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Generic Strategies

Differentiation Strategy
A generic business strategy in which a business produces distinct products or services industrywide for a large market

Cost

Ivory Intro. AA

Differentiation

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Generic Strategies
Focus Differentiation Strategy
Cost
Cray

Is appropriate for business units that produce highly differentiated, needfulfilling products or services for the speialized needs of a narrow range of customers in a market niche.
Differentiation

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Differentiation
Objective: Incorporate differentiating features that cause buyers to prefer firms product or service over the brands of rivals Uniqueness through:
unique product features quality of inputs performance

after sale service speed and flexibility image - organizational reputation and brand name

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What does it take to be a differentiator?

Customers should be willing to pay a premium price attributes that make the product unique should be valued by the customer attributes should appeal to large percentage of the market (broad differentiator) Company should be able to communicate its uniqueness Costs of differentiation should not be too high.

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The Appeal of Differentiation Strategies

A powerful competitive approach when uniqueness can be achieved in ways that

Buyers perceive as valuable Rivals find hard to copy

Can be incorporated at a cost well below the price premium that buyers will pay

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Other requirements for differentiation

Marketing abilities Product engineering skills Creativity Capability in basic research Loosely structured organization, strong interfunctional coordination Compensation and rewards based on subjective criteria Strengths in marketing, R&D, technology, and innovativeness

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Risks of Differentiation Strategy

Customers may choose to sacrifice some features. Competitors may imitate the differentiating feature. Not understanding what buyers want or prefer and differentiating on the wrong things.

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Effective Differentiators can MITIGATE the Five Forces to Earn Above Average Profits.
Can mitigate Supplier Power by: Absorbing price increases due to higher margins Passing on higher supplier prices because buyers are brand loyal

Threat of New Entrants

Can fend off New Entrants because:

New products must surpass proven products, or Be equal to performance but offer a lower price

Bargaining Power of Suppliers

Rivalry Among Competing Firms in Industry

Bargaining Power of Buyers

Can mitigate Buyer Power because:

Well positioned relative to Substitutes because:

Brand loyalty tends to reduce new product trial and brand switching

Threat of Substitute Products

Well differentiated products reduce customer sensitivity to price increases 8

Finally, even when the competitive environment is unattractive, an organization using the differentiation strategy well, can still garner above average profits.

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Effective Differentiators can also succeed IN SPITE of unattractive Five Forces

Powerful Suppliers can: Raise their Prices Lower their Quality

DIFF can absorb these COST increases better than others.

Threat of New Entrants

New Entrants cannot make a profit compared to Diff as long as the basis for differentiation remains.

Bargaining Power of Suppliers

Substitutes Place a Price Ceiling on the Industry. Diff can profit better than others even as this ceiling is lowered due to more plentiful substitutes as long as the basis for Diff survives.

Rivals
Cant absorb costs of price wars or marketing blitzes as well as the Diff.

Bargaining Power of Buyers

Powerful Buyers can: Demand Lower Prices Demand Higher Quality

Threat of Substitute Products

Diff can absorb these COST increases better than others.

An assumption in this line of reasoning is that all competitors begin with the same cost structure. This isnt really a rational assumption since differentiators normally have a higher cost structure necessary to provide the difference. However, its good enough for our considerations.

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Agenda
Focus strategies Best-cost provider strategy Song Airlines

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Generic Strategies
III. Focus: Serving the needs of a special market segment better than anyone else What does it take to pursue a focus strategy? Ability to segment the market Ability to assess and meet the needs of buyers in a particular segment better than other competitors. Risks: Cost focus - cost leadership Differentiation focus - differentiation The narrow market segment may become like the broader market thus eliminating the need for a focused approach.

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Ways Organizations Can Simultaneously Differentiate Their Products and Lower Their Costs
Dedication to Quality Quality is defined as the totality of features and characteritics of a product or service that bear on its ability to satisfy needs or implied needs. Process Innovation A business units activities that increase the efficiency of operations and distribution. Product Innovation A business units activities that enhance the differentiation of its products and services.

