mgt703: strategic management module 3 · 11/10/2008 · dr ahmad faisal doc: mgt703 – m3...

MGT703: STRATEGIC MANAGEMENT

Module 3: Internal Analysis & Five Generic Competitive Strategies

Chapter 4 and 5DR AHMAD FAISAL

Doc: MGT703 – M3 November 2008 Dr Ahmad FaisalNon-Commercial Use Only

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Module Overview

Internal Analysis•Competence•Competitive advantage•SWOT analysis•Prices and cost competitiveness•The value chain•Competitive positioning

Five generic competitive strategies•Overall cost-leadership strategy•Broad differentiation strategy•Focused cost-leadership strategy•Focused differentiation strategy•Best-cost provider strategy

Question 1: How Well Is the Company’s Present Strategy Working?Question 2: What Are the Company’s Resource Strengths and Weaknesses and Its External Opportunities and Threats?Question 3: Are the Company’s Prices and Costs Competitive?Question 4: Is the Company Competitively Stronger or Weaker than Key Rivals?Question 5: What Strategic Issues and Problems Merit Front-Burner Managerial Attention?


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Competencies – Explained

A competence is the product of organisational learning and experience and represents real proficiency in performing an internal activity

A core competence is a well-performing internal activity that is central (not peripheral or incidental) to a company’s competitiveness and profitability

A distinctive competence is a competitively valuable activity a company performs better than its rivals


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Core Competencies – Examples

• Expertise in integrating multiple technologies to create families of new products

• Know-how in creating operating systems for cost efficient supply chain management

• Speeding next-generation products to market

• Better after-sale service capability

• Skills in manufacturing a high quality product

• Systems to fill customer orders accurately


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Distinctive competencies – Examples

• Sharp Corporation – expertise in flat-panel display technology

• Toyota and Honda – low cost, high-quality manufacturing capability and short design-to-market cycles

• Intel – ability to design and manufacture ever more powerful microprocessors for PCs

• Wal-Mart – low cost distribution and use of state-of-the-art retail technology


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Distinctive competencies, resources, and capabilities

ResourcesResources

HigherProfits

DistinctiveCompetencies

Capabilities

Differentia-tion

Low Cost

ValueCreation

Superior

•Efficiency•Quality•Innovation•CustomerRespon-siveness

Source: Hill, Jones and Galvin (2004, p. 115)


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Roots of competitive advantage


SuperiorQuality

SuperiorQuality

CompetitiveAdvantage:

•Low Cost•Differentiation

CompetitiveAdvantage:

•Low Cost•Differentiation

SuperiorInnovation Superior

Innovation

SuperiorEfficiencySuperior

EfficiencySuperior

CustomerResponsiveness

SuperiorCustomer

Responsiveness


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The impact of quality on profits


IncreasedReliability

IncreasedReliability

Higher Prices

Higher Prices

IncreasedQuality

IncreasedQuality

HigherProfits HigherProfits

IncreasedProductivityIncreased

ProductivityLower Costs

Lower Costs


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The relationship between costs and competitive advantage

Source: Hill, Jones and Galvin (2004, p. 121

Innovation

Lower Unit Costs

Higher Unit Prices



Quality

Efficiency


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The Three Steps of SWOT Analysis


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The role of SWOT in crafting a better strategy

The most important part of SWOT is;

To draw conclusions about a company’s overall situation and

To Act on the conclusions to

• Better match a company’s strategy to its resource strengths and market opportunities,

• Correct the important weaknesses, and

• Defend against external threats

Opportunities most relevant to a company are those offering;

• A good match with its financial and organisational resource capabilities

• Best prospects for profitable long-term growth

• Potential for competitive advantage

Threats are;

Emergence of cheaper/better technologies Introduction of better products by rivals

Entry of lower-cost foreign competitors Tedious regulations Rise in interest rates Potential of a hostile takeover Unfavorable demographic shifts Adverse shifts in foreign exchange rates Political upheaval in a country


