STRATEGIC ALTERNATIVES Payne 5 Key Text Readings Chapters

STRATEGIC ALTERNATIVES Payne (5) Key Text Readings: Chapters 6 & 7 1

INDUSTRY ATTRACTIVENESS RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL How do we make money? Which businesses should we be in? CORPORATE STRATEGY COMPETITIVE ADVANTAGE How should we compete? BUSINESS STRATEGY 2

The Decision Logic of Strategy Formulation May be Corporate or Business Strategic Decisions Establishment of mission, vision, values, objectives -- the Directional Strategies Identification, evaluation, and selection of -- the Adaptive Strategies Identification, evaluation, and selection of -- the Market Entry Strategies Identification, evaluation, and selection of -- the Positioning Strategies Implementation through development of -- the Functional & Operational Strategies 3

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Adaptive Strategies • Delineate how the organization will adapt to changes in the environment or competitive landscape: Expansion • Diversification • Vertical Integration • Market Development • Product Development • Penetration Contraction • Divestiture • Liquidation • Harvesting • Retrenchment • Outsourcing Stabilization • Enhancement • Status Quo Corporate Strategy Decisions Only 5

Remember Ansoff’s Matrix? 6

Business-Level Strategy Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. Key Issues: • What product/service to offer customers? • How to manufacture or create the product or service? • How to distribute the product/service in the marketplace? 7

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RBV: Core Competencies and Strategy Core competencies The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage Business-level strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets 9

Competitive Advantage “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 • COMPETITIVE ADVANTAGE exists when a firm’s strategy gives it an edge in: Defending against competitive forces and – Securing customers – …such that the firm earns (or has the potential to earn) a persistently higher rate of profit. 10

Gaining of Competitive Advantage “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 COMPETITIVE ADVANTAGE comes with the offering of SUPERIOR VALUE through: • –Offering buyers a good product at a lower price –Offering a better product/service buyers think is worth a premium price 11

Adaptive: Expansion-Market/Product Development & Penetration • Market Development -- expand geographic service area or by targeting new market segments within the present area. – Building new store near high-growth residential areas • Product Development -- introduction of new product/services in present markets, through product/service enhancement and line expansion. • Penetration -- centered on promotional, distribution, and pricing strategies with current products or services. – 1 in 12 wins Coca-Cola or “buy one, get one free” for Tinactin. 12

The BCG Portfolio Matrix 22% Stars Question Marks 20% 16% 14% 12% 10% Cash Cows 8% Dogs 6% 4% 0. 1 X 0. 2 X 0. 3 X 0. 4 X 0. 5 X 1 X 1. 5 X 2 X 0 4 X 2% 10 X Business Growth Rate 18% Relative Market Share 13

Adaptive: Stabilization Strategies When past strategies have been viewed as appropriate and few changes are required: • Enhancement - when organization just “needs to do things better; ” takes forms of CQI, TQM programs, speeding delivery, adding flexibility to service design • Status Quo - maintenance of services at the current levels, defending against competitors 14

Market Entry Strategies • Carry out the expansion (and stabilization) strategies through: – Purchase Strategies: May be Corporate Decision if in Different Market • Acquisition – purchase of new product, unit or organization • Licensing – lease technology, product or service • Venture Capital Investment – “try out” investment option – Cooperation Strategies: • Mergers – two organizations come together as one • Strategic Alliance – long-term agreement to work together • Joint Venture – combined resources to work on common issue of interest – Developmental Strategies: • Internal Development – uses existing resources or structures • Internal Ventures – establishes new entity for developmental purposes 15

Positioning Strategies • Business Level Positioning: – Position the organization vis-à-vis other organizations within the market – These are market-oriented and best articulate the competitive advantage within the market – May be market-wide (or broad-based) or directed at a particular segment (or niche-focused) • Based largely on Generic Business Strategies: Low-Cost Leadership Strategy – Broad Differentiation Strategy – Focused Low-Cost Strategy – Focused Differentiation Strategy – 16

Porter’s Generic Strategies 17

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A Low-Cost Leadership Strategy Objective: Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to: – – Under-price rivals and reap market share gains OR Earn higher profit margin selling at going price Keys to Success: • Make achievement of low-cost relative to rivals the THEME of firm’s business strategy • Find ways to drive costs out of business year-after-year Characteristics Cost conscious corporate culture • Efficient manufacturing facilities • Efficient scale facilities • Simplified production processes • Tightly controlled production costs and • Intensive scrutiny of budget overhead requests • Minimized costs of sales, R&D and service • 19

Drivers of Cost Advantage • Economies of Scale – Indivisibilities – Specialization and Division of Labor • Economies of Learning – Increased Dexterity – Improved Coordination and Organization • Process Technology and Process Design – Mechanization and Automation – Efficient Utilization of Materials – Increased Precision • Product Design – Design for Automation – Designs to Economize on Materials • Input Costs – – Location Advantages Ownership of Low-Cost Inputs Bargaining Power Supplier Cooperation • Capacity Utilization – Ratio of Fixed to Variable Costs – Costs of Installing and Closing Capacity • Managerial / Organizational Efficiency – Organizational Slack 20

Common Structure for Cost Leadership • Operations is main function • Process engineering is Office of the President emphasized over R&D • Large centralized staff • Formalized procedures • Structure is mechanical, job roles highly structured Engineering Centralized Staff Accounting Operations Marketing Personnel 21

A Differentiation Strategy Objective • Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals Keys to Success Find ways to differentiate that CREATE VALUE for buyers and that are NOT EASILY MATCHED or CHEAPLY COPIED by rivals • Not spending more to achieve differentiation than the price premium that can be charged • Characteristics • Uniqueness is achieved in ways that: – – – Buyers perceive as valuable Rivals find hard to match or copy Can be incorporated at a cost well below the price premium that buyers will pay 22

Differentiation Strategy Differentiation actions required: Ø Ø Ø Developing new systems and processes Shaping perceptions through advertising Quality focus Capability in R&D Maximize human resource contributions through low turnover and high motivation Factors Driving Differentiation: Ø Unique product features Ø Quality of inputs Ø Unique product performance Ø Exceptional skill or experience Ø Exceptional services Ø Detailed information Ø New technologies Ø Extensive personal relationships with buyers and suppliers 23

Common Structure for Differentiation President and Limited Staff R&D New Product R&D Marketing Operations Finance Human Resources • Marketing is the main function for tracking new product ideas • New product R&D is emphasized • Most functions are decentralized • Formalization is limited to foster change and promote new ideas • Overall structure is organic; job roles are less structured 24

Best Cost Provider/Integrative Strategy Objective • 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 Keys to Success Create superior value by MEETING OR EXCEEDING buyer expectations on product attributes and BEATING their price expectations • Be the low-cost producer of a product with GOOD-TOEXCELLENT product attributes, then use cost advantage to UNDERPRICE comparable brands • 25

Major Risk of Integrated Strategy • An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) • The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy 26

A Focus / Niche Strategy Objective Involves concentrated attention on a narrow piece of the total market • 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 • Two Types • Achieve LOWER COSTS than rivals in serving the segment-- A low-cost strategy • Offer niche buyers SOMETHING DIFFERENT from rivals-- A differentiation strategy 27

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M&S: Key Problems 29

M&S Examples 30