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Best-Cost Strategy
Hybrid strategy:
Firm pursues low cost and differentiation simultaneously.

High differentiation and low costs can be complementary:

Total Quality Management (TQM) High levels of advertising and promotional expenditure (differentiation) --> increased market share --> economies of scale (low costs). Profits generated from pursuit of low costs allow investments in differentiating features.

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Best Cost Provider Strategies

Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation

Make an upscale product at a lower cost Give customers more value for the money

Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands

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How a Best-Cost Strategy Differs from a Low-Cost Strategy

Aim of a low-cost strategy--Achieve lower costs than any other competitor in the industry Intent of a best-cost strategy--Make a more upscale product at lower costs than the makers of other brands with comparable features and attributes A best-cost provider cannot be the industrys absolute low-cost leader because of the added costs of incorporating the additional upscale features and attributes that the low-cost leaders product doesnt have

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Example-Toyotas Lexus Line

Designing high performance characteristics and upscale features Transferring its low-cost capabilities to making premium quality cars Underprice Mercedes and BMW Established a new network of dealers

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Corporate-Level Strategies

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Agenda
Defining corporate-level strategy Concentration strategies Integrative strategies
Vertical integration Horizontal integration

Diversification strategies
Related diversification Unrelated diversification

Renewal strategies Means to pursue corporate-level strategies Portfolio management

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Corporate-Level Strategy
Overall direction of the firm Growth Renewal Optimal mix of businesses Single business Vs. Multiple businesses Allocation of resources between the different businesses of the firm.

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Possible Growth Strategies

Concentration
Vertical Integration
Backward Forward

Organizational Growth

Diversification
Related Unrelated

Horizontal Integration

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Customers

Concentration Options
Product(s)

Current Product/Market Exploitation

New Product Development

Current

New

Market Development

Product/Market Proliferation

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Concentration Strategies
Means firm concentrates on its primary business. Is the simplest and the least ambiguous Has four options: 1. Product/Market Exploitation Increasing sales of current products in current markets 2. Product Development developing new products for current customers. New products - improved or modified

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Concentration Strategies
3. Market Development:
Selling current products in new markets New markets - additional geographic areas, different market segments

4. Product/Market Proliferation:
Expanding both into new products and into new markets

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Concentration Strategies
Advantages: Allows the firm to master one business Allows top managers to specialize in one business Allows all organization resources to be allocated to one business and put under less strain Disadvantages: Is risky when environments are unstable Is vulnerable to risks of product obsolescence and industry maturity May lead to cash flow problems

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Integrative Growth Strategies

Vertical Integration
Backward Forward

Horizontal Integration

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Horizontal Integration
Means investing in the purchase of one or more competitors. Purpose is to gain market share, expand geographically, augment product or service lines. Example: BMWs Rover acquisition

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Vertical Integration Strategies

Vertical integration extends a firms competitive scope within same industry
Backward into sources of supply Forward toward end-users of final product

Can aim at either full or partial integration

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

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Appeal of Backward Integration

Reduces risk of depending on suppliers of crucial raw materials / parts / components Ensures smoother and better coordinated operations Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Potential to reduce costs exists when
Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met

Can produce a differentiation-based competitive advantage when it results in a better quality part

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Appeal of Forward Integration

Advantageous for a firm to establish its own distribution network if:
Undependable distribution channels undermine steady production operations

Integrating forward into distribution and retailing may:

be cheaper than going through independent distributors help achieve stronger product differentiation, allowing escape from price competition provide better access to users

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Strategic Disadvantages of Vertical Integration

Locks firm deeper into same industry Poses problems of balancing capacity at each stage of value chain May require radically different skills / capabilities Reduces manufacturing flexibility, lengthening design time and ability to introduce new products

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When to Integrate Vertically?

Are our existing suppliers or customers meeting the final consumers needs? How dynamic is the industry? Will vertical integration enhance the businesss position?

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Competitive Strategy Principle

A vertical integration strategy has appeal ONLY if it significantly strengthens a firms
competitive position!

