CHAPTER 1
What Is Strategy and
Why Is It Important?
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Learning Objectives
This chapter will help you understand:
1. What we mean by a company’s strategy and why it
needs to differ from competitors' strategies.
2. The concept of a sustainable competitive advantage.
3. The five most basic strategic approaches for setting a
company apart from its rivals.
4. That a company’s strategy tends to evolve.
5. What constitutes a viable business model.
6. The three tests of a winning strategy.
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What Do We Mean By Strategy ?
A company’s strategy is the
coordinated set of actions that its
managers take in order to outperform
the company’s competitors and
achieve superior profitability.
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All Businesses Face Three Central Questions
1. What is our present situation?
•
Industry conditions and competitive pressures, market standing,
competitive strengths and weaknesses, and future prospects in
light of changes taking place in the business environment
2. What should the company’s future direction be and what
performance targets should we set?
•
•
•
What buyer needs to try to satisfy
Which growth opportunities to emphasize?
Where to head and what outcomes to strive to achieve?
3. What’s our plan for running the company and achieving
good results?
•
Challenges managers to craft a series of competitive moves and
business approaches—henceforth called a strategy—for heading
the firm in the intended direction, staking out a market position,
attracting customers, and achieving the targeted outcomes
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Strategy Is about Making Choices
Strategy is all about choosing How:
•
How to position the firm in the marketplace
•
How to attract customers
•
How to compete against rivals
•
How to achieve the firm’s performance targets
•
How to capitalize on opportunities to grow the business
•
How to respond to changing economic and market
conditions
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Strategy Is about Competing Differently
Strategy as a choice:
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•
Is deciding to compete differently from rivals—
pressuring rivals by doing what they do not do or,
even better, doing what they cannot do.
•
Guides the company in what it must do and also in
knowing what it must not do.
•
Is successful when its actions, business approaches,
and competitive moves appeal to buyers in ways that:
•
Set it apart from its rivals by either providing products with
higher perceived values or efficiently producing at lower costs.
•
Stake out a market position that is not crowded with strong
competitors.
FIGURE 1.1 Identifying a Firm’s Strategy–What to Look for
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Illustration Capsule 1.1 Apple Inc.: Exemplifying a
Successful Strategy
Key elements of Apple’s successful strategy are:
• Designing and developing its own operating systems,
hardware, application software and services.
• Continuously investing in R&D and frequently
introducing products.
• Strategically locating its stores and staffing them with
knowledgeable personnel.
• Maintaining a quality brand image, supported by
premium pricing.
• Committing to corporate social responsibility and
sustainability through supplier relations.
• Cultivating a diverse workforce rooted in transparency.
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Strategy and the Quest for
Competitive Advantage
Competitive advantage:
•
Requires meeting customer needs either more effectively (with
products or services that customers value more highly) or more
efficiently (by providing products or services at a lower cost to
customers.)
Sustainable competitive advantage requires:
•
Giving buyers lasting reasons to prefer a firm’s products or
services over those of its competitors.
•
Developing expertise and long-term competitive capabilities that
cannot be readily overcome.
•
Putting the constant quest for sustainable competitive advantage
at center stage in crafting your strategy.
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Basic Strategic Approaches (1 of 2)
Strategies for Building Competitive Advantage
Low-Cost
Provider
Focused LowCost
Focused
Differentiation
Broad Differentiation
Best-Cost Provider
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Basic Strategic Approaches (2 of 2)
Low-cost provider strategy—achieving a cost-based advantage over
rivals
Broad differentiation strategy—differentiating the firm’s product or
service from rivals in ways that appeal to a broad spectrum of buyers
A focused low-cost strategy—concentrating on a narrow buyer
segment (or market niche) by having lower costs to serve niche
members at a lower price
Focused differentiation strategy—concentrating on a narrow buyer
segment (or market niche) by offering buyers customized attributes that
meet their specialized needs and tastes better than rivals’ products
Best-cost provider strategy—giving customers more perceived value
for their money by satisfying their expectations on key quality features,
performance, and/or service attributes that match or exceed their price
expectations
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Why a Company’s Strategy
Evolves over Time
Managers modify strategy in response to:
•
Changing market conditions.
•
Advancing technology.
•
Fresh moves of competitors.
•
Shifting buyer needs.
•
Emerging market opportunities.
•
New ideas for improving the strategy.
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FIGURE 1.2 A Company’s Strategy Is a Blend of Proactive
Initiatives and Reactive Adjustments
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A Company’s Strategy Is Partly Proactive
and Partly Reactive
Realized (current) strategy is a blend of:
•
Proactive (deliberate) strategy elements that include
planned initiatives to improve the company’s financial
performance and secure a competitive edge.
•
Reactive (emergent) strategy elements developed on
the fly in response to unanticipated developments and
fresh market conditions.
•
Abandoned and superseded strategy elements that no
longer fit with the company’s ongoing strategy.
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Just for Fun
Using the terms shown in Figure 1.2, explain why
U.S. football teams get four downs to make a first
down.
How does risk affect play selection (reactive
strategy) as a team fails to advance on each of its
four downs? What would be the risk effect of
requiring more than a 10-yard gain for achieving a
first down?
What rules of play in other sports (e.g., soccer)
affect how the basic principles of strategy are
applied to game play?
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A Company’s Strategy and Its Business Model
How the firm will make money:
•
By providing customers with value
•
•
The firm’s customer value proposition
By generating revenues sufficient to cover costs and
produce attractive profits
•
The firm’s profit formula
It takes a proven business model—one that yields
appealing profitability—to demonstrate viability of
a firm’s strategy.
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The Relationship Between a Company’s
Strategy and Its Business Model
REALIZED
STRATEGY
Competitive Initiatives
Business Approaches
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BUSINESS
MODEL
Value Proposition
Profit Formula
Business Model Elements:
The Customer Value Proposition
The customer value proposition is:
•
Satisfying buyer wants and needs at a price customers
will consider a good value.
•
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The greater the value provided (V) and the lower the price (P),
the more attractive the value proposition is to customers
Business Model Elements:
The Profit Formula
The profit formula:
•
Creates a cost structure that allows for acceptable
profits, given that pricing is tied to the customer value
proposition.
V – the value provided to customers
P – the price charged to customers
C – the firm’s costs
•
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The lower the costs (C) for a given customer value
proposition (V–P), the greater the ability of the
business model to be a moneymaker.
FIGURE 1.3
The Business Model and the Value-Price-Cost
Framework
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Is The Company’s Strategy A Winner?
THREE
TESTS OF A
WINNING
STRATEGY
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EXHIBITS GOOD
FIT WITH
SITUATION
RESULTS IN
COMPETITIVE
ADVANTAGE
PROMOTES
SUPERIOR
PERFORMANCE
What Makes a Strategy a Winner?
A winning strategy must pass three tests:
•
The fit test
Does it exhibit good fit with the external and internal aspects of
the firm’s dynamic situation?
•
The competitive advantage test
Is it likely to result in a sustainable competitive advantage?
•
The performance test
Is it producing superior performance, as indicated by the firm’s
profitability, financial and competitive strengths, and market
standing?
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Illustration Capsule 1.2 Pandora, Sirius XM, and
Broadcast Radio: Three Contrasting Business
Models
Who listens to the radio anymore?
•
How sustainable are the business models of Pandora,
Sirius XM and over-the-air broadcasters over the long
term?
•
Given the changes in user listening habits, which
competitor’s present strategy best passes the three
tests of a winning strategy?
•
What internal and external factors will create particular
difficulties for each competitor in changing its strategy
or business model?
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Why Crafting and Executing Strategy Are
Important Tasks
Strategy provides:
•
A prescription for doing business.
•
A road map to competitive advantage.
•
A game plan for pleasing customers.
•
A formula for attaining long-term standout marketplace
performance.
Good Strategy + Good Strategy Execution =
Good Management
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Applying What You Learned in This Chapter
Google’s browser-based Chrome operating system
and its online applications suite are challenging
Microsoft’s long-term dominance of the office
productivity application marketplace sectors.
What should be Microsoft’s near-term response to
this competitive challenge?
How will Microsoft’s long-term response to this
competitor’s actions affect its business model?
Which competitor’s strategy will likely be the eventual
winner in the marketplace? Why?
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The Road Ahead
Strategy is about asking the right questions.
•
What must managers do, and do well, to make
a firm successful in the marketplace?
Strategy requires getting the right answers
•
Good strategic thinking and good management of the
strategy-making, strategy-executing process are
important.
•
First-rate capabilities and skills in crafting and
executing strategy are essential to managing
successfully.
Welcome and best wishes for your success!
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CHAPTER 2
Charting a
Company’s
Direction:
Its Vision, Mission,
Objectives, and
Strategy
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instructor use
the classroom.
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or
© in
McGraw-Hill
Education.
Permission
required for reproduction or display.
further distribution permitted without the prior written consent of McGraw-Hill Education.
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Learning Objectives
This chapter will help you understand:
1. Why it is critical for managers to have a clear strategic vision of
where the company needs to head, and why.
2. The importance of setting both strategic and financial objectives.
3. Why the strategic initiatives taken at various organizational levels
must be tightly coordinated.
4. What a company must do to achieve operating excellence and to
execute its strategy proficiently.
5. The role and responsibility of a company’s board of directors in
overseeing the strategic management process.
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What Does the Strategy-Making, StrategyExecuting Process Entail?
1. Developing a strategic vision, a mission
statement, and a set of core values
2. Setting objectives for measuring the firm's
performance and tracking its progress
3. Crafting a strategy to move the firm along its
strategic course and achieve its objectives
4. Executing the chosen strategy efficiently and
effectively
5. Monitoring developments, evaluating
performance, and initiating corrective
adjustments
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FIGURE 2.1 The Strategy-Making, Strategy-Executing Process
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STAGE 1: Developing a Strategic Vision,
Mission Statement, and Set of Core Values
Developing a strategic vision
•
Delineates management’s aspirations for the firm to its
stakeholders
•
Provides direction: “where we are going”
•
Sets out the compelling rationale (strategic
soundness) for the firm’s direction
•
Uses distinctive and specific language to set the firm
apart from its rivals
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TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts (1 of 2)
The Dos
The Don’ts
Be graphic.
Don’t be vague or incomplete.
Paint a clear picture of where the
company is headed and the market
position(s) the company is striving to stake
out.
Never skimp on specifics about where the
company is headed or how the company
intends to prepare for the future.
Be forward-looking and directional.
Don’t dwell on the present.
