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STRATEGIC ANALYSIS AND

CHOICE IN SINGLE OR DOMINANT PRODUCT


BUSINESSES:

BUILDING SUSTAINABLE
COMPETITIVE ADVANTAGES

By Ivan Collinson
MBA Programme
Catholic University of Mozambique
July, 2010
catholic university of mozambique

Presentation Structure

Objectives
Evaluating and choosing business strategies: seeking sustained
competitive advantages
Evaluating cost leadership opportunities
Evaluating differentiation opportunities
Evaluating Speed as a Competitive Advantage
Evaluating Market Focus as a Way to Competitive Advantage

Selected industry environments and business strategy choices


Competitive Advantage in Emerging Industries
Competitive Advantage in the Transition to Industry Maturity
Competitive Advantage in Mature and Declining Industries
Competitive Advantage in Fragmented Industries
Competitive Advantage in Global Industries

strategic management
catholic university of mozambique

Presentation Structure

Evaluating and choosing to diversify to build value in dominant


product/service businesses
Grand strategy selection Matrix
Model of Grand Strategy Clusters
Opportunities for Building Value as a Basis for Choosing Diversification
or Integration
Bibliography

strategic management
catholic university of mozambique

Objectives

Show how business managers can examine and


choose a business strategy that allows their business
to create a sustainable competitive advantage;
Describe how to evaluate and determine which value
chain activities provide the basis to promote
competitive advantage among other competitors.

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EVALUATING AND CHOOSING BUSINESS STRATEGIES

SEEKING SUSTAINED COMPETITIVE ADVANTAGE


catholic university of mozambique

Competitive Advantage (by M. Porter)

Businesses should pursue policies that create high


quality goods to sell in the market.

A competitive advantage exists when a firm is able to


deliver the same benefits as its competitors but at
lower cost (cost advantage), or deliver benefits that
exceed those of competing products (differentiation
advantage).

strategic management
catholic university of mozambique

Competitive Advantage: The Model

Resources

Cost Advantage
Distinctive
or Value Creation
Competencies
Differentiation Advantage

Capabilities

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catholic university of mozambique

Competitive Advantage

Differentiation Cost Overall Average


Advantage Advantage ROI
High High 35%
Low High 26%
High Low 22%
Low Low 9.5%

strategic management
catholic university of mozambique

Competitive Advantage: The Challenge

Evaluate and choose business strategies based on


core competencies and value chain activities that
will sustain both types of competitive advantage
simultaneously.

Basically: how to combine the two types of


competitive advantage simultaneously?

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EVALUATING COST LEADEARSHIP OPPORTUNITIES
catholic university of mozambique

valuating Cost Leadearship Opportunities

Cost leadership states that the costs to provide


products/services are lower than the competitors
(cost-effective).
The costs must be reduced on the value chain
activities (support and primary activities), in order to
create cost advantage.

strategic management
catholic university of mozambique

valuating Cost Leadearship Opportunities

The Value Chain

strategic management
catholic university of mozambique

valuating Cost Leadearship Opportunities

Cost-Leadership Opportunities vs. Porter 5 Forces


Bargaining power of customers:
Low-cost advantages reduce the likelihood of pricing
pressure from buyers.

Competitive rivalry
Truly sustained low-cost advantages may push rivals
into other areas, lessening price competition.

strategic management
catholic university of mozambique

valuating Cost Leadearship Opportunities

Threat of New Entrants


New entrants competing on price must face an
entrenched cost leader without the experience to
replicate every cost advantage.
Threat of Substitute Products
Low-cost advantages should lessen the attractiveness
of substitutes products
Power of Suppliers
High margins allows low-cost producers to withstand
supplier cost increases

strategic management
catholic university of mozambique

valuating Cost Leadearship Opportunities

Cost-Leadership Risks
Many costs-saving activities can be easily duplicated.
Exclusive cost-leadership can become a trap.
Obsessive cost cutting can shrink other competitive
advantages.
Cost differences often decline over time.

