Thompson

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Crafting a Strategy
Chapter 4
Screen graphics created by Jana F. Kuzmicki,
PhD Troy University - Florida and Western Region
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Successful business strategy is about
actively shaping the game you play, not just
playing the game you find.
Quote . . .

• Adam M. Brandenburger and Barry J. Nalebuff

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Chapter Outline

• Five Generic Competitive Strategies
• Collaborative Strategies Strategic Alliances
  and Partnerships
• Merger and Acquisition Strategies
• Vertical Integration Strategies
• Outsourcing Strategies
• Offensive Strategies
• Defensive Strategies
• Web Site Strategies
• Choosing Appropriate Functional-Area Strategies
• First-Mover Advantages and Disadvantages

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Fig. 4.1 A Companys Menu of Strategy
Options
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What Is Competitive Strategy?

• Deals exclusively with a companysbusiness plans
  to compete successfully
• Specific efforts to please customers
• Offensive and defensive movesto 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
  firmsstrategy gives it an edge in
• Attracting customers and
• Defending against competitive forces
• Convince customers firms product / service
  offers superior value
• An acceptable product at a bargain price
• A superior product worth paying more for
• A more-value-for-the-money product (an upscale
  product at a low price

Key to Gaining a Competitive Advantage
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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 firms 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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The Two Options for Turning aLow-Cost
Advantage into Higher Profits

• Option 1 Use lower-cost edge to under-price
  competitors
• Attract price-sensitive buyers in enoughnumbers
  to increase total profits despite a lower profit
  margin on each unit sold
• Option 2 Maintain present price, be content
  with present market share, and use lower-cost
  edge to
• Earn a higher profit margin on eachunit sold,
  thereby increasing total profits

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How to Achieve a Cost Advantage
Approach 1

• Do a better job than rivals of controlling the
  costs of performing value chain activities

Approach 2
Revamp value chain to eliminate cost-producing
activities that add little value from the buyers
perspective
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Approach 1 Do a Better Job ThanRivals of
Controlling the Cost Drivers

• Pursue scale economies avoid scale diseconomies
• Capture learning and experience curve effects
• Adopt ways to hold down labor costs
• Do a better job of supply chain management
• Invest in low cost technologies
• Compare cost of doing things in-house vs.
  outsourcing
• Fully utilize available production capacity
• Always strive to perform each value chain
  activity in the most cost efficient manner

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Approach 2 Revamping the ValueChain to
Bypass Low-Value Activities

• Make greater use of Internet technology
  applications
• Use direct-to-end-user sales/marketing methods
  (cut out the middleman)
• Simplify product design
• Offer a basic, no-frills product/service (cuts
  out all the value chain activities associated
  with providing all the extras)
• Shift to a simpler, less capital-intensive, or
  more flexible technological process
• Find ways to bypass use of high-cost materials
  and components
• Relocate facilities adjacent to suppliers or
  customers to cut out shipping
• Drop something for everyone approach and focus
  on a limited number of models/styles/selection
  (cuts out all the activities associated with
  providing slow-selling or less popular items)

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Keys to Success inAchieving Low-Cost
Leadership

• Scrutinize each value chain activity toidentify
  what factors drive the costs of performing the
  activity
• Use knowledge about cost drivers tomanage costs
  of each activity down year after year
• Find ways to restructure value chain to eliminate
  nonessential work steps and low-value activities
• Aggressively pursue investments in resources and
  capabilities that promise to drive costs out of
  the business

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Characteristics of aLow-Cost Provider

• Cost conscious corporate culture
• Broad 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-CostStrategy Work Best?

