Transcript Crafting Strategy - Quest for Resources & Competitive Advantage

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Chapter 4
Crafting a
Strategy
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“The essence of strategy lies in
creating tomorrow’s competitive
advantages faster than competitors
mimic the ones you possess today.”
Gary Hamel and C.K. Prahalad
“Strategies for taking the hill
won’t necessarily hold it.”
Amar Bhide
Chapter Outline
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Five Generic Competitive Strategies
Strategic Alliances and Partnerships
Merger and Acquisition Strategies
Vertical Integration Strategies
Outsourcing Strategies
Offensive and Defensive Strategies
Strategies for Using the Internet
Choosing Appropriate Functional-Area Strategies
Importance of Linking Strategy to Company
Values and Ethical Standards
 First-Mover Advantages and Disadvantages
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Fig. 4.1: Menu of Strategy Options
for Winning in the Marketplace
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What Is “Competitive Strategy”?
 Deals exclusively with a company’s
business plans to compete successfully
 Specific efforts to please customers
 Offensive and defensive moves
to counter maneuvers of rivals
 Responses to prevailing market conditions
 Initiatives to strengthen its market
position
 Narrower in scope than business strategy
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Strategy and Competitive Advantage
 Competitive advantage exists when a firm’s
strategy gives it an edge in
 Attracting customers and
 Defending against competitive forces
Key to Gaining a Competitive Advantage
 Convince customers firm’s product / service
offers superior value
 A good product at a low price
 A superior product worth paying more for
 A best-value product
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Fig. 4.2: The Five Generic
Competitive Strategies
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Low-Cost Provider Strategies
Keys to Success
 Make achievement of meaningful lower costs
than rivals the theme of firm’s strategy
 Include features and services in product
offering that buyers consider essential
 Find approaches to achieve a cost advantage
in ways difficult for rivals to copy or match
Low-cost leadership means low
overall costs, not just low
manufacturing or production costs!
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Options: Achieving a
Low-Cost Advantage
Option 1: Use lower-cost edge to
 Underprice competitors and attract
price-sensitive buyers in enough
numbers to increase total profits
Option 2: Maintain present price, be content
with present market share, and use lower-cost
edge to
 Earn a higher profit margin on
each unit sold, thereby
increasing total profits
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Approaches to Securing
a 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 costproducing activities that add little
value from the buyer’s perspective
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Control
costs!
By-pass
costs!
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Approach 1: Controlling
the Cost Drivers
 Capture scale economies; avoid scale diseconomies
 Capture learning and experience curve effects
 Manage costs of key resource 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
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Approach 2: Revamping
the Value Chain
 Make greater use of Internet technology applications
 Use direct-to-end-user sales/marketing methods
 Simplify product design
 Offer basic, no-frills product/service
 Shift to a simpler, less capital-intensive, or more
flexible technological process
 Find ways to bypass use of high-cost raw materials
 Relocate facilities closer to suppliers or customers
 Drop “something for everyone” approach and focus
on a limited product/service
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Keys to Success in Achieving
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 restructure value chain to
eliminate nonessential work steps and lowvalue activities
 Aggressively pursue investments in resources
and capabilities that promise to drive costs out
of the business
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Characteristics 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 continuous cost
improvement
Successful low-cost producers champion
frugality but wisely and aggressively
invest in cost-saving improvements !
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When Does a Low-Cost
Strategy Work Best?
 Price competition is vigorous
 Product is standardized or readily available
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from many suppliers
There are few ways to achieve
differentiation that have value to buyers
Most buyers use product in same ways
Buyers incur low switching costs
Buyers are large and have
significant bargaining power
Industry newcomers use introductory low prices to
attract buyers and build customer base
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Pitfalls of Low-Cost Strategies
 Being overly aggressive in cutting price
 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
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Differentiation Strategies
Objective
 Incorporate differentiating features that cause
buyers to prefer firm’s product or service over
brands of rivals
Keys to Success
 Find ways to differentiate that create value for
buyers and are not easily matched or cheaply
copied by rivals
 Not spending more to achieve differentiation
than the price premium that can be charged
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Benefits of Successful Differentiation
A product / service with unique,
appealing attributes allows a firm to
 Command a premium price and/or
 Increase unit sales and/or
 Build brand loyalty
Which
hat is
unique?
