Strategy Formulation HCAD 5390. Strategies 4 Adaptive Strategies

Strategy Formulation

HCAD 5390

Strategies

Strategies

4

Adaptive Strategies

5

Expansion Adaptive Strategy:– Orientation toward growth

Expand, cut back, status quo? Concentrate within current industry, diversify into

other industries? Growth and expansion through internal development

or acquisitions, mergers, or strategic alliances?

Adaptive Strategies

6

Basic Growth Strategies:

Concentration– Current product line in one industry

– Vertical Integration– Market Development– Product Development– Penetration

Diversification– Into other product lines in other industries

Adaptive Strategies

7

Expansion of ScopeBasic Concentration Strategies:

Vertical growthHorizontal growth

Adaptive Strategies

8

Vertical growth

– Vertical integration Full integration Taper integration Quasi-integration

– Backward integration

– Forward integration

Adaptive Strategies

Adaptive Strategies

10

Horizontal Growth

– Horizontal integration

Adaptive Strategies

Concentration on a Single Business

Advantages– Operational focus on a

single familiar industry or market.

– Current resources and capabilities add value.

– Growing with the market brings competitive advantage.

Disadvantages– No diversification of market

risks.– Vertical integration may be

required to create value and establish competitive advantage.

– Opportunities to create value and make a profit may be missed.

12

Basic Diversification Strategies:

– Concentric Diversification

– Conglomerate Diversification

Adaptive Strategies

13

Concentric Diversification

– Growth into related industry– Search for synergies

Adaptive Strategies

Adaptive Strategies

15

Unrelated (Conglomerate) Diversification– Growth into unrelated industry– Concern with financial considerations

Adaptive Strategies

Adaptive Strategies

Reasons for Diversification

Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness

• Economies of scope/scale

• Market power

• Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerialMotivesMotives

Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness

• Anti-trust regulation

• Tax laws

• Low performance

• Uncertain future cash flows

• Firm risk reduction


ResourcesResources



Incentives to Diversify

External Incentives:External Incentives: Relaxation of anti-trust regulation allows more related Relaxation of anti-trust regulation allows more related

acquisitions than in the pastacquisitions than in the past Before 1986, higher taxes on dividends favored spending Before 1986, higher taxes on dividends favored spending

retained earnings on acquisitionsretained earnings on acquisitions After 1986, firms made fewer acquisitions with retained After 1986, firms made fewer acquisitions with retained

earnings, shifting to the use of debt to take advantage of tax earnings, shifting to the use of debt to take advantage of tax deductible interest paymentsdeductible interest payments

Incentives to Diversify

Internal Incentives:Internal Incentives: Poor performance may lead some firms to diversify an Poor performance may lead some firms to diversify an

attempt to achieve better returnsattempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to Firms may diversify into different businesses in order to

reduce riskreduce risk

Resources and Diversification

Besides strong incentives, firms are more likely to Besides strong incentives, firms are more likely to diversify if they have the resources to do sodiversify if they have the resources to do so

Value creation is determined more by appropriate Value creation is determined more by appropriate use of resources than incentives to diversifyuse of resources than incentives to diversify

Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation


ResourcesResources



Managerial Motives to Diversify

Managers have motives to diversifyManagers have motives to diversify – diversification increases size; size is associated with diversification increases size; size is associated with

executive compensationexecutive compensation– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict such effective governance mechanisms may restrict such

motivesmotives

Bureaucratic Costs and the Limits of Diversification

Number of businesses– Information overload can lead to poor resource allocation

decisions and create inefficiencies.Coordination among businesses

– As the scope of diversification widens, control and bureaucratic costs increase.

– Resource sharing and pooling arrangements that create value also cause coordination problems.

Limits of diversification– The extent of diversification must be balanced with its

bureaucratic costs.

