MGT 563
OPERATIONS STRATEGIES
Dr. Aneel SALMAN
Department of Management Sciences
COMSATS Institute of Information
Technology, Islamabad
Recap Lecture 02
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What is strategy
Mission and Objectives
Strategic Plan
Implementation
Evaluation
A Situation Analysis
• A situation analysis identifies strategic options and
opportunities
• A situation analysis involves
– External factors: Macroenvironment (industry and competitive
conditions)
– Internal factors: Microenvironment (organization’s internal situation
and competitive position)
• External factors
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Industry’s dominant economic traits
Competitive forces
Competitive moves of rivals
Key success factors
Attractiveness of the industry
SWOT
Internal Factors
Strengths
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Weaknesses
Five Forces Model
Substitute
Products
Suppliers
Rivalry among sellers
Buyers
Potential Entrants
Analysis of Competitive Forces
• The analysis is designed to identify the main sources of
competitive forces and the strength of the pressure
• Sources of competitive pressures are defined by
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Rivalry among competitors
Substitute products
Potential entry
Bargaining power of suppliers
Bargaining power of buyers
• Rate the strength of each competitive force
• Explain how each competitive force works and its role in the
overall competitive picture
Environmental Scanning
• A way to monitor and interpret social, political,
economic, ecological and technological events in an
effort to spot trends and conditions that could
eventually impact the industry and the organization.
• The purpose of environmental scanning is to raise
the consciousness of managers about potential
developments that could have an important impact
on industry conditions and pose new opportunities
and threats
Assessing Competitive Positions:
Strategic Groups
• A Strategic Group consists of those rival firms with similar
competitive approaches and positions in an industry
• A Strategic Group displays different competitive positions that
rival firms occupy
• Organizations in the same strategic group have one or more
competitive characteristics in common
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Sell in the same price/quality range
Cover same geographic areas
Be vertically integrated to same degree
Emphasize same types of distribution channels
Offer buyers similar services
Use identical technological approaches
Competitor Analysis
• An organization’s strategy is affected by
– Current strategies of competitors
– Actions competitors are likely to take
• Profile of key competitors involves studying
– Current position in the industry of each competitor
– Strategic objectives and recent business plans of each competitor
– Basic competitive approach of each competitor
• Successful strategies take into account
– Understanding competitor strategies
– Evaluating their vulnerability to driving forces and competitive
pressures
– Sizing strengths and weaknesses of each competitor
– Anticipating each competitor’s next move
Key Industry Success Factors
• Key success factors spell the difference between
– Profit and loss
– Competitive success or failure
• A key success factor can be
– A specific skill or talent
– Competitive capability
– Something an organization must do to satisfy customers
• Being distinctively better than competitors on one or more
key success factors produces a competitive advantage
• Key success factors consist of 3-5 major determinants of
financial and competitive success in an industry
Competitive Strategy
Competitive Strategy
• A competitive strategy consists of moves to
– Attract customers
– Withstand competitive pressures
– Strengthen an organization’s market position
• The objective of a competitive strategy is to generate a
competitive advantage, increase the loyalty of customers and
beat competitors
• A competitive strategy is narrower in scope than a business
strategy
• Five competitive strategies are
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Overall low-cost leadership strategy
Best cost provider strategy
Broad differentiation strategy
Focused low-cost strategy
Focused differentiation strategy
Overall Low-Cost Leadership Strategy
• Strive to be the overall low-cost provider in an industry
• How to achieve overall low-cost leadership
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Scrutinize each cost activity
