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Strategy
A View
From
the Top
Prentice Hall
Cornelis A.
de Kluyver
and
John A.
Pearce II
Third Edition
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
6-1
Strategic Logic at Business Unit Level
A firm’s success is explained by two factors:
 Attractiveness of the industry
 Relative position of the firm within the industry
Relative profitability depends on
 Nature of the firm’s competitive position
 Ability to create sustainable competitive
advantage
Cost leadership
Product/ service differentiation
Strategic Logic at Business Unit Level
firm success
relative position
industry structure
sust. comp. adv.
value chain
drivers
mgmt. choices
initial conditions
The PIMS Project
 Key Questions
 What factors influences business profitability and
how much influence does each one have?
 How does ROI change with strategy and market
conditions?
 Major Findings
 Businesses with higher market share were more
profitable
 Product quality is important to market share
 ROI is positively correlated with market growth
 Forward integration is more profitable than
backward integration
 Relation between ROI & new product activity, R&D
to sales and marketing to sales is more
pronounced in the later stages of product cycle
 High investment intensity tends to depress ROI
 Capacity utilization is critical for business with high
level of capital intensity
Porter’s Generic Strategies:
Differentiation or Low Cost?
Cost Leadership
 Minimal expenditure in R&D, marketing and
overhead
 Serves as an entry barrier to potential
competitors
 Can help maintain a defensible position in
marketplace
Differentiation
 Create uniqueness on an industry-wide basis
 Uses product design, brand image, technology,
distribution, service or a combination of these
elements
 Key: customers should be willing to pay for
value added
Generic Strategic Choices
Uniqueness
Perceived by customer
Low Cost Position
Differentiation
Overall Cost
Leadership
Industrywide
Particular
Segment
Only
Focus
Cost Leadership
 Outgrowth of Experience Curve Concept
 Yields above average returns despite the
presence of strong competitive forces
 Often requires high relative market share or
other advantages (e.g. favorable access to raw
materials)
 Can sometimes rewrite the competitive rules for
an entire industry
Examples: Briggs and Stratton (small hp gas
engines), Texas Instruments (calculators)
Risks of Overall Cost Leadership
Technological change that
nullifies past investments or
learning
Low-cost learning by newcomers
Inability to see product or
marketing change because of
cost focus
Cost inflation reducing differential
with differentiators
Differentiation
 Has many variations: design/brand
image (Mercedes); technology (Apple);
customer service (Crown, Cork &
Seal); features (Jenn-Air); etc.
 Can create defensible position for
coping with the five competitive forces
 May preclude gaining high market
share
 Sensitive to cost of differentiation
Recognizing Customer Value:
Key to Differentiation
Customer value definition
 Relative importance
customers attach to
the satisfaction of
different needs or
wants
Characteristics
 Stated in terms of
benefits sought Convenience,
compatibility, cost
savings
Classes of Values
Psychological
Functional
Economic
How is Differentiation Achieved
By leveraging relative advantage at
various points in the value chain:
Purchasing -- purchase of more reliable or higher quality
materials
Technology -- product designs with unique performance
characteristics
Firm Infrastructure -- superior corporate culture, more
defined strategic focus
Human Resource Management -- better trained personnel
Inbound Logistics -- reduction of raw materials inventory
Operations -- flexible manufacturing facilities
Outbound Logistics -- quicker delivery
Marketing -- superior marketing programs
Service -- quicker or more reliable service
Keys To Effective Differentiation
Enhance sources of uniqueness
 Use multiple sources of differentiation
 Emphasize real differences (position, advertise)
Use cost of differentiation as an
advantage
 Exploit least costly sources (linkages)
 Control cost drivers of differentiation via timing,
interrelationships, scale, and learning
 Emphasize sustainable differentiators (R&D)
 Reduce cost in activities that do not truly differentiate
Change the rules
 Find the decision maker who appreciates your
uniqueness
 Develop unrecognized uniqueness criteria
 React quickly to a changed market
 Develop new uniqueness criteria (reconfigure the
value chain)
Remember…
The ability to
differentiate is only
valuable if it is
valuable to your
customer.
How Can Differentiation Be Sustained?
