Strategic Management Online

Module Name and Strategic Number Management 9791B Topic Name Business Level Strategy Formulation

The essence of strategy lies in creating tomorrow's competitive advantages faster than competitors mimic the ones you possess today. (Gary Hamel & C. K. Prahalad) This topic looks at business level strategy. This is the competitive strategy needed to achieve the organisation's strategic or overarching performance goals in alignment with its direction. Sustainable competitive advantage is achieved when organisations implement a value creating strategy that is grounded in their own unique resources, capabilities, and core competencies. Organisations achieve strategic competitiveness and earn aboveaverage returns when their unique core competencies are leveraged effectively to take advantage of opportunities in the external environment. In this topic we are concerned with how to compete successfully in each of the lines of business an organisation has chosen to engage in. The central thrust is how to build and improve the organisation's competitive position for each of its lines while being mindful of resource implications. An organisation has competitive advantage whenever it has an edge over rivals in attracting customers and defending against competitive forces. We want to develop competitive advantages that have some sustainability. Successful competitive strategies usually involve building uniquely strong or distinctive competencies in one or several areas crucial to success and using them to maintain a competitive edge over rivals. Some examples of distinctive competencies are: superior technology and/or product features better manufacturing technology and skills superior sales and distribution capabilities better customer service and convenience

We will consider several strategy models including those associated with product/market position, portfolio, product lifecycle, and of

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course Michael Porter's competitive strategy and value analysis models. The notes provided here are but a taster. To make informed and defensible strategy decisions, it is recommended you investigate the options more deeply by conducting further online and offline research. In addition you may like to read about perspectives on 'growth' in contemporary Australian Businesses (pdf 239k) which is available from the online site. Remember, your goal is to evaluate your options and choose that strategy that best allows your meeting of the organisation's goals. In addition, you must be able to defend your strategy choice to key stakeholders.

Offensive (Growth) Product-Market Strategies

Most vision, mission and goal statements reflect the desire to grow to increase revenue and profits through market share. In seeking growth, an organisation must consider its products and markets. Then it has to decide whether to continue what it is currently doing only do it better, or to establish new ventures. The product-market growth matrix, first proposed by Igor Ansoff, depicts these options. As you can see from the following diagram, four growth strategies are available. Ansoff's Matrix - Planning for Growth This well known marketing tool was first published in the Harvard Business Review (1957) in an article called Strategies for Diversification. It is used by strategists who have objectives for growth. Ansoffs matrix offers strategic choices. There are four main categories for selection. Market Penetration Here we market our existing products to our existing customers. This means increasing our revenue by, for example, promoting the product, repositioning the brand, and so on. However, the product is not altered and we do not seek any new customers. Market Development Here we market our existing product range in a new market. This means that the product remains the same, but it is marketed to a new audience. Exporting the product, or marketing it in a new region, are examples of market development.

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Product Development This is a new product to be marketed to our existing customers. Here we develop and innovate new product offerings to replace existing ones. Such products are then marketed to our existing customers. This often happens with the auto markets where existing models are updated or replaced and then marketed to existing customers. Diversification This is where we market completely new products to new customers. There are two types of diversification, namely related and unrelated diversification. Related diversification means that we remain in a market or industry with which we are familiar. For example, a soup manufacturer diversifies into cake manufacture (ie the food industry). Unrelated diversification is where we have no previous industry nor market experience. For example a soup manufacturer invests in the rail business. Ansoffs matrix is one of the most well know frameworks for deciding upon strategies for growth.

Ansoffs Matrix Exercise

Colorado Ricardo Mountain Bikes Colorado Ricardo Mountain Bikes was founded by Ricardo Francisco in 1992. He was a keen cyclist who spent his weekends with many friends cycling and having fun in the mountains of Colorado. He was very competitive and loved to take his bike off-road to test his strength and endurance. However he found that the bikes themselves kept on breaking-down under the strain. So Ricardo designed and built a number of bikes to overcome this problem. Many failed but eventually he came up with the ultimate in off-road bike, which he called the 'Colorado Ricardo'. People liked Ricardos bike and he was asked to build and sell them to other cyclists in the Colorado region. It went so well that soon he was able to give up his own job as a DJ to focus on the construction of the bikes. As the mountain bike sport took off, Ricardos business grew to produce 10,000 units in 1996. However sales have fallen annually since then and forecasted sales for 2000 are only 4,000 units. Ricardos company needs strategies for growth before it is too late. Use Ansoffs matrix to examine the options for Colorado Ricardo. Ansoffs Matrix Answer - Colorado Ricardo Mountain Bikes

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As you can see there are many strategic options for Ricardo. As a marketer you now have to decide upon which strategy or strategies the company should actually implement. This is based upon a number of factors such as competitive activity, available resources, the good old 'gut feeling', and others. Marketing Teacher will look at these over the next few weeks.
Product/Market Matrix

Present Markets New Markets

Present Products Market Penetration Market Development

New Products Product Development Diversification

Diversification Growth
This strategy entails adding products to the present line. These products may be compatible with the present products or unrelated. Related diversification is attractive when strategic fits are turned into competitive advantages. Strategic fit relationships are important because they provide cost efficiencies, skills and technology transfers, brand name advantages etc. An examples of a related diversifier that we can all relate to is Pepsico which owns Pepsi Cola and Mountain Dew softdrinks, Kentucky Fried Chicken, Pizza Hut and Taco Bell. Capability The idea of unrelated diversification is normally associated with a product-market assumption. However some diversifiers apply the same capabilities to businesses in a wide variety of productmarkets, giving the appearance of unrelated acquisitions, but in fact being extremely focussed on a particular capability. Consider Soul Pattinson moving into Internet Broadband provision and Publishing

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& Broadcasting Limited (PBL) into gambling with the purchase of the Crown Casino in 1999. Portfolio Diversification involves allocating resources across various products and markets. Portfolio models have been built to help guide resource allocations and priorities.

