Transcript Chapter 7 Business Unit Strategy Strategy: A View From the Top

CHAPTER 7
BUSINESS UNIT STRATEGY
STRATEGY: A VIEW FROM THE TOP
Kelly Bredensteiner
Christine Cox
Caitlin Greenwood
Michele Haynes
BUSINESS UNIT STRATEGY
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To forecast the relative effectiveness of a strategy
a company must analyze the industry
characteristics in which it will be competing
First, we look at 3 contexts that relate to the
evolutionary stages of an industry:
emerging, growth, and mature and declining
Next, we discuss 3 industry environments that
pose strategic challenges:
fragmented, deregulating, and hypercompetitive
STRATEGY IN EMERGING INDUSTRIES
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New industries provide new opportunities:
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Technologies are typically immature meaning competitors will
try to improve existing designs and processes or leapfrog them
altogether with next generation technology
Costs are typically high, entry barriers are low, supplier
relationships are underdeveloped and distribution channels
are just emerging
Timing can be crucial in determining success:
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First mover advantage
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opportunity to shape customer expectations and set the competitive
rules of the game
Exercising leadership can be an effective way to reduce
risk:
Ability to control product and process development through
superior technology, quality, or customer knowledge
 Ability to leverage existing relationships with suppliers and
distributors
 Ability to leverage access to a core group of customers
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STRATEGY IN GROWTH INDUSTRIES
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Growth presents several challenges:
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During the early growth stage, companies tend to add more products,
models, and sizes to appeal an increasingly segmented market
Toward the end of the growth phase cost considerations become the
priority
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Competitors tend to focus on expanding their market shares
Cost control becomes an important element of strategy as unit margins
shrink and new products and applications are harder to find
International markets must be considered as globalization of competition
continues to arise
Process innovation and redefinitions of supplier and distributor relations
become important dimensions of cost control
Finally, horizontal integration becomes attractive as a way of
increasing a firm’s international presence or consolidating a
company’s market position
New companies that enter the market during the final stages of
growth are known as followers
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Benefits:
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Opportunity to evaluate alternative technologies
Delay investment in risky projects
Initiate superior product and technology offerings
NEW ENTRANTS IN GROWING INDUSTRIES
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Must decide to enter into a market through internal
development or acquisition
Two major issues must be analyzed as part of the
decision process to enter a market:
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What are the structural barriers to entry?
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How will incumbent firms react?
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Structural barriers may include the level of investment
required, access to production or distribution facilities, and
threat of overcapacity
Retaliation of competitors is lower in industries where growth
is low, products are highly differentiated, and fixed costs are
high
New entrants should focus on industries where the
reaction may be slow in which the firm can influence
the industry structure, and where the benefits of
entry exceed the costs
STRATEGY IN MATURE AND DECLINING
INDUSTRIES
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Important issues as maturity sets in and threat
declines:
Choosing a balance between differentiation and low cost
postures
 Deciding whether to compete in multiple or single industry
segments
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Firms earn profits during the long maturity
stage of an industries growth if:
Concentrate on segments that offer chances for higher
growth or higher return
 Manage product and process innovation aimed at further
differentiation, cost reduction, or rejuvenating segment
growth
 Streamline production and delivery to cut costs
 Gradually “harvest” the business in preparation for a
strategic shift to better product or industries
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INDUSTRY EVOLUTION AND FUNCTIONAL
PRIORITIES
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Early development of a product usually entails:
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Slow growth in sales
Major R&D
Rapid technological change in the product
Operating losses
Need for slack to support temporarily unprofitable operations
Factors of success :
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Technical skills
Being 1st in new markets
Marketing advantage that creates widespread awareness
Rapid growth
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Brings more competitors
Factors of success:
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Brand awareness
Product differentiation
Financial resources support:
 Heavy marketing expenses
 Price competition
INDUSTRY EVOLUTION AND FUNCTIONAL
PRIORITIES CONTINUED
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Maturity Stage
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Sales growth continues but at a decreasing rate
# of industry segments increases, but change in
product design slows
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Result: competition becomes more intense and promotional
and pricing advantages become key strengths
Decline Stage
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Strengths center on:
Cost advantages
 Superior supplier relationships
 Customer relationships
 Financial control
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Competitive advantage can exist if a firm serves
gradually shrinking markets that competitors choose
to leave
STRATEGY IN FRAGMENTED INDUSTRIES
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Fragmented industries are those in which no single
company or small group of firms has a large enough