Describe the strategic course that will help
the company prepare for the future.
A vision is not about what a firm once did or
does now; it’s about “where we are going.”
Keep it focused.
Don’t use overly broad language.
Focus on providing managers with
guidance in making decisions and
allocating resources.
All-inclusive language that gives the
company license to pursue any opportunity
must be avoided.
Have some wiggle room.
Don’t state the vision in bland or
uninspiring terms.
Language that allows some flexibility
allows the directional course to be
adjusted as market, customer, and
technology circumstances change.
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The best vision statements have the power
to motivate company personnel and inspire
shareholder confidence about the
company’s future.
TABLE 2.1 Wording a Vision Statement—the Dos and Don’ts (2 of 2)
The Dos
The Don’ts
Be sure the journey is feasible.
Don’t be generic.
The path and direction should be within the
realm of what the company can accomplish;
over time, a company should be able to
demonstrate measurable progress in
achieving the vision.
A vision statement that could apply to
companies in any of several industries (or
to any of several companies in the same
industry) is not specific enough to provide
any guidance.
Indicate why the directional path makes
good business sense.
Don’t rely on superlatives.
The directional path should be in the longterm interests of stakeholders, especially
shareowners, employees, and suppliers.
Visions that claim the company’s strategic
course is one of being the “best” or “most
successful” usually lack specifics about
the path the company is taking to get
there.
Make it memorable.
Don’t run on and on.
To give the organization a sense of direction A vision statement that is not short and to
and purpose, the vision needs to be easily
the point will tend to lose its audience.
communicated. Ideally, it should be
reducible to a few choice lines or a
memorable “slogan.”
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Examples of Strategic Visions—How Well Do They Measure Up? (1 of 2)
Vision Statement
Effective Elements
Shortcomings
Whole Foods Market is a dynamic leader in the
quality food business. We are a mission-driven
company that aims to set the standards of
excellence for food retailers. We are building a
business in which high standards permeate all
aspects of our company. Quality is a state of
mind at Whole Foods Market.
• Forward- looking
• Too long
• Graphic
• Not memorable
Our motto—Whole Foods, Whole People, Whole
Planet—emphasizes that our vision reaches far
beyond just being a food retailer. Our success in
fulfilling our vision is measured by customer
satisfaction, team member happiness and
excellence, return on capital investment,
improvement in the state of the environment and
local and larger community support.
Our ability to instill a clear sense of
interdependence among our various
stakeholders (the people who are interested and
benefit from the success of our company) is
contingent upon our efforts to communicate
more often, more openly, and more
compassionately. Better communication equals
better understanding and more trust.
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• Focused
• Makes good business
sense
Examples of Strategic Visions—How Well Do They Measure Up? (2 of 2)
Vision Statement
Effective Elements
Shortcomings
Keurig
• Focused
• Not graphic
Become the world’s leading
personal beverage systems
company.
• Flexible
• Lacks specifics
• Makes good
business sense
• Not forward-looking
Nike
• Forward-looking
• Vague and lacks detail
NIKE, Inc. fosters a culture of
invention. We create products,
services and experiences for
today’s athlete* while solving
problems for the next generation.
*If you have a body, you are an
athlete.
• Flexible
• Not focused
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• Generic
• Not necessarily feasible
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Strategic Vision Examples—How Well Do
They Measure Up?
For which of these three businesses is it the most
difficult to create a vision statement?
How does the scope of a business affect the
language of its vision statement?
Considering the acquisition of Whole Foods by
Amazon, how would you reword the Whole Foods
mission statement to reduce it to less than 100
words? (Currently = 154 words)
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Communicating the Strategic Vision
Why communicate the vision?
• Fosters
employee commitment to the firm’s
chosen strategic direction
• Ensures
understanding of its importance
• Motivates,
informs, and inspires internal and
external stakeholders
• Demonstrates
top management support for the
firm’s future strategic direction and competitive
efforts
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Putting the Strategic Vision in Place
What needs to be done:
• Put the vision in writing and distribute it.
• Hold meetings to personally explain the vision
and its rationale.
• Create a memorable slogan or phrase that
effectively expresses the essence of the vision.
• Emphasize the positive payoffs for making the
vision happen.
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Why a Sound, Well-Communicated
Strategic Vision Matters
• It crystallizes senior executives’ own views about the
firm’s long-term direction.
• It reduces the risk of rudderless decision making.
• It is a tool for winning the support of organization
members to help make the vision a reality.
• It provides a beacon for lower-level managers in setting
departmental objectives and crafting departmental
strategies that are in sync with the firm’s overall strategy.
• It helps an organization prepare for the future.
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Developing a Company Mission Statement
A well-conceived company mission statement:
•
Uses specific language to give the firm its own unique
identity
•
Describes the firm’s current business and purpose—
“who we are, what we do, and why we are here”
•
Focuses on describing the firm’s business, not on
“making a profit”—earning a profit is an objective, not a
mission
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An “Ideal” Mission Statement
• Identifies the company’s product or services
• Specifies the buyer needs it seeks to satisfy
• Identifies the customer groups or markets it is
endeavoring to serve
• Gives the company its own identity that sets the
company firm apart from its rivals
• Clarifies the firm’s purpose and business
makeup to stakeholders
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Linking the Vision and Mission with Core
Values
Core values:
•
Are the beliefs, traits, and behavioral norms that
employees are expected to display in conducting the
firm’s business and in pursuing its strategic vision and
mission.
•
Become an integral part of the firm’s culture and what
makes it tick when strongly espoused and supported
by top management.
•
Match the firm’s vision, mission, and strategy,
contributing to the firm’s business success.
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TOMS Shoes: A Mission with a
Company
TOMS’s mission statement
•
With every product you purchase, TOMS will help a person in
need. One for One.®
TOM’s core values
•
Our mission is ingrained in our one-to-one business model.
•
Lead with the story: our mission and purpose are the same.
•
Communicate to ensure that customers know they are doing more
than just buying a product.
•
Extend and adapt the one–for-one model to other product
categories to support other causes.
•
Protect the success of the model when acquiring stakeholders.
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Stage 2: Setting Objectives
The purposes of setting objectives:
•
To convert the vision and mission into specific,
measurable, challenging yet achievable, deadline
performance targets
•
To focus efforts and align actions throughout the
organization
•
To serve as yardsticks for tracking a firm’s
performance and progress
•
To provide motivation and inspire employees to
greater levels of effort
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Converting the Vision and Mission into
Specific Performance Targets
Specific
Characteristics
of Well-Stated
Objectives
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Quantifiable
(Measurable)
Challenging
(Motivating)
Deadline for
Achievement
Setting Stretch Objectives
Setting stretch objectives promotes better overall
performance because stretch targets because
they:
•
Push a firm to be more inventive.
•
Increase the urgency for improving financial
performance and competitive position.
•
Cause the firm to be more intentional and
focused in its actions.
•
Create an exciting work environment and attract the
best people.
•
Help prevent internal inertia and contentment with
modest gains in performance.
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Cautions About Stretch Goals
Realistic stretch goals
•
Are definitely reachable, with a strong and coordinated
effort on the part of company personnel.
Overly ambitious stretch goals
•
Are usually beyond the organization's capabilities to
reach, regardless of the level of effort.
•
Involve radical expectations and often go unachieved,
and run the risk of killing motivation, eroding employee
confidence, and damaging both worker and company
performance.
•
Can work as envisioned if:
• the company has ample resources and capabilities.
• its recent performance is strong.
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What Kinds of Objectives To Set
Financial Objectives
•
Communicate top
management’s goals for
financial performance.
•
Are focused internally
on the firm’s operations
and activities.
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Strategic Objectives
•
Are the firm's goals
related to market
standing and
competitive position.
•
Are focused externally
on competition vis-à-vis
the firm’s rivals.
The Need for Short-Term and
Long-Term Objectives
Short-Term Objectives:
•
Focus attention on quarterly and annual performance
improvements to satisfy near-term shareholder
expectations.
Long-Term Objectives:
•
Force consideration of what to do now to achieve optimal
long-term performance.
•
Help pose a barrier to overemphasizing achieving just
short-term results and postponing/delaying actions
needed to achieve long-term performance targets.
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Examples of Common Financial Objectives
• An x percent increase in annual revenues
• Annual increases in after-tax profits of x percent
• Annual increases in earnings per share of x percent
• Annual dividend increases of x percent
• Profit margins of x percent
• An x percent return on capital employed (ROCE) or return on
shareholders’ equity investment (ROE)
• Increased shareholder value—in the form of an upward-trending
stock price
• Bond and credit ratings of x
• Internal cash flows of x dollars to fund new capital investment
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Examples of Common Strategic Objectives
• Winning an x percent market share
• Achieving lower overall costs than rivals
• Overtaking key competitors on product performance or quality or
customer service
• Deriving x percent of revenues from the sale of new products
introduced within the past five years
• Having broader or deeper technological capabilities than rivals
• Having a wider product line than rivals
• Having a better-known or more powerful brand name than rivals
• Having stronger national or global sales and distribution capabilities
than rivals
• Consistently getting new or improved products to market ahead of
rivals
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The Need for a Balanced Approach to
Objective Setting
A balanced scorecard strives to place:
•
Balanced emphasis on achieving
both financial and strategic objectives by tracking
measures of both financial performance and the
competitiveness of its market position.
•
The four dimensions of a Balanced Scorecard:
•
•
•
•
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Financial objectives
Strategic objectives that signal greater competitive strength
(and thus greater capability to achieve higher levels of
financial performance)
Internal process objectives relating to productivity and quality
Organizational objectives concerning human capital, culture,
infrastructure, and innovation
Good Strategic Performance Is the Key to
Better Financial Performance
Good financial performance is not enough.
•
Current financial results are lagging indicators and do
not assure the development of competitive capabilities
for delivering better financial results in the future.
•
Setting and achieving stretch strategic objectives
signal improvements in a firm’s competitiveness and
strength in the marketplace.
•
Ongoing good strategic performance is a leading
indicator of a firm’s increasing capability to deliver
improved future financial performance.
© McGraw-Hill Education.
Setting Objectives for Every Organizational
Level
• Breaks down overall performance targets into
targets for each of the organization’s separate
units
• Fosters setting lower-level performance targets
or outcomes that support achievement of firmwide strategic and financial objectives
• Extends the top-down objective-setting process
to all organizational levels
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Examples of Company Objectives
Jet Blue, Lululemon Athletica, Inc., General Mills
•
Which company included the most specific strategic
objectives in its listing of objectives?
