Module 6 - Matching Strategy to a Company's Situation
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Transcript of Module 6 - Matching Strategy to a Company's Situation
Module 6
Matching Strategy to a
Company’s Situation
Module Outline
• Strategies for Competing in Emerging Industries
• Strategies for Competing in a Maturing Industry
• Strategies for Firms in Declining Industries
• Strategies for Firms in Fragmented Industries
• Strategies for Competing in International Markets
• Strategies for Industry Leaders
• Strategies for Runner-Up Firms
• Strategies for Weak Businesses
• Thirteen Commandments for Crafting strategies
Overview: Matching Strategy to a
Company’s Situation
• The most important drivers shaping a firm’s
strategic options falls into 2 categories:
1. Nature on industry and competitive conditions
2. Firm’s own competitive capabilities market
position, and best opportunities
• Matching strategy to a company’s situation
can be examine via
– 5 classic types of industry environments
– 3 classic types of company situations
What is an Emerging Industry?
• Market is new and unproven
• Buyers first-time users
• Companies in grow-and-build mode
• Technological know-how emerging
• Information about customers and market
conditions hard to get
• Uncertainty about how fast demand for
product will grow and how big market will get
• First-generation product improved rapidly
Features of an Emerging Industry
• No “rules of the game”
• Technological know-how is proprietary
• Entry barriers tend to be low
• Experience curve effects often permit significant cost reductions as volume builds
• Marketing task involves inducing initial purchase and overcoming customer concerns
• Difficulties in securing raw materials
• Firms run short of funds for R&D and start-up
Strategy Options: Competing in
Emerging Industries
• Try to win early race for industry leadership by
employing a bold, creative strategy
• Push hard to
– Perfect technology
– Improve product quality
– Develop attractive performance features
– Shape rules of competition
• Try to capture potential first-mover advantages
• Pursue new
– Customer and user applications
– Geographical areas to enter
Strategy Options: Competing in
Emerging Industries
• Shift advertising focus from building product
awareness to
– increasing frequency of use, and
– Creating brand loyalty
• Move quickly when technological uncertainty
clears and a “dominant” technology emerges
• Use price cuts to attract price-sensitive buyers
• Expect established firms looking for growth
opportunities to enter market when risk lessens
Strategy Options: Competing in
Emerging Industries
• Strategic success in an emerging industry
calls for
– Bold entrepreneurship
– Willingness to pioneer and take risks
– Intuitive feel for what buyer will like and how they
will use product
– Quick response to new developments
– Opportunistic strategy-making
Features: Transitioning to Industry
Maturity
• Slowing demand generates head-to-head
competition for market share
• Buyers are more sophisticated, driving harder
bargain on repeat purchases
• Greater emphasis on cost and service
• Firms have “topping out” problem in adding
production capacity
• Product innovation and new end-use applications
harder to come by
• International competition increases
• Industry profitability falls
Transition to Industry Maturity
Principle
• Slower rates of market growth cause
competition pressures to intensify, often
producing a
– Shake-out of weaker competitors, and
– Slimmer profit margins industry-wide
Strategy Options: Competing in a
Maturing Industry
• Prune product line
• Emphasize process innovation
• Push hard for cost reduction
• Find ways to increase sales to present
customers
• Purchase rival firms at bargain prices
• Expand internationally
Strategic Mistakes in a Maturing
Industry
• Not pursuing a strategy which gives firm strong
image with buyers –
Stuck in the Middle!
• Putting more emphasize on boosting short-term
profits than on strengthening long-term competitive
position
• Waiting too long to respond to price-cutting by
aggressive rivals
• Getting caught with too much excess capacity
• Failing to aggressively pursue cost reductions
Strategic Management Principle
One of the greatest strategic mistakes firm
can make in a maturing industry is pursuing
a compromise between low-cost,
differentiation, and focusing such that it ends
up “Stuck in the Middle” with little chance of
attaining industry leadership!