Manage each cost lower year after year
Reengineer cost activities to reduce overall costs
Cut some cost activities out of the value chain
• Competitive strengths of a overall low-cost strategy
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Organization in a better position to compete offensively on price
Organization is better able to negotiate with large customers
Organization is able to use price as a defense against substitutes
Low cost is a significant barrier to entry
Organization is more insulated from the power of suppliers
When Does an Overall Low-Cost
Strategy Work the Best
• When price competition is a dominant competitive
force
• The product is a “commodity”
• There are few ways to differentiate the product
• Most customers have similar needs/requirements
• Customers incur low switching costs changing sellers
• Customers are large and have significant bargaining
power
When Doesn’t a Overall Low-Cost Strategy
Work
• When technological breakthroughs open cost reductions for
competitors, negating a low-cost provider’s efficiency
advantage
• Competitors find it relatively easy and inexpensive to imitate
the leader’s low cost methods
• Low-cost leader focuses so much on cost reduction that the
organization fails to respond to
– Changes in customer requirements for quality and service
– New product developments
– Reduced customer sensitivity to price
Broad Differentiation Strategies
• Striving to build customer loyalty by differentiating an
organization’s products from competitors’ products
• Keys to success include
– Finding ways to differentiate to create value for customers that are not
easily copied
– Not spending more to differentiate than the price premium that can
be charged
• A successful differential strategy allows an organization to
– Set a premium price
– Increase unit sales
– Build brand loyalty
Broad Differentiation Strategies
• Where to look for differentiation opportunities
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Supply chain
Research and development
Production activities
Marketing, sales and service activities
• Strengths of a Differentiation Strategy
– Customers develop loyalty to the brand
– Brand loyalty acts as an entry barrier
– Organization is better able to fend off threats of substitute products because
of brand loyalty
– Reduces bargaining power of large customers since other brands are less
attractive
– Seller may be in a better position to resist efforts of suppliers to raise prices
Pitfalls of a Broad Differentiation Strategy
• Trying to differentiate on an unimportant product
feature that doesn’t result in providing more value to
the customer
• Over differentiating the product such that the
product features exceed the customers’ needs
• Charging a price premium that buyers perceive as too
high
• Ignoring need to signal value
• Not identifying what customers consider valuable
Best-Cost Provider Strategy
• Striving to give customers more value for the money by
combining an emphasis on low cost with an emphasis on
upscale differentiation
– Combines low-cost and differentiation
• The objective is to create superior value by meeting or
beating customer expectation on product attributes and
beating their price expectations
• Keys to success
– Match close competitors on key product attributes and beat them on
cost
– Expertise at incorporating upscale product attributes at a lower cost
than competitors
– Contain costs by providing customers a better product
Advantages of Best-Cost Provider Strategy
• Competitive advantage comes from matching close
competitors on key product attributes and beating
them on price
• Most successful best-cost providers have skills to
simultaneously manage costs down and product
quality up
• Best-cost provider can often beat an overall low-cost
strategy and a broad differentiation strategy where
– Customer diversity makes product differentiation the norm
– Many customers are price and value sensitive
Focus Strategies
• Focus strategy based on low-cost
– Concentrate on a narrow customer segment beating the competition
on lower cost
• Focus strategy based on differentiation
– Offering niche customers a product customized to their needs
• Overall objective of both focus strategies is to do a better job
of serving a niche target market than competitors
• Keys to success
– Choose a niche were customers have a distinctive preference, unique
needs or special requirements
– Develop a unique ability to serve the needs of a niche target market
What Makes a Niche Attractive?
