Chapter 8
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
Determine why a business would choose a lowcost, differentiation, or speed-based strategy
2. Explain the nature and value of a market focus
strategy
3. Illustrate how a firm can pursue both low-cost
and differentiation strategies
4. Identify requirements for business success at
different stages of industry evolution
5. Determine good business strategies in
fragmented and global industries
6. Decide when a business should diversify
1.
8-3
Evaluating and Choosing Business Strategies: Seeking
Sustained Competitive Advantage

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The two most prominent sources of
competitive advantage can be found in the
business’s cost structure and its ability to
differentiate the business from competitors
Businesses that have one or more
sources/capabilities that let them
operate at a lower cost will
consistently outperform their
rivals that don’t
8-4
Evaluating Cost Leadership Opportunities

Business success built on cost leadership requires
the business to be able to provide its product or
service at a cost below what its competitors can
achieve
8-5
Ex. 8.2 Evaluating a Business’s Cost Leadership Opportunities
8-6
Sustainable Low-Cost Activities
1.
2.
3.
4.
5.
Some low-cost advantages reduce the likelihood of
buyers’ pricing pressure
Truly sustained low-cost advantages may push
rivals into other areas
New entrants competing on price must face an
entrenched cost leader
Low-cost advantages should lessen the
attractiveness of substitute products
Higher margins allow low-cost producers to
withstand supplier cost increases
8-7
Risks of a Cost Leadership Strategy
1.
2.
3.
4.
Many cost-saving activities are easily duplicated
Exclusive cost leadership can be a trap
Obsessive cost cutting can shrink other
competitive advantages
Cost differences often decline over time
8-8
Evaluating Differentiation

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Differentiation requires that the
business have sustainable advantages
that allow it to provide buyers with
something uniquely valuable to them
Differentiation usually arises from
one or more activities in the value
chain that create a unique value
important to buyers
Strategists use benchmarking and
consider the 5 forces in considering
differentiation
8-9
Ex. 8.3 Evaluating a Business’s Differentiation Opportunities
8-10
Evaluating Speed as a Competitive Advantage
 Speed-based strategies, or rapid
response to customer requests or
market and technological changes,
have become a major source of
competitive advantage for
numerous firms in today’s intensely
competitive global economy
8-11
Ex. 8.5 Evaluating a Business’s Rapid Response (Speed)
Opportunities
8-12
Speed can be created by:

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Customer responsiveness
Product development cycles
Product or service improvements
Speed in delivery or distribution
Information Sharing and Technology
8-13
Risks of Speed-based Strategy



Speeding up activities that haven’t been
conducted in a fashion that prioritizes rapid
response should only be done after
considerable attention to training,
reorganization, and/or reengineering
Some industries may not offer much advantage
to the firm that introduces some forms of rapid
response
Customers in such settings may prefer the
slower pace or the lower costs currently
available, or they may have long time frames in
purchasing
8-14
Evaluating Market Focus as a Way to Competitive Advantage



Market focus: the extent to which a
business concentrates on a narrowly
defined market
Small companies, at least the better ones,
usually thrive because they serve narrow
market niches
Market focus allows some businesses to
compete on the basis of low cost,
differentiation, and rapid response
against much larger businesses with
greater resources
8-15
Risks of Market Focus



The risk of focus is that you attract major
competitors who have waited for your business to
“prove” the market
Publicly traded companies built around focus
strategies become takeover targets for large firms
seeking to fill out a product portfolio
Slipping into the illusion that it is focus itself, and
not low cost, etc. that is creating the business’s
success.
8-16
Stages of Industry Evolution and Business Strategy Choices


The requirements for success in industry
segments change over time
Strategists can use these changing requirements,
which are associated with different stages of
industry evolution, as a way to isolate key
competitive advantages and shape strategic
choices around them
8-17
Emerging Industries
 Emerging industries are newly
formed or re-formed industries
that typically are created by
technological innovation, newly
emerging customer needs, or other
economic or sociological changes
 There are no “rules of the game”
8-18
Business Strategies in Emerging Industries