•
Which company has the shortest-term focus based on
its objectives? Which has the longest-term focus?
•
Which company’s listing of objectives appears to best
fit the balanced scorecard concept?
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Stage 3: Crafting a Strategy
Strategy making:
•
Addresses a series of strategic hows.
•
Requires choosing among strategic alternatives.
•
Promotes actions to do things differently from
competitors rather than running with the herd.
•
Is a collaborative team effort that involves managers
in various positions at all organizational levels.
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Strategy-Making Involves Managers at All
Organizational Levels.
Chief executive officer (CEO)
•
Has ultimate responsibility for leading the strategy-making process
as the strategic visionary and chief architect of strategy.
Senior executives
•
Fashion the major strategy components involving their areas of
responsibility.
Managers of subsidiaries, divisions, geographic regions,
plants, and other operating units (and key employees with
specialized expertise)
•
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Utilize on-the-scene familiarity with their business units to
orchestrate their specific pieces of the strategy.
FIGURE 2.2 A Company’s Strategy-Making Hierarchy
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A Firm’s Strategy-Making Hierarchy (1 of 2)
Corporate strategy
•
Multibusiness strategy—how to gain synergies from
managing a portfolio of businesses together rather
than as separate businesses
Business strategy
•
How to strengthen market position and gain
competitive advantage
•
Actions to build competitive capabilities of single
businesses
•
Monitoring and aligning lower-level strategies
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A Firm’s Strategy-Making Hierarchy (2 of 2)
Functional area strategies
•
Add relevant detail to the “hows” of business strategy.
•
Provide a game plan for managing a particular activity
in ways that support the business strategy.
Operational strategies
•
Add detail and completeness to business and
functional strategies.
•
Provide a game plan for managing specific operating
activities with strategic significance.
NOTE: These four strategies all impact each other.
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UNITING THE STRATEGY-MAKING HIERARCHY
Corporate Level
Business Level
Functional Level
Operational Level
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Components of a
company’s strategy
up and down the
strategy hierarchy
should be cohesive
and mutually
reinforcing.
A Strategic Vision + Mission + Objectives + Strategy = A
Strategic Plan
ELEMENTS OF A
FIRM’S STRATEGIC
PLAN
• Its strategic
vision, business
mission, and
core values
• Its strategic and
financial
objectives
• Its chosen
strategy
© McGraw-Hill Education.
Stage 4: Executing the Strategy
Converting strategic plans into actions requires:
•
Directing organizational action
•
Motivating people
•
Building and strengthening the firm’s competencies
and competitive capabilities
•
Creating and nurturing a strategy-supportive work
climate
•
Meeting or beating performance targets
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Managing the Strategy Execution Process
(1 of 2)
• Creating a strategy-supporting structure
• Staffing the firm with the needed skills and
expertise
• Developing and strengthening strategysupporting resources and capabilities
• Allocating ample resources to the activities
critical to strategic success
• Ensuring that policies and procedures facilitate
effective strategy execution
• Organizing work effort to achieve best practices
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Managing the Strategy Execution Process
(2 of 2)
• Installing information and operating systems
that enable company personnel to perform
essential activities
• Motivating people by tying rewards and
incentives to the achievement of performance
objectives
• Creating a company culture conducive to
successful strategy execution
• Exerting the internal leadership needed to
propel implementation forward
© McGraw-Hill Education.
Stage 5: Evaluating Performance and
Initiating Corrective Adjustments
Evaluating performance
•
Deciding whether the enterprise is passing the three
tests of a winning strategy—good fit, competitive
advantage, strong performance
Initiating corrective adjustment
•
Deciding whether to continue or change the firm’s
vision and mission, objectives, strategy, and strategy
execution methods
•
Applying lessons based on organizational learning.
© McGraw-Hill Education.
The Role of the Board of Directors in
Corporate Governance
Obligations of the board of directors:
•
Oversee the firm’s financial accounting and reporting
practices compliance with GAAP principles.
•
Critically appraise the firm’s direction, strategy, and
business approaches.
•
Evaluate the caliber of senior executives’ strategic
leadership skills.
•
Institute a compensation plan that rewards top
executives for actions and results that serve
stakeholder interests—especially shareholders.
© McGraw-Hill Education.
Achieving Effective Corporate Governance
A strong, independent board of directors:
•
Is well informed about the firm’s performance.
•
Guides and judges the CEO and other executives.
•
Can curb management actions the board believes are
inappropriate or unduly risky.
•
Can certify to shareholders that the CEO is doing what
the board expects.
•
Provides insight and advice to top management.
•
Is intensely involved in debating the pros and cons of
key strategic decisions and actions.
© McGraw-Hill Education.
Corporate Governance Failures
at Volkswagen
Why does the VW advisory board refuse to
accept responsibility for the continuing series
of management scandals that have plagued
the firm for the past two decades?
How has the government-mandated two-tier
governance structure promoted misconduct in
the organization?
What must be changed at VW to restore
stakeholder confidence in the firm?
© McGraw-Hill Education.
CHAPTER 3
Evaluating a
Company’s
External
Environment
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Learning Objectives
This Chapter Will Help You Understand:
1. How to recognize the factors in a company’s broad
macro-environment that may have strategic significance.
2. How to use analytic tools to diagnose the competitive
conditions in a company’s industry.
3. How to map the market positions of key groups of industry
rivals.
4. How to determine whether an industry’s outlook presents
a company with sufficiently attractive opportunities for
growth and profitability.
© McGraw-Hill Education.
FIGURE 3.1 From Analyzing the Company’s Situation
to Choosing a Strategy
Chapter 3 External Environment
Chapter 4 Internal Environment
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Analyzing the Company's MacroEnvironment
PESTEL Analysis
•
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Focuses on principal components of strategic
significance in the macro-environment
• Political factors
• Economic conditions (local to worldwide)
• Sociocultural forces
• Technological factors
• Environmental factors (the natural environment)
• Legal and regulatory conditions
FIGURE 3.2 The Components of a Company’s MacroEnvironment
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Assessing the Company’s Industry and
Competitive Environment
Thinking strategically about the competitive
environment requires managers to use some well
validated concepts and analytical tools.
• Five forces framework
• The value net
• Driving forces
• Strategic groups
• Competitor analysis
• Key success factors
© McGraw-Hill Education.
The Five Forces Framework
The five competitive forces
•
Competition from rival sellers
•
Competition from potential new entrants
•
Competition from producers of substitute products
•
Supplier bargaining power
•
Customer bargaining power
© McGraw-Hill Education.
FIGURE 3.3 The Five Forces Model of Competition:
A Key Analytical Tool
Sources: Adapted from M.E. Porter, “How
Competitive Forces Shape Strategy,” Harvard
Business Review 57, no. 2 (1979), pp.137-145;
M.E. Porter, “The Five Competitive Forces That
Shape Strategy,” Harvard Business Review 86,
no 1 (2008), pp. 80-86.
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Using the Five-forces Model of Competition
STEP 1: For each of the five forces, identify the
different parties involved, along with the
specific factors that bring about
competitive pressures.
STEP 2: Evaluate how strong the pressures
stemming from each of the five forces are
(strong, moderate, or weak).
STEP 3: Determine whether the five forces,
overall, are supportive of high industry
profitability.
© McGraw-Hill Education.
Competitive Pressures That Increase
Rivalry among Competing Sellers
• Buyer demand is growing slowly or declining.
• It is becoming less costly for buyers to switch brands.
• Industry products are becoming less differentiated.
• There is unused production capacity, or products have
high fixed costs or high storage costs.
• The number of competitors is increasing, or they are
becoming more equal in size and competitive strength.
• The diversity of competitors is increasing.
• High exit barriers keep firms from exiting the industry.
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FIGURE 3.4 Factors Affecting the Strength of Rivalry
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Competitive Pressures Associated with the
Threat of New Entrants
Entry threat considerations
•
Expected defensive reactions of incumbent firms
•
Strength of barriers to entry
•
Attractiveness of a particular market’s growth
in demand and profit potential
•
Capabilities and resources of potential entrants
•
Entry of existing competitors into market segments
in which they have no current presence
© McGraw-Hill Education.
Market Entry Barriers Facing New Entrants
• Sizable economies of scale in production, distribution,
advertising, or other activities
• Hard-to-replicate learning curve and industry relationship
cost advantages of incumbents
• Strong brand preferences and high customer loyalty
• Patents and other intellectual property protection
• Strong “network effects” in customer demand
• High capital requirements
• Building distributor and/or dealer networks and securing
adequate space on retailers’ shelves
• Restrictive regulatory and trade policies
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FIGURE 3.5 Factors Affecting the Threat of Entry
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Competitive Pressures from the Sellers of
Substitute Products
Substitute products considerations
•
Readily available and attractively priced?
•
Comparable or better in terms of quality, performance,
and other relevant attributes?
•
Offer lower switching costs to buyers?
Indicators of substitutes’ competitive strength
•
Increasing rate of growth in sales of substitutes
•
Substitute producers adding new output capacity
•
Increasing profitability of substitute producers
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FIGURE 3.6 Factors Affecting Competition from
Substitute Products
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Competitive Pressures Stemming from
Supplier Bargaining Power
Supplier bargaining power depends on:
•
Strength of demand for and availability of suppliers’ products.
•
Whether suppliers provide a differentiated input that enhances the
performance of the industry’s product.
•
Industry members’ costs for switching among suppliers.
•
Size and number of suppliers relative to industry members.
•
Possibility of backward integration into suppliers’ industry.
•
Fraction of the cost of the supplier’s product relative to the total
cost of the industry’s product.
•
Availability of good substitutes for suppliers’ products.
•
Whether industry members are major customers of suppliers.
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FIGURE 3.7 Factors Affecting the Bargaining Power of
Suppliers
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Competitive Pressures Stemming from Buyer
Bargaining Power and Price Sensitivity
Buyer bargaining power considerations
•
Strength of buyers’ demand for sellers’ products
•
Degree to which industry goods are differentiated
•
Buyers’ costs for switching to competing sellers or substitutes
•
Number and size of buyers relative to number of sellers
•
Threat of buyers’ integration into sellers’ industry
•
Buyers’ knowledge of products, costs and pricing
•
Buyers’ discretion in delaying purchases
•
Buyers’ price sensitivity due to low profits, size of purchase, and
consequences of purchase
•
Product quality not at issue price is primary concern
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FIGURE 3.8 Factors Affecting the Bargaining Power of Buyers
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Is the Collective Strength of the Five Competitive
Forces Conducive to Good Profitability?