Features of Mature Industries
• Demand grows slower than economy-wide
average or begins declining
• Competitive pressures intensify, resulting in
heated battle for market share
• To grow and prosper, firm must take market
share away from rivals
• Industry consolidates to smaller number of
key players
Strategic Options: Competing in a
Mature / Declining Industry
• Pursue focus strategy by exploiting growth
segments within industry
• Pursue differentiation strategy
• Work diligently to drive costs down by
– Outsourcing activities
– Redesigning internal business processes
– Consolidating under-utilized production facilities
– Closing low-volume, high-cost distribution outlets
– Cutting marginal activities out of value chain
Strategic Pitfalls of Competing in a
Stagnant Industry
• Getting trapped in profitless war of attrition
• Diverting too much cash out of firm too
quickly, accelerating its demise
• Over-optimism about industry’s future
Competitive Features of Fragmented
Industries
• Absence of visible market leaders
• Low entry barriers and absence of scale economies
• Market for product is local
• Small quantities of customized products required
• Market is so large and diverse it takes numerous
firms to accommodate buyer needs
• High transportation costs prevent serving large
market area
• Local regulatory requirements make each
geographic area unique
• Newness of industry
Examples: Fragmented Industries
• Book publishing
• Landscaping and plant nurseries
• Auto repair
• Restaurant industry
• Public accounting
• Women’s dresses
• Meat packing
• Paperboard boxes
• Hotels and motels
• furniture
Strategic Options: Competing in a
Fragmented Industry
• Construct and operate “formula” facilities
• Become a low-cost producer
• Increase customer value via vertical
integration
• Specialized by product type
• Specialized by customer type
• Focus on limited geographic area
Strategic Management Principle
In fragmented industries, competitors
usually have strategic latitude to
1. Compete broadly or to focus
2. Pursue either a low-cost or differentiation-
based competitive advantage
What is the Motivation for Competing
Internationally?
• Desire to seek out new markets to sustain
growth in sales and profits
• Desire to achieve lower costs to strengthen
firm’s long-term competitive position
• Desire to access natural resource deposits in
other countries
Strategic Management Principle
Competing in international markets posses a
bigger strategy-making challenge than
competing in only the company’s home
market!
Competitive Features of International
Markets
• Market differences among countries
• Cost differences among countries
• Differences in host government trade policies
Competitive Features of International
Markets
• Market differences among countries
– Buyer needs and habits
– Distribution channels
– Long-run growth potential
– Driving forces
– Competitive pressures
Competitive Features of International
Markets
• Cost differences among countries
– Wage rates
– Worker productivity
– Natural resource availability
– Inflation rates
– Energy costs
– Tax rates
– Fluctuation currency exchange rates
Competitive Features of International
Markets
• Differences in host government trade policies
– Import tariffs or quotas
– Local content requirements
– Price control policies
– Other regulations
• Technical standards
• Product certification
• Minority ownership by local citizens
• Prior approval of capital spending projects
• Withdrawal of funds from country
Manufacturing Vs. Brand Share
• Firm with biggest manufacturing share best
positioned to be –
– The global low-cost producer
• A firm’s manufacturing share can be bigger
than its own branded share since it makes
brands for other sellers
– Extra manufacturing volume may open door to
achieving lower costs
Types of International Competition
• Multi-country Competition
• Global Competition
Characteristics of Multi-Country
Competition
• Competition in each national market is
independent of competition in other national
markets
• No “international” market
• Rivals compete for market leadership country
by country
Characteristics of Global Competition
• Competitive conditions across national
markets are linked to form an international
market
• A firm’s competitive position in one country
affects and is affected by its position in other
countries
• Leading competitors compete head-to-head
in numerous countries
Strategy Options for Competing
Internationally
• License foreign firm to use one’s technology
or to produce and distribute one’s products
• Maintain a national production base and
export goods to foreign markets
• Multi-country strategy
• Global low-cost strategy
• Global differentiation strategy
• Global focus strategy
Multi-Country Strategy
• Matches strategy to host country circumstances
• Works best when
– Market conditions are diverse among countries
– Buyers insist on highly customized products
– Buyer demand for product exists in few markets
– Host government regulations preclude uniform global
approach
• Two drawbacks:
1. Entails little coordination across countries
2. Not tightly based on competitive advantage
Global Strategy
• Works best when
– Great similarities in products and buyer
requirements exist among countries
• Involves
– Coordinating firm’s strategic moves worldwide
– Selling in many, if not all, nations where
significant buyer demand exists
• Allows firm to concentrate on securing
competitive advantage over
– Both international and domestic rivals
Competitive Strategy Principle
A multi-country strategy is appropriate for
industries where multi-country competition
dominates!