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Technologies that are most proprietary to the pioneering
firms and technological uncertainty will unfold
Competitor uncertainty because of inadequate
information about competitors, buyers, and the timing of
demand
High initial costs but steep cost declines
Few entry barriers
First-time buyers requiring initial inducement to purchase
Inability to obtain raw materials and components until
suppliers gear up to meet the industry’s needs
Need for high-risk capital because of the industry’s
uncertain prospects
8-19
Emerging Industries

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For success in this industry setting, business
strategies require one or more of these features:
The ability to shape the industry’s structure
The ability to rapidly improve product quality and
performance features
Advantageous relationships with key suppliers and
promising distribution channels
The ability to establish the firm’s technology as the
dominant one
The early acquisition of a core group of loyal
customers and then the expansion of that customer
base
The ability to forecast future competitors
8-20
Competitive Advantages and Strategic Choices in Growing Industries


Rapid growth brings new competitors into the
industry
At this stage, growth industry strategies that
emphasize brand recognition, product
differentiation, and the financial resources to support
both heavy marketing expenses and the effect of
price competition on cash flow can be key strengths
8-21
Growth Industries

For success in this industry setting, business strategies
require one or more of the following features:

The ability to establish strong brand recognition

The ability and resources to scale up to meet increasing
demand

Strong product design skills to be able to adapt products
and services

The ability to differentiate the firm’s product[s] from
competitors entering the market

R&D resources and skills to create product variations

The ability to build repeat buying from established
customers

Strong capabilities in sales and marketing
8-22
Competitive Advantages and Strategic Choices in
Mature Industries


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As an industry evolves, its rate of growth eventually
declines
Firms working with the mature industry
strategies sell increasingly to experienced, repeat
buyers who are now making choices among known
alternatives
Competition becomes more oriented to cost and
service as knowledgeable buyers
expect similar price and features
8-23
Mature Industries
Strategy elements of successful firms in maturing
industries often include the following:

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Product line pricing
Emphasis on process innovation that permits low-cost product
design, manufacturing methods, and distribution
synergy
Emphasis on cost reduction
Careful buyer selection to focus on buyers who are less
aggressive, more closely tied to the firm, and able to buy more
from the firm
Horizontal integration to acquire rival firms whose
weaknesses can be used to gain a bargain price
International expansion to markets where attractive growth
and limited competition still exist
8-24
Competitive Advantages and Strategic Choices in Declining Industries

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Declining industries are those that make
products or services for which demand is
growing slower than demand in the economy
as a whole or is actually declining
Focus on higher growth or a higher return
Emphasize product innovation and quality
improvement
Emphasize production and distribution
efficiency
Gradually harvest the business
8-25
Competitive Advantage in Fragmented Industries

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A fragmented industry is one in which no firm
has a significant market share and can strongly
influence industry outcomes
Tightly managed decentralization
“Formula” facilities
Increased value added
Specialization
Bare bones/no frills
8-26
Competitive Advantage in Global Industries

A global industry is one that comprises firms
whose competitive positions in major geographic
or national markets are fundamentally affected by
their overall global competitive positions


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License foreign firms to produce and distribute the
firm’s products
Maintain a domestic production base and export
products to foreign countries
Establish foreign-based plants and distribution to
compete directly in the markets of one or more
foreign countries
8-27
Four Generic Global
Competitive Strategies
 Broad-line global competition
 Global focus strategy
 National focus strategy
 Protected niche strategy
8-28
Ex. 8.10
Grand Strategy Selection Matrix
8-29
Ex. 8.11
Model of Grand Strategy Clusters
8-30
Building Value as a Basis for Choosing Diversification
or Integration

The grand strategy selection matrix and
model of grand strategy clusters are useful
tools to help dominant product company
managers evaluate and narrow their choices
among alternative grand strategies

Dominant product company managers
who choose diversification or integration
eventually create another management
challenge
8-31