Drucker (1969) describes the main reasons for diversification as:

Internal Pressures 1. Psychologically people get tired of doing the same thing over and over again 2. Diversification is seen as a way to convert present internal cost centers into revenue producers External Pressures 1. The economy (or market) appears too small and confined to allow growth 2. The organisation's R&D turn up products which appear to have promise Christensen (1994) has considered the main reasons for diversification and identified their flaws. 1. Diversification is pursued to take advantage of an exceptional market opportunity. This type of diversification is characterised by high growth in the market, which has a tendency to reduce the rivalry in an industry, therefore reducing barriers to entry and may be even offering an opportunity to become a dominant player in the industry. However, a successful acquisition is based on a good fit between opportunity and company resources/capabilities. According to Christensen (1994) most companies in pursuit of this type of diversification only consider the opportunity aspect and do not consider adequately the fit of resources and capabilities. 2. Diversification is pursued because the current product market shows little growth potential. This is a problem for a company in a mature industry. The major problem is that mature industries have a requirement for different management skills than a rapidly growing business. As the author put it

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recognising the absence of opportunity in an existing business does not confer the capability to succeed in a new one. 3. Diversification is pursued to create a more stable stream of earnings. This is a strategy for companies who experience, for example, considerable seasonal variations, and the diversification product/market and/or partner is often in a business that is inversely correlated. Whilst there is potential to overcome the unstable income stream, this is often at considerable risk. As in (2) above, Christensen (1994) believes that the businesses are likely to be fundamentally different and require different management practices and company capabilities. 4. Diversification is pursued to save investors a double taxation of dividends through reinvestment in new businesses. The author suggests that in most instances the costs of entry and of learning how to run the new business significantly exceed the tax benefit. Institutional investors are even worse off because they are not subject to any significant amount of double taxation. 5. Diversification is pursued to exploit synergies between a business and its corporate parent. This is the only valid reason for pursuing diversification. Diversification strategies are less popular in recent years because companies have discovered that diversified businesses are hard to manage. The advice from gurus such as Porter (1980) and Peters & Waterman (1982) is to stick to the companys area of competence if this is possible. Whilst this may be good advice in developed economies, in emerging markets, the conglomerate is often able to provide the infrastructure that supports their activities, this being provided by governments and institutions in developed economies. Companies therefore must adapt their thinking according to the context they operate in. Issues of concern are the country's market for the factors of production, its legal system, customer protection and mechanisms for enforcing contracts. In situations where a system of caveat emptor prevails or where the financial markets are underdeveloped and weakly monitored, the conglomerate can foster the trust that other firms cannot muster. Indeed, the Indian and South Korean Governments have restricted the amount of capital that banks are permitted to loan to conglomerates (Khanna and Palepu, 1997). In this situation, the conglomerate is able to benefit by being diversified and would not benefit if it "stuck to the knitting".

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In recent years shareholders began to express the view that they are capable of diversifying their shares by holding portfolios. They do not need one company to do this on their behalf. Nevertheless, diversification is appropriate if the industry attractiveness is low and there is no chance of this changing. The cigarette industry in particular needed to opt for diversification with environmental pressures from governments, consumers, and doctors negatively affecting the industry. Concentric and horizontal diversification at least offers some form of synergy which the company can take advantage of. In consumer goods markets especially, horizontal diversification can benefit the company because they can utilise the fact that they are familiar with customers or a segment of the market. Concentric diversification can offer synergistic benefits in any organisational sub-system, for example in the production process, the inventory control, channels of distribution, the way a product is promoted, or with a common component. Collis and Montgomery (1998) point out that companies mistakenly enter businesses based on similarities of product rather than the resources that contribute to competitive advantage in each business. Concentric diversification based on resource leadership therefore would be a preferred diversification path according to the two writers. Conglomerate diversification is most appropriate when industry attractiveness is low, but the company business strength in the current product market is average. On the other hand when a company has strong competitive capabilities but the industry is not attractive, then concentric or horizontal diversification may be more appropriate because the company can benefit from its outstanding business strength.

Diversification & Product Portfolio Analysis

This component of business level strategy is concerned with our product portfolio or product lines. Portfolio matrix models can be useful in re-examining the present portfolio in preparation for cosidering a diversification strategy. The two primary models are the BCG Growth-Share Matrix (or Boston Box) and the McKinsey/GE Portfolio Matrix. The purpose of all portfolio matrix models is to help us understand and consider changes in our product portfolio. Both these models consider and display on a 2D graph, each major product line in terms of some measure of its market attractiveness and its relative competitive strength. The BCG Growth-Share Matrix model considers relatively simple variables: growth rate of the product as an indication of its attractiveness, and relative market share as an indication of its relative competitive strength. You can read a little more about the Boston Box at the end of this document.

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In addition, you should consult your own and any other current Strategic Management and/or Marketing text.