= Competitive Advantage
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Types of Differentiation Themes
 Unique taste -- Dr. Pepper
 Multiple features -- Microsoft Windows and Office
 Wide selection and one-stop shopping -- Home
Depot and Amazon.com
 Superior service -- FedEx, Ritz-Carlton
 Spare parts availability -- Caterpillar
 More for your money -- McDonald’s, Wal-Mart
 Prestige -- Rolex
 Quality manufacture -- Honda, Toyota
 Technological leadership -- 3M Corporation
 Top-of-line image -- Ralph Lauren, Chanel, Cross
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Sustaining Differentiation: Keys to
Competitive Advantage
 Most appealing approaches to differentiation
Those hardest for rivals to match or imitate
Those buyers will find most appealing
 Best choices to gain a longer-lasting, more
profitable competitive edge
New product innovation
Technical superiority
Product quality and reliability
Comprehensive customer service
Unique competitive capabilities
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Where to Find Differentiation
Opportunities in the Value Chain
 Purchasing and procurement activities
 Product R&D and product design activities
 Production process / technology-related activities
 Manufacturing / production activities
 Distribution-related activities
 Marketing, sales, and customer service activities
Activities,
Costs, &
Margins of
Suppliers
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Internally
Performed
Activities,
Costs, &
Margins
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
Buyer/User
Value
Chains
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How to Achieve a
Differentiation-Based Advantage
Approach 1
Incorporate product features/attributes that lower
buyer’s overall costs of using product
Approach 2
Incorporate features/attributes that raise the
performance a buyer gets out of the product
Approach 3
Incorporate features/attributes that enhance buyer
satisfaction in non-economic or intangible ways
Approach 4
Compete on the basis of superior capabilities
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When Does a Differentiation
Strategy Work Best?
 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
differentiation approach
 Technological change and
product innovation are fast-paced
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Pitfalls of Differentiation Strategies
 Buyers see little value in unique attributes
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of product
Appealing product features are easily
copied by rivals
Differentiating 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
buyers perceive is too high
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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
 Deliver superior value by meeting or exceeding
buyer expectations on product attributes and
beating their price expectations
 Be the low-cost provider of a product with goodto-excellent product attributes, then use cost
advantage to underprice comparable brands
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Competitive Strength of a
Best-Cost Provider Strategy
 A best-cost provider’s 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 features at a lower cost than rivals
 A best-cost producer 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
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Risk of a Best-Cost
Provider Strategy
 A best-cost provider may get squeezed
between strategies of firms using low-cost
and differentiation strategies
 Low-cost leaders may be able to siphon
customers away with a lower price
 High-end differentiators may be able to steal
customers away with better product
attributes
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Focus / Niche Strategies
 Involve concentrated attention on a narrow
piece of the total market
Objective

Serve niche buyers better than rivals
Keys 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
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Approaches to Defining
a Market Niche
 Geographic uniqueness
 Specialized requirements in
using product/service
 Special product attributes appealing only
to niche buyers
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Examples of Focus Strategies
 eBay
 Online auctions
 Porsche
 Sports cars
 Jiffy Lube International
 Maintenance for motor vehicles
 Pottery Barn Kids
 Children’s furniture and accessories
 Bandag
 Specialist in truck tire recapping
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Focus / Niche Strategies
and Competitive Advantage
Approach 1
Achieve lower costs than rivals
in serving the segment -A low-cost strategy
Approach 2
Which
hat is
unique?
Offer niche buyers something
different from rivals -A differentiation strategy
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What Makes a Niche
Attractive for Focusing?
 Big enough to be profitable and offers good
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growth potential
Not crucial to success of industry leaders
Costly or difficult for multi-segment competitors to
meet specialized needs of niche members
Focuser has resources and capabilities to
effectively serve an attractive niche
Few other rivals are specializing in same niche
Focuser can defend against challengers via
superior ability to serve niche members
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Risks 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
overall market
 Segment becomes so attractive
it becomes crowded with rivals,
causing segment profits to
be splintered
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Strategic Alliances
and Partnerships
Companies sometimes use strategic
alliances or collaborative partnerships to
complement their own strategic initiatives and
strengthen their competitiveness. Such
cooperative strategies go beyond normal
company-to-company dealings but fall short
of merger or formal joint venture.