Answers to three questions are needed:
• Is the state of competition in the industry
stronger than normal?
• Can industry firms expect to earn decent profits
given prevailing competitive forces?
• Are some of the competitive forces sufficiently
powerful to undermine industry profitability?
Even one powerful competitive force may be enough
to make the industry unattractive in terms of its
profit potential.
© McGraw-Hill Education.
Matching Company Strategy to
Competitive Conditions
Effectively matching a firm’s business strategy to
prevailing competitive conditions has two aspects:
•
Pursuing avenues that shield the firm from as many
competitive pressures as possible
•
Initiating actions calculated to shift competitive forces
in the firm’s favor by altering underlying factors driving
the five forces
© McGraw-Hill Education.
Complementors and the Value Net
How the value net differs from the five forces
•
Focuses on the interactions of industry participants
with a particular (focal) company
•
Defines the category of competitors to include the focal
firm’s direct competitors, industry rivals, the sellers of
substitute products, and potential entrants
•
Introduces a new category of industry participant—
complementors—producers of products that enhance
the value of the focal firm’s products when they are
used together
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FIGURE 3.9 The Value Net
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Industry Dynamics and the Forces Driving
Change
Driving forces analysis has three steps.
•
Identifying what the driving forces are
•
Assessing whether the drivers of change are
acting to make the industry more or less attractive
•
Determining what strategy changes are needed to
prepare for the impact of the driving forces
© McGraw-Hill Education.
Identifying the Forces Driving Industry Change
• Changes in the long-term industry growth rate
• Increasing globalization
• Emerging new Internet capabilities and applications
• Shifts in buyer demographics
• Technological change and manufacturing process innovation
• Product and marketing innovation
• Entry or exit of major firms
• Diffusion of technical know-how across firms and countries
• Changes in cost and efficiency
• Reductions in uncertainty and business risk
• Regulatory influences and government policy changes
• Changing societal concerns, attitudes, and lifestyles
© McGraw-Hill Education.
Assessing the Impact of the Factors Driving
Industry Change
Are the driving forces, on balance, acting to cause
demand for the industry’s product to increase or
decrease?
Is the collective impact of the driving forces making
competition more or less intense?
Will the combined impacts of the driving forces
lead to higher or lower industry profitability?
© McGraw-Hill Education.
Adjusting Strategy to Prepare for the
Impacts of Driving Forces
What strategy adjustments will be needed
to deal with the impacts of the driving forces?
•
What adjustments must be made immediately?
•
What actions currently being taken should be halted or
abandoned?
•
What can we do now to prepare for adjustments we
anticipate making in the future?
© McGraw-Hill Education.
Strategic Group Analysis
Strategic group
•
© McGraw-Hill Education.
Consists of those industry members with similar
competitive approaches and positions in the market
•
Having comparable product-line breadth
•
Emphasizing the same distribution channels
•
Depending on identical technological approaches
•
Offering the same product attributes to buyers
•
Offering similar services and technical assistance
Using Strategic Group Maps to Assess the
Market Positions of Key Competitors
Constructing a strategic group map
•
Identify the competitive characteristics that delineate
strategic approaches used in the industry.
•
Plot the firms on a two-variable map using pairs of
competitive characteristics.
•
Assign firms occupying about the same map location to
the same strategic group.
•
Draw circles around each strategic group, making the
circles proportional to the size of the group’s share of
total industry sales revenues.
© McGraw-Hill Education.
Typical Variables Used in
Creating Group Maps
• Price and quality range (high, medium, low)
• Geographic coverage (local, regional, national,
global)
• Product-line breadth (wide, narrow)
• Degree of service offered (no frills, limited, full)
• Distribution channels (retail, wholesale, Internet,
multiple)
• Degree of vertical integration (none, partial, full)
• Degree of diversification into other industries
(none, some, considerable)
© McGraw-Hill Education.
Guidelines for Creating Group Maps
1. Variables selected as map axes should not be highly
correlated.
2. Variables should reflect important (sizable) differences
among rival approaches.
3. Variables may be quantitative, continuous, discrete, or
defined in terms of distinct classes and combinations.
4. Drawing group circles proportional to the combined
sales of firms in each group will reflect the relative sizes
of each strategic group.
5. Drawing maps using different pairs of variables will
show the different competitive positioning relationships
present in the industry’s structure.
© McGraw-Hill Education.
Illustration Capsule 3.1 Comparative Market Positions of Selected Companies in the
Casual Dining Industry: A Strategic Group Map Example
Footnote: Circles are drawn roughly proportional to the sizes of the chains, based on revenues.
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Examining the Comparative Market Positions of
Strategic Groups in the Casual Dining Industry
Which strategic group is located in the least
favorable market position? Which group is in the
most favorable position?
Which strategic group is likely to experience
increased intragroup competition?
Which groups are most threatened by the likely
strategic moves of members of nearby strategic
groups?
© McGraw-Hill Education.
The Value of Strategic Group Maps
Maps are useful in identifying which industry
members are close rivals and which are distant
rivals.
Not all map positions are equally attractive
•
Prevailing competitive pressures from the industry’s
five forces may cause the profit potential of different
strategic groups to vary.
•
Industry driving forces may favor some strategic
groups and hurt others.
© McGraw-Hill Education.
Competitor Analysis
Competitive intelligence
•
Information about rivals that is useful in anticipating
their next strategic moves
Signals of the likelihood of strategic moves
•
Rivals under pressure to improve financial
performance
• Rivals seeking to increase market standing
• Public statements of rivals’ intentions
• Profiles developed by competitive intelligence units
© McGraw-Hill Education.
FIGURE 3.10 The SOAR Framework for Competitor Analysis
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SOAR Framework for Competitor Analysis
Indicators of a rival firm’s likely strategic
moves and countermoves
© McGraw-Hill Education.
•
The rival firm’s current strategy
•
The rival firm’s objectives
•
The rival firm’s assumptions about itself and
its industry
•
The rival firm’s resources and capabilities
Key Success Factors
Key success factors (KSFs):
•
Are the strategy elements, product and service
attributes, operational approaches, resources, and
competitive capabilities that are necessary for
competitive success by any and all firms in an
industry.
•
These vary from industry to industry, and over time
within the same industry, and in importance as drivers
of change and competitive conditions change.
© McGraw-Hill Education.
Identification of Key Success Factors
What crucial product attributes and service
characteristics do buyers of the industry’s product
consider when choosing among competing brands
of sellers?
Given the nature of competitive rivalry prevailing in
the marketplace, what resources and competitive
capabilities must a firm have to be competitively
successful?
What shortcomings are almost certain to put a firm
at a significant competitive disadvantage?
© McGraw-Hill Education.
The Industry Outlook for Profitability
An industry environment is fundamentally
attractive if it presents a company with good
opportunity for above-average profitability.
An industry environment is fundamentally
unattractive if a firm’s profit prospects in the
industry are unappealingly low.
© McGraw-Hill Education.
Factors to Consider in Assessing
Industry Attractiveness
• How the firm is impacted by the state of the macro-environment
• Whether strong competitive forces are squeezing industry
profitability to subpar levels
• Whether the presence of complementors and the possibility of
cooperative actions improve the company’s prospects
• Whether industry profitability will be favorably or unfavorably
affected by the prevailing driving forces
• Whether the firm occupies a stronger market position than rivals
• Whether this is likely to change in the course of competitive
interactions
• How well the firm’s strategy delivers on industry key success factors
© McGraw-Hill Education.
Industry Attractiveness Is Not
the Same for All Participants
Industry outsiders may conclude that they have the
resources to easily hurdle the barriers to entering an
attractive industry while other outsiders may find the same
industry unattractive because they do not want to challenge
market leaders and have better opportunities elsewhere.
A particular industry’s attractiveness depends in large part
on whether a company has the resources and capabilities
to be competitively successful and profitable in that
environment.
© McGraw-Hill Education.
What Should a Current Competitor
Decide About Its Industry?
When a competitor decides an industry is attractive, it
should invest aggressively to capture the opportunities it
sees and to improve its long-term competitive position in
the business.
When a strong competitor concludes its industry is
relatively unattractive and lacking in opportunity, it may
elect to protect its present position, investing cautiously, if
at all, and looking for opportunities in other industries.
A competitively weak company in an unattractive industry
may see its best option as finding a buyer, perhaps a rival,
to acquire its business.
© McGraw-Hill Education.
CHAPTER 4
Evaluating a
Company’s
Resources,
Capabilities, and
Competitiveness
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Learning Objectives
This chapter will help you understand:
1. How to evaluate how well a firm’s strategy is working.
2. How to assess the company’s strengths and
weaknesses in light of market opportunities and external
threats.
3. Why a company’s resources and capabilities are critical
in gaining a competitive edge over rivals.
4. How value chain activities affect a company’s cost
structure and customer value proposition.
5. How a comprehensive evaluation of a firm’s competitive
situation can assist managers in making critical
decisions about their next strategic moves.
© McGraw-Hill Education.
QUESTION 1: How Well Is the
Company’s Present Strategy Working?
The three best indicators of how well
a company’s strategy is working are:
1. Whether it is achieving its stated
financial and strategic objectives
2. Whether its financial performance is
above the industry average
3. Whether it is gaining customers and
gaining market share
© McGraw-Hill Education.
FIGURE 4.1 Identifying the Components of a Single-Business
Company’s Strategy
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Specific Indicators of Strategic Success
Sales and earnings growth trends
Stock price trends
Company’s overall financial strength
Customer retention rate
Rate of new customers acquired
Evidence of improvement in internal processes
defect rate, order fulfillment, delivery times, days of inventory, and employee
productivity
© McGraw-Hill Education.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (1 of 8)
Profitability Ratios
Gross profit margin
How Calculated
What It Shows
Sales revenues − Cost of goods sold
Sales revenues
Shows the percentage of
revenues available to cover
operating expenses and yield a
profit.
Operating profit margin Sales revenues − Operating expenses
(or return on sales)
Sales revenues
or
Operating income
Sales revenues
Shows the profitability of current
operations without regard to
interest charges and income
taxes. Earnings before interest
and taxes is known as EBIT in
financial and business
accounting.
Net profit margin (or
net return on sales)
Shows after-tax profits per
dollar of sales.
Total return on assets
© McGraw-Hill Education.
Profits after taxes
Sales revenues
Profits after taxes + Interest
Total assets
A measure of the return on total
investment in the enterprise.