A global strategy works best in markets that
are globally competitive or beginning to
globalize!
Global Strategy and Competitive
Advantage
• A global strategy provides two avenues to
gain competitive advantage
1. Locating activities among nations in ways that
lower costs or helps achieve greater product
differentiation
2. Coordinating dispersed activities in ways
domestic-only competitor cannot
Principle of Competitive Markets
With a global strategy, an international
competitor can pursue sustainable
competitive advantage by locating activities
in the most advantageous countries and
coordinating strategic actions worldwide. A
domestic-only competitor forfeits such
opportunities!
Locating Activities to Build a Global
Advantage
• To build competitive advantage via location,
firm must consider
– Whether to concentrate each activity
• In one or two countries, or
• Disperse performance of activity to many
nations
– In which countries to locate activities
Locating Activities to Build a Global
Advantage
• Activities tend to be concentrated when
– Scale economies / experience curve effects exist
– Coordination of related activities is enhanced
• Dispersing activities works best when
– Buyer-related activities must take place close to
buyers
– Transportation costs, scale diseconomies, and
trade barriers make centralization expensive
– It buffers fluctuating exchange rates, supply
interruptions, and adverse political developments
Coordinating Activities and Strategic
Moves
• Competitive advantage can be built via
– Knowledge and expertise accumulated at one
location can be transferred to other locations
– Production can be shifted from one location to
another to take advantage of most favorable cast
or trade conditions
– Brand reputation can be enhanced by positioning
products with same differentiating attribute on a
worldwide basis
– Global competitor can choose where and how to
challenge rivals
Strategic Alliances
Concept
• Agreements between firms to do business
together in ways that go beyond normal fir-
to-firm dealings but fall short of merger or full
partnership
Competitive Strategy Principle
• More effective in combating competitive
disadvantage than in gaining competitive
advantage!
Strategic Alliances
• An alliance can take form of
– Joint research efforts
– Technology-sharing
– Joint use of production facilities
– Marketing one another’s products
– Jointly manufacturing components of assembling finished products
• Alliances enable firms in same industry based in different countries to compete on a
– More global scale, while
– Preserving their independence
Benefits of Strategic Alliances
• Allies may gain economies scale in
production and / or marketing
• Allies can share and / or transfer technical
and manufacturing expertise
• Alliances may allow access to markets
previously blocked by governmental barriers
• Allies can direct combines competitive
energies into building competitive advantage
and defeating mutual rivals
Pitfalls of Strategic Alliances
• Effective coordinating is challenging and time
consuming
• Language and cultural barriers and problems of
mistrust may exist
• Relationships may cool and benefits never realized
• Collaboration in competitively sensitive areas can
be difficult
• Clash of egos and company cultures may occur
• One firm may become too dependent on another
firm’s capabilities
Guidelines: Forming Strategic Alliances
• Pick a compatible partner
• Choose an ally whose products and market
strongholds complement firm’s own
products and customers
• Learn thoroughly and rapidly about partner’s
technology and management
• Be careful not to divulge competitively
sensitive information to a partner
• View alliances as temporary
How Strategic Intent Varies Among
Industry Competitors
Global Dominance
– Long-term strategic intent is pursuing a global strategy
Dominance in Home Market
– Primary strategic objective is defending home country
market
Host Country Responsiveness
– Primary strategic orientation is pursuing a multi-country
strategy
Domestic-Only
– Strategic intent is focused on home country market
Concept: Profit Sanctuaries
• Profit Sanctuaries are country markets
where a firm
– Has strong or protected market position, and
– Derives substantial profits
• A country is a firm’s profit sanctuary when it
derives a substantial fraction of total profits
from sales in that country
• Generally, a firm’s most strategically
crucial sanctuary is its home market
Competitive Strategy Principle
A global competitor with multiple profit
sanctuaries can wage and generally win a
competitive offensive against a domestic
competitor whose only profit sanctuary is its
home market!