Relationship Between Diversification and Performance

Per

form

ance

Per

form

ance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Restructuring:Contraction of Scope

Why restructure?– Pull-back from overdiversification.– Attacks by competitors on core

businesses.– Diminished strategic advantages of

vertical integration and diversification.Contraction (Exit) strategies

– Retrenchment– Divestment– spinoffs of profitable SBUs to investors;

management buy outs (MBOs).– Harvest– halting investment, maximizing cash flow.– Liquidation– Cease operations, write off assets.

Why Contraction of Scope?

The causes of corporate decline– Poor management– incompetence, neglect– Overexpansion– empire-building CEO’s– Inadequate financial controls– no profit responsibility– High costs– low labor productivity– New competition– powerful emerging competitors– Unforeseen demand shifts– major market changes– Organizational inertia– slow to respond to new competitive

conditions

The Main Steps of Turnaround

Changing the leadership– Replace entrenched management with new managers.

Redefining strategic focus– Evaluate and reconstitute the organization’s strategy.

Asset sales and closures– Divest unwanted assets for investment resources.

Improving profitability– Reduce costs, tighten finance and performance controls.

Acquisitions– Make acquisitions of skills and competencies to strengthen

core businesses.

Adaptive Strategies

Maintenance of ScopeEnhancement

Status Quo

Market Entry Strategies

Acquisition:Acquisition: a strategy through which one organization buys a a strategy through which one organization buys a controlling interest in another organization with the intent of controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own making the acquired firm a subsidiary business within its own portfolioportfolio

Licensing:Licensing: a strategy where the organization purchases the a strategy where the organization purchases the right to use technology, process, etc. right to use technology, process, etc.

Joint Venture:Joint Venture: a strategy where an organization joins with a strategy where an organization joins with another organization(s) to form a new organizationanother organization(s) to form a new organization

AcquisitionsAcquisitions

Reasons for Making Acquisitions

IncreaseIncreasemarket powermarket power

OvercomeOvercomeentry barriersentry barriers

Cost of newCost of newproduct developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncreasediversificationdiversification

Reshape firm’sReshape firm’scompetitive scopecompetitive scope

Lower risk comparedLower risk comparedto developing newto developing new

productsproducts

Learn and developLearn and developnew capabilitiesnew capabilities

Reasons for Making Acquisitions:

Factors increasing market powerFactors increasing market power– when a firm is able to sell its goods or services above when a firm is able to sell its goods or services above

competitive levels orcompetitive levels or– when the costs of its primary or support activities are below when the costs of its primary or support activities are below

those of its competitorsthose of its competitors– usually is derived from the size of the firm and its resources usually is derived from the size of the firm and its resources

and capabilities to compete and capabilities to compete Market power is increased byMarket power is increased by

– horizontal acquisitionshorizontal acquisitions– vertical acquisitionsvertical acquisitions– related acquisitionsrelated acquisitions

Increased Market PowerIncreased Market Power


Barriers to entry includeBarriers to entry include– economies of scale in established competitorseconomies of scale in established competitors– differentiated products by competitorsdifferentiated products by competitors– enduring relationships with customers that create product enduring relationships with customers that create product

loyalties with competitorsloyalties with competitors

acquisition of an established company acquisition of an established company – may be more effective than entering the market as a may be more effective than entering the market as a

competitor offering an unfamiliar good or service that is competitor offering an unfamiliar good or service that is unfamiliar to current buyersunfamiliar to current buyers

Cross-border acquisitionCross-border acquisition

Overcome Barriers to EntryOvercome Barriers to Entry


Significant investments of a firm’s resources are Significant investments of a firm’s resources are required torequired to– develop new products internallydevelop new products internally– introduce new products into the marketplaceintroduce new products into the marketplace

Acquisition of a competitor may result inAcquisition of a competitor may result in– lower risk compared to developing new productslower risk compared to developing new products– increased diversificationincreased diversification– reshaping the firm’s competitive scopereshaping the firm’s competitive scope– learning and developing new capabilities learning and developing new capabilities – faster market entryfaster market entry– rapid access to new capabilitiesrapid access to new capabilities