The McKinsey/GE Portfolio Matrix moves beyond the Boston Box and its advantage is that it allows strategists to include more factors than the strictly two-factor BCG. It considers two composite variables in a nine box arrangement which you can customise for example (a) product attractiveness (eg market size, growth rate, price sensitivity, barriers to entry/exit etc) and (b) competitive strength (eg, product's relative market share, technological strength, profit margins etc). Implications of the McKinsey/GE Matrix Products that fall within the upper left corner should be:

Accorded top investment priority Grown and built

Products that fall within the three diagonal cells should be:

Given medium investment priority Invested in at a level which will maintain position

Products that fall within the lower right corner are:

Candidates for harvesting or divestiture

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adapted from Buttery & Richter (2001:270)

A criticism of the McKinsey/GE Matrix is that like the BCG Matrix, it makes no allowance for changes in the product over time. The best test of the attractiveness of the product portfolio is whether the combined growth and profitability of the products in the portfolio will allow the organisation to attain its goals and performance objectives. Related to this overall question are such questions as: Does our portfolio contain enough products in attractive market segments? Does it contain too many 'question mark' products? Is the proportion of mature/declining products so great that growth will be sluggish? Are there some products we really don't need or should divest? Do we have our share of market leaders, or are we burdened with too many products in modest competitive positions? Is our portfolio of products and their relative risk/growth potential consistent with our business goals? Do the core products generate dependable profits and/or cash flow?

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Do we have enough cash-producing products to finance those needing investment Is the portfolio overly vulnerable to seasonal or recessionary influences? Does the portfolio put the business in good position for the future?

You need to consider diversification vs. concentration while working on your portfolio strategy. Remember that single product strategies can be very successful. Some reasons for this are: there is less ambiguity about who we are and what we do efforts of the total organisation are focussed and not stretched thin hands-on experience distinctive competence is more likely

However, having a single product puts all your eggs in one basket. Don't forget: markets, industries and technology may change diversification becomes more important when market growth rate slows building shareholder value is the ultimate justification for diversifying - or any strategy

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Investment Prescription Comparison
BCG Matrix

high growth high share (Star) high growth low share (Question Mark) low growth low share (Dog) low growth

McKinsey/GE Matrix high business attractiveness

Invest for growth

Improve or get out

high competitive strength high attractiveness low strength low attractiveness low strength low attractiveness

Divest

Harvest (Generate Cash)

high share (Cash cow) high strength Source: Viljoen and Dann (2991:440)

Harvesting Harvesting is the strategy of deliberately exchanging (percentage) points of market share for higher short-term cash flow and/or profits/opportunities. In other words harvesting is the practice of generating cash from products for which growth has been ruled out as a possible strategy. Several opinions have been offered concerning the situation in which harvesting is appropriate. According to the Boston Consulting Group (BCG), a product line with a low expected growth rate that also enjoys high market share is called a cash cow. Harvesting is the appropriate strategy for such a business. The following conditions for harvesting have been suggested by Kotler: 1. The market is stable or declining. 2. The product is not strategically important. 3. Attempts to increase market share would likely prove futile. 4. Total sales depend little on the unit. 5. Opportunity costs are significant.

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6. Chances are high that even with reduced support of the product it can continue to produce positive net cash flows, at least for a while. Schoeffler cautions that harvesting can lead to sudden collapse of a business and offers the following conditions for successful use of this strategy: 1. 2. 3. 4. Market maturity. Average or above average product quality. Reasonable market share. Average or above average price.

Strategy & Product Life Cycle Position

Strategic choice is affected by the product life cycle (PLC). Once a new product has been introduced, ideally it has a long and prosperous life. Each product usually follows a PLC; its shape or length however is unknown at the time of product launch. A typical PLC follows the shape shown below and distinguishes four phases: introduction, growth, maturity and decline The Product Lifecycle

Phase 1 - Introduction This phase follows the product development when considerable effort and financial resources have been ploughed into the product. At introduction, the product is made available for distribution and purchase. At this stage, sales tend to be slow; profits are often small or even negative, reflecting the large expenditure on distribution and promotion. As the product is new, the company initially pursues market development, especially as market segments are not developed at this early stage. Phase 2 - Growth

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Phase 2 is the growth stage where sales volume is expanding rapidly as customers try to adopt the product and of course profits are rising. Much cash is invested at this stage in the promotional and distribution effort. The aim at this early growth stage is one of market penetration. At later stages of the growth phase, the company is beginning to feel competitive rivalry, and so it is necessary to differentiate brands, product lines are often extended and improved, leading to further market development. Phase 3 - Maturity At the maturity stage, the sale volume is beginning to become static, and although profits are large, they are levelling off or even declining. At this stage companies frequently pursue product development strategies to modify the product or the marketing mix to extend the PLC. Also companies frequently attempt to increase consumption of the current product by means of market penetration and market development. Phase 4 - Decline At the decline stage, the product sales volume declines, often because technology has moved on or customer tastes have changed. At this stage of the PLC some companies decide to take advantage of previous expenditure by means of harvesting, or when the weak product is too expensive to carry, a retrenchment strategy may be called for.