Concept: Critical Markets
• Critical markets are in countries that
– Are profit sanctuaries of key competitors
– Have big sales volume
– Include prestigious customers whose business it
is strategically important to have
– Offer exceptionally good profit margines
Competitive Strategy Principle
Building a defense against global
competitors does not require competing in all
foreign markets, but it does mean competing
in all critical markets!
Competitive Power of Cross-
Subsidization
• Involves using profits earned in a country market to
– Support offensive against key rivals, or
– Gain increased penetration of a critical market
• Most powerful when global firm with multiple profit
sanctuaries is intent on
– Achieving global market dominance
• A global firm can use lower prices to siphon a
domestic firm’s customer while
– Gaining market share, and
– Covering losses with profit earned in another critical
market
Competitive Strategy Principle
To defend against aggressive multinational
competitors intent on global dominance, a
domestic-only competitor usually has to
– Abandon its domestic focus
– Become a multinational competitor, and
– Craft a multinational competitive strategy
Why a Global Competitor Can Defeat a
Domestic-Only Firm?
• A one-country firm cannot effectively defend
its market share in the long-term against a
global firm because
– Global multi-country rival can use profits earned
elsewhere to subsidize price cutting in domestic
firm’s profit sanctuary
– If domestic firm retaliates with matching price
cuts
• It erodes it own profitability in its only profit sanctuary
Situation of Industry Leaders
• Characteristics of industry leaders
– Competitive position ranges from stronger-than
average to powerful
– Well-known reputation
– Leadership position is usually keyed to a proven
strategy
– Main strategic concern is how to sustain the
dominant leadership position
Strategy Options: Industry Leaders
1. Stay-on-the-offensive strategy
2. Fortify and defend strategy
3. Follow-the-leader strategy
Stay-On-The-Offensive Strategy
• Best defense is a good offense
• Be a first-mover
• Relentlessly pursue continuous improvement
and innovation
• Force rivals to scramble to keep up
• Launch initiatives that keep rivals off balance
• Try to grow faster than industry and to wrest
market share from rivals
Fortify and Defend Strategy
Basic Objectives
• Make it harder for new firms to enter and for
challengers to gain ground
• Hold onto present market share
• Strengthen current market position
• Protect competitive advantage held by firm
Types of Defensive Actions
• Increase advertising spending
• Provide higher levels of customer service
• Introduce more brands to match product attributes
of rival’s brands
• Broaden product line to close off vacant niches
• Keep prices reasonable and quality attractive
• Build new capacity ahead of market demand
• Invest enough to remain cost competitive
• Patent feasible alternative technologies
• Sign exclusive contracts with best suppliers and
distributors
Follow-The-Leader Strategy
Basic objectives
• Leader’s strategic posture involves
– Using its competitive muscle to encourage
runner-up firms to be content followers
– Signaling smaller rivals that moves to cut into
leader’s business will be hard fought
Follow-The-Leader Strategy
• Strategic Themes
• Be quick to meet all competitive price cuts
• Be ready to counter with large-scale
promotional campaigns if challengers boosts
advertising
• Offer better deals to major customers of
next-in-line firms
• Use “hardball” measures to signal aggressive
small firms who should lead
Types of Runner-Up Firms
Market Challengers
– Willing and able to use offensive strategies to
gain market share
Content Followers
– Willing to coast along in current position because
profits are adequate
Competitive Strategy Principle
rarely can a runner-up firm successfully
challenge an industry leader with an imitative
strategy – regardless of the financial
resources or staying power it may have!