Interest is added to after-tax
profits to form the numerator,
since total assets are financed
by creditors as well as by
stockholders.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (2 of 8)
Profitability Ratios
How Calculated
Net return on total assets
(ROA)
Profits after taxes
Total assets
What It Shows
A measure of the return
earned by stockholders on
the firm’s total assets.
Return on stockholders’
equity (ROE)
Profits after taxes
Total stockholders’ equity
The return stockholders are
earning on their capital
investment in the enterprise.
A return in the 12% to 15%
range is average.
Return on invested
capital (ROIC)—
sometimes referred to as
return on capital
employed (ROCE)​
Profits after taxes
Long-term debt +
Total stockholders’ equity
A measure of the return that
shareholders are earning on
the monetary capital invested
in the enterprise. A higher
return reflects greater
bottom-line effectiveness in
the use of long-term capital.
© McGraw-Hill Education.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (3 of 8)
Liquidity Ratios
Current ratio
Working capital
© McGraw-Hill Education.
How Calculated
What It Shows
Current assets
Current liabilities
Shows a firm’s ability to pay
current liabilities using assets that
can be converted to cash in the
near term. Ratio should be higher
than 1.0.
Current assets − Current liabilities
The cash available for a firm’s
day-to-day operations. Larger
amounts mean the firm has more
internal funds to (1) pay its
current liabilities on a timely basis
and (2) finance inventory
expansion, additional accounts
receivable, and a larger base of
operations without resorting to
borrowing or raising more equity
capital.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (4 of 8)
Leverage Ratios
How Calculated
What It Shows
Total debt-to-assets
ratio
Total debt
Total assets
Measures the extent to which borrowed
funds (both short-term loans and long-term
debt) have been used to finance the firm’s
operations. A low ratio is better—a high
fraction indicates overuse of debt and
greater risk of bankruptcy.
Long-term debt-tocapital ratio
© McGraw-Hill Education.
Long-term debt
A measure of creditworthiness and
Long-term debt +
balance-sheet strength. It indicates the
Total stockholders’ equity percentage of capital investment that has
been financed by both long-term lenders
and stockholders. A ratio below 0.25 is
preferable since the lower the ratio, the
greater the capacity to borrow additional
funds. Debt-to-capital ratios above 0.50
indicate an excessive reliance on longterm borrowing, lower creditworthiness,
and weak balance- sheet strength.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (5 of 8)
Leverage Ratios
How Calculated
What It Shows
Debt-to-equity ratio
Total debt
Shows the balance between debt (funds
Total stockholders’ equity borrowed, both short term and long term)
and the amount that stockholders have
invested in the enterprise. The further the
ratio is below 1.0, the greater the firm’s
ability to borrow additional funds. Ratios
above 1.0 put creditors at greater risk,
signal weaker balance sheet strength, and
often result in lower credit ratings.
Long-term debt-toequity ratio
Long-term debt
Shows the balance between long-term debt
Total stockholders’ equity and stockholders’ equity in the firm’s longterm capital structure. Low ratios indicate a
greater capacity to borrow additional funds
if needed.
Times-interestearned (or
coverage) ratio
© McGraw-Hill Education.
Operating income
Interest expenses
Measures the ability to pay annual interest
charges. Lenders usually insist on a
minimum ratio of 2.0, but ratios above 3.0
signal increasing creditworthiness.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (6 of 8)
Activity Ratios
How Calculated
Days of inventory
Inventory
Cost of goods sold ÷
365
Inventory turnover
Cost of goods sold
Inventory
Average collection
period
Accounts receivable
Total sales ÷ 365
or
Accounts receivable
Average daily sales
© McGraw-Hill Education.
What It Shows
Measures inventory management
efficiency. Fewer days of inventory are
better.
Measures the number of inventory turns
per year. Higher is better.
Indicates the average length of time the
firm must wait after making a sale to
receive cash payment. A shorter collection
time is better.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (7 of 8)
Other Ratios
How Calculated
What It Shows
Dividend yield on
common stock
Annual dividends
per share
Current market price
per share
A measure of the return that shareholders
receive in the form of dividends. A “typical”
dividend yield is 2% to 3%. The dividend
yield for fast-growth firms is often below
1%; the dividend yield for slow-growth
firms can run 4% to 5%.
Price-to-earnings
(P/E) ratio
Current market price
per share
Earnings per share
P/E ratios above 20 indicate strong
investor confidence in a firm’s outlook and
earnings growth; firms whose future
earnings are at risk or likely to grow slowly
typically have ratios below 12.
Dividend payout
ratio
Annual dividends
per share
Earnings per share
© McGraw-Hill Education.
Indicates the percentage of after-tax
profits paid out as dividends.
TABLE 4.1 Key Financial Ratios: How to Calculate
Them and What They Mean (8 of 8)
Other Ratios
Internal cash flow
Free cash flow
© McGraw-Hill Education.
How Calculated
What It Shows
After-tax profits +
Depreciation
A rough estimate of the cash a firm’s business is
generating after payment of operating expenses,
interest, and taxes. Such amounts can be used
for dividend payments or funding capital
expenditures.
After-tax profits +
Depreciation –
Capital expenditures –
Dividends
A rough estimate of the cash a firm’s business is
generating after payment of operating expenses,
interest, taxes, dividends, and desirable
reinvestments in the business. The larger a
firm’s free cash flow, the greater its ability to
internally fund new strategic initiatives, repay
debt, make new acquisitions, repurchase shares
of stock, or increase dividend payments.
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QUESTION 2: What Are the Company’s
Strengths and Weaknesses in Relation to the
Market Opportunities and External Threats?
SWOT analysis is a tool for identifying situational
reasons underlying a firm’s performance.
© McGraw-Hill Education.
•
Internal strengths (the basis for strategy)
•
Internal weaknesses (deficient capabilities)
•
Market opportunities (strategic objectives)
•
External threats (strategic defenses)
Identifying a Company’s Internal Strengths
• A competence is an activity that a firm has
learned to perform with proficiency and at an
acceptable cost—a true capability, in other
words.
• A core competence is an activity that a firm
performs proficiently and that is also central to
its strategy and competitive success.
• A distinctive competence is a competitively
important activity that a firm performs better
than its rivals—it represents a competitively
superior internal strength.
© McGraw-Hill Education.
Identifying a Company’s Internal Weaknesses
A weakness
•
Is something a firm lacks or does poorly (in comparison
to others) or a condition that puts it at a competitive
disadvantage in the marketplace
Types of weaknesses
•
Inferior or unproven skills, expertise, or intellectual
capital in competitively important areas of the business
•
Deficiencies in physical, organizational, or intangible
assets
© McGraw-Hill Education.
Identifying a Company’s Market Opportunities
Characteristics of market opportunities
•
Newly emerging and fast-changing markets may
represent “golden opportunities” but are often hidden in
“fog of the future.”
•
Opportunities can evolve in mature markets.
•
Opportunities with market factors aligned with the
firm’s strengths offer the most potential for the firm to
gain competitive advantage.
© McGraw-Hill Education.
Identifying External Threats
Types of threats
•
Normal course-of-business
•
Sudden-death (survival)
Considering threats
•
Identify threats to the firm’s future prospects
•
Evaluate strategic actions to be taken to neutralize or
lessen impact
© McGraw-Hill Education.
TABLE 4.2 What to Look for in Identifying a Company’s
Strengths, Weaknesses, Opportunities, and Threats (1 of 4)
Strengths and Competitive Assets
Weaknesses and Competitive
Deficiencies
•
Ample financial resources to grow the
business
•
No distinctive core competencies
•
Strong brand-name image or company
reputation
•
Lack of attention to customer needs
•
Cost advantages over rivals
•
Weak balance sheet, too much debt
•
Attractive customer base
•
Higher costs than competitors
•
Proprietary technology, superior
technological skills, important patents
•
Too narrow a product line relative to rivals
•
Strong bargaining power over suppliers
or buyers
•
Weak brand image or reputation
© McGraw-Hill Education.
TABLE 4.2 What to Look for in Identifying a Company’s
Strengths, Weaknesses, Opportunities, and Threats (2 of 4)
Strengths and Competitive Assets
(continued)
Weaknesses and Competitive
Deficiencies (continued)
• Superior product quality
• Lack of adequate distribution capability
• Wide geographic coverage or strong
global distribution capability
• Lack of management depth
• Alliances or joint ventures that
provide access to valuable
technology competencies, or
attractive geographic markets
• A plague of internal operating problems
or obsolete facilities
• Too much underutilized plan capacity
© McGraw-Hill Education.
TABLE 4.2 What to Look for in Identifying a Company’s
Strengths, Weaknesses, Opportunities, and Threats (3 of 4)
Market Opportunities
External Threats
• Meet sharply rising buyer demand for the
industry’s product
• Increasing intensity of competition
• Serve additional customer groups or
market segments
• Slowdowns in market growth
• Expand into new geographic markets
• Likely entry of potent new
competitions
• Expand the company’s product line to
meet a broader range of customer needs
• Growing bargaining power of
customers or suppliers
• Enter new product lines or new
businesses
• A shift in buyer needs and tastes
away from the industry’s product
• Take advantage of failing trade barriers in • Adverse demographic changes
attractive foreign markets
that threaten to curtail demand for
the industry’s product
© McGraw-Hill Education.
TABLE 4.2 What to Look for in Identifying a Company’s
Strengths, Weaknesses, Opportunities, and Threats (4 of 4)
Market Opportunities (continued)
External Threats (continued)
• Take advantage of an adverse change
in the fortunes of rival firms
• Adverse economic conditions that
threaten critical suppliers or
distributors
• Acquire rival firms or companies with
attractive technological expertise or
competencies
• Changes in technology—particularly
disruptive technology that can
undermine the company’s distinctive
competencies
• Take advantage of emerging
technological developments to
innovate
• Enter into alliances or other
cooperative ventures
•
•
•
•
© McGraw-Hill Education.
Restrictive foreign trade policies
Costly new regulatory requirements
Tight credit conditions
Rising prices on energy or other key
inputs
What Do SWOT Listings Reveal?
New strategy
• SWOT is the foundation for positioning the firm to use
its strengths to seize opportunities and to shore up its
competitive deficiencies to mitigate external threats.
Existing strategy
• SWOT insights into the firm’s overall business
situation can translate into recommended strategic
actions.
© McGraw-Hill Education.
FIGURE 4.2 The Steps Involved in SWOT Analysis: Identify the Four
Components of SWOT, Draw Conclusions, Translate Implications into
Strategic Actions
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QUESTION 3: What Are the Company’s Most
Important Resources and Capabilities, and Will
They Give the Company a Lasting Competitive
Advantage?