Strategies based on Competitive Market Position

The appropriateness and feasibility of a strategy is highly dependent on the competitive status or position of the business organisation. In this respect, market leaders may contemplate different competitive strategies to market followers, challengers or nichers. Strategies of the Leader Source: Buttery & Richter (2001 Ch 6) with permission Industries generally have a market leader whose life is not easy. A market leader must be constantly vigilant to keep its leadership. It seeks optimal market share to ensure maximised profitability. Basically

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there are three competitive strategies and a number of tactics open to such organisations. 1. To expand the total market 2. To expand their own market share, even if total markets are not growing 3. To protect market share 4. To harvest another line in order to expand/protect Expand total market This can be achieved by attracting new users to the product, by finding new uses and by ensuring that current customers use more of the product. Expand market share This strategy is to the direct detriment of other players in the industry. Nevertheless, it is pursued because decision-makers believe that there is a positive correlation between market share and profitability (Buzzell et al. 1975). However, increased market share does not automatically improve profitability. Protect market share Market leaders can protect their market share by employing one of the six defence strategies: (a) position defence, (b) flanking defence, (c) pre-emptive defence, (d) counter-offensive defence, (e) mobile defence and (f) contraction defence. Market leaders can protect their own position best by ensuring that customers perceive their product continuously as good value, by keeping prices down and remaining innovative. They must eradicate any weaknesses and must never be satisfied with the status quo. Kotler et al. (1994) identify the following defence strategies for leaders. Position Defence an organisation builds a defence around its product. This is unlikely to represent a longterm strategy as no product can be defended indefinitely.

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Flanking Defence an organisation's strategy includes watching its flanks closely, thus not permitting competitors to find an unserved niche. Pre-Emptive Defence the motto here is that attack is the best form of defence. The leader strikes the challenger before they can attack

Strategies of the Challenger

Specific Strategies

Price-discount Cheaper goods Prestige goods Product proliferation Product innovation Improved services Distribution innovation Manufacturing cost reduction (efficiencies)

Intensive advertising promotion A challenger by definition attacks the market leader or other competitor in order to obtain the leadership position. This is because the challenger wishes to increase the organisation's market share. The attack is of benefit to the market if the competitors are not serving the market very well. Success for challengers cannot be guaranteed and can only be contemplated if the challenging company has some competitive advantage over the leader or other competitors. The competitive advantage may be derived from a new generation of excellent products, from cost quality leadership, from customer service, the alliance with another organisation or information technology. Kleenex for example outperformed Sorbent, the market leader, by producing a better, more absorbent product than the competitor. Generally, though, it may be easier to attack smaller competitors because they often cannot offer a sufficiently broad product line, or are starved of finance. At the same time, organisations may wish to attack the leader organisation, as this is where market share is. Therefore, the strategy a challenger chooses will depend on who is being targeted for the challenge. Marketers, such as Kotler (1994) and Trout and Ries (1982), suggest that there are five basic 'military

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style' attack strategies for challengers. They are frontal attack, flank attack, encirclement attack, bypass attack and guerrilla attack. Challenger Attack Strategies 1. Frontal attack when such a scenario is contemplated, the challenger has to match or even outperform the competitor in terms of products, distribution channels and financial resources which can be utilized towards promotion and pricing strategies. In a frontal attack, the challenger attacks the competitor on its strength rather than weakness. 2. If the challenger does not match the competitors resources, a frontal attack does not work well as a strategy. In such cases, a flank attack may be more appropriate. This means the challenger pursues the weak points of the competitor. A typical flanking attack will look for gaps in the competitors products, distribution networks, etc. and fill this hitherto unserved market. Kotler (1994) shows the case of Plumrose and QUF Industries in Australia who served the yogurt market, but Allowrie Farmers recognized a gap in the cottage cheese market and launched Fruche dairy desserts. Now the market leaders have difficulty even in establishing a rival brand. 3. Encirclement attack involves the challenger attacking the competitor from all directions. Like the frontal attack, this competitive strategy only makes sense if superior resources are at hand. In relation to this strategy, Seiko watches is cited which offers around 2300 models world-wide ensuring that they have a product suitable for every need, want and occasion. 4. The bypass attack involves the challenger biding their time until they have developed the next generation of technology and they are capable of leap-frogging the leader. A bypass attack may also take place when a challenger bypasses the leader into a new geographic market. 5. The guerilla attack is a final attack option, and one that is designed to unnerve the competitor. It is a strategy pursued by a company with inferior resources, but is not one that ultimately wins through and it is not inexpensive either. A guerilla attack involves such ploys as corporate raids, legal action, temporary price cuts, and temporary interference of sales personnel in the competitors territory.

Strategies of the Follower

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The larger companies in the market do not always wish to challenge the leader and/or the smaller competitors. In some industries, especially once they are mature, the competitive game is set up, and the players appreciate the benefits of a non-turbulent competitive environment. Such companies have learned that price wars, for example, involve a strategy of cutting the competitors throat and bleeding to death oneself. For this and other reasons, organisations may opt for a follower strategy rather than a challenger strategy. Followers can gain advantages which include learning from competitors errors and mistakes, having a readily developed primary market when they come on the scene, no expenses need to be spent on educating the channels or the consumers. Haines, Chandran & Parkhe (1989), therefore, conclude that followers can be very profitable. Once an organisation has chosen the strategy of a follower, it must decide to what extent it wishes to follow. Some very close followers also called cloners. Others which copy some factors but maintain a degree of differentiation are called imitators. As the follower is a target of the challenger for take over, challengers must have strategies, which ensure that they are cost efficient and capable of serving their customers well. Follower strategies include: cloner adapter imitator counterfeiter

Strategies of the Nicher

Nichers are those organisations that pursue small segments within a larger segment, sometimes on the basis of geographic location, sometimes on the basis of customers needs. Nichers can be very profitable partly because of the specialist knowledge they hold and partly because the price charged to customers can reflect the specialist nature of their expertise. Nichers need to identify those niches that are not serviced by the larger competitors, yet the niche must be big enough to make it worth the while of the company to develop a marketing mix, and it must be profitable and/or growing. The major risk involved in niching is that the chosen niche is attacked or is no longer desirable to customers. Most marketers therefore recommend a multi-niche strategy. Niches can include: 1. End-user specialist 2. Vertical-level specialist