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The concept of value chain

A company’s business consists of all activities undertaken in designing, producing, marketing, delivering, and supporting its product or service

A company’s value chain consists of a linked set of value-creating activities performed internally

The value chain contains two types of activities• Primary activities – where most of the value for customers is created• Support activities – facilitate performance of the primary activities

Typical Company’s Value Chain


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Characteristics of value chain analysis

• Combined costs of all activities in a company’s value chain define the company’s internal cost structure

• Compares a firm’s costs activity by activity against costs of key rivals – from raw materials purchase to price paid by ultimate customer

• Pinpoints which internal activities are a source of cost advantage or disadvantage

Why do value chains of rivals differ?

Several factors can cause differences in value chains of rival companies such as:

Internal operations Strategy Approaches used in execution of the strategy Underlying economics of the activities

Differences can complicate the task of assessing rivals’ relative cost positions


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The Industry value chain


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The value chain system for an entire industry • Assessing a company’s cost competitiveness involves comparing costs along

the industry’s value chain

• Suppliers’ value chains are relevant because: Costs, performance features, and quality of inputs provided by suppliers can influence a firm’s own costs and product performance

• Forward channel allies’ value chains are relevant because: • Costs and margins are part of price paid by ultimate end-user• Activities performed affect end-user satisfaction

Benchmarking costs of key value chain activities

Focuses on cross-company comparisons of how certain activities are performed and costs associated with these activities:

Purchase of materials Payment of suppliers Management of inventories Getting new products to market Performance of quality control Filling and shipping of customer orders Training of employees n Processing of payrolls


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Options to correct internal cost disadvantages

•Implement use of best practices throughout company

•Eliminate some cost-producing activities altogether by revamping value chain system

•Relocate high-cost activities to lower-cost geographic areas

•See if high-cost activities can be performed cheaper by outside vendors/suppliers

• Invest in cost-saving technology

•Innovate around troublesome cost components

•Simplify product design

•Make up difference by achieving savings in backward or forward portions of value chain system

Refer recommended text for more illustrations


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Translating Value Chain into Competitive Position

Refer recommended text for more description


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Analysing the Competitive Competition

• How does a company rank relative to competitors on each important factor that determines market success?

• Does a company have a net competitive advantage or disadvantage compared to major competitors?

Overall competitive position involves answering two questions

Refer recommended text for more description


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Strategic issues and managerial attentionBased on results of both industry and competitive analysis and an evaluation of a company’s competitiveness, what items should be on a company’s “worry list”?

It Requires thinking strategically about: Pluses and minuses in the industry and competitive situation Company’s resource strengths and weaknesses and attractiveness of its competitive position.

• How to encounter market challenges from new foreign competitors?

• How to combat price discounting of rivals?• How to reduce a company’s high costs?• How to sustain a company’s present growth in light of

slowing buyer demand?• Whether to expand a company’s product line?• Whether to acquire a rival firm?• Whether to expand into foreign markets rapidly or

cautiously?• What to do about aging demographics of a

company’s customer base?

A “good” strategy must address “what to do”about each and every

strategic issue!


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Business Strategy – WHAT?

• Generic competitive strategies that occur at the business level of the organisation

• A plan of action that a company follows to gain a competitive advantage

• Who is being satisfied?

• What is being satisfied?

• How are customers being satisfied?