Competitive assets
•
© McGraw-Hill Education.
Resources and capabilities
•
They determine competitiveness and the ability to succeed in
the marketplace.
•
A firm’s strategy depends on these to develop sustainable
competitive advantage over its rivals.
Identifying the Company’s
Resources and Capabilities
A resource
•
A productive input or competitive asset that is owned
or controlled by a firm (e.g., a fleet of oil tankers)
A capability
•
© McGraw-Hill Education.
The capacity of a firm to perform some activity
proficiently (e.g., superior skills in marketing)
TABLE 4.3 Types of Company Resources (1 of 2)
Tangible resources
• Physical resources: land and real estate; manufacturing plants, equipment, or
distribution facilities; the locations of stores, plants, or distribution centers,
including the overall pattern of their physical locations; ownership of or access
rights to natural resources (such as mineral deposits)
• Financial resources: cash and cash equivalents; marketable securities; other
financial assets such as a company’s credit rating and borrowing capacity
• Technological assets: patents, copyrights, production technology, innovation
technologies, technological processes
• Organizational resources: IT and communication systems (satellites, servers,
workstations, etc.); other planning, coordination, and control systems; the
company’s organizational design and reporting structure
© McGraw-Hill Education.
TABLE 4.3 Types of Company Resources (2 of 2)
Intangible resources
•
Human assets and intellectual capital: the education, experience, knowledge, and talent
of the workforce, cumulative learning, and tacit knowledge of employees; collective learning
embedded in the organization, the intellectual capital and know-how of specialized teams
and work groups; the knowledge of key personnel concerning important business functions;
managerial talent and leadership skill; the creativity and innovativeness of certain personnel
•
Brands, company image, and reputational assets: brand names, trademarks, product or
company image, buyer loyalty and goodwill; company reputation for quality, service, and
reliability; reputation with suppliers and partners for fair dealing
•
Relationships: alliances, joint ventures, or partnerships that provide access to
technologies, specialized know-how, or geographic markets; networks of dealers or
distributors; the trust established with various partners
•
Company culture and incentive system: the norms of behavior, business principles, and
ingrained beliefs within the company; the attachment of personnel to the company’s ideals;
the compensation system and the motivation level of company personnel
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Identifying Capabilities
An organizational capability
•
Is the intangible but observable capacity of a firm to
perform a critical activity proficiently using a related
combination (cross-functional bundle) of its resources
•
Is knowledge-based, residing in people and in a firm’s
intellectual capital or in its organizational processes
and systems, embodying tacit knowledge
A resource bundle
•
© McGraw-Hill Education.
Is a linked and closely integrated set of competitive
assets centered around one or more cross-functional
capabilities
Assessing the Competitive Power of a
Company’s Resources and Capabilities
• The Total Economic Value produced by a firm
is equal to V-C. It is the difference between the
buyer's perceived value (V) regarding a product
or service and what it costs (C) the firm to
produce it.
• Competitively superior resources and
capabilities are strategic assets capable of
producing a sustainable competitive advantage
with far greater profit potential.
© McGraw-Hill Education.
VRIN: Four Tests of a Resource’s
Competitive Power
The VRIN Test for sustainable competitive
advantage asks if a resource or capability is
Valuable, Rare, Inimitable, and Non-substitutable.
•
V: Is the resource (or capability) competitively valuable?
•
R: Is it rare—is it something rivals lack?
•
I: Is it hard to copy (inimitable)?
•
N: Is it invulnerable to the threat of substitution of different
types of resources and capabilities (non-substitutable)?
© McGraw-Hill Education.
Social Complexity and Causal Ambiguity
Two factors that inhibit the ability of rivals to imitate
a firm’s most valuable resources and capabilities.
• Social complexity refers to factors in a firm’s culture,
the interpersonal relationships among managers or
R&D teams, its trust-based relations with customers or
suppliers that contribute to its competitive advantage.
• Causal ambiguity about the how the firm uses its
resources and relationships puts competitors at a loss
in understanding how to imitate these complex
resources.
© McGraw-Hill Education.
Managing Resources and Capabilities
Dynamically
Threats to resources and capabilities
•
Rivals develop better substitutes over time.
•
Current capabilities decay from benign neglect.
•
Disruptive changes in the competitive environment.
Manage capabilities dynamically
•
Attend to the ongoing modification of existing
competitive assets.
•
Take advantage of opportunities to develop totally new
kinds of capabilities.
© McGraw-Hill Education.
The Role of Dynamic Capabilities
To sustain its competitiveness and help drive
improvements in its performance, a firm requires
a dynamically evolving portfolio of resources and
capabilities.
A dynamic capability is the ongoing capacity of
a firm to modify its existing resources and
capabilities or create new ones.
• Improve on existing resources and capabilities
incrementally.
• Add new resources and capabilities to the firm’s
competitive asset portfolio.
© McGraw-Hill Education.
QUESTION 4: How Do Value Chain Activities
Impact a Company’s Cost Structure and Its
Customer Value Proposition?
Signs of a firm’s competitive strength
•
Its prices and costs are in line with rivals.
•
Its customer-value proposition is competitive and cost
effective.
•
Its bundled capabilities are yielding a sustainable
competitive advantage.
© McGraw-Hill Education.
The Concept of a Company Value Chain
The value chain
•
Identifies the primary activities and related support
activities that create customer value
•
Identifies the inner workings of the firm's customer
value proposition and business model
•
Permits a deep look at the firm’s cost structure and its
ability to profitably offer low prices
•
Reveals the emphasis that a firm places on activities
that enhance differentiation and support higher prices
© McGraw-Hill Education.
FIGURE 4.3 A Representative Company Value Chain
Source: Based on the discussion in Michael E. Porter, Competitive Advantage (New York: Free Press,
1985), pp. 37-43.
© McGraw-Hill Education.
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Comparing Value Chains of Rival Companies
Value chain analysis
•
Facilitates a comparison, activity-by-activity, of how
effectively and efficiently a firm delivers value to its
customers, relative to its competitors
The value chain analysis process
•
Segregates a firm’s operations into different types of
primary and secondary activities to identify major
components of its internal cost structure
•
Uses activity-based costing to evaluate activities
•
Same for significant competitors
© McGraw-Hill Education.
The Value Chain System
An industry value chain includes
•
Internal value chain
•
Value chains of upstream industry suppliers
•
Value chains of forward channel intermediaries
Effects of the industry value chain
•
Costs and profit margins of suppliers and channel
partners can affect prices to end consumers.
•
Activities of channel partners can affect industry sales
volumes and customer satisfaction.
© McGraw-Hill Education.
FIGURE 4.4 A Representative Value Chain System
Source: Based in part on the single-industry value chain display in Michael E. Porter, Competitive Advantage (New York:
Free Press, 1985), p. 35.
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© McGraw-Hill Education.
The Value Chain for Boll & Branch
• Which activities in the value chain are primary
activities? Which are secondary activities?
• Which activities are linked to the value chain for
the entire industry?
• Where in the industry activity chain could Boll &
Branch possibly reduce cost(s) without
reducing its competitive strength?
© McGraw-Hill Education.
Benchmarking: Assessing the Cost and
Effectiveness of Value Chain Activities
Benchmarking
•
Involves improving internal activities based on learning
from other companies’ “best practices”
•
Assesses whether the cost competitiveness and
effectiveness of a company’s value chain activities are
in line with its competitors’ activities
Sources of benchmarking information
•
Market data reports from consulting companies and
market analysts, publications of industry trade groups
and government agencies, and customers
•
Visits to benchmark firms
© McGraw-Hill Education.
Illustration Capsule 4.2
Benchmarking in the Solar Industry
• What benchmarks does the solar industry use in
comparing costs among industry competitors?
• How has SunPower responded to the continued
downward pricing pressure in the industry?
• Why is the collection of competitive intelligence to
accurately benchmark delivered costs of such
importance in the solar industry?
© McGraw-Hill Education.
Strategic Options for Remedying a Cost or
Value Disadvantage
Areas in the total value chain system assess ways
to improve efficiency and effectiveness.
•
Internal activity segments
•
Suppliers’ part of the value chain system
•
Forward-channel portion of the value chain system
© McGraw-Hill Education.
Improving Internally Performed
Value Chain Activities
• Implement best practices throughout the firm, particularly
for high-value activities.
• Redesign products, components and activities to
facilitate speedier and more economical manufacture or
assembly.
• Relocate high-cost activities to external value chains to
be performed more cheaply by vendors or contractors.
• Reallocate resources to activities that address buyers’
most important purchase criteria.
• Adopt productivity-enhancing, cost-saving technological
improvements that spur innovation, improve design, and
enhance creativity.
© McGraw-Hill Education.
Improving Supplier-Related
Value Chain Activities
• Pressure suppliers for lower prices.
• Switch to lower-priced substitute inputs.
• Collaborate closely with suppliers to identify mutual costsaving opportunities.
• Work with suppliers to enhance the firm’s differentiation.
• Select and retain suppliers who meet higher-quality
standards.
• Coordinate with suppliers to enhance design or other
features desired by customers.
• Provide incentives to suppliers to meet higher-quality
standards, and assist suppliers in their efforts to improve.
© McGraw-Hill Education.
Improving Value Chain Activities of
Distribution Partners
Achieving cost-based competitiveness
•
Pressure forward-channel allies to reduce their costs
and markups.
•
Collaborate with forward-channel allies to identify winwin opportunities to reduce costs.
•
Change to a more economical distribution strategy,
including switching to cheaper distribution channels.
© McGraw-Hill Education.
Enhancing Differentiation Through Activities at
the Forward End of the Value Chain System
• Engage in cooperative advertising and
promotions with forward-channel allies.
• Use exclusive arrangements with downstream
sellers or other mechanisms that increase their
incentives to enhance delivered customer
value.
• Create and enforce standards for downstream
activities and assist in training channel partners
in business practices.
© McGraw-Hill Education.
Translating Proficient Performance of Value
Chain Activities into Competitive Advantage
Option 1: Beat rivals by creating more customer value from value
chain activities, for a differentiation-based competitive
advantage
1. Managers decide to perform value chain activities in ways that drive
improvements in quality, features, performance, and other differentiationenhancing aspects.
2. Competencies gradually emerge in performing value chain activities that
drive improvements in quality, features, and performance.
3. Company proficiency in performing some of these differentiation-enhancing
activities rises to the level of a core competence.
4. Company proficiency in performing the core competence continues to build
and evolves into a distinctive competence.