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3. Geographic specialist 4. Product or product-line specialist 5. Product-feature specialist 6. Quality-price specialist 7. Service specialist 8. Specific-customers

Porter's Generic Competitive Strategy Model

In his book, Competitive Strategy (Free Press: 1980), Michael Porter identifies four competitive strategies. He argues that a business only needs to make two fundamental decisions in establishing its competitive advantage: (a) whether to compete primarily on price (he says "cost") or to compete through providing some distinctive points of differentiation that justify higher prices, and (b) how broad a market target it will aim at (its competitive scope). These two choices define the following four generic competitive strategies which he argues cover the fundamental range of choices.

Adapted from Porter (1985)

Overall Price (Cost) Leadership: appealing to a broad crosssection of the market by providing standardised products or services at the lowest price. Implementing this strategy successfully requires continual, exceptional efforts to reduce costs - without excluding product features and services that buyers consider essential. It also requires achieving cost advantages in ways that are hard for competitors to copy or match. Some conditions that tend to make this strategy an attractive choice are: Industry's product is much the same from seller to seller Marketplace is dominated by price competition Few ways to achieve product differentiation that have much value to buyers Most buyers use product in same ways - common user requirements

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Low switching costs for buyers Buyers are large and have significant bargaining power

Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer segment and competing with lowest prices, which, again, requires having lower cost structure than competitors (e.g., a single, small shop on a side-street in Reseda that orders electronic equipment at low prices, or the cheapest automobile made in the former Bulgaria). Some conditions that tend to favor focus (either cost or differentiation focus) are: The business is new and/or has modest resources We lack the capability to go after a wider part of the total market Buyers' needs or uses of the item are diverse; there are many different niches and segments in the industry Buyer segments differ widely in size, growth rate, profitability, and intensity in the five competitive forces, making some segments more attractive than others Industry leaders don't see the niche as crucial to their own success Few or no other rivals are attempting to specialize in the same target segment

Differentiation: appealing to a broad cross-section of the market through offering differentiating features that make customers willing to pay premium prices (eg superior technology, quality, prestige, special features, service, convenience). Success with this type of strategy requires differentiation features that are hard or expensive for competitors to duplicate. Sustainable differentiation usually comes from advantages in core competencies, unique company resources or capabilities such as intellectual property (IP), and superior management of value chain activities. Some conditions that tend to favour differentiation strategies are: There are many ways to differentiate the product/service that buyers think have value Buyers needs or uses of the product/service are diverse Not many rivals are following a similar differentiation strategy Technological change and product innovations are rapid and competition emphasises the latest product features.

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Differentiation Focus: a market niche strategy, concentrating on a narrow customer segment and competing through differentiating features (eg a high-fashion women's clothing boutique on Rodeo Drive or the Champs Elyees or Ferrari) Porter lays out the required skills and resources, organisational elements and risks associated with each of his strategies in the table below. (NB - this is a shorthand version only).

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Competitive Strategy

Overall Cost Leadership

Required Skills & Organizational Resources Elements Sustained capital Tight cost control investment and Frequent, detailed access to capital reports Process engineering Structured skills organization and Intensive responsibilities supervision of labor Incentives based on Products designed meeting strict for ease of quantitative targets manufacture Low-cost distribution system

Associated Risks

Differentiatio n

Focus (or niche)

Technological change that nullifies past investments or learning Low-cost learning by industry newcomers or followers through imitation, or through their ability to invest in state-of-the-art facilities Inability to see required product or marketing change because of the attention placed on cost Inflation in costs that narrow the firms ability to maintain enough of a price differential to offset competitors brand images or other approaches to differentiation Strong marketing Strong coordination The cost differential abilities among functions in between low-cost Product engineering R&D, product competitors and the Creative flair development, and differentiated firm Strong capability in marketing becomes too great basic research Subjective for differentiation to Corporate measurement and hold brand loyalty. reputation for incentives instead of Buyers thus sacrifice quality or quantitative some of the features, technological measures services, or image leadership Amenities to attract possessed by the Long tradition in the highly skilled labor, differentiated firm for industry or unique scientists, or creativelarge cost savings. combination of skills people Buyers need for the drawn from other differentiating factor businesses falls. This can occur Strong cooperation as buyers become from channels more sophisticated. Imitation narrows perceived differentiation, a common occurrence as industries mature. Combination of the Combination of the The cost differential above policies above policies between broad-range directed at the directed at the competitors and the particular strategic particular strategic focused firm widens target target to eliminate the cost

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Competitive Strategy Required Skills & Resources Organizational Elements Associated Risks advantages of serving a narrow target or to offset the differentiation achieved by focus. The differences in desired products or services between the strategic target and the market as a whole narrows. Competitors find submarkets within the strategic target and outfocus the focuser

A fifth strategy alternative is added to Porter's model by some other sources. This is the Hybrid strategy. Hybrid or Best-Cost Provider Strategy Giving customers the best cost/value combination, by incorporating key good-or-better product characteristics at a lower cost than competitors. This strategy is a mixture or hybrid of low-cost and differentiation, and targeting a segment of value-conscious buyers that is usually larger than a market niche, but smaller than a broad market. Successful implementation of this strategy requires the company to have the resources, skills, capabilities (and possibly luck) to incorporate up- scale features at lower cost than competitors. Note that Porter would argue that this strategy is often temporary, and that a business should choose and achieve one of the four generic competitive strategies above. Otherwise, the business is stuck in the middle of the competitive marketplace and will be out-performed by competitors who choose and excel in one of the fundamental strategies. However, others present examples of companies such as Honda and Toyota, demonstrate that they are able to achieve both cost leadership and differentiation simultaneously, together with stability.