Develop barriers to entry around
uniqueness
Develop cost advantages in the
uniqueness criteria
Use multiple sources of
differentiation
Create switching costs
Pitfalls of Differentiation Strategies
 Uniqueness that is not valuable to
customers
 Too much differentiation relative to price
 Too much price premium relative to
differentiation
 Ignoring need to signal value
 Not knowing cost of differentiation
 Sole focus on differentiation of product as
opposed to differentiation of other
activities in the value chain
 Failure to recognize uniqueness segments
among buyers
Focus Strategies
Hybrid strategy (Can be low
cost or differentiation in a
particular segment); Essence:
Narrow target
Limits market share achievable;
embodies a trade-off between
profitability and volume
Risks of Focus Strategies
 Cost differential between broad-range
competitors and focus players widens
offsetting the advantages of a focus
strategy (Differentiation too expensive )
 Differences in desired product/service
features across the entire market
narrow
 Focus players are out-focused (subsegmentation)
 Focus players outgrow their target
segment(s)
An Alternative Generic Framework:
Value Disciplines
Product Leadership
State of art products & services
Innovation driven
Constantly raise bar for competitors
Johnson & Johnson, BMW
Operational Excellence
Better production and delivery systems
Dell, Wall-Mart, American Airlines &
FedEx
Customer Intimacy
Building customer loyalty
Nordstrom & Home Depot
Different Strategies Call for
Different Competencies
Competitive Drivers/Needs
Operational
Effectiveness
Customer
Intimacy
Product
Leadership
 Narrow product lines
 High expertise in chosen areas of focus
 Moderate change in technology or
structure
 Focus on cost, efficiency/volume
 Strong customer focus
 Relationship driven
 Two competitive requirements
 Quick movement in developing
markets
 Efficient operations as markets
mature
 Search for new products/new
markets/new techniques
 Experiment with trends
 Initiate change to which competitors
must respond
Different Strategies Call for Different
Competencies
Strategic Focus
Work Environment
Employee Competencies
Customer
Intimacy
Values-driven, dynamic, challenging,
informal, collegial, conversational, few
policies, service-oriented, qualitative,
bottoms-up, employee as customer,
“whatever it takes”
Relationship-building, listening,
rapid problem-solving,
independent action, initiative,
collaboration, quality-focused,
understands motivation
Operational
Effectiveness
Stable, predictable, measurable,
hierarchical, cost-conscious, team-based,
formal, complaint, “if it ain’t broke, break it
bit by bit”
Process control, continuous
improvement, teamwork,
analysis, financial/operational
understanding, group facilitation,
attention to detail, drive for
results
Product
Leadership
Exciting, experimental, learning-focused,
technical, informal, fast-paced, resourcerich, comfortable, constantly changing,
speed to market, “if we build it, they will
come”
Life-long learning, information
sharing, curiosity, creativity,
group problem-solving,
breakthrough thinking, artistic,
visionary
Formulating Business Unit Strategy:
Four Key Challenges...
Monitor & learn
Choose
Among the
alternative
strategies
Analyze the
Competitive
environment
Assess
Sustainability
Anticipate
competitors
actions
& reactions
Competitors
Behavior &
Intentions
Customer
responses
Assess Risks &
Rewards
Constraints
•Antitrust
•Commitments
Communicate Assumptions
Formulate
Dynamic
Strategies
Selecting the Right Business Model…
Are you using the right
business model?
 Do you understand which parts of
the value chain generate profit?
Which should be outsourced?
 Is there consistency among
activities?
 Are the activities reinforcing?
 Do the different activities optimize
efforts?
What is Your Business Model?
Why?
(Customer solutions)
(Integrated components)
Yours?
(Brand)
(Product pyramids)
Reversing the
Value Chain Helps Us
Focus on Profits
The traditional view
Source of profit? Assets
Inputs ProductsServices ChannelsCustomer
A different perspective
Source of profit! Customer Channel Services Product
Inputs
Assets
Choosing a Profitable Business Model:
Ten Questions
1. Who are my customers?
2.
3.
4.
5.
How are their priorities changing?
Who should be my customer?
How can I add value to the customer?
How can I become the customer’s first
choice?
6. What is my profit model?
7. What is my current business design?
8. Who are my real competitors?
9. What is my toughest competitors’ business
design?
10.What is my next business design?
Strategy
A View
From
the Top
Prentice Hall
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior
written permission of the publisher. Printed in the United
States of America.
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
6-26