• Price competition is vigorous
• Product is standardized or readily availablefrom
  many suppliers
• There are few ways to achievedifferentiation
  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

• Cutting price by an amount greater than size of
  cost advantage (having a 1 cost advantage and
  cutting price by 2)
• Low cost methods are easily imitated by rivals
• Becoming too fixated on reducing costsand
  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, thus allowing them to
  close cost gap

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Differentiation Strategies
Objective

• Incorporate differentiating features that cause
  buyers to prefer firms product or service over
  brands of rivals
• Finding 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 customers are willing to
  pay for all the differentiating extras

Keys to Success
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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
• Competitive Advantage

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Types of Differentiation Themes

• Unique taste Dr. Pepper and Listerine
• Multiple features Microsoft Windows and Office
• Wide selection and one-stop shopping Home Depot
  and Amazon.com
• Superior service FedEx
• Spare parts availability Caterpillar
• Engineering design and performance Mercedes and
  BMW
• Prestige Rolex
• Product reliability Johnson Johnson
• Quality manufacture Karastan, Michelin, and
  Honda
• Technological leadership 3M Corporation
• Complete line of products Campbells
• Top-of-line image Ralph Lauren and Starbucks

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Sustaining DifferentiationKeys to
Competitive Advantage

• Most appealing approaches to differentiation
• Those hardest for rivals to duplicate
• 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 DifferentiationOpportunities
in the Value Chain

• Purchasing and procurement activities
• Product RD and product design activities
• Production process / technology-related
  activities
• Manufacturing / production activities
• Distribution-related activities
• Marketing, sales, and customer service activities

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How to Achieve aDifferentiation-Based
Advantage
Approach 1

• Incorporate product features/attributes that
  lowerbuyers overall costs of using product

Approach 2
Incorporate features/attributesthat raise
product performance
Approach 3
Incorporate features/attributes that enhance
buyer satisfaction in non-economic or intangible
ways
Approach 4
Develop superior competencies and competitive
capabilities that rivals dont have and cant
match
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When Does a DifferentiationStrategy Work
Best?

• There are many ways to differentiate aproduct
  that have value and please customers
• Buyer needs and uses are diverse
• Few rivals are following a similardifferentiation
  approach
• Technological change andproduct innovation are
  fast-paced, thus opening up an ongoing stream of
  new ways to differentiate

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Pitfalls of Differentiation Strategies

• Buyers see little value in a products unique
  attributes
• 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 productfeatures
  exceed buyers needs
• Charging a price premiumbuyers 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
• Deliver superior value by meeting or exceeding
  buyer expectations on product attributes and
  beating their expectations on what price they
  will have to pay
• Be the low-cost provider of a product with
  good-to-excellent product attributes, then use
  cost advantage to underprice comparable brands

Objectives
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Competitive Strength of a Best-Cost
Provider Strategy

• A best-cost providers competitive
  advantagecomes 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 wont meet
  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 siphoncustomers
  away with a lower price
• High-end differentiators may be able to
  stealcustomers away with better product
  attributes

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Focus / Niche Strategies

• Involve concentrated attention on a narrow
  pieceof the total market
• Serve needs of niche buyers better than rivals
• Choose a market niche where buyers have
  distinctive preferences, special requirements, or
  unique needs
• Develop unique capabilities and product
  attributes to serve needs of target buyer segment

Objective
Keys to Success
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Approaches to Defining a Market Niche

• Geographic uniqueness
• Specialized requirements inusing 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
• Quick maintenance for motor vehicles
• Pottery Barn Kids
• Childrens furniture and accessories
• Bandag
• Specialist in truck tire recapping

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Focus / Niche Strategiesand Competitive
Advantage
Approach 1

• Achieve lower costs than rivals in serving the
  segment --
• A low-cost strategy

Approach 2

• Offer niche buyers something different from
  rivals --
• A differentiation strategy

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What Makes a NicheAttractive for Focusing?

• Big enough to be profitable and offers good
  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
  afocusers 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 itbecomes crowded
  with rivals, causingsegment profits to be
  splintered

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Deciding Which Generic Competitive Strategy
to Use

• Each positions a company differently in its
  market
• Each establishes a central theme for how a
  company will endeavor to outcompete rivals
• Each creates some boundaries for maneuvering as
  market circumstances unfold
• Each points to different ways of experimenting
  with the basics of the strategy
• Each entails differences in product line,
  production emphasis, marketing emphasis, and
  means to sustain the strategy

The big risk Selecting a stuck in the middle
strategy! This rarely produces a sustainable
competitiveadvantage or a distinctive
competitive position!
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Collaborative Strategies Strategic Alliances
and Partnerships

• Companies sometimes use 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 AreIntegral to a
Firms Competitiveness

• Two demanding competitive challenges arefaced by
  many companies
• Global race to build a market presencein many
  different national markets
• Race to seize opportunities on thefrontiers 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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Purposes of Strategic Alliances

• To acquire or improve market access via joint
  marketing agreements
• To pursue joint sales or distribution
• To gain economies of scale in production
• To collaborate on the design of new products
• To engage in joint research and development
• To form technology licensing agreements

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What Factors Makean Alliance Strategic?

