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Pearce & Robinson, 10th ed.

 Chapter 8
Business Strategy

McGraw-Hill/Irwin
Strategic Management, 10/e Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
1. Determine why a business would choose a low-
cost, differentiation, or speed-based strategy
2. Explain the nature and value of a market focus
strategy
3. Illustrate how a firm can pursue both low-cost and
differentiation strategies
4. Identify requirements for business success at
different stages of industry evolution
5. Determine good business strategies in fragmented
and global industries
6. Decide when a business should diversify
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Choice of a Business Strategy

Strategic analysis and choice is the phase of the strategic management
process in which business managers examine and choose a business
strategy that allows their business to maintain or create a sustainable
competitive advantage.

The starting point is to evaluate and determine which competitive

advantages provide the basis for distinguishing the firm in the
customers mind from other reasonable alternatives.

Business with a dominant product or service line must also choose

among alternate grand strategies to guide the firms activities,
especially when they plan to broadening their scope beyond its core
business.
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Choice of a Business Strategy

This chapter examines strategic analysis and choice in single- or dominant-
product/service businesses by addressing two basic issues:
1) What strategies are most effective at building sustainable competitive
advantages for single business units?
What competitive strategy positions a business most effectively in its industry?
i.e., Scania, the most productive truck manufacturer in the world, joins its major
competitor Volvo where it has it ROS (9.9%) but Mercedes (2.6%) and Volvo (2.5%).
It has built huge reputation by manufacturing heavy vehicles solely (with low-cost)
destined to Eurpoe, Latin America, and Asia over the last 60-years.
2) Should dominant-product/service businesses diversify to build value and
competitive advantage?
Dell and Coca-Cola managers examined this question of diversification and concluded
that they should focus on their core business and exploring new markets for the same
products are the best.
IBM and Pepsi examined the same question and made inference that concentric
diversification and vertical integration were the best.
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Evaluating and Choosing Business Strategies:
Seeking Sustained Competitive Advantage
The two most prominent sources of competitive advantage can be found in the
businesss cost structure and its ability to differentiate the business from
competitors.
DisneyWorld: Very popular for its unique and differentiated theme-park services
Costco: Largest American membership-only warehouse club. Extremely popular for
its low-cost for big customers and small-business owners.

Businesses that have one or more sources/capabilities that let them

operate at a lower cost will consistently outperform their rivals that dont enjoy
the cost-leadership or differentiation advantages.

Two recognized studies (by G. G. Dess & G. T. Lumpkin) found that businesses
that do not have either form of competitive advantage perform the poorest among
the peers while those companies enjoy both advantages secure the highest profits
in the industry. (*** See the book page 246 for more references on these studies).
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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.
Nirma, a true Indian brand that prevailed and succeeded
superbly competing with mighty MNCs. In 60s and 70s, Dr.
Karsanbhai Patel, the innovator and founder, started door-to-
door selling of detergent at a price of Rs. 3-kg when its
competitor were selling at a price of Rs. 13-kg. Now, Nirma is
one of the top conglomerates of the Indian market. Its highly
prominent at selling finest products at an affordable price.
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Evaluating a Businesss Cost and
Leadership Opportunities
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Sustainable Low-Cost Activities

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
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Sustainable Low-Cost Activities

1. Higher margins allow low-cost producers to withstand supplier cost
increases: Severe droughts in California quadrupled the price of lettuce-a key
restaurant demand. Popular chains that worked-well with farmers gained a loyal and
sustained supplies with favorable price but other chains charged their customers a
lettuce-tax.
2. Many cost-saving activities are easily duplicated: A good-practice by a
company is followed by other competing companies. Waste Management in BD Vs.
UK
3. Exclusive cost leadership can be a trap: With commodity-type products, the low-
cost leader seeking to seeking to sustain a superior margin may encounter increased
pressure to cut prices which may damage for leaders and emerging players.
4. Obsessive cost cutting can shrink other competitive advantages: Intense cost
cutting may hinder opportunities for further investment and innovation in processes
and products and services designs. Additionally, it can lead to use inferior raw
materials, processes or activities that may seriously hurt the firms reputation.
5. Cost differences often decline over time: Non-sustained advantages can reduced
over time as the competitors learn how to match the cost advantages.
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Evaluating Differentiation
Differentiation requires that the business have sustainable advantages that allow
it to provide buyers with something uniquely valuable to them. Customers are
ready to pay more for such specialties.
iPhone, MacBook, Federal Express, Mercedes