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Why Cooperative Strategies Are Integral
to a Firm’s Competitiveness
 Two demanding competitive challenges are
faced by many companies
 Global race to build a market presence
in many different national markets
 Race to seize opportunities on the
frontiers of advancing technology
 Collaborative arrangements can help a
company lower its costs and/or gain access to
needed expertise and capabilities
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Competitive Value of
Strategic Alliances to the Partners
 Capacity of partners to defuse organizational
frictions
 Ability to collaborate effectively over time and
work through challenges
 Technological and competitive surprises
 New market developments
 Changes in their own priorities
and competitive circumstances
 Competitive advantage emerges when a
company acquires valuable capabilities via
alliances it could not obtain on its own
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Why Are Strategic Alliances Formed?
 To collaborate on technology development or
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new product development
To fill gaps in technical or manufacturing
expertise
To acquire new competencies
To improve supply chain efficiency
To gain economies of scale in production
and/or marketing
To acquire or improve market access via joint
marketing agreements
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Potential Benefits of Alliances to Achieve
Global and Industry Leadership
 Get into critical country markets quickly to
accelerate process of building a global presence
 Gain inside knowledge about unfamiliar markets and
cultures
 Access valuable skills and competencies
concentrated in particular geographic locations
 Establish a beachead to participate in target industry
 Master new technologies and build new expertise
faster than would be possible internally
 Open up expanded opportunities in target industry
by combining firm’s capabilities with resources of
partners
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Why Alliances Fail
 Ability of an alliance to endure depends on
 How well partners work together
 Success of partners in responding
and adapting to changing conditions
 Willingness of partners to
renegotiate the bargain
 Reasons for alliance failure
 Diverging objectives and priorities of partners
 Inability of partners to work well together
 Emergence of more attractive technological paths
 Marketplace rivalry between one or more allies
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Merger and Acquisition Strategies
 Merger - Combination and pooling of equals, with
newly created firm often taking on a new name
 Acquisition - One firm, the acquirer, purchases
and absorbs operations of another, the acquired
 Merger-acquisition
 Much-used strategic option
 Especially suited for situations where
alliances do not provide a firm with needed
capabilities or cost-reducing opportunities
 Ownership allows for tightly integrated operations,
creating more control and autonomy than alliances
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Objectives of Mergers
and Acquisitions
 To pave way for acquiring firm to gain more market
share and create a more efficient operation
 To expand a firm’s geographic coverage
 To extend a firm’s business into new product
categories or international markets
 To gain quick access to new technologies
 To invent a new industry and lead the
convergence of industries whose
boundaries are blurred by changing
technologies and new market opportunities
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Pitfalls of Mergers and Acquisitions
 Combining operations may result in
 Resistance from rank-and-file employees
 Hard-to-resolve conflicts in management
styles and corporate cultures
 Tough problems of integration
 Greater-than-anticipated difficulties in
 Achieving expected cost-savings
 Sharing of expertise
 Achieving enhanced competitive capabilities
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Vertical Integration Strategies
 Extend 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
Activities,
Costs, &
Margins of
Suppliers
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Internally
Performed
Activities,
Costs, &
Margins
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners
Buyer/User
Value
Chains
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Strategic Advantages
of Backward Integration
 Generates 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 produce 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
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Strategic Advantages
of Forward Integration
 To gain better access to end users and better
market visibility
 To compensate for undependable distribution
channels which undermine steady operations
 To offset the lack of a broad product line, a firm may
sell directly to end users
 To bypass regular distribution channels in favor of
direct sales and Internet retailing which may
 Lower distribution costs
 Produce a relative cost advantage over rivals
 Enable lower selling prices to end users
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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 all types of capacity-matching problems
 May require radically different skills / capabilities
 Reduces flexibility to make changes in
component parts which may lengthen design
time and ability to introduce new products
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Pros and Cons of
Integration vs. De-Integration
 Whether vertical integration is a viable
strategic option depends on its
 Ability to lower cost, build expertise,
increase differentiation, or enhance
performance of strategy-critical activities
 Impact on investment cost, flexibility,
and administrative overhead
 Contribution to enhancing a firm’s competitiveness
Many companies are finding that
de-integrating value chain activities is a
more flexible, economic strategic option!
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Outsourcing Strategies
Concept
Involve withdrawing from certain value
chain activities and relying on outsiders
to supply needed products, support
services, or functional activities
Internally
Performed
Activities
Suppliers
Support
Services
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Functional
Activities
Distributors
or Retailers
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When Does Outsourcing
Make Strategic Sense?