Criticisms of Porter's Framework

Here are but a few of the criticisms made of Porters generic strategy framework. The assumption that industry affects profitability. Porter asserts that some industries are naturally more profitable than

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others. The resource / competence-based approach argues that it is the individual organisation which determines its own profitability. The concept of being 'stuck in the middle' Porter argues that organisations must choose between either a differentiation or a cost leadership strategy. An organisation which is 'stuck in the middle' of the two will not achieve competitive advantage. Evidence, however, suggests that companies can combine low of cost with differentiation. Toyota have very low production costs but a reputation for high quality which allows them to charge a premium price for their motor cars. This is known as a hybrid strategy and works for them. Low cost does not sell products This criticism asserts that low cost does not in itself sell products customers must wish to buy them on the basis of quality or price. Despite these criticisms Porter's generic strategy framework is useful in understanding how businesses achieve competitive advantage.

Which of Porter's Strategies is most Appropriate?

The Value Chain
adapted from:

http://www.mgt.smsu.edu/mgt487/internal.htm The Value Chain is another contribution from Michael Porter and the Industrial Organisation School of Thought and is used in conjunction with Porter's generic competitive strategies. It breaks all of the organisation's processes (input-output) and activities up and tries to

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show where competitive advantage is located. Competitive advantage is gained because of its internal strengths and and competencies. The essence of the Value Chain model can be summarised succinctly as follows. Each transformational (ie input to output) activity should add value to the customer, hence the model's name. The greater the value added by these activities, the wider the organisation's profit margin will be because of its competitive (cost) advantages (each activity ties up assets and incurs costs, and the value-chain-analysis assigns costs to each which can be analysed and benchmarked). An organisation's strategic managers should choose one or two of these activities, either primary or secondary, in which to excel. They will resource it/them appropriately so that this can be achieved. This will focus employees' efforts and produce a "claim to fame" activity for the organisation. Then managers should insure that the organisation performs the remaining activities at least at an average level for the industry from benchmarking and competitor research and analysis. From the Industrial Organisation perspective, the activity to emphasise would be identified from a careful examination of the organisations internal strengths and weaknesses compared to those of its close industry competitors. Read some of the key questions to ask when assessing an organisation's value chain here.

Value Chain Questions

The key questions to ask when assessing an organisation's value chain are listed below for your convenience. Assessing the Primary Activities in the Value Chain INBOUND LOGISTICS Is there a materials control system? How well does it work? What type of inventory control system is there? How well does it work? How are raw materials handled and warehoused? How efficiently are raw materials handled and warehoused? OPERATIONS How productive is our equipment compared to our competitor's? What type of plant layout is used? How efficient is it? Are production control systems in place to control quality and reduce costs? How efficient and effective are they in doing so? Are we using the appropriate level of automation in our production processes? OUTBOUND LOGISTICS

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Are finished products delivered in a timely fashion to customers? Are finished products efficiently delivered to customers? Are finished products warehoused efficiently? MARKETING AND SALES Is marketing research effectively used to identify customer segments and needs? Are sales promotions and advertising innovative? Have alternative distribution channels been evaluated? How competent is the sales force? Is their level of motivation as high as it can be? Does our organization present an image of quality to our customers? Does our organization have a favorable reputation? How brand loyal are our customers? Does our customer brand loyalty need improvement? Do we dominate the various market segments in which we compete? CUSTOMER SERVICE How well do we solicit customer input for product improvements? How promptly and effectively are customer complaints handled? Are our product warranty and guarantee policies appropriate? How effectively do we train employees in customer education and service issues? How well do we provide replacement parts and repair services? Assessing the Support Activities in the Value Chain PROCUREMENT Have we developed alternate sources for obtaining needed resources? Are resources procured in a timely fashion At lowest possible cost? At acceptable quality levels? How efficient and effective are our procedures for procuring large capital expenditure resources such as plant, machinery, and buildings? Are criteria in place for deciding on lease-versus-purchase decisions? Have we established sound long-term relationships with reliable suppliers? TECHNOLOGY DEVELOPMENT How successful have our research and development activities been in product and process innovations?

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Is the relationship between R&D employees and other departments strong and reliable? Have technology development activities been able to meet critical deadlines? What is the quality of our organization's laboratories and other research facilities? How qualified and trained are our laboratory technicians and scientists? Does our organizational culture encourage creativity and innovation? HUMAN RESOURCE MANAGEMENT How effective are our procedures for recruiting, selecting, orienting, and training employees? Are there appropriate employee promotion policies in place and are they used effectively? How appropriate are reward systems for motivating and challenging employees? Do we have a work environment that minimizes absenteeism and keeps turnover at reasonable levels? Are union-organization relations acceptable? Do managers and technical personnel actively participate in professional organizations? Are levels of employee motivation, job commitment, and job satisfaction acceptable? ORGANISATIONAL INFRASTRUCTURE Is our organization able to identify potential external opportunities and threats? Does our strategic planning system facilitate and enhance the accomplishment of organizational goals? Are value chain activities coordinated and integrated throughout the organization? Can we obtain relatively low-cost funds for capital expenditures and working capital? Does our information system support strategic and operational decision making? Does our information system provide timely and accurate information on general environmental trends and competitive conditions? Do we have good relations with our stakeholders, including public policy makers and interest groups? Do we have a good public image of being a responsible corporate citizen?

