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Business Strategy and Competitive Advantage

Chapter II

What is Business Strategy?

 Business Strategy consists of the decisions made by top management and the resulting
actions taken to achieve the objectives set for the business.

Global Competitive Challenges

Global Business Challenge centers on two important competitive issues:

1. Companies with the skills and resources for competing beyond their domestic markets
have major opportunities for growth. And these opportunities are not restricted to
industry giants.

2. Maintaining a competitive position in the domestic market requires knowledge of key

competitors in the global marketplace.

EXHIBIT 2-1 Corporate Strategy Components and Issues

Strategy Component Key Issues

Scope, mission, and intent What business(es) should the firm be in?

What customer needs, market segments,

and/or technologies should be focused on?

What is the firm’s enduring strategic

purposeor intent?

Objectives What performance dimensions should the

firm’s business units and employees focus

What is the target level of performance to

be achieved on each dimension?

What is the time frame in which each target

should be attained?
Development Strategy How can the firm achieve a desired level of
growth over time?

Can the desired growth be attained by

expanding the firm’s current businesses?

Will the company have to diversify into

new businesses or product-markets to
achieve its future growth objectives?

Resource allocation How should the firms’ limited financial

resources be allocated across its businesses
to produce the highest returns?

Of the alternative strategies that each

businessmight pursue, which will produce
the greatest returns for the dollars invested?

Sources of synergy What competencies, knowledge, and

customer-based intangibles ( e.g.,
brand recognition, reputation ) might
be developed and shared across the
firm’s businesses?

What operational resources,

facilities, or functions ( e.g., plants,
R&D, salesforce ) might the firm’s
businesses share to increase their
Exhibit 2-2 International Labor Cost Comparisons

Dimensions of the Challenge

The Wage Gap

Average 1993 hourly labor costs in manufacturing, in dollars

Western Germany Italy Hungary

$24.87 $14.82 $1.82

Switzerland Britain Poland

21.90 12.37 1.40

Belgium Ireland Czech Republic

21.00 11.88 1.14

Netherlands Spain Thailand

19.83 11.73 0.71

Austria Taiwan Romania

19.26 5.46 0.68

Denmark Singapore Philippines

19.21 5.12 0.68

Sweden South Korea Bulgaria

18.30 4.93 0.63

Japan Portugal China

16.91 4.63 0.54

U.S Hong Kong Russia

16.40 4.21 0.54

France Mexico Yugo/Serbia

16.26 2.41 0.40
Organizational Renewal

 Organizational Renewal is more than just reducing staff, eliminating layers of

management, and adopting worker empowerment processes. Typically, the renewal
(reforming) of the traditional organization moves through three phases:

1) Vertical disaggregation

2) Internal redesign

3) Network formation

Vertical Disaggregation

 Disaggregation reduces the size of the organization by eliminating jobs and layers of
middle managers and flattening the hierarchy.

Internal Redesign

 The second phase alters the internal design of the organization.

 The new organization forms are lean, flexible, adaptive and responsive to customer needs
and market requirements. Technology is a core advantage, involving innovation in
designing products to meet customer needs, arranging supply and distribution networks,
and constantly staying in touch with the marketplace.

 A priority of these organizations understands customer needs, offering value to

customers, and retaining customers.

Network Formation

 The third phase of renewal involves the formation of relationships with other

 Companies are expanding these relationships with suppliers, customers, and even

 These new organization forms are called “NETWORKS” since they involve several
collaborative arrangements.

 Networks are more likely to be launched by entrepreneurs.

 Transformation means fewer people on the corporate payroll, different management

challenges, drastic cultural changes, and complex collaborative relationships with other
Competitive Advantage

EXHIBIT 2-3 The Elements of Competitive Advantage

Sources of Positional Performance

Advantage Advantages Outcomes
• Superior • Superior • Satisfaction
skills customer
• Superior value • Loyalty
resources • Lower • Market share
• Superior relative costs
controls • Profitability

Investment of profits to sustain advantage

Obtaining competitive advantage

1) Sources of Advantage – the sources of advantage are superior skills, resources and controls.

a. Superior skills – enable an organization to select and implement strategies that

will distinguish the organization from its competition. Skills include technical,
managerial, and operational capabilities.

b. Superior resources – are the enabling aspects of advantage.

c. Superior controls – include capabilities in monitoring and analyzing business

processes and results.

2) Positional Advantages – positional advantage results from cost leadership or differentiation

that gives customers superior value. An important factor in seeking advantage is deciding where
and how to compete.

3) Performance Outcomes – when the company’s skills, resources, and controls are used to
gain a value and/or cost advantage, the positional advantage leads to favorable performance
outcomes ( customer satisfaction, brand loyalty, market share, and profitability).
Analyzing Competitive Position

 New opportunity to gain advantage requires analyzing customers and competition.