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Large enough to be profitable
Good growth potential
Not critical to the success of major competitors
Organization has the resources to effectively serve
the niche
• Organization can defend itself against challengers
through a superior ability to serve the niche
• No competitors are focusing on the niche
Strengths and Risks of Focus Strategies
• Strengths
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Competitors don’t have the motivation to meet specialized needs of the niche
Organization’s competitive advantage could be seen as a barrier to entry
Organization’s competitive advantage provides an obstacle for substitutes
Organization’s ability to meet the needs of customers in the niche can reduce
the bargaining power of large niche buyers
• Risks
– Broad differentiated competitors may find effective ways to enter the niche
– Niche customers’ preferences may move toward the product attributes
desired by a larger market segment
– Profitability may be limited if too many competitors enter the niche
From Single-Business to Diversification
• Stage 1 - Single-business serves a local or
regional market
• Stage 2 – Geographic expansion
• Stage 3 – Vertical integration
• Stage 4 – Growth slows so the business
diversifies
The Growth Matrix
Products
Present
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Present
New
Market
Penetration
Market
Development
New
Product
Development
Diversification
Market Penetration
• Use when markets are not saturated with an organization’s
products
• Use when the usage rate of present customers can be
increased
• Use when the market shares of the major competitors has
been declining
• Use when the relationship between sales and marketing
expenses is high
• Use when increased economies of scale provide the
opportunity for competitive advantages
Product Development
• Use when the organization has successful products that are in
the maturity stage of the product life cycle. The objective is to
attract satisfied customers to try new, improved products
• Use when an organization competes in an industry that is
characterized by rapid technological change
• Use when competitors offer better quality products at
comparable prices
• Use if the organization competes in a high-growth industry
• Use when the organization has strong research and
development capabilities
Market Development
• Use when channels of distribution are available, reliable and
inexpensive
• Use when the organization is very successful in what it does
• Use when the organization has excess production capacity
• Use when the organization possesses the needed capital and
human resources to manage the expanded operations
• Use when unsaturated markets exist
Diversification
• Use when entering new industries
– Acquire an existing company in the target industry
– Start a new company internally
– Form a joint venture
• Acquiring an existing company
– Quick entry into target market
– Able to hurdle entry barriers
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Technological inexperience
Gain access to reliable suppliers
Being of a size to match competitors in terms of efficiency and costs
Get distribution access
Start a New Company
• Use when ample time exists to enter by starting from scratch
• Use if existing competitors are slow to respond to changes in
the industry
• Use if it is more economical to start from scratch rather than
acquiring an existing company
• Use if the organization already has most of the needed skills
• Use if additional capacity will not adversely impact the
industry
• Use when the new company doesn’t have to go head-to-head
against powerful competitors
Joint Ventures
• Use when it is too risky to go it alone
• Use when pooling competencies of partners provides a
stronger competitor
• Drawbacks
– Which partner will do what
– Who has effective control
• Potential conflicts
– Sourcing of components
– Control over cash flows and profits
– Whether operations should conform to one partner or the other
Linking the Budget to Strategy
• Implementation of a strategy requires
– Enough resources to support the strategy
– Screening of requests for new capital projects and bigger operating budgets
– Shifting resources to support new strategy priorities
- Downsizing some areas and upsizing other areas
- Eliminating activities that are no longer needed
How well budget allocations are linked to the needs of a strategy
can either promote or impede the implementation process.
Implementing Best Practices & Continuous
Improvement
• Implementing a strategy involves adopting “best practices”
– Best practices means:
• Benchmarking is an integral part of a successfully
implemented strategy
– Continuous improvement programs
– Total quality management - TQM
Instituting Best Practices & Continuous
Improvement
• Quality improvement programs are linked to
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Defect-free manufacture
Superior product quality
Superior customer service
Total customer satisfaction
Identifying & implementing best practices is a journey, not a
destination; it’s an exercise in doing things in a world-class
way.
Formal Reporting of Strategy-Critical
Information
• Accurate & timely information is essential to guide action
• Prompt feedback on implementation initiatives are needed
BEFORE actions are fully completed
• Monitoring early implementation actions serves two purposes
– Quick detection of the need to adjust the strategy or its
implementation
– Making sure things are moving in the planned direction
• Critical success variables must be track as needed
Formal Reporting of Strategy-Critical
Information
• Information systems should cover
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Customer data
Operations data
Employee data
Financial data
Accurate information allows a strategy to be monitored and
corrective action to be taken promptly
Commitment to Chosen Strategy
• Implementing rewards & incentives inducing employees to make the
strategy work
– The reward structure must motivate people to do the very things it takes to
mjake the strategy work successfully
• Requiring results, not intentions
• Keys to implementing pay-for-performance programs
– Make performance targets the basis for structuring the incentive system
– Ensure performance targets are clearly defined and every person/group is
accountable for achieving them
– Be fair and impartial in comparing actual performance against targets
– Avoid rewarding non-performers
– Explore reasons for deviations (“poor” individual performance or
circumstances beyond the individual’s control)