An acquisition’s outcomes can be estimated more An acquisition’s outcomes can be estimated more easily and accurately compared to the outcomes of an easily and accurately compared to the outcomes of an internal product development processinternal product development process

Therefore managers may view acquisitions as lowering Therefore managers may view acquisitions as lowering riskrisk

Lower Risk Compared to Developing Lower Risk Compared to Developing New ProductsNew Products


It may be easier to develop and introduce new products It may be easier to develop and introduce new products in markets currently served by the firmin markets currently served by the firm

It may be difficult to develop new products for markets It may be difficult to develop new products for markets in which a firm lacks experiencein which a firm lacks experience– it is uncommon for a firm to develop new products internally to it is uncommon for a firm to develop new products internally to

diversify its product linesdiversify its product lines– acquisitions are the quickest and easiest way to diversify a firm acquisitions are the quickest and easiest way to diversify a firm

and change its portfolio of businessesand change its portfolio of businesses

Increased DiversificationIncreased Diversification


Firms may use acquisitions to reduce their Firms may use acquisitions to reduce their dependence on one or more products or marketsdependence on one or more products or markets

Reducing a company’s dependence on specific Reducing a company’s dependence on specific markets alters the firm’s competitive scopemarkets alters the firm’s competitive scope

Reshaping the Firms’ Competitive ScopeReshaping the Firms’ Competitive Scope


Acquisitions may gain capabilities that the firm does Acquisitions may gain capabilities that the firm does not possessnot possess

Acquisitions may be used toAcquisitions may be used to– acquire a special technological capabilityacquire a special technological capability– broaden a firm’s knowledge basebroaden a firm’s knowledge base

– reduce inertiareduce inertia

Learning and Developing New CapabilitiesLearning and Developing New Capabilities

AcquisitionsAcquisitions

Problems With AcquisitionsIntegrationIntegrationdifficultiesdifficulties

InadequateInadequateevaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability toachieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overlyfocused on acquisitionsfocused on acquisitions

Resulting firmResulting firmis too largeis too large

Problems With Acquisitions

Integration challenges includeIntegration challenges include– melding two disparate corporate culturesmelding two disparate corporate cultures– linking different financial and control systemslinking different financial and control systems– building effective working relationships (particularly when building effective working relationships (particularly when

management styles differ)management styles differ)– resolving problems regarding the status of the newly resolving problems regarding the status of the newly

acquired firm’s executivesacquired firm’s executives– loss of key personnel weakens the acquired firm’s loss of key personnel weakens the acquired firm’s

capabilities and reduces its valuecapabilities and reduces its value

Integration DifficultiesIntegration Difficulties


Evaluation requires that hundreds of issues be Evaluation requires that hundreds of issues be closely examined, includingclosely examined, including– financing for the intended transactionfinancing for the intended transaction– differences in cultures between the acquiring and target firmdifferences in cultures between the acquiring and target firm– tax consequences of the transactiontax consequences of the transaction– actions that would be necessary to successfully meld the actions that would be necessary to successfully meld the

two workforcestwo workforces Ineffective due-diligence process mayIneffective due-diligence process may

– result in paying excessive premium for the target companyresult in paying excessive premium for the target company

Inadequate Evaluation of TargetInadequate Evaluation of Target


Firm may take on significant debt to acquire a Firm may take on significant debt to acquire a companycompany

High debt can High debt can – increase the likelihood of bankruptcyincrease the likelihood of bankruptcy– lead to a downgrade in the firm’s credit ratinglead to a downgrade in the firm’s credit rating– preclude needed investment in activities that contribute to preclude needed investment in activities that contribute to

the firm’s long-term successthe firm’s long-term success

Large or Extraordinary DebtLarge or Extraordinary Debt


Synergy exists when assets are worth more when Synergy exists when assets are worth more when used in conjunction with each other than when they used in conjunction with each other than when they are used separatelyare used separately