• It is critical to a companys achievement of an
  important objective
• It helps build, sustain, or enhance a
• Core competence or
• Competitive advantage
• It helps block a competitive threat
• It helps open up important new market
  opportunities
• It mitigates a significant risk to a companys
  business

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Why Are Strategic Alliances Formed?

• To expedite development of promising new
  technologies or products
• To fill gaps in technical or manufacturing
  expertise
• To create desirable new skill sets and
  capabilities
• To improve supply chain efficiency
• To gain economies of scale inproduction and/or
  marketing
• To acquire or improve market accessvia joint
  marketing agreements

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Potential Benefits of Alliances toAchieve
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 beachhead 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 firms capabilities with resources
  of partners

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Why Do Alliances Fail?

• Ability of an alliance to endure depends on
• How well partners work together
• Success of partners in respondingand adapting to
  changing conditions
• Willingness of partners torenegotiate 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 Involves a pooling of equals, with newly
  createdfirm often taking on a new name
• Acquisition One firm, the acquirer,
  purchasesand absorbs operations of another, the
  acquired
• Characteristics of mergers and acquisitions
• 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 firms geographic coverage
• To extend a firms business into new product
  categories or international markets
• To gain quick access to new technologies
• To invent a new industry and lead theconvergence
  of industries whoseboundaries 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
  stylesand 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 firms competitive scope withinsame
  industry
• Backward into sources of supply
• Forward toward end-users of final product
• Can aim at either full or partial integration

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Advantages of a Vertical Integration Strategy

• Two reasons to invest resources in vertical
  integration
• Strengthen a firms competitive position and/or
• Boost a firms profitability
• Potential benefits of vertical integration
• Produces sufficient cost savings and/or profit
  increases to justify extra investment
• Adds materially to a firms technological and
  competitive strengths
• Helps differentiate a firms product offerings

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Strategic Advantagesof Backward Integration

• Generates cost savings only if volume needed
  isbig enough to capture efficiencies equal to
  that 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 for
  crucial raw materials / parts / components

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Strategic Advantagesof Forward Integration

• To gain better access to end users and
  bettermarket 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 Disadvantagesof Vertical Integration

• Boosts resource requirements
• Locks firm deeper into same industry which may
• Result in fixed sources of supply and
• Less flexibility in accommodatingbuyer demand
  for product variety
• Poses all types of capacity-matching problems
• May require radically different skills /
  capabilities
• Reduces flexibility to make changes incomponent
  parts which may
• Lengthen design time and
• Delay new product introductions

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Pros and Cons ofIntegration vs.
De-Integration

• Whether vertical integration is a
  viablestrategic option depends on its
• Ability to lower cost, build expertise,increase
  differentiation, or enhanceperformance of
  strategy-critical activities
• Impact on investment cost, flexibility, and
  administrative overhead
• Contribution to enhancing a firms competitiveness

Many firms are finding de-integratingvalue chain
activities is a moreflexible, economic strategic
option!
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Outsourcing Strategies
Concept

• Involves withdrawing from certain value chain
  activities and relying on outsiders to supply
  needed products, support services, or functional
  activities

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What Factors Drive Decisions toOutsource?

• Outsiders can often perform certainactivities
  better or cheaper
• Allows a firm to focus its entireenergies on
  activities that are
• At the center of its expertise Core
  competencies
• Most critical to its competitive and financial
  success

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When Does OutsourcingMake Strategic Sense?