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Five generic competitive strategies:An overview

• Overall cost-leadership strategy

• Broad differentiation strategy

• Focused cost-leadership strategy

• Focused differentiation strategy

• Best-cost provider strategy


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Five generic competitive strategies


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Overall low-cost strategy

Strategic choices

• pursue a low level of product differentiation

• aim at the average customer

• engage in a limited amount of market segmentation

• increase efficiency and lower costs

• develop skills in flexible manufacturing

Advantages• as long as price is key to a significant

number of buyers• protection from industry competitors and

new entrants by cost advantage• less vulnerable to powerful suppliers and

increases in the price of inputs• less vulnerable to powerful buyers that may

insist on a price reduction

Disadvantages• technological change can render

experience-curve economies obsolete• tied to maintaining low labour costs• competitors may be able to imitate the

cost-leader’s methods• risk of not responding, in a timely manner to

changes in customer preferencesDoc: MGT703 – M3 November 2008 Dr Ahmad FaisalNon-Commercial Use Only

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Achieving superior efficiency• Efficiency = outputs / inputs

• Outputs are goods and services

• Inputs include labour, land, capital and technological know-how

• Efficiency produces higher productivity and thereby lowers the per unit cost

• Maximising resources and minimising wastage

• Economies of scale – lower unit costs due to large scale production volumes

• Scale economies can be achieved by, increasing sales and or greater labour specialisation

• Minimum efficient scale

A typical long-term unit-cost curve (Hill, Jones & Galvin 2004, p. 152)


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Differentiation strategy

Strategic choices

• pursue a high level of product differentiation

• be responsive to customers through after-sales service and product repair

• engage in the maximum amount of market segmentation

• develop skills relevant to the sourceof differentiation

Advantages• protected from industry competitors and

new entrants by brand loyalty• less vulnerable to moderate increases in

cost of inputs• less vulnerable to powerful buyers because

of unique products

Disadvantages• pressure to maintain perceived uniqueness

in the eye of customers• competitors may be able to imitate a

differentiator’s product• importance of differentiation may diminish

over time


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Focus strategy

Strategic choices

• pursue either a high or a low level of product differentiation

• choose a specific niche market or a number of niche markets

• develop relevant skills according to adoption of cost leadership or differentiation

Advantages• protected from industry competitors and

new entrants by uniqueness of product or service and customer loyalty

• increase in cost of inputs could be passed on to customers

• forms a strong relationship with customers and allows for changing customer needs

Disadvantages• vulnerable to powerful suppliers• production costs can be high relative to

those of low-cost companies• higher costs can reduce profitability• niche market may not be stable and may

disappear


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Best-cost provider strategies

Strategic choices

• A combination of low-cost and differentiation

• upscale product at a lower cost

• giving customers more value for their money

• Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations

• Be the low-cost provider of a product with above average product attributes, then use cost advantage to under-price comparable brands

Competitive Strength• A best-cost provider’s competitive advantage

comes from matching close rivals on key product attributes and beating them on price

• Success depends on having the skills and capabilities to provide attractive performanceand features at a lower cost than rivals

• A best-cost producer can often out-competeboth a low-cost provider and a differentiator when

• existing standardised features/attributes do not meet diverse needs of buyers

• many buyers are price and value sensitive

Risks• A best-cost provider may get squeezed between

strategies of firms using low-cost and differentiation strategies

• Low-cost leaders may be able to siphoncustomers away with a lower price

• High-end differentiators may be able tosteal customers away with better product attributesDoc: MGT703 – M3 November 2008 Dr Ahmad Faisal

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Stuck in the middle

• Poor planning choices

• Lack of consistency in approach to implementation of strategy

• Still possible to be successful but unlikely to be sustainable over the long-term

This rarely produces a sustainable competitive advantage or a

distinctive competitive position.

Deciding Which Generic Competitive Strategy to Use

• Each positions a company differently in its market

• Each establishes a central theme for how a company will endeavor to outcompete rivals

• Each creates some boundaries for maneuvering as market circumstances unfold

• Each points to different ways of experimenting with the basics of the strategy

• Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy

Why

?

How?


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Choosing a business-level strategy


Investment strategy

•the resources (human, functional and financial) required to gain a sustainable competitive advantage

Competitive position

•market share is an indicator of competitive strength

•distinctive competencies are competitive tools

mgt703: strategic management module 3 · 11/10/2008 · dr ahmad faisal doc: mgt703 – m3...

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