Firms experience transaction costs (e.g., legal fees) Firms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create when they use acquisition strategies to create synergysynergy

Firms tend to underestimate indirect costs of Firms tend to underestimate indirect costs of integration when evaluating a potential acquisitionintegration when evaluating a potential acquisition

Inability to Achieve SynergyInability to Achieve Synergy


Diversified firms must process more information of Diversified firms must process more information of greater diversity greater diversity

Scope created by diversification may cause Scope created by diversification may cause managers to rely too much on financial rather than managers to rely too much on financial rather than strategic controls to evaluate business units’ strategic controls to evaluate business units’ performancesperformances

Acquisitions may become substitutes for innovationAcquisitions may become substitutes for innovation

Too Much DiversificationToo Much Diversification


Managers in target firms may operate in a state of Managers in target firms may operate in a state of virtual suspended animation during an acquisitionvirtual suspended animation during an acquisition

Executives may become hesitant to make decisions Executives may become hesitant to make decisions with long-term consequences until negotiations have with long-term consequences until negotiations have been completedbeen completed

Acquisition process can create a short-term Acquisition process can create a short-term perspective and a greater aversion to risk among perspective and a greater aversion to risk among top-level executives in a target firmtop-level executives in a target firm

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions


Additional costs may exceed the benefits of the Additional costs may exceed the benefits of the economies of scale and additional market powereconomies of scale and additional market power

Larger size may lead to more bureaucratic controls Larger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and Formalized controls often lead to relatively rigid and

standardized managerial behaviorstandardized managerial behavior Firm may produce less innovationFirm may produce less innovation

Too LargeToo Large

Strategic Alliance

A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which– firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities– to create a competitive advantageto create a competitive advantage

A strategic alliance involvesA strategic alliance involves– exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities– co-development or distribution of goods or servicesco-development or distribution of goods or services

CombinedCombinedResourcesResources

CapabilitiesCapabilitiesCore CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Strategic Alliance

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

Types of Cooperative Strategies

Joint venture: two or more firms create an Joint venture: two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassets

Equity strategic alliance: partners who own different Equity strategic alliance: partners who own different percentages of equity in a new venturepercentages of equity in a new venture

Nonequity strategic alliances: contractual Nonequity strategic alliances: contractual agreements given to a company to supply, produce, agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity or distribute a firm’s goods or services without equity sharingsharing

Strategic Alliances

Margin Margin

Primary Activities

Sup

port

Act

iviti

es Service

Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

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Hum

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Mgm

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Margin Margin

Primary Activities

Sup

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Act

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Marketing & Sales

Outbound Logistics

Operations


Inf

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Ver

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l All

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SupplierSupplier

• vertical complementary strategic vertical complementary strategic alliance is formed between firms alliance is formed between firms that agree to use their skills and that agree to use their skills and capabilities in different stages of capabilities in different stages of the value chain to create value the value chain to create value for both firmsfor both firms

• outsourcing is one example of outsourcing is one example of this type of alliancethis type of alliance

Strategic Alliances

Margin Margin

Primary Activities

Sup

port

Act

iviti

es Service

Marketing & Sales

Outbound Logistics

Operations


Inf

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Hum

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Mgm

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Margin Margin

Primary Activities

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Marketing & Sales

Outbound Logistics

Operations


Inf

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BuyerBuyerPotential CompetitorsPotential Competitors

• horizontal complementary strategic alliance is formed horizontal complementary strategic alliance is formed between partners who agree to combine their resources and between partners who agree to combine their resources and skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain

• focus on long-term product development and distribution opportunities

• the partners may become competitorsthe partners may become competitors• requires a great deal of trust between the partnersrequires a great deal of trust between the partners

BuyerBuyer

Competitive Strategies

Strategic Posture– Defender– Prospector– Analyzer

Positioning

Competitive Strategies

Competitive strategies are intended to create Competitive strategies are intended to create differences between the firm’s position relative to differences between the firm’s position relative to those of its rivalsthose of its rivals