 Activity can be performed better or more cheaply
by outside specialists
 Activity is not crucial to achieve a sustainable
competitive advantage
 Risk exposure to changing technology and/or
changing buyer preferences is reduced
 Operations are streamlined to
 Cut cycle time
 Speed decision-making
 Reduce coordination costs
 Firm can concentrate on “core” value chain
activities that best suit its resource strengths
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Strategic Advantages
of Outsourcing
 Improves firm’s ability to obtain high quality and/or
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cheaper components or services
Improves firm’s ability to innovate by interacting
with “best-in-world” suppliers
Enhances firm’s flexibility should customer needs
and market conditions suddenly shift
Increases firm’s ability to assemble diverse kinds of
expertise speedily and efficiently
Allows firm to concentrate its resources on
performing those activities internally which it can
perform better than outsiders
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Pitfalls of Outsourcing
 Farming out too many or the wrong
activities, thus
 Hollowing out capabilities
 Losing touch with activities and expertise
that determine overall long-term success
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Offensive and Defensive Strategies
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Offensive Strategies
Defensive Strategies
Used to build new or
stronger market
position and/or create
competitive advantage
Used to protect
competitive advantage
(rarely used to create
advantage)
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Types of Offensive Strategies
1. Initiatives to match or exceed competitor
strengths
2. Initiatives to capitalize on competitor
weaknesses
3. Simultaneous initiatives on many fronts
4. End-run offensives
5. Guerrilla offensives
6. Preemptive strikes
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Attacking Competitor Strengths
Objectives
 Whittle away at a rival’s
competitive advantage
 Gain market share by
out-matching strengths of
weaker rivals
Challenging strong competitors with a
lower price is foolhardy unless the
aggressor has a cost advantage or
advantage of greater financial strength!
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Options for Attacking
a Competitor’s Strengths
 Offer equally good product at a lower price
 Develop low-cost edge, then use it to under
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price rivals
Leapfrog into next-generation technologies
Add appealing new features
Run comparison ads
Construct new plant capacity in rival’s market
strongholds
Offer a wider product line
Develop better customer service capabilities
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Attacking Competitor Weaknesses
Objective
Concentrate company strengths on
exploiting rival’s weaknesses
Weaknesses to Attack
 Customers rival is least equipped to serve
 Rivals providing sub-par customer service
 Rivals with weaker marketing skills
 Geographic regions where rival is weak
 Segments rival is neglecting
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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
A challenger with superior resources can overpower
weaker rivals by out-competing them across-theboard long enough to become a market leader!
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End-Run Offensives
Objectives
 Maneuver around strong competitors
 Capture unoccupied or less contested
markets
 Change rules of competition in aggressor’s
favor
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Approaches for End-Run Offensives
 Introduce new products that redefine market
and terms of competition
 Build presence in geographic areas where
rivals have little presence
 Create new segments by introducing products
with different features to better
meet buyer needs
 Introduce next-generation
technologies to leapfrog rivals
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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 and market visibility
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Options for Guerrilla Offenses
 Make random, scattered raids on leaders’
customers
 Occasional low-balling on price
 Intense bursts of promotional activity
 Special campaigns to attract buyers from rivals
plagued with a strike or delivery problems
 Challenge rivals encountering problems with
quality or providing adequate technical support
 File legal actions charging antitrust violations,
patent infringements, or unfair advertising
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Preemptive Strikes
Approach
Involves moving first to secure an
advantageous position that rivals
are foreclosed or discouraged
from duplicating!