Rule of Offensive Strategy
Runner-up firms should avoid attacking a
leader head-on with an imitative strategy,
regardless of resources and staying power
an underdog may have!
Overcoming Obstacles of Small Size
• In industries where big size is a competitive
asset, firms with low market share are faced
with obstacles
– Less access to certain economies of scale
– Difficulty in gaining customer recognition
– Inability to afford grand-scale mass media
advertising
– Difficulty in funding capital requirements
Overcoming Obstacles of Small Size
• Runner-up firms can overcome these
obstacles by
– Focusing on a few segments where strengths
can yield a competitive edge
– Developing technical expertise highly valued by
customers
– Aggressively pursuing development of new
products for customers in target segments
– Using innovative entrepreneurial approaches to
out-manage slow-to-change market leaders
Strategy Options: Weak Business
• Launch a strategic offensive
• Play aggressively defense
• Pursue immediate abandonment
• Adopt a harvest strategy
What is a Harvest Strategy?
• Steers middle course between maintenance
and abandonment
• Reinvestment in business held to minimum
Objectives
• Short-term
– Generate largest feasible cash flow
• Long-term
– Orderly market exit
Sample Harvesting Options
• Operating budget reduced to rock-bottom level
• Emphasis placed on stringent internal cost control
• Capital investment in new equipment given minimal
financial priority
• Price gradually raised
• Promotional expenses trimmed back
• Quality reduced in not so visible ways
• Non-essential customer services curtailed
• Equipment maintenance shaved
When Should Harvesting be
Considered?
• Industry’s long-term prospect are unattractive
• Building up business would be too costly
• Market share is increasingly costly to maintain
• Reduced levels of competitive effort will not trigger
immediate fall-off in sales
• Enterprise can redeploy freed-up resources in
higher opportunity areas
• Business is not a major component of diversified
firm’s portfolio
• Business does not contribute other desired features
to overall business portfolio
Strategy Options for Achieving a
Business Turnaround
• Revise existing strategy
• Launch efforts to boost revenues
• Cut costs
• Sell off assets to generate cash and / or
reduce debt
• Combination of efforts
13 Commandments for Crafting
Successful Business Strategies
1. Always put top priority on crafting and executing strategic moves that enhance a firm’s competitive position for the long-term and that serve to establish it as an industry leader.
2. Understand that a clear, consistent competitive strategy, when well-crafted and well-executed, builds reputation and recognizable industry position whereas a strategy aimed solely at capturing momentary market opportunities yields fleeting benefits.
13 Commandments for Crafting
Successful Business Strategies
3. Endeavor not to get “stuck back in the
pack” with no coherent long-term strategy
or distinctive competitive position, and little
prospect of climbing into the ranks of the
industry leaders.
4. Invest in creating a sustainable competitive
advantage, for it is a most dependable
contributor to above-average profitability.
13 Commandments for Crafting
Successful Business Strategies
5. Play aggressive offense to build
competitive advantage and aggressive
defense to protect it.
6. Avoid strategies capable of succeeding
only in the best of circumstances.
7. Likewise, avoid rigidly prescribed or
inflexible strategies – changing market
condition may render it quickly obsolete.
13 Commandments for Crafting
Successful Business Strategies
8. Don’t underestimate the reactions and the
commitment of rivals firm.
9. Be wary of attacking strong, resourceful
rivals without first having solid competitive
advantage and ample financial strength.
10.Consider that attacking competitive
weakness is usually more profitable than
attacking competitive strength.
13 Commandments for Crafting
Successful Business Strategies
11.Be judicious in cutting prices without an established cost advantage.
12.Be aware that aggressive strategic moves to wrest crucial market share away from rivals often provoke aggressive retaliation in the form of a marketing “arm race” and / or price wars.
13.Employ bold strategic moves in pursuing differentiation strategies so as to open up very meaningful gaps in quality or service or advertising or other product attributes.
End of Module 6