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Body Glove
Initially, in what steps of the value chain of activities of creating a wet suit was Body Glove involved? Why has this changed? What disadvantages do you think would be associated with Body Glove no longer being backwardly integrated? What advantages are there?

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Diversification and Corporate Strategy

A company is diversified when it is in two or more lines of business

A diversified company needs a multi-industry, multi-business strategy

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Types of Diversification

Related
Related to WHAT?

Unrelated

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Types of Related Diversification

Operational Skills/ Capabilities Product Similarities Distribution Channels

Related Diversification

Similar Technology

Customer Use

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Common Responses to: Why Diversify?

Reduce risk
Increase CEOs
Wealth Ego/Prestige

Risk = variability in cash flow.

Other reasons?

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Cash Flow

Winter: Snowmobiles
Snowmobiles

Time

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Cash Flow

Summer: Jet Skis

Jet skis

Time

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TogetherCancels Risk
Jet skis Snowmobiles

Cash Flow

Time

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Why Diversify?

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Why Diversify?

To build shareholder value

Make 2 + 2 = 5

Diversification is capable of increasing shareholder value if it passes three tests:

1. Attractiveness Test 2. Cost of Entry Test 3. Better-Off Test

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When to Diversify?
The attractiveness test: Are the industries chosen for diversification structurally attractive or capable of being made attractive? The-cost-of entry test: The cost of entry must not capitalize all the future profits. The better-off test: Will the diversified business or the core business or both become more profitable?

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When to Diversify?
The better-off test:
Diversifications are successful when they produce one or more of the following:
Economies of scope:
Share tangible resources & human resources : Share intangible resources : Share Capabilities

Market Power - predatory pricing Balancing financial resources Reducing risk due to volatile earnings
counter cyclical businesses

Related diversification yields superior results compared to unrelated diversification.

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Concept: Economies of Scope

Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella Cost saving opportunities can stem from interrelationships anywhere along businesses value chains

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Capturing Benefits of Economies of Scope

Benefits dont occur by themselves!

Businesses with sharing potential must be reorganized to coordinate activities Means must be found to make skills transfer effective

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Types of Diversification

Related

Unrelated
Next

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What Is Unrelated Diversification?

Involves diversifying into businesses with

No strategic fit No meaningful value chain relationships

Approach is to venture into any business in which we think we can make a profit Firms pursuing unrelated diversification are often referred to as conglomerates

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Basic Premise of Unrelated Diversification

Any company that can be acquired on good financial terms and offers good prospects for profitability is a good business to diversify into!

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Appeal of Unrelated Diversification

Spreading business risk over different industries

Stability of profits -- Hard times in one industry may be offset by good times in another industry
If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced Capital resources can be directed to those industries offering best profit prospects

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Drawbacks of Unrelated Diversification

Tends to be less profitable than related diversification. Difficulties of competently managing many diverse businesses Opportunities for economies of scope are much less
Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)

Performance

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Diversification and Firm Performance

Dominant/Single Business

Related Businesses

Unrelated Businesses
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Level of Diversification

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Problems with Unrelated Diversification

Places significant demands on executives due to increased complexity. Conglomerate discount: The stock of a conglomerate sells less than the total of individual stocks would sell for if each business in the corporation sold its stock separately.

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Agenda
Designing the organization to capture economies of scope/synergy Means to pursue growth strategies:
Strategic partnerships Mergers & Acquisitions Internal development

Renewal strategies

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Capturing Benefits of Economies of Scope

Benefits dont occur by themselves!

Businesses with sharing potential must be reorganized to coordinate activities Means must be found to make skills transfer effective

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Rosabeth Moss Kanters Video

Clear focus on and understanding of their strengths. Flexible enough to exploit opportunities as they arise and willing to modify their organization. Open to collaborations with other organizations. Move quickly to develop new business ideas. Three mechanisms: Synergies Alliances or partnerships New ventures

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Synergy
Whole of a company is worth more than sum of its parts Cowboy management

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Questions
How did Nichols Institute attain synergies? How about Ford Motor Company? How did Banc One develop synergies through acquisitions? What is American Express One Enterprise program? How did GE attain synergies?