market share to strongly affect industry structure or
outcomes
Includes: retail sectors, distribution businesses,
professional services, and small manufacturing
 Most prevalent when:
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Entry/exit barriers are low
Few economies of scale
Cost structures unattractive
Products and services highly diverse
Fragmented markets require creative strategies
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Example: 1971 H. Wayne Huizinga took Waste
Management Corporation Public
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Hundreds of “mom and pop” garbage companies acquired
through stock
Gained capitalization of $5 million, and after Huizinga’s
departure in 1984 market value was $3 billion
STRATEGY IN DEREGULATING INDUSTRIES
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1975 Securities and Exchange Commissions
abolished fixed rates for U.S. securities brokers
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Airlines, trucking, railroads, banking, and
telecommunications followed
The pattern that followed was as such
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Large # of new entrants, most failing quickly
Industry profitability decreased rapidly
Pattern of segment profitability altered
Variance in profitability
Two waves - Merger and Acquisition
Consolidation
DEREGULATION OF ENERGY
1996 saw the Deregulation in Energy markets.
 California endured hardships in many of their
electric power companies the biggest being PG&E
 Two reasons for bankruptcy
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First: Couldn’t pay bills, high rates, and lower prices
 Second: Couldn’t expand power generators
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4 PROVEN SUCCESSFUL COPING
STRATEGIC POSTURES
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Broad-based distributors that offer wide range
of products and services
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Low-cost entrants that become niche players
Focused segment marketers to emphasize the
company’s value added specific customer groups
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Example AT&T
Identify the new
Leveraging
Upgrading
Shared utilities focus on making economies of
scale available to smaller competitors
PRICING IN NEWLY DEREGULATED
INDUSTRY
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Four Factors that Incumbents should use to
adjust their prices correctly after deregulation
takes effect
Competitor’s prices
Switching rates
Customer value
Cost to serve
STRATEGY IN HYPERCOMPETITIVE
INDUSTRIES
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Hypercompetitive industries
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Intense rivalry
Successful Strategies
Take competitor by surprise
 Then move on when competition tries to recover
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Designed to enable the company to gain an
advantage over competitors by disrupting the
market with quick innovative change.
 Has short product life cycles
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Make sure to Strong Market Awareness
COMPETITIVE REACTIONS UNDER
EXTREME COMPETITION
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Six actions that established companies can consider to
counter the fresh, aggressive, and innovative moves of
competitors:
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Retool strategy and restore its importance
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Manage transition economics
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Fight aggregation with disaggregation
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Seek out new demand and new growth
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Use a portfolio of initiatives to increase speed
and flexibility
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Count on strategic risk
SPEED
pace of progress that a company displays in
responding to current or anticipated business
needs
 Newest and least understood of the critical
success factors
 Internet business applications led to the
elevation of speed
 Speed merchants
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Build their strategies on the rapid pace of their
operations
 AAA, Dell, Domino’s
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PRESSURES TO SPEED
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Come from
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Customers
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Need for creating a new basis for competitive
advantage
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Competitive pressures
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Industry shifts
REQUIREMENTS OF SPEED
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every aspect of an organization needs to be focused on
the pace of work
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Refocusing the Business Mission
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Creating a Speed Compatible Culture
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Upgrading Communication
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Refocusing Business Process Reengineering
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Committing to New Performance Metrics
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Methods to Speed
METHODS OF SPEED
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Companies first analyze determine where speed
exist and where it does not. Then they look to
eliminate speed gaps by:
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Streamlining Operations
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Upgrading Technology
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Forming Partnerships
FORMING PARTNERSHIPS
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Proven way to shorten time needed to improve
market responsiveness
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Ex: Ford + GM + Daimler Chrysler
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Shares business burden
CREATING VALUE THROUGH INNOVATION
Value creation greatly depends on innovation
 Companies recognize that they need to generate
more value from core businesses and leverage
their core
 Innovators’ Dilemma
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Innovation is a major strategic challenge for most
companies
“Innovators’ Dilemma”- describes how successful
companies with established products can keep from
being pushed aside by competitors with newer,
cheaper products, that will, over time, get better and
become a serious threat.