5. Company gains a competitive advantage based on superior differentiation
capabilities.
© McGraw-Hill Education.
Translating Proficient Value Chain Activity
Performance into Competitive Advantage
Option 2: Beat rivals by conducting value chain activities more
efficiently, for a cost-based competitive advantage
1. Company managers decide to perform value chain activities in the most
cost-efficient manner.
2. Competencies gradually emerge in driving down the cost of value chain
activities (such as production, inventory management, etc.).
3. Company capabilities in performing certain value chain activities more
efficiently rise to the level of a core competence.
4. Company proficiency in performing the core competence continues to build
and evolves into a distinctive competence.
5. Company gains a competitive advantage based on superior differentiation
capabilities.
© McGraw-Hill Education.
QUESTION 5: Is the Company Competitively
Stronger or Weaker Than Key Rivals?
Assessing overall competitive strength
•
How does the firm rank relative to competitors on
each of the important factors that determine market
success?
•
Does the firm have a net competitive advantage or
disadvantage versus major competitors?
© McGraw-Hill Education.
Steps in the Competitive Strength
Assessment Process
1. Make a list of the industry’s key success factors and
measures of competitive strength or weakness.
2. Assign weights to each competitive strength measure
based on its perceived importance.
3. Score competitors on each competitive strength measure
and multiply by each measure by its corresponding weight.
4. Sum the weighted strength ratings on each factor to get an
overall measure of competitive strength for each firm.
5. Use overall strength ratings to draw conclusions about the
firm’s net competitive advantage or disadvantage and to
take specific note of areas of strength and weakness.
© McGraw-Hill Education.
TABLE 4.4 A Representative Weighted Competitive
Strength Assessment
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Strategic Implications of a Competitive
Strength Assessment
• The higher a firm’s overall weighted strength rating, the
stronger its overall competitiveness versus rivals.
• The rating score indicates the total net competitive
advantage for a firm relative to other firms.
• Firms with high competitive strength scores are targets
for benchmarking.
• The ratings show how a firm compares against rivals,
factor by factor (or capability by capability).
• Strength scores can be useful in deciding what strategic
moves to make.
© McGraw-Hill Education.
QUESTION 6: What Strategic Issues and
Problems Merit Front-Burner Managerial
Attention?
• Which and how serious are the strategic issues
that managers must address—and resolve—for
the firm to be more financially and
competitively successful in the years ahead.
• A good strategy must contain ways to deal with
all the strategic issues and obstacles that stand
in the way of the firm’s financial and
competitive success in the years ahead.
© McGraw-Hill Education.
Strategic Priority “How To” Issues
• How to meet challenges of new foreign
competitors
• How to combat the price discounting of rivals
• How to both reduce high costs and prepare for
price reductions
• How to sustain growth as buyer demand slows
• How to adapt to the changing demographics of
the firm’s customer base
© McGraw-Hill Education.
Strategic Priority “Should We” Issues
• Expand rapidly or cautiously into foreign
markets?
• Reposition the firm to move to a different
strategic group?
• Counter increasing buyer interest in substitute
products?
• Expand the firm’s product line?
• Correct the firm’s competitive deficiencies by
acquiring a rival firm with the missing strengths?
© McGraw-Hill Education.
CHAPTER 5
The Five Generic
Competitive
Strategiwes
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use in the classroom.
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Learning Objectives
This chapter will help you understand:
1. What distinguishes each of the five generic strategies
and why some of these strategies work better in certain
kinds of competitive conditions than in others.
2. The major avenues for achieving a competitive
advantage based on lower costs.
3. The major avenues to a competitive advantage based
on differentiating a company’s product or service
offering from the offerings of rivals.
4. The attributes of a best-cost strategy—a hybrid of lowcost and differentiation strategies
© McGraw-Hill Education.
Why Do Strategies Differ?
A firm’s competitive strategy deals exclusively with the
specifics of its efforts to position itself in the market-place,
please customers, ward off competitive threats, and achieve
a particular kind of competitive advantage.
Key factors that
distinguish one strategy
from another
© McGraw-Hill Education.
Is the firm’s market
target broad or narrow?
Is the competitive
advantage being
pursued linked to low
costs or product
differentiation?
Types of Generic Competitive Strategies
Types
GENERIC COMPETITIVE STRATEGIES
Broad,
Low-cost
Strategy
Striving to achieve broad lower overall costs than rivals on comparable
products that attract a broad spectrum of buyers, usually by underpricing
rivals
Broad
Differentiation
Strategy
Seeking to differentiate the firm’s product offering from its rivals’ with
attributes that will appeal to a broad spectrum of buyers.
Focused
Low-cost
Strategy
Concentrating on a narrow buyer segment (or market niche striving to
meet these needs at lower costs than rivals (thereby being able to serve
niche members at a lower price)
Focused
Differentiation
Strategy
Concentrating on a narrow buyer segment (or market niche) by offering
its members customized attributes that meet their specific tastes and
requirements of niche members better than rivals
Best-cost
(Hybrid)
Strategy
Striving to incorporate upscale product attributes at a lower cost than
rivals. Being the “best-cost” producer of an upscale, multifeatured
product allows a firm to give customers more value for their money by
underpricing rivals whose products have similar upscale, multifeatured
attributes
© McGraw-Hill Education.
FIGURE 5.1 The Five Generic Competitive Strategies
Source: This is an expanded version of a three-strategy classification discussed in Michael E. Porter, Competitive Strategy (New York: Free Press, 1980).
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© McGraw-Hill Education.
Low-Cost Strategies
Effective low-cost approaches
•
Pursue cost savings that are difficult to imitate
•
Avoid reducing product quality to unacceptable levels
Competitive advantages and risks
•
Greater total profits and increased market share gained from
underpricing competitors
•
Larger profit margins when selling products at prices comparable
to and competitive with rivals
•
Low pricing does not attract enough new buyers
•
Rival’s retaliatory price-cutting sets off a price war
© McGraw-Hill Education.
The Two Major Avenues for Achieving a
Cost Advantage
Low-cost advantage
•
Cumulative costs across the overall value chain must
be lower than competitors’ cumulative costs.
Options for translating a low-cost advantage over rivals into
attractive profit performance:
1. Perform value-chain activities more cost-effectively
than rivals
2. Revamp the firm’s overall value chain to eliminate or
bypass cost-producing activities
© McGraw-Hill Education.
Cost-Efficient Management of Value Chain
Activities (1 of 2)
Cost driver
•
A factor with a strong influence on a firm’s costs
•
Can be asset-based or activity-based
Securing a cost advantage
•
Use lower-cost inputs and hold minimal assets
•
Offer only “essential” product features or services
•
Offer only limited product lines
•
Use low-cost distribution channels
•
Use the most economical delivery methods
© McGraw-Hill Education.
FIGURE 5.2 Cost Drivers: The Keys to Driving Down
Company Costs
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985).
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Cost-Cutting Methods (1 of 2)
1. Capturing all available economies of scale
2. Taking full advantage of experience and learning-curve
effects
3. Operating facilities at full or near-full capacity
4. Improving supply chain efficiency
5. Substituting lower-cost inputs wherever there is little or
no sacrifice in product quality or performance
6. Using the firm’s bargaining power vis-à-vis suppliers or
others in the value chain system to gain concessions
7. Using online systems and sophisticated software to
achieve operating efficiencies
© McGraw-Hill Education.
Cost-Cutting Methods (2 of 2)
8. Improving process design and employing advanced
production technology
9. Being alert to the cost advantages of outsourcing or
vertical integration
10. Motivating employees through incentives and company
culture
© McGraw-Hill Education.
Revamping the Value Chain System
to Lower Costs
Selling direct to consumers and bypassing the activities
and costs of distributors and dealers by using a direct sales
force and a company website
Streamlining operations to eliminate low value-added or
unnecessary work steps and activities
Reduce materials-handling and shipping costs by having
suppliers locate their plants or warehouses close to the
firm’s own facilities
© McGraw-Hill Education.
Vanguard’s Path to Becoming the Low-Cost
Leader in Investment Management
Describe Vanguard’s business segment.
How well are Vanguard’s competitive strengths matched to
the five forces in its competitive environment?
Which of Vanguard’s value chain activities would be most
easily overcome by rivals? most difficult to overcome?
Assume you have been tasked to revamp a rival’s value
chain activities to better compete with Vanguard. In what
order of expected payoff should you attempt to revamp its
value chain activities?
© McGraw-Hill Education.
The Keys to a Successful Low-Cost
Strategy
Success in achieving a low-cost edge over rivals comes
from out-managing rivals in finding ways to perform value
chain activities faster, more accurately, and more costeffectively by:
•
Spending aggressively on resources and capabilities
that promise to drive costs out of the business
•
Carefully estimating the cost savings of new
technologies before investing in them
•
Constantly reviewing cost-saving resources to ensure
they remain competitively superior
© McGraw-Hill Education.
When a Low-Cost Strategy Works Best
1. Price competition among rival sellers is vigorous.
2. Identical products are available from many sellers.
3. There are few ways to differentiate industry products.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching among sellers.
© McGraw-Hill Education.
Pitfalls to Avoid in Pursuing a Low-Cost
Strategy
• Engaging in overly aggressive price cutting that does not
result in unit sales gains sufficient to recoup forgone
profits
• Relying on a cost advantage that is not sustainable
because rival firms can easily copy or overcome it
• Becoming so fixated on cost reduction such that the
firm’s offerings lack the primary features that attract
buyers
• Having a rival discover a new lower-cost value chain
approach or develop a cost-saving technological
breakthrough
© McGraw-Hill Education.
Broad Differentiation Strategies
Effective Differentiation Approaches
•
Carefully study buyer needs and behaviors, values, and
willingness to pay for a unique product or service
•
Incorporate features that both appeal to buyers and create a
sustainably distinctive product offering
•
Use higher prices to recoup differentiation costs
Advantages of Differentiation
•
Command premium prices for the firm’s products
•
Increased unit sales due to attractive differentiation
•
Brand loyalty that bonds buyers to the differentiating features of
the firm’s products
© McGraw-Hill Education.
Cost-Efficient Management of Value Chain
Activities (2 of 2)
A value driver can
•
Have a strong differentiating effect
•
Be based on physical as well as functional attributes of
a firm’s products
•
Be the result of superior performance capabilities of
the firm’s human capital
•
Have an effect on more than one of the firm’s value
chain activities
•
Create a perception of value (brand loyalty) in buyers
where there is little reason for it to exist
© McGraw-Hill Education.
