its rate of growth
eventually declines
• Firms in mature industry sell increasingly to
experienced, repeat buyers who are now
making choices among known alternatives
• Competition becomes more oriented to cost
and service as knowledgeable buyers
expect similar price and features
 Business Strategies
8-23

in Mature Industries
• Strategies in maturing industries often include the
following:
– Product line pricing
– Emphasis on process innovation that permits low-cost
product design, manufacturing methods, and
distribution synergy
– Emphasis on cost reduction
– Careful buyer selection to focus on buyers who are
less aggressive, more closely tied to the firm, and able
to buy more from the firm
– Horizontal integration to acquire rival firms whose
weaknesses can be used to gain a bargain price
– International expansion to markets where attractive
growth and limited competition still exist
 8-24
Competitive Advantages and Strategic
Choices in Declining Industries
• Declining industries characterized by demand
growing slower than demand in the economy or
actual declines
• Strategies can involve:
– Focus on higher growth or a higher return
– Emphasize product innovation and quality
improvement
– Emphasize production and distribution efficiency
– Gradually harvest the business
 8-25
Competitive Advantage in
Fragmented Industries
• A fragmented industry is one in which no firm
has a significant market share and can strongly
influence industry outcomes
• Strategies can involve:
– Tightly managed decentralization
– “Formula” facilities
– Increased value added
– Specialization
– Bare bones/no frills
 8-26
Competitive Advantage in
Global Industries
• Global industry composed of firms whose
competitive positions in major geographic or
national markets are fundamentally affected by
their overall global competitive positions
• Strategies can involve:
– License foreign firms to produce and distribute the firm’s
products
– Maintain a domestic production base and export products
to foreign countries
– Establish foreign-based plants and distribution to
compete directly in the markets of one or more foreign
countries
 8-27
Four Generic Global
Competitive Strategies
• Broad-line global competition
• Global focus strategy
• National focus strategy
• Protected niche strategy
 8-28

Grand Strategy Selection Matrix

 8-29

Model of Grand Strategy Clusters

 8-30
Building Value as a Basis for Choosing
Diversification or Integration
• The grand strategy selection matrix and model
of grand strategy clusters are useful tools to
help dominant product company managers
evaluate and narrow their choices among
alternative grand strategies
• Dominant product company managers who
choose diversification or integration eventually
create another management challenge