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MANAGEMENT POLICY AND STRATEGY
SESSION - VII
Strategic Analysis and Choice in
Single Product Businesses
Prof. Sushil
Department of Management Studies
Indian Institute of Technology, Delhi
INDIA
Email: sushil@dms.iitd.ernet.in
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Key Issues: Strategic Choice in Single
Businesses
1. What strategies are most effective at building
sustainable competitive advantages for single
business units?
2. Should dominant-product/service businesses
diversify to build value and competitive
advantage? What grand strategies are most
appropriate?
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Prominent Sources of Competitive
Advantage
Cost leadership
Sources of
competitive
advantage
Differentiation
Speed
Market focus
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Evaluating A Business’s Cost Leadership
Opportunities
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A. Skills and Resources Fostering Cost Leadership
• Sustained capital investment and access to capital
• Process engineering skills
• Intense supervision of labor or core technical operations
• Products or services designed for ease of manufacture or
delivery
• Low-cost distribution system
B. Organizational Requirements Supporting Cost Leadership
• Tight cost control
• Frequent, detailed control reports
• Continuous improvement and benchmarking orientation
• Structured organization and responsibilities
• Incentives based on meeting strict, usually quantitative
targets
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Advantages of a Cost Leadership
Strategy
Low-cost advantages
pressure from buyers
reduce likelihood of
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pricing
Sustained low-cost advantages may push rivals into
other areas, lessening price competition
New entrants must face an entrenched cost leader
without experience to replicate cost advantages
Low-cost advantages should lessen attractiveness of
substitutes
Higher margins allow low-cost producers to withstand
supplier cost increases
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Key Risks of Cost Leadership
Many cost-saving activities are easily duplicated
Exclusive cost leadership can become a trap
Obsessive cost cutting can shrink other competitive
advantages involving key product attributes
Cost differences often decline over time
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Evaluating A Business’s Differentiation
Opportunities
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A. Skills and Resources Fostering Differentiation
•Strong marketing abilities
•Product engineering
•Creative talent and flair
•Strong capabilities in basic research
•Corporate reputation for quality or technological
leadership
•Long tradition in an industry or unique combination of
skills
•Strong cooperation from channels and suppliers of major
components
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Evaluating A Business’s Differentiation
Opportunities
Contd….
B. Organizational Requirements Supporting Differentiation
•Strong coordination among functions in R&D, product
development, and marketing
•Subjective measurement and incentives instead of
quantitative measures
•Amenities to attract highly skilled labor, scientists, and
creative people
•Tradition of closeness to key customers
•Some personnel skilled in sales and operations - technical
and marketing
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Advantages of a Differentiation Strategy
Rivalry is reduced
differentiates itself
when
a
business
successful
Buyers are less sensitive to prices for effectively
differentiated products
Brand loyalty is hard for new entrants to overcome
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Key Risks of Differentiation
Imitation
narrows
perceived
differentiation,
rendering differentiation meaningless
Technological changes that nullify past investments
or learning
Cost difference between low-cost competitors and
the differentiated business becomes too great for
differentiation to hold brand loyalty
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Creating a Competitive Advantage Based on
Speed


Has become a major source of competitive
advantage for many firms
Involves the availability of a rapid response to
customers by


Providing current products quicker
Accelerating
improvement
new
product
development

Quickly adjusting production processes

Making decisions quickly
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or
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Evaluating A Business’s Rapid Response
Opportunities
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A. Skills and Resources Fostering Speed
•Process engineering skills
•Excellent inbound and outbound logistics
•Technical people in sales and customer service
•High levels of automation
•Corporate reputation for quality or technical leadership
•Flexible manufacturing capabilities
•Strong downstream partners
•Strong cooperation from suppliers of major components
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Evaluating A Business’s Rapid Response
Opportunities Contd….
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B. Organizational Requirements Supporting Rapid
Response
•Strong coordination among functions in R&D, product
development, and marketing
•Major emphasis on customer satisfaction in incentive
programs
•Strong delegation to operating personnel
•Tradition of closeness to key customers
•Some personnel skilled in sales and operations - technical
and marketing
•Empowered customer service personnel
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Activities Conducive to Building Speed-Based
Competitive Advantages
Customer
responsiveness
Product
development
cycles
Product or
service
improvements
Information
sharing and
technology
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Speed in
delivery or
distribution
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Advantages of a Speed-Based Strategy
Creates a way to lessen rivalry because firm has the
availability of something a rival may not
Allows firm to charge buyers more, engender loyalty,
or enhance its’ position relative to its buyers
Generates cooperation and concessions from
suppliers since they benefit from increased revenues
Substitutes and new entrants are trying to keep up
with the rapid changes rather than introducing them
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Key Risks of a Speed-Based Strategy
Speeding up activities that have not been
conducted in a fashion prioritizing rapid response
should only be done after attention to training,
reorganization, and/or reengineering
Some industries - stable, mature ones - may not
offer much advantage to a firm introducing some
forms of rapid response
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Creating a Competitive Advantage Based on
Market Focus