WHAT IS INNOVATION?
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Innovation is a product of anticipating, assessing,
and fulfilling potential customer needs in a
creative manner.
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Ex: 3M succeeded because its business model is based
on a culture that is geared toward producing
innovative products
HOW 3M SUCCEEDED
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Six mandates that drove innovation for 3M:
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Support innovation from research and development
to customer sales and support.
Understand the future by trying to anticipate and
analyze future trends.
Establish stretch goals. It is a measure that
encourages growth.
Empower employees to meet goals.
Support broad networking across the company.
Recognize and reward innovative people.
SUSTAINING AND DISRUPTIVE
INNOVATION
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Industry leaders and competitors mostly engage in
sustaining innovation- innovation that focuses on
“better” products.
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Private companies often have better opportunities to invest
for the long term and pursue disruptive innovations, which
require a long time to develop and mature and might
produce short-term losses in the early stages of the
development
New entrants and challengers have greater freedom
to engage in disruptive innovation- launching
products that may not be as good as the existing
products and, therefore, not attractive to current
customers, but that are simple, and often more
affordable.
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Ex: Wireless handheld devices, such as blackberries and
iPhones, disrupted notebook computers.
CREATING A CULTURE OF INNOVATION
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Strategic planning too often centers on existing or
closely related products and services rather than on
opportunity to drive future demand.
Fostering a culture of innovation takes time and
effort.
There are five common characteristics to creating a
culture of innovation:
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First, a business needs a top-level commitment to
innovation
Second, they need a long-term focus
Third, a business needs a flexible organization structure
Fourth, a business needs a combination of loose and tight
planning and control
Last, they need to create an environment for innovation
and appropriate incentives
RELATIONSHIP BETWEEN INNOVATION
AND PERFORMANCE
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Evidence on the relationship between research
and development (R&D), innovation, and
financial performance is inconsistent.
Research has been done by:
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Booz Allen Hamilton (“The Global Innovation 1000”
study)
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Boston Consulting Group (“Innovation 2006” study)
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Monitor Group (“The Innovation Premium Study”)
RESULTS OF THE STUDIES
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Booz Allen Hamilton
Study done in 2006
Study analyzed 1,000 public companies that spent the most
on R&D
 There was no correspondence between R&D and financial
gain
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Boston Consulting Group (BCG)
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Study done in 2006
Analyzed the 25 most innovative companies
Found that innovation translates into superior long-term
stock market performance
Monitor Group
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Published in 1999
Demonstrated a strong positive correlation between a
company’s effective focus on innovation and organic
growth, and its future shareholder returns.
INNOVATION AND PROFITABILITY
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Research suggests that executives lack confidence in
their companies’ ability to use innovation to drive
profit.
The reason for the lack of success in translating
innovation into profitable performance surfaced in a
study of the growth records of the Fortune 50.
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The study concluded that the single biggest growth
inhibitor for large companies was “mismanagement of the
innovation process.”
Another explanation for the lack of success in
innovation is the lack of measurement metrics or the
failure to implement the metrics effectively.
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Half of all companies do not closely track the efficiency of
their innovation process
INNOVATION AND PROFITABILITY CONT.
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R&D investments fail to generate successful
products and financial gains for three main
reasons:
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Failure to develop truly innovative products
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Failure to successfully commercialize innovative
products once they are on the market
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Failure to market innovative products in a timely
manner
RECOMMENDATIONS FOR IMPROVING
PERFORMANCE THROUGH INNOVATION
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Six recommendations for strategic managers to
improve performance through innovation:
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Plan synergy between strategy and innovation
Areas where new opportunities and competitive
advantage exist provide a firm’s best chances to profit
from innovative
Profits from innovation in business systems can match
those from product development
Look outside of the company’s internal environment to
increase the likelihood of success and reduce the risk of
innovation
Alliances and corporate venture capital programs allow a
firm to share the risks associated with exploration
investments.
Involve customers early and often in the innovation
process