To position itself, the firm must decide whether it To position itself, the firm must decide whether it intends to perform activities differently or to perform intends to perform activities differently or to perform different activities as compared to its rivalsdifferent activities as compared to its rivals

Five Generic StrategiesCompetitive AdvantageCompetitive Advantage

Co

mp

etit

ive

Sco

pe

Co

mp

etit

ive

Sco

pe

CostCost UniquenessUniqueness

Bro

ad

Bro

ad

targ

etta

rget

Nar

row

N

arro

w

targ

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Cost Cost LeadershipLeadership

DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Focused Focused DifferentiationDifferentiation

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

Cost Leadership Strategy

An integrated set of actions designed to produce or An integrated set of actions designed to produce or deliver goods or services at the deliver goods or services at the lowest costlowest cost, , relative to relative to competitorscompetitors with features that are acceptable to with features that are acceptable to customerscustomers

– relatively standardized productsrelatively standardized products– features acceptable to many customersfeatures acceptable to many customers– lowest competitive pricelowest competitive price

Cost Leadership Strategy

Cost saving actions required by this strategy:Cost saving actions required by this strategy:– building efficient scale facilities– tightly controlling production costs and overhead– minimizing costs of sales, R&D and service– building efficient manufacturing facilities– monitoring costs of activities provided by outsiders– simplifying production processes

How to Obtain a Cost Advantage

Cost DriversCost Drivers Value ChainValue Chain

Determine and Determine and controlcontrol

Reconfigure, if Reconfigure, if neededneeded

• Alter production process• Alter production process• Change in automation• Change in automation• New distribution channel• New distribution channel

• Direct sales in place of indirect sales

• Direct sales in place of indirect sales

• New advertising media• New advertising media

• New raw material• New raw material

• Backward integration• Backward integration• Forward integration• Forward integration

• Change location relative to suppliers or buyers

• Change location relative to suppliers or buyers

Product features Performance Mix & variety of

products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training,

motivation

Factors That Drive Costs

Economies of scale Asset utilization Capacity utilization

pattern• Seasonal, cyclical

Interrelationships Order processing

and distribution Value chain linkages

• Advertising & sales• Logistics &

operations

Cost Leadership Strategy and the Five Forces of Competition

Rivalry Among Rivalry Among Competing FirmsCompeting FirmsCan use cost leadership Can use cost leadership strategy to advantage since:strategy to advantage since:

competitors avoid price competitors avoid price wars with cost leaders, wars with cost leaders, creating higher profits for creating higher profits for the entire industrythe entire industry

Rivalry Among

Rivalry Among

Competing Firms

Competing FirmsB

arga

inin

g P

ower

Bar

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Pow

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of B

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Buy

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Bargaining Power Bargaining Power of Suppliersof Suppliers

Threat of N

ew

Threat of N

ew

Entrants

Entrants

Threat o

f

Threat o

f

Substitute

Products

Substitute

Products

Five Forces ofFive Forces ofCompetitionCompetition


Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyers’ power Can mitigate buyers’ power by:by:

driving prices far below driving prices far below competitors, causing competitors, causing them to exit and shifting them to exit and shifting power with buyers back power with buyers back to the firmto the firm

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

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Entrants

Entrants

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Threat o

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Substitute

Products

Substitute

Products



Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ Can mitigate suppliers’ power by:power by:

being able to absorb cost being able to absorb cost increases due to low cost increases due to low cost positionposition

being able to make very being able to make very large purchases, reducing large purchases, reducing chance of supplier using chance of supplier using powerpower

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

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Threat of N

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Entrants

Entrants

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Threat o

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Substitute

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Substitute

Products



Rivalry Among

Rivalry Among

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Substitute

Products


Threat of New EntrantsThreat of New EntrantsCan frighten off new Can frighten off new entrants due to:entrants due to: their need to enter on a their need to enter on a

large scale in order to be large scale in order to be cost competitivecost competitive

the time it takes to move the time it takes to move down the learning curvedown the learning curve