 Several techniques for customer – and competitor – oriented advantage analysis:

1) Customer – Oriented Analysis – this activity includes determining who is the customer,
identifying the values they are seeking, comparing the organizations performance to its
competition, and identifying why customers consider one firm superior to another.

2) Competitor – Centered Analysis – two techniques useful in competitor analysis are:

a. Value – chain analysis – the value chain desegregates a firm into its strategically
relevant activities in order to understand the behavior of costs and the existing and
potential sources of differentiation. The activities that an organization performs to
design, produce, market, deliver and support its product or services comprise its
value chain. Value System – is composed of the chains of organizations such as
suppliers, a manufacturer, and distribution network (e.g., distributors, dealers,

b. Benchmarking – is the process of continually comparing a company’s

performance on critical customer requirements against the best in the industry
(direct competitors) or the class (companies recognized for superiority in
performing certain processes) in order to determine which areas should be
targeted for improvement. Benchmarking places at tension on the entire value
chain rather than only completed products. The tool was developed by Xerox in
1979 to compare the manufacturing cost and features of its copying machines to
competitors’ products.

Competitive Advantage Strategy Valujet Airline’s No Frills Strategy

• ValueJet bought old but reliable DC – 9 – 30 aircraft because financing newer aircraft
was not feasible.

• The 39 used planes kept costs low and, in 1995, helped ValueJet gain first place in
profitability in the industry.

• Revenues for the fist six months of 1995 were nearly $150 million with a net income of
$26 million.

• New aircraft will cost up to $20 million, three times the cost of a used DC – 9.

• ValueJet is adding 1.5 to 2 planes per month, so in 1996 the new – plane strategy became
essential to growth.
• ValueJet appeals to travelers with low prices and no – frills flights. A city – to – city
strategy is used, with the destinations carefully selected by management.

• ValueJet’s major competitive hurdle is obtaining the aircraft needed to fuel its growth
since the supply of DC – 9’s is very limited.

• Several aircraft operating problems and the May 1996 crash in the Florida Everglades
which killed 110 people raised questions about ValueJet’s rapid expansion, tight cost
controls, use of older planes, and the passenger safety.

Sustaining Competitive Advantage

EXHIBIT 2 – 4 A Marketing – Driven Value Chain

Human resources
Functions Technology development
Control systems

Sourcing Design Communicate Distribution Install

Primary and
Value Inbound Operations Persuade Physical Service
Logistics logistics

Market Entry Barriers

 Entry barrier analysis includes:

1) Identifying the barriers and their relative importance.

2) Estimating the effect of the barriers on entry at different stages of product – market

3) Recognizing how entry barriers vary in different product – markets (e.g., consumer and
industrial products).

 Entry Barriers – the major barriers are described in Exhibit 2 – 5 with accompanying
definitions. A variety of specific barriers can be identified within the six areas suggested
by Exhibit – 5. For example, cost advantage may be due to volume production, design
efficiency, and experience.

 Early versus Late Market Entry – the market pioneer (first to enter) often gains a
sustainable competitive edge over firms entering the market later. The successful pioneer
must select and implement strategies for sustaining competitive advantage.

 Entry Barriers in Different Product – Markets – the importance of the six entry
barriers may vary across consumer and industrial markets. Product differentiation and
access to distribution channels are more influential in early entry for consumer markets.
Variation in the importance of entry barriers appeals to be influenced by product – market


Concept Definition

Cost advantages of The advantages include the decline in unit cost of a product as the absolute volume
incumbents of production per period increases, as well as the reduction in unit cost resulting from
product know – how, design characteristics, favorable access to raw materials,
favorable locations, government subsidies, and learning or experience curve.

Production Established firms have brand identification and customer loyalties stemming from
differentiation of past advertising, customer service, product differences, or simply being first into the
incumbents market.

Capital The need to invest large financial resources to enter a market and compete in that
requirements market.

Customer switching One – time costs to the buyer due to switching from one supplier to another (i.e.,
costs employee retraining costs, cost of new ancillary equipment, need for new technical
help, product redesign, etc.)
Access to The extent to which logical distribution channels for a product are already served by
distribution the established firms in the market.

Government policy The extent to which government limits or forecloses entry into industries with such
controls as licensing requirements and limits access to raw materials (i.e., regulated
industries and Environmental Protection Agency laws).


Developing strategies for sustainable competitive advantage, implementing them, and adjusting
the strategies to respond to new environmental requirements are a continuing process. It begins
by defining the mission of the business. Managers monitor the market and competitive
environment. The corporate mission may, over time, be changed because of problems or
opportunities identified by monitoring. An important part of business strategy in a firm made up
of more than one business area (e.g., different products and/or markets) is managing the portfolio
of business units. These units often have different objectives and strategies. The strategy for each
unit indicates how it will fulfill its assigned role in the corporation. Underlying each unit’s
strategic plan are functional strategies for marketing, finance, research and development, and

Deciding Corporate Mission

 The corporate mission defines what the business is and what is does and provides
important guidelines for managing and improving the corporation.