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In addition, you should seek out examples of how value has been analysed in a real organisation and be capable of undertaking such an evaluation.

Generic strategies, core competences and the value chain

Generic strategies and core competences are linked to the way in which the organisation organises its value adding activities. A core competence or distinctive capability is a unique attribute, or bundle of attributes which give competitive advantage to the organisation in possession of them. Core competences arise from using resources and competences distinctively and differently to competitors. Core competences which are based upon knowledge, information, skills, technology, structure, relationships, and reputation and so on add to the perceived value attributed to the organisation's products and services by customers. A competence is an attribute (skill, knowledge, technology, process) found in most of the organisations in an industry and necessary for their survival. Competences are based upon the organisation's resources and processes.

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Value chain activity

Core competence and Core competence and differentiation strategy cost/price-based strategies Control of quality of Strict control of cost of materials materials Total Quality Lowering production Management control costs, high volume of quality of productionproduction Sales on the basis of Achieving high volume quality technology, sales through performance, advertising and reputation, outlets etc. promotion Ensuring efficient Maintaining low distribution distribution costs Adding to product Minimal service to value by high quality keep costs low and differentiated service Emphasis on quality Training to create a culture, skills which emphasises quality, customer service, product development Developing new products, improving product quality, improving product performance, improving customer service Obtaining high quality resources and materials Emphasis on efficiency and cost reduction Training to reduce costs

Primary activities Inbound logistics Operations

Marketing

Outbound logistics Service

Support activities Organisation infrastructure Human resource development

Technology development

Reducing production costs and increasing efficiency

Procurement

Obtaining low cost resources and materials.

adapted from Stonehouse et al (2000)

Competitive Tactics
Although a choice of one of Porter's generic competitive strategies discussed in the linked section above can provide the foundation for a business strategy, there are many variations and elaborations.

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Among these are various tactics that may be useful (in general, tactics are shorter in time horizon and narrower in scope than strategies). Two categories of tactics are those dealing with timing (when to enter a market) and market location (where and how to enter and/or defend). 1. Timing Tactics: When to make a strategic move is often as important as what move to make. We often speak of firstmovers (ie, the first to provide a product or service), secondmovers or rapid followers, and late movers (wait-and-see). Each tactic can have advantages and disadvantages:
o

Being a first-mover can have major strategic advantages when: (a) doing so builds an important image and reputation with buyers; (b) early commitments to new technologies, new-style components, distribution channels, etc, can produce an absolute cost advantage over rivals; (c) first-time customers remain strongly loyal to pioneering organisations in making repeat purchases; and (d) moving first constitutes a pre-emptive strike, making imitation and entry hard or unlikely. However, being a second- or late-mover isn't necessarily a disadvantage. There are cases in which the firstmover's skills, technology, and actions are easily copied or even surpassed by later-movers, allowing them to catch or pass the first-mover in a relatively short period, while having the advantage of minimising risks by waiting until a new market is established. Sometimes, there are advantages to being an adept follower rather than a first-mover, eg, when: (a) pioneering leadership is more costly than imitating and only modest experience curve benefits accrue to the leader (followers can end up with lower costs than the first-mover under some conditions); (b) the products of an innovator are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower to win disenchanted buyers away from the leader with better performing products; (c) technology is advancing rapidly, giving fast followers the opening to leapfrog a first-mover's products with more attractive and full-featured second and third generation products; (d) when consumers are not quite ready to accept a new product and significant time and promotion costs may need to be expended by the product innovator before

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the market truly embraces the product; and (e) the first-mover ignores market segments that can be picked up easily.

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2. Some Defensive Tactics are:
o

Raise Structural Barriers: Block avenues challengers can take in mounting an offensive. Increase Expected Retaliation: Signal challengers that there is threat of strong retaliation if they attack. Lower Inducement for Attacks: Eg, lower profits to make things less attractive (including use of accounting techniques to obscure true profitability). Keeping prices very low gives a new entrant little profit incentive to enter.

The general experience is that any competitive advantage currently held will eventually be eroded by the actions of competent, resourceful competitors. Therefore, to sustain its initial advantage, an organisation must use both defensive and offensive strategies, in elaborating on its basic competitive strategy.

Strategies to Avoid if Possible

1. Follow the leader - when the market has no more room for copycat products and look-alike competitors (can work fine, but not without careful consideration of our particular strengths and weaknesses) 2. Try to do everything - establishing many weak market positions instead of a few strong ones 3. Pumping more money into a losing hand 4. Arms race - eg, some airlines - attacking the market leaders head-on without having either a good competitive advantage or adequate financial strength; making such aggressive attempts to take market share that rivals are provoked into strong retaliation and a costly "arms race." Such battles seldom produce a substantial change in market shares; usual outcome is higher costs and profitless sales growth 5. Using debt to finance cost-saving investments in new facilities and equipment, then getting trapped with high fixed costs when demand turns down, excess capacity appears, and cash flows are tight 6. Spending more money on marketing and sales promotions to try to get around problems with product quality and performance

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7. Allocating R&D efforts to weak products instead of strong products 8. Going after the high end of the market without having the reputation to attract buyers looking for name-brand, prestige goods