Involves building cost, differentiation, and/or speed
competitive advantages targeted to a narrow,
market niche
Allows a firm to
 “Learn” its target customers
 Build up organizational knowledge of ways to
satisfy its target market better than larger rivals
Risks of focus strategies
 Can attract major competitors to the segment
 Believing a focus strategy, by itself, creates
success, rather than a form of low cost,
differentiation, or speed
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Industry Environments and Strategy
Choices
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Emerging Industries
Industries Transitioning to Maturity
Mature and Declining Industries
Fragmented Industries
Global Industries
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Characteristics of Markets in Emerging
Industries







Proprietary technology and technological uncertainty
Competitor
uncertainty
regarding
inadequate
information
High initial cost structure
Few entry barriers
First-time buyers require initial inducement
Inability to easily obtain raw materials and
components
Need for high-risk capital
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Strategic Options for Emerging Industries
1. Ability to shape industry’s structure
2. Ability to rapidly improve product quality
3. Establish favorable relations with key suppliers
4. Ability to establish technology as dominant force
5. Acquire a core group of loyal customers
6. Ability to forecast future competitors
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Characteristics of Industries Transitioning to
Maturity
 Intense
competition for market share
 Increased
sales to experienced, repeat
buyers
 Greater
emphasis on cost and service
 Declining
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profitability
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Strategic Options for Maturing Industries
1. Prune the product line
2. Emphasize process innovation
3. Emphasize cost reductions
4. Focus on selecting loyal buyers
5. Pursue horizontal integration
6. Expand internationally
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Pitfalls to Avoid in Competing in Maturing
Industries
A middle-ground approach to selecting a generic
competitive strategy
Sacrificing market share for short-term profits
Waiting too long to respond to price reductions
Retaining unneeded excess capacity
Engaging in sporadic efforts to boost sales
Placing hopes on new products
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Characteristics of Mature/Declining
Industries


Demand grows
or even declines
more
slowly
than
economy,
Slowing growth is caused by

Technological substitution

Demographic shifts

Shifts in consumer needs
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Strategic Options for Mature/Declining
Industries
1. Focus on key market segments offering growth
opportunities
2. Emphasize product innovation and quality
improvement
3.
Emphasize
efficiency
production
and
distribution
4. Gradually harvest the business
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Pitfalls to Avoid in Competing in
Mature/Declining Industries
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Being overly optimistic about prospects for an
industry revival
Getting trapped in a profitless war of attrition
Harvesting from a weak position
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Characteristics of Fragmented Industries



No firm has a significant market share
No firm
outcomes
can
significantly
influence
industry
Examples

Professional services

Retailing

Wood and metal fabrication

Agricultural products

Funeral industry
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Strategic Options for Fragmented
Industries
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1. Tightly managed decentralization - Intense local
coordination, high personal service, local autonomy
2. Formula facilities - Standardized, efficient, low-cost
facilities at multiple locations
3. Increased value added - Difficult to differentiate
products/services
4. Specialization - Product type, customer type, type of
order, geographic areas
5. Bare bones/no frills - Intense low margin competition
(low overhead, minimum wages, tight cost controls)
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Characteristics of Global Industries




