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Pearce & Robinson, 10th ed.
Chapter 8
Business Strategy
McGraw-Hill/Irwin
Strategic Management, 10/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
1. Determine why a business would choose a lowcost, differentiation, or speed-based strategy
2. Explain the nature and value of a market focus
strategy
3. Illustrate how a firm can pursue both low-cost and
differentiation strategies
4. Identify requirements for business success at
different stages of industry evolution
5. Determine good business strategies in fragmented
and global industries
6. Decide when a business should diversify
Evaluating and Choosing Business Strategies:
Seeking Sustained Competitive Advantage
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The two most prominent sources of competitive
advantage can be found in the business’s cost
structure and its ability to differentiate the
business from competitors
Businesses that have one or more
sources/capabilities that let them
operate at a lower cost will
consistently outperform their
rivals that don’t
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Evaluating Cost Leadership
Opportunities
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Business success built on cost leadership requires
the business to be able to provide its product or
service at a cost below what its competitors can
achieve
Evaluating a Business’s Cost and
Leadership Opportunities
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Sustainable Low-Cost Activities
1. Some low-cost advantages reduce the likelihood of
buyers’ pricing pressure
2. Truly sustained low-cost advantages may push rivals
into other areas
3. New entrants competing on price must face an
entrenched cost leader
4. Low-cost advantages should lessen the attractiveness of
substitute products
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Sustainable Low-Cost Activities
1. Higher margins allow low-cost producers to withstand
supplier cost increases
2. Many cost-saving activities are easily duplicated
3. Exclusive cost leadership can be a trap
4. Obsessive cost cutting can shrink other competitive
advantages
5. Cost differences often decline over time
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Evaluating Differentiation
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Differentiation requires that the business
have sustainable advantages that allow it to
provide buyers with something uniquely
valuable to them
Differentiation usually arises from one or
more activities in the value chain that create
a unique value important to buyers
Strategists use benchmarking and consider
the 5 forces in considering differentiation
Evaluating a Business’s Differentiation
Opportunities
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Evaluating Speed as a Competitive
Advantage
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• Speed-based strategies, or rapid response to
customer requests or market and
technological changes, have become a major
source of competitive advantage for
numerous firms in today’s intensely
competitive global economy
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Evaluating a Business’s Rapid Response
(Speed) Opportunities
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Speed can be created by:
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Customer responsiveness
Product development cycles
Product or service improvements
Speed in delivery or distribution
Information Sharing and Technology
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Risks of Speed-based Strategy
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Speeding up activities that haven’t been
conducted in a fashion that prioritizes rapid
response should only be done after
considerable attention to training,
reorganization, and/or reengineering
Some industries may not offer much
advantage to the firm that introduces some
forms of rapid response
Customers in such settings may prefer the
slower pace or the lower costs currently
available, or they may have long time frames
in purchasing
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Evaluating Market Focus as a Way
to Competitive Advantage
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Market focus: the extent to which a
business concentrates on a narrowly
defined market
Small companies, at least the better
ones, usually thrive because they serve
narrow market niches
Market focus allows some businesses to
compete on the basis of low cost,
differentiation, and rapid response
against much larger businesses with
greater resources
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Risks of Market Focus
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The risk of focus is that you attract major
competitors who have waited for your business to
“prove” the market
Managers evaluating opportunities to build
competitive advantage should link strategies to
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Resources
Capabilities
Value chain activities that exploit low cost,
differentiation, and rapid response
Stages of Industry Evolution and
Business Strategy Choices
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The requirements for success in industry segments change
over time
Strategists can use these changing requirements, which are
associated with different stages of industry evolution, as a
way to isolate key competitive advantages and shape
strategic choices around them
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Emerging Industries
• Emerging industries are newly
formed or re-formed industries
that typically are created by
technological innovation, newly
emerging customer needs, or other
economic or sociological changes
• There are no “rules of the game”
Business Strategies in
Emerging Industries
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Technologies that are most proprietary to the pioneering
firms and technological uncertainty will unfold
Competitor uncertainty because of inadequate information
about competitors, buyers, and the timing of demand
High initial costs but steep cost declines
Few entry barriers
First-time buyers requiring initial inducement to purchase
Inability to obtain raw materials and components until
suppliers gear up to meet the industry’s needs
Need for high-risk capital because of the industry’s
uncertain prospects
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Emerging Industries
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For success in this industry setting, business strategies
require one or more of these features:
The ability to shape the industry’s structure
The ability to rapidly improve product quality and
performance features
Advantageous relationships with key suppliers and
promising distribution channels
The ability to establish the firm’s technology as the
dominant one
The early acquisition of a core group of loyal customers
and then the expansion of that customer base
The ability to forecast future competitors
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Competitive Advantages and Strategic
Choices in Growing Industries
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Rapid growth brings new competitors into the
industry
At this stage, growth industry strategies that
emphasize brand recognition, product
differentiation, and the financial resources to
support both heavy marketing expenses and the
effect of price competition on cash flow can be key
strengths
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Growth Industries
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For success in this industry setting, business strategies
require one or more of the following features:
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The ability to establish strong brand recognition
The ability and resources to scale up to meet increasing demand
Strong product design skills to be able to adapt products and
services
The ability to differentiate the firm’s product[s] from competitors
entering the market
R&D resources and skills to create product variations
The ability to build repeat buying from established customers
Strong capabilities in sales and marketing
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Competitive Advantages and Strategic
Choices in Mature Industries
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As an industry evolves, its rate of growth
eventually declines
Firms working with the mature industry
strategies sell increasingly to experienced, repeat
buyers who are now making choices among known
alternatives
Competition becomes more
oriented to cost and service
as knowledgeable buyers
expect similar price and features
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Mature Industries
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Strategy elements of successful firms in maturing
industries often include the following:
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Product line pricing
Emphasis on process innovation that
permits low-cost product design,
manufacturing methods, and distribution
synergy
Emphasis on cost reduction
Careful buyer selection to focus on
buyers who are less aggressive, more
closely tied to the firm, and able to buy more from the firm
Horizontal integration to acquire rival firms whose weaknesses can
be used to gain a bargain price
International expansion to markets where attractive growth and
limited competition still exist
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Competitive Advantages and Strategic
Choices in Declining Industries
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Declining industries are those that make products or
services for which demand is growing slower than
demand in the economy as a whole or is actually declining
Focus on higher growth
or a higher return
Emphasize product innovation
and quality improvement
Emphasize production and
distribution efficiency
Gradually harvest the business
Competitive Advantage in
Fragmented Industries
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A fragmented industry is one in which no firm
has a significant market share and can strongly
influence industry outcomes
Tightly managed decentralization
“Formula” facilities
Increased value added
Specialization
Bare bones/no frills
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Competitive Advantage in
Global Industries
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A global industry is one that comprises firms
whose competitive positions in major geographic
or national markets are fundamentally affected by
their overall global competitive positions
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License foreign firms to produce and distribute the firm’s
products
Maintain a domestic production base and export products to
foreign countries
Establish foreign-based plants and distribution to compete
directly in the markets of one or more foreign countries
Four Generic Global
Competitive Strategies
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Broad-line global competition
Global focus strategy
National focus strategy
Protected niche strategy
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Grand Strategy Selection Matrix
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Model of Grand Strategy Clusters
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Building Value as a Basis for Choosing
Diversification or Integration
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The grand strategy selection matrix and
model of grand strategy clusters are
useful tools to help dominant product
company managers evaluate and narrow
their choices among alternative grand
strategies
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Dominant product company managers who
choose diversification or integration
eventually create another management
challenge