 Strategic choices about where the firm is going in the future – choices that take into
account company capabilities, resources, opportunities, and problems – establish the
mission of the enterprise.

 The mission is reviewed and updated as shifts in the strategic direction of the enterprise
occur over time.

 The mission statement sets several important guidelines for business operations.
1) The reason for the company’s existence and its responsibilities to stockholders,
employees, society, and other stakeholders.

2) The firm’s customers and the needs (benefits) that are to be met by the firm’s products or
services (areas of product and market involvement).

3) The extent of specialization within each product – market area and the geographical
scope of operations.

4) The amount and types of product – market diversification desired by management.

5) The stage in the distribution system (level of participation in the sequence of stages in the
value - added system from raw materials to the end – user).

6) Management’s performance expectations for the company.

7) Other general guidelines for over all business strategy, such as technologies to be used and
the role of research and development in the corporation.

 Core Competence – these core competencies may offer the organization the potential to
compete in different markets, provide significant value to end – user customers, and
create barriers to competitor duplication.

 Corporate Objectives – corporate objectives are often established in the following areas:
marketing, innovation, resources, productivity, social responsibility, and finance.
Examples include growth and market – share expectations, improving product quality,
employee training and development, new – products targets, return on invested capital,
earnings growth rates, debt limits, energy reduction objectives, and pollution standards.
Objectives are set at several levels in an organization beginning with those indicating the
enterprise’s overall objectives.

Corporate Development Alternatives

Several possible directions of growth that may be taken from the core (initial) business of the
corporation are shown in Exhibit 2 – 7. There are, of course, many specific combinations of
these corporate development options. Success often leads to expanding into related areas and
sometimes entirely new product – market areas.
EXHIBIT 2 – 6 Illustrative Distinctive Capabilities


L.L Bean’s mall order products offer value to its customers but it is widely acknowledges for its
order fulfillment capabilities.


Rubbermaid has been unusually successful competing in the commodity kitchenware market
with a successful new product development process that creates many new products each year.


Singapore Airlines performs many commercial air transportation functions well, but it is widely
recognized as the industry leader in customer service delivery.


Wal – Mart has value – priced products and convenient retail locations but its efficient and
responsive distribution system is how it mapped the path to competitiveness.
EXHIBIT 2 -7 Corporate Development Options

Core Business

New products New markets

for existing for existing
markets products


Unrelated to Related to
core business core business

 Core Business – the initial venture of an enterprise is the core business, as bakery
products are for Sara Lee. Many firms start out competing in one product – market. This
strategy offers the advantage of specialization but also the risks of being dependent on
one set of customer needs. As the corporation grows and prospers, management often
decides to move into other product and market areas, as shown in Exhibit 2-7.

 New Markets for Existing Products – one way to expand away from serving a single
product – market is to target other customer groups using the same product or a similar
product. This strategy reduces the risks of depending on a single market yet it allows the
use of existing technical and production capabilities.

 New Products for Existing Markets – another strategy for shifting away from
dependence on one product is to expand the product mix offered to the firm’s target
market. Use of common distribution channels, promotional support, research and
development, and production technology are among the possible advantages of this
strategy. New products can be developed internally, although acquisition may be
faster. Resources are necessary to support either alternative.
 Diversification – is movement into a new product and new market area by internal
development or by acquisition. This option is often the riskiest and costliest of all those
shown in Exhibit 2 – 7.

 A comprehensive study of diversifications of 33 large U.S companies during the

1950 -1986 period found that the most of the firms:

 Disposed of many of their acquisitions.

 Dissipated instead of created shareholder value.

 Successful diversification appears to be closely related to industry attractiveness,

reasonable cost of entry, preplanning of the acquisition, and the opportunity for
improving competitive advantage.

Business composition

 Defining the composition of the business is helpful in both corporate and marketing
strategy design.

1) Business Segment, Group, or Division – these terms are used to identify the major areas
of business of a diversified corporation. Each segment, group, or division often contains a
mix of related products (or services), though a single product can be assigned such a

 The term segment does not correspond to a market segment (subgroup of end – users in a
product – market).

2) Strategic Business Unit – a business segment, group, or division is often too large in
terms of product and market composition to use in strategic analysis and planning, so it is
divided into more specific strategic units.

 A popular name for these units is the strategic business unit (SBU).

 Typically, SBU’s display product and customer group similarities.

 Typically, the SBU has its own strategy rather than a shared strategy with another
business area.

 It is a cohesive organizational unit that is separately managed and produces sales and
profit results.
Corporate Strategy

Top management sets the guidelines for long – term strategic planning of the corporation. In a
business that has two or more strategic business units, decisions must be made at two levels.