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Preemptive Strike Options
 Secure exclusive/dominant access to best
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distributors
Secure best geographic locations
Tie up best or most sources of essential raw
materials
Obtain business of prestigious customers
Expand capacity ahead of demand in hopes
of discouraging rivals from following suit
Build an image in buyers’ minds that is unique
or hard to copy
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Choosing Rivals to Attack
 Four types of firms can be the target of
a fresh offensive
 Vulnerable market leaders
 Runner-up firms with weaknesses
where challenger is strong
 Struggling rivals on verge
of going under
 Small local or regional
firms with limited capabilities
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Offensive Strategy as a Basis to
Achieve Competitive Advantage
 Strategic offensives offering strongest basis
for competitive advantage usually entail
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An important core competence
A unique competitive capability
Much-improved performance features
An innovative new product
Technological superiority
A cost advantage in manufacturing or
distribution
 Some type of differentiation advantage
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Defensive Strategy
Objectives
 Lessen risk of being attacked
 Blunt impact of any attack that occurs
 Influence challengers to aim
attacks at other rivals
Approaches
 Block avenues open to challengers
 Signal challengers vigorous retaliation
is likely
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Block Avenues Open to Challengers
 Participate in alternative technologies
 Introduce new features, add new models, or broaden
product line to close gaps rivals may pursue
 Maintain economy-priced models
 Increase warranty coverage
 Offer free training and support services
 Reduce delivery times for spare parts
 Make early announcements about new
products or price changes
 Challenge quality or safety of rivals’ products
using legal tactics
 Sign exclusive agreements with distributors
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Signal Challengers Retaliation Is Likely
 Publicly announce management’s strong
commitment to maintain present market share
 Publicly commit firm to policy of
matching rivals’ terms or prices
 Maintain war chest of cash reserves
 Make occasional counterresponse
to moves of weaker rivals
 Give out advance information about new
products, technological breakthroughs, and other
moves
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Strategies: Using the Internet
as a Distribution Channel
 Challenge -- How firms should use Internet in
staking their position in marketplace
 Approaches to using the Internet
 Solely as a vehicle to disseminate product
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information
Minor distribution channel
One of several important
distribution channels
Primary distribution channel
Exclusive distribution channel
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Using the Internet to
Disseminate Product Information
 Approach -- Website used to provide product
information of manufacturers or wholesalers
 Relies on click-throughs to websites of dealers for
sales transactions
 Informs end-users of location of retail stores
 Issues -- Pursuing online sales may
 Signal weak strategic commitment to dealers
 Signal willingness to cannibalize dealers’ sales
 Prompt dealers to aggressively market rivals’ brands
 Avoids channel conflict with dealers -- Important
where strong support of dealer networks is essential
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Using the Internet as a
Minor Distribution Channel
 Approach -- Use online sales to
 Achieve incremental sales
 Gain online sales experience
 Conduct marketing research
 Learn more about buyer tastes and preferences
 Test reactions to new products
 Create added market buzz about products
 Unlikely to provoke much outcry from dealers
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Brick-and-Click Strategies: An
Appealing Middle Ground Strategy
 Approach
 Sell directly to consumers and
 Use traditional wholesale/retail channels
 Reasons to pursue a brick-and-click strategy
 Manufacturer’s profit margin from online sales is bigger
than that from sales through traditional channels
 Encouraging buyers to visit a firm’s website educates
them to the ease and convenience of purchasing online
 Selling directly to end users allows a manufacturer to
make greater use of build-to-order manufacturing and
assembly
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Strategies for Online Enterprises
 Approach -- Use Internet as the exclusive channel
of all buyer-seller contact
 Success depends on a firm’s ability to
incorporate following features
 Capability to deliver unique value to buyers
 Deliberate efforts to engineer a value
chain that enables differentiation, lower costs,
or better value for the money
 Innovative, fresh, and entertaining website
 Clear focus on a limited number of competencies and a
relatively specialized number of value chain activities
 Innovative marketing techniques
 Minimal reliance on ancillary revenues
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Choosing Appropriate
Functional-Area Strategies
 Involves strategic choices about how functional
areas are managed to support competitive
strategy and additional strategic moves
 Functional strategies include




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Research and development
Production
Human resources
Sales and marketing
Finance
Tailoring functional-area strategies to support
key business-level strategies is critical !
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Linking Strategy to Company Values
and Ethics Standards
 Tightly linking a firm’s strategy to high ethical
standards begins with
 Managers with strong character and
 A set of corporate values and ethical
standards that genuinely govern a firm’s
strategy and business conduct
 Responsibility of top management
 See that values statements and ethics codes
are observed in devising strategies and
 Become a way of life for all employees
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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 new technologies,
new-style components, and distribution
channels can produce cost advantage
 Loyalty of first time buyers is high
 Moving first can be a preemptive strike
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First-Mover Disadvantages
 Moving early can be a disadvantage (or
fail to produce an advantage) when
 Costs of pioneering are sizable and loyalty
of first time buyers is weak
 Innovator’s products are
primitive, not living up to
buyer expectations
 Rapid technological change
allows followers to leapfrog pioneers
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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 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
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