strategic management
catholic university of mozambique

valuating Cost Leadearship Opportunities

Examples of Cost-Leadership Activities


Skills and resources that promote cost leadership
Sustained capital investment and access to capital
Process engineering skills.
Intense supervision of labor or core technical
operations.
Products or services designed for ease of manufacture
or delivery.
Low-cost distribution system.

strategic management
catholic university of mozambique

valuating Cost Leadearship Opportunities

Examples of Cost-Leadership Activities


Requirements to Support and Sustain Cost-Leadership
Activities
Tight cost control.
Frequent, detailed control reports.
Continuous improvement and benchmarking
orientation.
Structured organization and responsibilities.
Incentives based on meeting strict, usually quantitative
targets.

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EVALUATING DIFFERENTIATION OPPORTUNITIES
catholic university of mozambique

valuating Differentiation Opportunities

Businesses should have sustainable advantages that allow


them to provide to consumers with something uniquely
valuable to them.
Differentiation comes from one or more activities from the
value chain, that creates unique value (perceived value).
The sustainability of differentiation depends on:
Continuation on its high perceived value to buyers.
Lack of limitation by competitors.

strategic management
catholic university of mozambique

valuating Differentiation Opportunities

Differentiation Opportunities vs. Porter 5 Forces


Competitive rivalry
Rivalry is reduced when a business successfully
differentiates itself.
Bargaining power of customers:
Buyers are less sensitive to prices for effectively
differentiated products.
Threats of New Entrants:
Brand loyalty is hard for new entrants to overcome

strategic management
catholic university of mozambique

valuating Differentiation Opportunities

Differentiation Risks
Imitation narrows perceived differentiation, rendering
differentiation meaningless.
Technological changes that nullify past investments or
learning.
Cost difference between low-cost competitors and the
differentiated business becomes too great for
differentiation to hold brand loyalty

strategic management
catholic university of mozambique

valuating Differentiation Opportunities

Examples of Differentiation Activities


Skills and resources that promote differentiation
Strong marketing abilities.
Product engineering.
Creative talent.
Strong capabilities in basic research.
Corporate reputation for quality and technical
leadership.
Long tradition in an industry.
Strong cooperation from suppliers.

strategic management
catholic university of mozambique

valuating Differentiation Opportunities

Examples of Differentiation Activities


Organizational requirements to support and sustain
differentiation activities:
Strong coordination at R&D, product development and
marketing.
Amenities to attract skilled labour.
Tradition in closeness to key customers (=corporate?)

strategic management
EVALUATING SPEED AS A COMPETITIVE ADVANTAGE
catholic university of mozambique

valuating Speed as a Competitive Advantage

Speed can be a form of differentiation, but more.


It is rapid response to:
o
Customers request
o
Market and technological changes
Provides products quicker
Accelerates new product improvement

strategic management
catholic university of mozambique

valuating Speed as a Competitive Advantage

Speed-based competitive advantages can be created


through several activities:
Customer responsiveness.
Product development.
Product and services improvements.
Speed in delivery or distribution.
Information sharing and technology.

strategic management
catholic university of mozambique

valuating Speed as a Competitive Advantage

Speed-based benefits:
Allows to address buyers more often.
Engender loyalty.
Increase the perceived value to the firm.
Substitutes products and new entrants keep trying
to follow the changes rather than actually
introduce them.

strategic management
catholic university of mozambique

valuating Speed as a Competitive Advantage

Speed-Based Risks
Speeding-up activities requires serious attention to
training, reorganization and reengineering.
For those firms or industries with minimal levels of
change, maybe speeding-up will not create so much
advantage.

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EVALUATING MARKETING FOCUS AS A WAY TO
COMPETITIVE ADVANTAGE
catholic university of mozambique

Evaluating Marketing Focus as a Way to


Competitive Advantage

Focus
The extent to which a business concentrates on a
narrowly defined market (niche).