Differences in prices and costs among countries due
to
 Currency exchange fluctuations
 Differences in wage and inflation rates
 Other economic factors
Differences in buyer needs across countries
Differences in competitors and ways of competing
among countries
Differences in trade rules and governmental
regulations across countries
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Key Components of Competing in Global
Industries
Approach to gain global
market coverage
Generic
competitive
strategy
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Strategic Options: Pursuing Global Market
Coverage
1. License foreign firms to produce and distribute
a firm’s products
2. Maintain a domestic production base and
export products
3. Establish foreign-based plants and distribution
in foreign countries
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Strategic Options: Choosing a Generic
Competitive Strategy
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1. Broad-line global competition
2. Global focus strategy
3. National focus strategy
4. Protected niche strategy
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Grand Strategy Selection Matrix
Overcome weaknesses
Internal
(redirected
resources
within the
firm)
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Turnaround or
retrenchment
Divestiture
Liquidation
Vertical integration
Conglomerate diversification
External
(acquisition
II I
or merger for
resource
III IV
capability)
Concentrated
Horizontal integration
growth
Concentric diversification
Market development Joint venture
Product
development
Innovation Maximize strengths
© 2000 The McGraw-Hill Companies, Inc.
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Model of Grand Strategy Clusters
Rapid market growth
1. Concentrated
growth
2. Vertical integration
3. Concentric
diversification
Strong
competitive
position
1. Reformulation of
concentrated growth
2. Horizontal integration
3. Divestiture
4. Liquidation
I
II
IV
III
Weak
competitive
position
1. Concentric
diversification
2. Conglomerate
diversification
3. Joint venture
1. Turnaround or retrenchment
2. Concentric diversification
3. Conglomerate
diversification
4. Divestiture
5. Liquidation
Slow market growth
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Strategic Factor Analysis Summary (SFAS): Matrix
Duration
Key Strategic Factors
(Select the most important
opportunities/threats from EFAS,
and the most important strengths
and weaknesses from IFAS)
S
h
o
r
t
Weighted
Weight Rating Score
 Quality Maytag Culture (S)
 Hoover’s international
orientation (S)
 Financial position (W)
 Global positioning (W)
.10
.10
5
3
.50
.30
.10
.15
2
2
.20
.30
 Economic integration of
European Community (O)
 Demographics favour quality (O)
 Trend to Super Stores (O+T)
 Whirlpool and Electrolux (T)
 Japanese appliance companies
(T)
Total Score
.10
4
.40
.10
.10
.15
.10
5
2
3
2
.50
.20
.45
.20
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1.00
3.05
In
te
r
m
e
di
at
e
L
o
n
g
X
High debt
X Only in N.A., U.K., and
Australia
X Acquisition of Hoover
Comments
X Quality key to success
X
Name recognition
X
X
X
Maytag quality
Weak in this channel
Dominate industry
Asian presence
© 2000 The McGraw-Hill Companies, Inc.
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TOWS MATRIX
INTERNAL FACTORS Strengths (S)
(IFAS)
List 5-10 internal strengths here
EXTERNAL
FACTORS (EFAS)
Opportunities (O)
List 5-10 external
opportunities here
Weaknesses (W)
List 5-10 internal weaknesses
here
WO strategies
Generate strategies here that
take advantage of
opportunities by overcoming
weaknesses
Threats (T)
ST strategies
WT strategies
List 5-10 external threats here Generate strategies here that use Generate strategies here that
strengths to avoid threats
minimize weaknesses and
avoid threats
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SO Strategies
Generate strategies here that use
strengths to take advantage of
opportunities
© 2000 The McGraw-Hill Companies, Inc.
TOWS MATRIX FOR MAYTAG CORPORATION
INTERNAL
FACTORS
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Weaknesses (W)
W1 Process-oriented R&D
W2 Distribution channels
EXTERNAL
W3 Financial position
W4 Global positioning
FACTORS
W5 Manufacturing facilities
Opportunities (O)
WO strategies
01Economic integration of
 Expand Hoover’s presence in
European Community
continental Europe by
02 Demographics favour quality
improving Hoover quality and
03 Economic development of Asia
reducing manufacturing and
04 Opening of Eastern Europe
distribution costs.
05 Trend toward super stores
 Emphasize superstore channel
for all non-Maytag brands
Threats (T)
ST strategies
WT strategies
T1 Increasing government
 Acquire Raytheon’s appliance
 Sell off Dixie-Narco Division to
regulation
business to increase US market
reduce debt.
T2 Strong US competition
share.
 Emphasize cost reduction to
T3 Whirlpool and Electrolux
 Merge with a Japanese major home
reduce break-even point.
positioned for global economy
appliance company
 Sell out to Raytheon or a
T4 New product advances
 Sell off all non-Maytag brands and
Japanese firm.
T5 Japanese appliance companies
strongly defend Maytag’s’ US niche.
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Strengths (S)
S1 Quality Maytag culture
S2 Experienced top Management
S3 Vertical integration
S4 Employee relations
S5 Hoover’s international orientation
SO Strategies
 Use worldwide Hoover distribution
channels to sell both Hoover and
Maytag major appliances
 Find joint venture partners in
Eastern Europe and Asia
© 2000 The McGraw-Hill Companies, Inc.
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Conclusion: Selecting a Business Strategy to
Achieve a Competitive Advantage
Selection
of
appropriate
business
strategie(s)
involves
Focusing on key sources of
competitive advantage requiring
total, consistent commitment
Weighing skills, resources,
organizational requirements, and
risks of each source of
competitive advantage
Considering unique effects of the
generic industry environment on a
firm’s value chain activities
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© 2000 The McGraw-Hill Companies, Inc.