Differentiation usually arises from one or more activities in the value chain that
create a unique value important to buyers.

Sustainability of the differentiation depends on two-things:

A continuation of its high perceived value to buyers
Lack of imitation by competitors sometimes protected by copyrights/patents

Strategists examining their businesss resources and capabilities for

differentiation use benchmarking and consider the 5 forces in considering
differentiation.
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Evaluating a Businesss Differentiation
Opportunities
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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 todays intensely
competitive global economy
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Evaluating a Businesss Rapid Response
(Speed) Opportunities
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Speed can be created by:

Customer responsiveness
Product development cycles
Product or service improvements
Speed in delivery or distribution
Information Sharing and Technology
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Risks of Speed-based Strategy

Speeding up activities that havent been
conducted in a fashion that prioritizes rapid
response should only be done after
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
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Evaluating Market Focus as a Way
to Competitive Advantage
Market focus: the extent to which a
business concentrates on a narrowly
defined market
Small companies, at least the better
ones, usually 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
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Risks of Market Focus

The risk of focus is that you 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
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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
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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
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Business Strategies in
Emerging Industries
Technologies that are most proprietary to the pioneering
firms and technological uncertainty will unfold
Competitor uncertainty because of 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 industrys needs
Need for high-risk capital because of the industrys
uncertain prospects
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Emerging Industries
For success in this industry setting, business strategies
require one or more of these features:
The ability to shape the industrys structure
The ability to rapidly improve product quality and
performance features
Advantageous relationships with key suppliers and
promising distribution channels
The ability to establish the firms technology as the
dominant one
The early acquisition of a core group of loyal customers
and then the expansion of that customer base
The ability to forecast future competitors
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Competitive Advantages and Strategic
Choices in Growing Industries
Rapid growth brings new competitors into the
industry
At this stage, growth industry strategies that
emphasize brand recognition, product
differentiation, and the financial resources to
support both heavy marketing expenses and the
effect of price competition on cash flow can be key
strengths
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Growth Industries
For success in this industry setting, business strategies
require one or more of the following features:
The ability to establish strong brand recognition
The ability and resources to scale up to meet increasing demand
Strong product design skills to be able to adapt products and
services
The ability to differentiate the firms product[s] from
competitors entering the market
R&D resources and skills to create product variations
The ability to build repeat buying from established customers
Strong capabilities in sales and marketing
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Competitive Advantages and Strategic
Choices in Mature Industries
As an industry evolves, its rate of growth
eventually declines
Firms working with the mature industry
strategies 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
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Mature Industries
Strategy elements of successful firms 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
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Competitive Advantages and Strategic
Choices in Declining Industries
Declining industries are those that make products or
services for which demand is growing slower than
demand in the economy as a whole or is actually declining
Focus on higher growth
or a higher return
Emphasize product innovation
and quality improvement
Emphasize production and
distribution efficiency
Gradually harvest the business
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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
Tightly managed decentralization
Formula facilities
Increased value added
Specialization
Bare bones/no frills
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Competitive Advantage in
Global Industries
A global industry is one that comprises firms
whose competitive positions in major geographic
or national markets are fundamentally affected by
their overall global competitive positions
License foreign firms to produce and distribute the firms
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
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Four Generic Global
Competitive Strategies
Broad-line global competition
Global focus strategy
National focus strategy
Protected niche strategy
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Grand Strategy Selection Matrix

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Model of Grand Strategy Clusters

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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