It needs to be combined with other types of


competitive advantages.

strategic management
catholic university of mozambique

Evaluating Marketing Focus as a Way to


Competitive Advantage

Advantages
Allows to learn more deeply about the customers.
Promotes the establishment of personal
relationships with customers.

strategic management
catholic university of mozambique

Evaluating Marketing Focus as a Way to


Competitive Advantage

Risks
Can attract major competitors which were waiting
for someone to test that market.
Fall into the illusion of using marketing focus,
rather than low-cost, differentiation or rapid
response.

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SELECTED INDUSTRY ENVIRONMENTS AND
BUSINESS STRATEGY CHOICES
catholic university of mozambique

Selected Industry Environments and


Business Strategy Choices
It is important to understand that different
competitive advantages might only work to a specific
industry environment.

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COMPETITIVE ADVANTAGE IN
EMERGING INDUSTRIES
catholic university of mozambique

ompetitive Advantage in Emerging


ndustries
Emerging industries are those which:
Are newly or re-newly formed.
Are Created by technological innovation, new
emerging customer needs and socio-economic
needs.
Essential characteristic:
There are no rules of the game.

strategic management
catholic university of mozambique

ompetitive Advantage in Emerging


ndustries
Market characteristics in emerging industries:
Technologies which belongs to pioneering firms and
technological uncertainty about how product
standardization will unfold.
Competitor uncertainty.
High initial costs.
Few entry barriers
First-time buyers requiring initial inducement
Inability to find raw materials
Need for high-risk capital

strategic management
catholic university of mozambique

ompetitive Advantage in Emerging


ndustries
Strategies choices in emerging industries:
Ability to shape the industrys structure.
Ability to rapidly improve product quality.
Advantageous relationships.
Ability to establish the firms technology as the dominant
one.
Acquisition of a core group of loyal customers.
Ability to forecast future competitors.

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COMPETITIVE ADVANTAGE IN THE TRANSITION
TO INDUSTRY MATURITY
catholic university of mozambique

ompetitive Advantage in the Transition


o Industry Maturity
Transition to maturity:
The declining of the rate of growth, caused by the
development of the industry.

strategic management
catholic university of mozambique

ompetitive Advantage in the Transition


o Industry Maturity
Common changes in the process of transition
Competition becomes more intense.
Firms in the industry start to sell more to
experienced buyers, who become to make
choices.
Competition becomes more oriented to
cost&service and the buyers expect to find similar
prices and features in the similar products.

strategic management
catholic university of mozambique

ompetitive Advantage in the Transition


o Industry Maturity
Common changes in the process of transition:
Industry capacity drops down.
New products/new applications are harder to
come by.
International competition increases.
Profitability falls.

strategic management
catholic university of mozambique

ompetitive Advantage in the Transition


o Industry Maturity
Strategy choices in an maturing industry:
Pruning the product line.
Emphasis on process innovation.
Emphasis on cost reduction.
Careful buyer selection.
Horizontal integration.
International expansion.

strategic management
catholic university of mozambique

ompetitive Advantage in the Transition


o Industry Maturity
Risks to be avoid in maturing industries businesses:
Mixing the 3 generic strategies and choose for a
middleground option.
Sacrifice market share for a short-term profit.
Waiting to long to respond to price reductions,
retaining unneeded excess capacity, engaging in
irrational efforts to boost sales and have hope on
new products.

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COMPETITIVE ADVANTAGE IN THE MATURE
AND DECLINING INDUSTRIES
catholic university of mozambique

Competitive Advantage in the Mature


and Declining Industries
Declining Industries:
Those that make products or services for which
demand is growing slower or is actually declining.

strategic management
catholic university of mozambique

Competitive Advantage in the Mature


and Declining Industries
Causes for slow growing or declining:
Technological substitution.
Demographic shifts.
Shifts on needs.

strategic management
catholic university of mozambique

Competitive Advantage in the Mature


and Declining Industries
Strategies to choose in a declining industry:
Focus on segments that can offer higher returns.
Emphasize product innovation and quality
improvement.
Emphasize production and distribution efficiency.
Gradually harvest the business.