• Activity can be performed better or more cheaply
  byoutside specialists
• Activity is not crucial to achieve a sustainable
  competitive advantage
• Risk exposure to changing technology and/or
  changing buyer preferences is reduced
• Firms ability to innovate is improved
• Operations are streamlined to
• Improve flexibility
• Cut cycle time
• Firm can assemble diverse kinds of expertise
  speedily and efficiently by using capable outside
  suppliers
• If it helps a firm concentrate its full energies
  and resource strengths on better performing
  core value chain activities

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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 Strategies

• Purposes of offensive strategies
• Improve market position
• Build a competitive advantage or widen an
  existing one
• Whittle away at a strong rivals competitive
  advantage
• Gain profitable market share at the expense of
  rivals despite their resource strengths and
  capabilities

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Types of Offensive Strategies

• 1. Offering an equally good or better product at
  a lower price
• 2. Leapfrogging competitors by being
• First adopter of next-generation technologies or
• First to market with next-generation products
• 3. Adopting and improving on good ideas of other
  companies
• 4. Attacking market segments where a key rival
  makes big profits
• 5. Attacking competitive weaknesses of rivals
• 6. Maneuvering around competitors and
  concentrating on capturing unoccupied or less
  contested market territory
• 7. Using hit-and-run tactics to grab market
  share from rivals
• 8. Launching a preemptive strike to secure an
  advantageous position that rivals are prevented
  from duplicating

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Offensive Strategy as a Basis toAchieve
Competitive Advantage

• Strategic offensives offering strongest basis for
  competitive advantage usually entail
• Exploiting a competitors weaknesses
• Concentrating on
• An important core competence or
• A unique competitive capability
• Focusing on key resource strengths
• Well-known brand name
• A cost advantage in manufacturing or distribution
• A new or much-improved product

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Defensive Strategies

• Purposes of defensive strategies
• Lesson risk of being attacked
• Blunt impact of any attack that occurs
• Influence challengers to aim attacks at other
  rivals
• Defend a firms competitive position / advantage
• Protect valuable resources and capabilities from
  imitation
• Types of defensive strategies
• 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 newproducts or
  price changes
• Challenge quality or safety of rivals products
• Sign exclusive agreements with distributors

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Signal Challengers Retaliation Is Likely

• Publicly announce managements strongcommitment
  to maintain present market share
• Publicly commit firm to policy ofmatching
  rivals terms or prices
• Maintain war chest of cash reserves
• Make occasional counterresponseto moves of
  weaker rivals

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Web Site StrategiesWhich One to Employ?

• Strategic Issue What role should a firms Web
  site play in its competitive strategy?
• Approaches to using the Internet
• Solely as a vehicle to disseminate product
  information
• Minor distribution channel
• One of several importantdistribution channels
• Primary distribution channel
• Exclusive distribution channel

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Using the Internet toDisseminate 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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Web Site E-Stores as aMinor 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
• Boost overall sales a few percentage points
• Unlikely to provoke much outcry from dealers

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Brick-and-Click Strategies AnAppealing
Middle Ground Strategy

• Strategic appeal
• Economic means of expanding a firms geographic
  reach
• Provide both existing and potential customers
  with additional ways to
• Communicate with firm
• Shop for product information
• Make purchases
• Resolve customer service problems

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Strategies for Online Enterprises

• Approach Use Internet as exclusive channel
  ofall buyer-seller contact
• Strategic issues
• How a firm will deliver unique value to buyers
• Whether a firm pursues competitive advantage
  based on lower costs, differentiation, or better
  value for the money
• Whether a firm will have a broad or narrow
  product offering
• Whether to perform order fulfillment activities
  internally or to outsource them
• How a firm will draw traffic to its Web site

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Choosing AppropriateFunctional-Area Strategies

• Involves strategic choices about how functional
  areasare managed to support competitive strategy
  and additional strategic moves
• Functional strategies include
• Research and development
• Production
• Human resources
• Sales and marketing
• Finance

Tailoring functional-area strategies to
supportkey business-level strategies is critical!
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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 firms image and
  reputation
• Early commitments to new technologies,new-style
  components, and distributionchannels 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
• Innovators products are primitive, notliving up
  to buyer expectations
• Rapid technological changeallows 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 yieldas 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