FIGURE 5.3 Value Drivers: The Keys to Creating a
Differentiation Advantage
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985).
Access the text alternative for these images.
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Managing the Value Chain to Create the
Differentiating Attributes
1. Create product features and performance attributes that
appeal to a wide range of buyers.
2. Improve customer service or add extra services.
3. Invest in production-related R&D activities.
4. Strive for innovation and technological advances.
5. Pursue continuous quality improvement.
6. Increase marketing and brand-building activities.
7. Seek out high-quality inputs.
8. Emphasize HRM activities that improve the skills,
expertise, and knowledge of company personnel.
© McGraw-Hill Education.
Revamping the Value Chain System to
Increase Differentiation
Coordinating with
downstream channel
allies to enhance
customer perceptions of
Approaches to
enhancing differentiation value
through changes in the
Coordinating with
value chain system
suppliers to better
address customer needs
© McGraw-Hill Education.
Delivering Superior Value via a Broad
Differentiation Strategy
Broad Differentiation:
Offering Customers Something That Rivals Cannot or Do Not
1. Incorporate product attributes and user features that lower the
buyer’s overall costs of using the firm’s product
2. Incorporate tangible features (e.g., styling) that increase
customer satisfaction with the product
3. Incorporate intangible features (e.g., buyer image) that
enhance buyer satisfaction in noneconomic ways
4. Signal the value of the firm’s product offering to buyers (e.g.,
price, packaging, placement, advertising)
© McGraw-Hill Education.
Differentiation: Signaling Value
Signaling value is important when:
•
The nature of differentiation is based on intangible
features and is therefore subjective or hard to quantify
by the buyer.
•
Buyers are making a first-time purchase and are
unsure what their experience will be with the product.
•
Product or service repurchase by buyers is infrequent.
•
Buyers are unsophisticated.
© McGraw-Hill Education.
Successful Approaches to Sustainable
Differentiation
Differentiation that is difficult for rivals to duplicate
or imitate
• Company
reputation
• Long-standing
•A
relationships with buyers
unique product or service image
Differentiation that creates substantial switching
costs that lock in buyers
• Patent-protected
product innovation
• Relationship-based
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customer service
When a Differentiation Strategy Works Best
Market Circumstances
Favoring
Differentiation
Buyer needs
and uses for
the product
are diverse.
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There are
many ways
that
differentiation
can have
value to
buyers.
Few rival
firms are
following a
similar
differentiation
approach.
There is rapid
change in the
product’s
technology
and features.
Pitfalls to Avoid in Pursuing a
Differentiation Strategy
• Relying on product attributes easily copied by rivals
• Introducing product attributes that do not evoke an
enthusiastic buyer response
• Eroding profitability by overspending on efforts to
differentiate the firm’s product offering
• Offering only trivial improvements in quality, service, or
performance features vis-à-vis the products of rivals
• Over-differentiating the product quality, features, or
service levels exceeds the needs of most buyers
• Charging too high a price premium
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Focused (or Market Niche) Strategies
Focused Strategy Approaches
Focused LowCost Strategy
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Focused Market
Niche Strategy
Clinícas del Azúcar’s Focused Low-Cost
Strategy
Which uniqueness drivers are responsible for the success
of Clinícas del Azúcar?
Which competitive conditions would mitigate against
successful entry of the Clinícas del Azúcar into the U.S.
diabetes care market?
What part do customer expectations about patient-doctor
relationships play in the delivery of health care in the
United States?
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When a Focused Low-Cost or Focused
Differentiation Strategy Is Attractive
• The target market niche is big enough to be profitable
and offers good growth potential.
• Industry leaders chose not to compete in the niche;
focusers avoid competing against strong competitors.
• It is costly or difficult for multi-segment competitors to
meet the specialized needs of niche buyers.
• The industry has many different niches and segments.
• Rivals have little or no entry interest in the target
segment.
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The Risks of a Focused Low-Cost or
Focused Differentiation Strategy
1. Competitors will find ways to match the focused firm’s
capabilities in serving the target niche.
2. The specialized preferences and needs of niche
members shift over time toward the product attributes
desired by the majority of buyers.
3. As attractiveness of the segment increases, it draws in
more competitors, intensifying rivalry and splintering
segment profits.
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Canada Goose’s Focused Differentiation
Strategy
Which decisions did CEO Dani Reiss make that launched
Canada Goods on its chosen strategic path?
Which uniqueness drivers are responsible for the success
of Canada Goose?
Which of Canada Goose’s uniqueness drivers are
competitors likely to attempt to copy first?
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Best-Cost (Hybrid) Strategies
Differentiation:
Providing desired
quality, features,
performance,
service attributes
Low Cost Producer:
Charging a lower price
than rivals with similar
caliber product offerings
Best-Cost Hybrid
Approach
Value-Conscious Buyer
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When a Best-Cost Strategy Works Best
• Product differentiation is the market norm.
• There are a large number of value-conscious buyers
who prefer mid-range products.
• There is competitive space near the middle of the market
for a competitor with either a medium-quality product at a
below-average price or a high-quality product at an
average or slightly higher price.
• Economic conditions have caused more buyers to
become value-conscious.
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The Risk of a Best-Cost Strategy
Best-Cost
Strategy
Low-Cost
Producers
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High-End
Differentiators
Trader Joe’s Focused Best-Cost Strategy
How can higher product quality lower product costs?
In which stages of an industry life cycle are low-cost
leadership, differentiation, focused niche, and best-cost
provider strategies most appropriate?
Could the lower-selling prices of its groceries versus its
competitors be used as a proxy for measuring the strength
of its focused best-cost strategy?
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The Contrasting Features of the Generic
Competitive Strategies
Each generic strategy:
•
Positions the firm differently in its market
•
Establishes a central theme for how the firm intends to
outcompete rivals
•
Creates boundaries or guidelines for strategic change
as market circumstances unfold
•
Entails different ways and means of maintaining the
basic strategy
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Table 5.1 Distinguishing Features of the Five Generic
Competitive Strategies (1 of 2)
FEATURE
Low-Cost
Broad
Differentiation
Focused lowcost
Focused
differentiation
Strategic target
A broad crosssection of the
market
A broad crosssection of the
market
A narrow market
niche where buyer
needs and
preferences are
distinctively
different
A narrow market
niche where buyer
needs and
preferences are
distinctively
different
Value-conscious
buyers. Or, a
middle-market
range
Basis of
competitive
strategy
Lower overall
costs than
competitors
Ability to offer
buyers something
attractively
different from
competitors’
offerings
Lower overall cost
than rivals in
serving niche
members
Attributes that
appeal specifically
to niche members
Ability to offer
better goods at
attractive prices
Product line
A good basic
product with few
frills (acceptable
quality and limited
selection)
Many product
variations, wide
selection,
emphasis on
differentiating
features
Features and
attributes tailored
to the tastes and
requirements of
niche members
Features and
attributes tailored
to the tastes and
requirements of
niche members
Items with
appealing
attributes and
assorted features;
better quality, not
best
Production
emphasis
A continuous
search for cost
reduction without
sacrificing
acceptable quality
and essential
features
Build in whatever
differentiating
features buyers
are willing to pay
for; strive for
product superiority
A continuous
search for cost
reduction for
products that meet
basic needs of
niche members
Small-scale
production or
custom-made
products that
match the tastes
and requirements
of niche members
Build in appealing
features and
better quality at
lower cost than
rivals
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Best-Cost
Table 5.1 Distinguishing Features of the Five Generic
Competitive Strategies (2 of 2)
FEATURE
Low-Cost
Broad
Differentiation
Focused lowcost
Focused
differentiation
Best-Cost
Marketing
emphasis
Low prices, good
value
Also, try to make a
virtue out of product
features that lead to
low cost
Tout differentiating
features.
Also, charge a
premium price to
cover the extra
costs of
differentiating
features
Communicate
attractive features
of a budget-priced
product offering that
fits niche buyers’
expectations
Communicate how
product offering
does the best job of
meeting niche
buyers’
expectations
Emphasize delivery
of best value for the
money
Keys to
maintaining the
strategy
Economical prices,
good value
Also, strive to
manage costs
down, year after
year, in every area
of the business
Stress constant
innovation to stay
ahead of imitative
competitors
Also, concentrate
on a few key
differentiating
features.
Stay committed to
serving the niche at
the lowest overall
cost; don’t blur the
firm’s image by
entering other
market segments or
adding other
products to widen
market appeal
Stay committed to
serving the niche
better than rivals;
don’t blur the firm’s
image by entering
other market
segments or adding
other products to
widen market
appeal.
Unique expertise in
simultaneously
managing costs
down while
incorporating
upscale features
and attributes
Resources and
capabilities
required
Capabilities for
driving costs out of
the value chain
system.
Examples: largescale automated
plants, an
efficiency-oriented
culture, bargaining
power
Capabilities
concerning quality,
design, intangibles,
and innovation
Examples:
marketing
capabilities, R&D
teams, technology
Capabilities to lower
costs on niche
goods Examples:
Lower input costs
for the specific
product desired by
the niche, batch
production
capabilities
Capabilities to meet
the highly specific
needs of niche
members
Examples: custom
production, close
customer relations.
Capabilities to
simultaneously
deliver lower cost
and higher-quality
or differentiated
feature
Examples: TQM
practices, mass
customization
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Successful Generic Strategies Are
Resource-Based
A firm’s competitive strategy is most likely to succeed if it is
predicated on leveraging a competitively valuable collection
of resources and capabilities that match the strategy.
Sustaining a firm’s competitive advantage depends on its
resources, capabilities, and competences that are difficult
for rivals to duplicate and have no good substitutes.
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FIGURE 5.4 Three Approaches to Competitive
Advantage and the Value-Price-Cost Framework
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Access the text alternative for these
images.
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Three Approaches to Competitive Advantage
and the Value-Price-Cost Framework
Figure 5.4 shows how a low cost generic strategy achieves lower
costs than an average competitor, at the sacrifice of some
perceived value to the consumer. If the decrease in producer costs
is less than the decrease in perceived value by the consumer, then
the total economic value (V-C) for the low cost leader will be greater
than the total economic value produced by its average rival,
creating a competitive advantage for the low cost leader. This is
clearly the case for the example of a low cost strategy depicted in
this figure.
The low-cost leader has chosen to charge a lower price than its
average rival. The result is that even with a lower V, the low cost
leader offers a more attractive (larger) consumer value proposition
(depicted in gold) and finds itself with a better profit formula
(depicted in blue).
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