strategic management
catholic university of mozambique

Competitive Advantage in the Mature


and Declining Industries
Risks to be avoided when implementing the
strategies in a declining industry:
Being too much optimist about the revival of the
industry.
Getting trapped in a profitless war of attrition.
Harvesting from a weak position.

strategic management
COMPETITIVE ADVANTAGE IN
FRAGMENTED INDUSTRIES
catholic university of mozambique

ompetitive Advantage in Fragmented


ndustries
Fragmented Industry:
No firm has a significant market share and can
strongly influence industry outcome.

strategic management
catholic university of mozambique

ompetitive Advantage in Fragmented


ndustries
Strategies to choose in a fragmented industry:
Tightly managed decentralization.
Formula facilities.
Increased value added.
Specialization.
Bar bones/No frills.

strategic management
COMPETITIVE ADVANTAGE IN
GLOBAL INDUSTRIES
catholic university of mozambique

Competitive Advantage in Global


Industries
Global Industry:
The firms which become part of this industry, are
fundamentally affected by their overall global
competitive positions.
To avoid strategic disadvantages, they are virtually
required to compete on a worldwide basis.

strategic management
catholic university of mozambique

Competitive Advantage in Global


Industries
Strategy-shaping features of the global industries:
Differences in prices.
Differences in buyer needs.
Differences in competitors and ways of
competing.
Differences in trade rules ad governmental
regulations.

strategic management
catholic university of mozambique

Competitive Advantage in Global


Industries
Strategy choices in a global industry:
Pursue global market coverage.
o
License foreign firms to produce.
o
Maintain a domestic production base and
export to foreign countries.
o
Establish foreign-based plants and distribution.

strategic management
catholic university of mozambique

Competitive Advantage in Global


Industries
Strategy choices in a global industry:
Generic global competitive strategy:
o
Broad-line global competition.
o
Global focus strategy.
o
National focus strategy.
o
Protected niche strategy.

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DOMINANT PRODUCT/SERVICE BUSINESSES:
EVALUATING AND CHOOSING TO DIVERSIFY
TO BUILD VALUE
catholic university of mozambique

Dominant Product/Service Business:


Evaluating And Choosing To Diversify To Build
Value
What grand strategies are best suited to continue to
build value, in a dominant product/service business?
Under what circumstances should be choose:
Expanded focus (diversification, vertical
integration);
Steady continued focus (concentration, market or
product development );
Narrowed focus (turnaround or divestiture);

strategic management
catholic university of mozambique

Grand Strategy Selection Matrix


Overcome
weakness

II I
Turnaround Vertical Integration
Divestiture Conglomerate Diversification
Liquidation
Internal External

III IV
Concentrated growth Horizontal Integration
Market development Concentric Diversification
Product development Joint Venture
Innovation Maximize
Strengths

strategic management
catholic university of mozambique

Grand Strategy Clusters

Grand Strategy Clusters Rapid market


growth
II
I Reformulation of concentrated growth
Concentrated growth Horizontal integration
Vertical Integration Divestiture
Liquidation
Strong Concentric diversification Weak
Competitive Competitive
position position
IV III
Concentric diversification Turnaround
Conglomerate diversification Concentric diversification
Joint ventures Conglomerate diversification
Divestiture
Slow market Liquidation
growth

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OPPORTUNITIES FOR BUILDING VALUE
AS A BASIS FOR CHOOSING
DIVERSIFICATION OR INTEGRATION
catholic university of mozambique

Opportunities for Building Value as a Basis fo


Choosing Diversification or Integration

The activities related to build value through


diversification or integration are mostly related with:
Reducing costs;
Improving margins;
Providing access to new revenue sources more
effectively.

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Thank you!
STRATEGIC ANALYSIS AND
CHOICE IN SINGLE OR DOMINANT PRODUCT
BUSINESSES:

BUILDING SUSTAINABLE
COMPETITIVE ADVANTAGES

By Ivan Collinson

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