Strategy Choice Considerations

adapted from Buttery & Richter (2001:291) Decision-makers must subject the strategic options to a rigorous review that includes considerations of market opportunity, sustainability of competitive advantage, existence of capabilities, resources, value and acceptability to stakeholders. Some techniques that can be applied to determine the existence of long-term market opportunities include life cycle and portfolio analyses. The sources of competitive advantage and their presence in the organisation, assisted by value chain analysis and benchmarking may aid decision-makers to determine the sustainability of competitive advantage. Whether the organisation has the capabilities and resources to implement strategies successfully depends on whether it is feasible, understood and accepted by employees and managers, and consistent at all levels. Whether feasibility can be established depends on the match between the SWOT in the form of a TOWS matrix, a strategy's suitability may also depend on its competitive position relative to its business strengths. This topic also matched the GE matrix with suitable strategies and discussed competitive strategies for leaders, followers, challengers and nichers. However, the firm must think outside the square and adopt a view that resourcefulness is often as useful as resources. Strategy must be acceptable to managers and staff and must be consistent between various levels. Risks and returns of a strategy must be acceptable to stakeholders. Stockholders are interested in the risk return profile of the firm and how it may be changed by new strategic thrust. Remember that you need to build a business case around everything that you decide. Quite a good document is included for your consideration in this regard. While it has a public sector focus, those of you in a commercial situation can substitute where appropriate.

Tools to Aid Strategy Decisions

As a practical matter, you do not have to use complex decisionmaking methods for this course, although they can be helpful and important in practice. However, you are expected to identify major advantages and disadvantages (+'s and -'s) of alternatives, and

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present a reasonable explanation for the choice to your client (in this case, your module facilitator). You can use a strategic alternatives template to help you in this regard. This allows you to: specify criteria you believe important weight each criterion according to its relative importance with an average value of 1 rate each strategy according to its potential for fulfilling each criterion between 1-5 * Performance Rating Scale 1. 2. 3. 4. 5. Doesn't meet criterion Minimally Partially Largely Completely

The BCG Matrix or Boston Box

adapted from: http://www.themanager.org/Models/BostonBox.htm

The Growth-Share-Matrix commonly known as the Boston Box was developed by the Boston Consulting Group (BCG) in the 1970's. It is a tool of portfolio management and evaluates either the business units within a corporation, or the products of an particular business, according to their market share with their industry and to their growth prospects within that industry. This reveals insights about their financial needs or their ability to generate cash for the organisation. The Boston Box model depends on the following premises: 1. The profits and cash generated from a product or business unit are a function of its market share (profits and market share correlate directly). 2. Revenue growth requires investment. In the context of the Boston Box, investments are mainly expenses for a move into a new business or at the product level, marketing, distribution and development. The extent of these expenses depends on the general market growth for that business or product. 3. High market shares require additional investments. 4. No business or product can grow infinitely within its industry or market.

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As a result, the profitability of a business or product depends on its market share, the growth rate of its industry or market and on its position in the industry or product lifecycle. Typical Question Marks are new businesses or products in industries or markets with a high growth rate. They enter the industry or market with a small market share in relation to the industry or market leader. In order to improve their position, it takes investments, especially in marketing. Normally, such businesses or products do not generate profits. Questions Marks that develop successfully achieve higher industry or market shares and finally become Stars. Stars are often businesses or products in their growth phase. In order to maintain their high share in a growing market, they require further investments. During phases of high growth, most of these businesses or products are not highly profitable. As soon as market growth slows down and the market becomes saturated, businesses or products with a high market share become Cash Cows. Due to the slow industry or market growth rate, such businesses or products need very little investment. They generate a positive cash flow for their corporation or strategic business unit. In a well balanced portfolio, the cash flow from a Cash Cow should be used for investments into Question Marks and Stars. Dogs are businesses or products that have a low market share in industries or markets with a low growth rate. Businesses or products from all other categories can become Dogs. Despite their poor prospects, Dogs can be profitable. Many former Cash Cows are well positioned and enjoy a stable demand, although there are newer product releases with a much higher market volume. It is necessary to keep in mind that this model is relatively simplistic. All it does is to choose one element from each of the two parts of strategic analysis internal and external analysis. It puts them on two axes and distinguishes high and low. The model can reveal valuable insights on the actual composition of a corporations strategic business unit portfolio or a business unit's product portfolio, and on the activities necessary to improve it. However, it would be a mistake not to go any further. Many businesses or business unit products and services are not really profitable and

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probably will never be. They are necessary to complement profitable core businesses or products, to differentiate from competitors or simply are a value added proposition that the customer expects. On the other hand, corporates or business units could have profitable businesses or products in their portfolio that are not related to all their other businesses or products and services. Does it really make sense to stick to them however profitable? or is it advisable to sell that Cash Cow and to use the price to invest in more related products? What are your feelings? Another weakness of the Boston Box is inherent in the historical context in which it was developed. The early 1970's was a period of relatively stable growth. At that time, strategic decisions were focused on reactions to changes in demand, on growth, and on diversification as a means of minimising risk. The Boston Box is an excellent model for such situations as its basic premise is that high market share leads to high profits. This is especially applicable to volume dependent industries. However today as you know, the situation has changed in many of our industries. Only those businesses who are profitable in their sectors will be able to extent their market share. The Boston Box does not take into consideration critical success factors like specialisation, flexibility, and customer orientation. You can read more about the BCG Matrix or Boston Box in any good Strategic Management or Marketing text.

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