Threat of Substitute Threat of Substitute ProductsProductsCost leader is well positioned Cost leader is well positioned to:to:

make investments to be make investments to be first to create substitutesfirst to create substitutes

buy patents developed by buy patents developed by potential substitutespotential substitutes

lower prices in order to lower prices in order to maintain value positionmaintain value position

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

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Threat of N

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Threat of N

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Entrants

Entrants

Threat o

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Threat o

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Substitute

Products

Substitute

Products


Major Risks of Cost Leadership Strategy

Dramatic technological change could take away your Dramatic technological change could take away your cost advantagecost advantage

Competitors may learn how to imitate value chainCompetitors may learn how to imitate value chain Focus on efficiency could cause cost leader to Focus on efficiency could cause cost leader to

overlook changes in customer preferencesoverlook changes in customer preferences

Differentiation Strategy

An integrated set of actions designed by a firm to An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways cost) that customers perceive as being different in ways that are important to themthat are important to them

– price for product can exceed what the firm’s target price for product can exceed what the firm’s target customers are willing to paycustomers are willing to pay

– nonstandardized productsnonstandardized products– customers value differentiated features more than they customers value differentiated features more than they

value low costvalue low cost


Value provided by Value provided by unique features and value unique features and value characteristicscharacteristics

Command premium priceCommand premium price High customer serviceHigh customer service Superior qualitySuperior quality Prestige or exclusivityPrestige or exclusivity Rapid innovationRapid innovation


Differentiation actions required by this strategy:Differentiation actions required by this strategy:– developing new systems and processesdeveloping new systems and processes– shaping perceptions through advertisingshaping perceptions through advertising– quality focusquality focus– capability in R&Dcapability in R&D– maximize human resource contributions through maximize human resource contributions through

low turnover and high motivationlow turnover and high motivation

How to Obtain a Differentiation Advantage

Cost DriversCost Drivers Value ChainValue Chain

Control if Control if neededneeded

Reconfigure to Reconfigure to maximizemaximize

customer perceptions of uniquenesscustomer perceptions of uniquenesscustomer perceptions of uniquenesscustomer perceptions of uniqueness

customer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique productcustomer reluctance to switch to non-unique product

• Raise performance of product or serviceRaise performance of product or service• Lower buyers’ costsLower buyers’ costs

• Create sustainability through:Create sustainability through:

Factors That Drive Differentiation

Unique product featuresUnique product features Unique product performanceUnique product performance Exceptional services Exceptional services New technologiesNew technologies Quality of inputsQuality of inputs Exceptional skill or experienceExceptional skill or experience Detailed informationDetailed information

Differentiation Strategy and the Five Forces of Competition

Rivalry Among Rivalry Among Competing FirmsCompeting FirmsCan defend against Can defend against competition because:competition because:

brand loyalty to brand loyalty to differentiated product differentiated product offsets price competitionoffsets price competition

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

Bar

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Substitute

Products



Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyer power Can mitigate buyer power because:because:

well differentiated well differentiated products reduce customer products reduce customer sensitivity to price sensitivity to price increasesincreases

Rivalry Among

Rivalry Among

Competing Firms

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Substitute

Products



Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:

absorbing price increases absorbing price increases due to higher marginsdue to higher margins

passing along higher passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated branddifferentiated brand

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

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Entrants

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Substitute

Products



Threat of New EntrantsThreat of New EntrantsCan defend against new Can defend against new entrants because:entrants because:

new products must surpass new products must surpass proven products or, proven products or,

new products must be at new products must be at least equal to performance least equal to performance of proven products, but of proven products, but offered at lower pricesoffered at lower prices

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

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Entrants

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Substitute

Products



Threat of Substitute Threat of Substitute ProductsProductsWell positioned relative to Well positioned relative to substitutes because:substitutes because:

brand loyalty to a brand loyalty to a differentiated product tends differentiated product tends to reduce customers’ to reduce customers’ testing of new products or testing of new products or switching brandsswitching brands