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Synergy Failures
Excessive in-house competition
not invented here Competitive myopia Waste of resources

Problems of chimneys
Loss of opportunity: dont look at environment Cannibalization Higher costs Slow decisions

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Synergy
You can build synergies within any company, small or large Developing synergies is especially important with acquisitions Synergies are also important in decentralized businesses The biggest synergy challenge is the corporation in many different industries

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Forms of Synergy
Resource Economies
Purchasing volume Distribution networks and channels Shared utilities

Marketing
Cross-marketing Data bases Product bundling Joint promotions Corporate image / umbrella image campaigns

Technology, products, innovation

Joint research Technology transfer Environmental scanning

Management competence, expertise

Learning from other units experience Systematic transfer of best ideas, best practices Talent pool

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Approaches for Synergies

One company identification campaigns Conferences for information, idea sharing Councils on broad issues Corporate office as synergy identifier, facilitator Task forces Mentor units Job rotations, career paths, etc. Internal benchmarking Common training in shared values, standards, methods

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Incentives for Synergies

Benefits from overall corporate results Career paths with mobility across units Resource pools for synergy projects Rewards and recognition for synergy contributions. Strong personal ties, relationships Spirit of cooperation

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Means to Pursue Growth Strategies

Mergers and Acquisitions Strategic Alliances Internal Development

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Mergers and Acquisitions

Merger: A legal transaction in which two or more organizations combine operations through an exchange of stock, but only one organization will actually remain. Acquisition: Purchase of an organization that is already in operation by another. Benefits: Quick Lower cost of entry Limitations: High takeover premiums High turnover

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Strategic Alliances
Arrangements in which two or more corporations join forces to form cooperative partnerships. Major form - Joint-Ventures When: each party has strengths to offset the others weaknesses Benefits: Less risky, lower investments, easier to finance. Limitations: difficult to coordinate

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Internal Development
Building new businesses from the ground up. Choice depends on:
height of entry barriers relatedness of the new business to existing ones speed and development costs risks stage of the industry life cycle

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Rosabeth Moss Kanters Video Alliances & Partnerships

Alliances and partnerships are very powerful ways to stretch capacity and exploit new opportunities when a company doesnt have all the resources or answers on its own. Importance of complementary strengths in successful alliances. 3 types of alliances:
Consortium Joint-venture Stakeholder alliance

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Three Types Of Alliances

Nonequity Alliance Contracts licensing supply & distribution agreements Equity Alliance Cross Equity Holdings partners own stakes in eachother

Joint Venture
Joint Equity Holdings independent firm is created

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How Strategic Alliances Create Value

Improve Current Operations

Value Creation

Shaping the Competitive Environment

Facilitating Entry and Exit

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Challenges to Value Creation and Allocation

Three Forms of Misappropriating Value

Adverse Selection

misrepresenting the value of inputs

Holdup

Moral Hazard

providing inputs of lesser value than promised

exploiting the transactionspecific investment of partners

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Deal Busters
Strategic shifts Internal politics Uneven commitment levels Power imbalances Benefits imbalances Premature trust Conflicting loyalties Undermanagement Hedging on resources, people, time for partnership

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Qualities of Successful Alliances

Importance Interdependence Investment Information Integration Institutionalization

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Renewal Strategies
Involves decisions to reduce operations and cut back to gain efficiencies and to improve performance. Retrenchment:
Downsizing Shutting down unprofitable plants Outsourcing unprofitable activities Implementing tighter cost and quality controls Changes in the organizational structure

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Renewal Strategies
More dramatic renewal strategies: Divestment Spin-off Liquidation

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Corporate Strategy Alternatives

Vertical Integration Diversify into Related Businesses PostDiversification Strategic Alternatives

Single Business Concentration

Diversify into Unrelated Businesses

Make new acquisitions

Divest weak units Restructure portfolio Retrench Liquidate

Diversify into Related & Unrelated Businesses

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Portfolio Management
Aids in managing the mix of businesses in the corporate portfolio. 2 models: The Boston Consulting (BCG) Matrix The GE Nine-Cell Matrix