 Corporate management - must first decide what business areas to pursue and set
priorities for allocating resources to each SBU. The decision makers for each SBU must
select the strategies for implementing the corporate strategy and producing the results that
corporate management expects.

 Corporate – level management – should assist SBU’s in achieving their objectives.

 Corporate strategy and resources – should help an SBU to compete more effectively
than if the unit operates on a completely independent basis.

 Corporate resources and synergies – help the SBU establish its competitive advantage.

The strategic focus and priorities of corporate strategy guide SBU strategies. Finally, top
management’s expectations for the corporation indicate the results expected from an SBU,
including both financial and nonfinancial objectives. When viewed in this context, the SBU’s
become the action centers of the corporation.

EXHIBIT 2 – 8 Characteristics of the Ideal Strategic Business Unit

Characteristics Rationale

Serves a homogeneous set of Minimizing the diversity of a business unit’s product –

markets with a limited number of market entries enables the unit’s manager to do a better
related technologies job of formulating and implementing a coherent and
internally consistent business strategy.

Serves a unique set of product – No other SBU within the firm should compete for the
markets same set of customers with similar products. This
enables the firm to avoid duplication of effort and helps
maximize economies of scale within its SBU’s
Has control over the factors This is not to say that an SBU should never share resources,
necessary for successful such as a manufacturing plant or a sale force, with one or
performance, such as R&D, more business units, but the SBU should have authority to
production, marketing, and determine how its share of the joint resource will be used to
distribution effectively carry out its strategy.

Has responsibility for its own Because top management cannot keep an eye on every
profitability decision and action taken by all its SBU’s, the success of an
SBU and its managers must be judged by monitoring its
performance over time. Thus, the SBU’s managers should
have control over the factors that affect performance, and then
be held accountable for the outcomes.

Strategy Analysis and Choice

 The corporate strategy determines the business portfolio of an organization and how it
will compete in each business area.

 The strategy components include the corporate mission, objectives, development strategy,
resource allocation, and sources of synergy (Exhibit 2 -1).

 The strategy also spells out the organization’s role in society, its responsibilities to the
stakeholders (employees, stockholders etc.), ethical guidelines, and environmental

 Selecting a strategy for an organization requires deciding on the product – markets in

which to compete (corporate – level strategies) and how to compete within those
environments (business – level strategies).

 Performance is the consequence of a combination of the strategy choices and how well
the strategy is implemented.


 Researchers, consultants, and managers have devoted extensive efforts to develop ways
of classifying generic business strategies. The logic of generic strategy is that it can be
followed by any organization encountering the same situational factors. Generic
strategies offer several advantages in guiding strategy selection.

1) The combine separate, situation – specific strategies, capturing their major commonalities
so that they facilitate the understanding of broad strategic patterns.
2) They guide corporate – level decisions concerning business portfolio management and
resource allocation.

3) They assist business – level strategy development by suggesting priorities and indicating
broad guidelines for action.

 Generic strategies – are not complete strategies.

 Generic strategy suggests what should be accomplished (e.g., growth)

 One type of generic classification model places business units into strategy categories
(e.g., growth, retrenchment) using two or more contingency factors as the basis of

 Their value is in indicating the type of strategy (e.g., downsizing) that is appropriate for
a particular situation.

 Strategic classification models and generic strategy guidelines are useful in setting
business – unit priorities and suggesting general strategy guidelines.

Generic Strategies

 Herbert and Deresky propose four generic strategies: develop, stabilize, turnaround,
and harvest. The classification scheme has the following features:

1) It is based on common (or overlapping) variables and characteristics of strategic types in

other models.

2) It proposes strategies that are independent of other strategies, environmental situations, or

organizational or product development stages. Thus, a harvest strategy could occur within
a rapidly developing business.

3) It encompasses/explains major and common types of generic strategies and their


4) It has been tested using data from a sample of companies. Consistent and interrelated
findings were found in the research results.

5) The Develop Strategy – the develop strategy seeks long – term growth via new –
product and/or market development.

6) The Stabilize Strategy – the strategy typically emphasizes high – quality products and
service and close contact with customers.
7) The Turnaround Strategy – this strategy is appropriate for survival and rebuilding
situations. Emphasis may be on improving cash flow and reducing costs or refocusing the
organization. Downsizing and other forms of restructuring may occur. The cost strategy
involves actions to increase efficiency, where refocusing may include reorganization,
diversification, and acquisitions (or mergers).

8) The Harvest Strategy – a business in this category is a candidate for removal from the
corporate portfolio. The factors driving the decision to harvest the business include poor
financial performance, lack of compatibility with the core business, no competitive
advantage, and poor fit with the future direction of the corporation.




JANUARY 11, 2019