Rivalry Among

Rivalry Among

Competing Firms

Competing Firms

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Major Risks of Differentiation Strategy

Customers may decide that the price differential Customers may decide that the price differential between the differentiated product and the cost between the differentiated product and the cost leader’s product is too largeleader’s product is too large

Means of differentiation may cease to provide value Means of differentiation may cease to provide value for which customers are willing to payfor which customers are willing to pay

Major Risks of Differentiation Strategy

Experience may narrow customer’s perceptions of Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s the value of differentiated features of the firm’s productsproducts

Makers of counterfeit goods may attempt to replicate Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s productsdifferentiated features of the firm’s products

Focused Business-Level Strategies

A focus strategy must exploit a narrow target’s A focus strategy must exploit a narrow target’s differences from the balance of the industry by:differences from the balance of the industry by:– isolating a particular buyer groupisolating a particular buyer group– isolating a unique segment of a product lineisolating a unique segment of a product line– concentrating on a particular geographic marketconcentrating on a particular geographic market– finding their “niche”finding their “niche”

Factors That May Drive Focused Strategies

Large firms may overlook small nichesLarge firms may overlook small niches Firm may lack resources to compete in the broader Firm may lack resources to compete in the broader

marketmarket May be able to serve a narrow market segment more May be able to serve a narrow market segment more

effectively than can larger industry-wide competitorseffectively than can larger industry-wide competitors Focus may allow the firm to direct resources to Focus may allow the firm to direct resources to

certain value chain activities to build competitive certain value chain activities to build competitive advantageadvantage

Major Risks of Focused Strategies

Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors Large competitor may set its sights on your niche Large competitor may set its sights on your niche

marketmarket Preferences of niche market may change to match Preferences of niche market may change to match

those of broad marketthose of broad market

STUCKIN THEMIDDLE

MY FIRM HASA COMPETITIVE

ADVANTAGE

MY FIRM HASA COMPETITIVE

ADVANTAGE

No Clearly Defined Strategy…

Integrated Competitive Strategy

Cost Leadership and Differentiation

CostCostLeadershipLeadership

BenefitsBenefits

DifferentiationDifferentiationBenefitsBenefits

Integrated Competitive Strategy

Cost Leadership and Differentiation

CostCostLeadershipLeadership

BenefitsBenefits

DifferentiationDifferentiationBenefitsBenefits

FlexibleFlexibleManufacturingManufacturingTechnologiesTechnologies

CombinedCombinedBenefitsBenefits

Advantages of Integrated Strategy

A firm that successfully uses an integrated cost A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a leadership/differentiation strategy should be in a better position to:better position to:– adapt quickly to environmental changesadapt quickly to environmental changes– learn new skills and technologies more quicklylearn new skills and technologies more quickly– effectively leverage its core competencies while effectively leverage its core competencies while

competing against its rivalscompeting against its rivals

Benefits of Integrated Strategy

Successful firms using this strategy have above-Successful firms using this strategy have above-average returnsaverage returns

Firm offers two types of values to customersFirm offers two types of values to customers– some differentiated features (but less than a true some differentiated features (but less than a true

differentiated firm)differentiated firm)– relatively low cost (but now as low as the cost relatively low cost (but now as low as the cost

leader’s price)leader’s price)

Major Risks of Integrated Strategy

An integrated cost/differentiation business level An integrated cost/differentiation business level strategy often involves compromises (neither the strategy often involves compromises (neither the lowest cost nor the most differentiated firm)lowest cost nor the most differentiated firm)

The firm may become “stuck in the middle” lacking The firm may become “stuck in the middle” lacking the strong commitment and expertise that the strong commitment and expertise that accompanies firms following either a cost leadership accompanies firms following either a cost leadership or a differentiated strategyor a differentiated strategy

Documents

Strategy Formulation HCAD 5390. Strategies 4 Adaptive Strategies