Unit 5 StrategyDiscussion Outline

• We look at sustainable competitive advantage, defined here as a competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate.

• We answer the questions of how a company can establish such an advantage against competitors and the significant benefits of doing so.

• We then move into the steps involved in the strategy-making process. This is followed by a discussion of three different kinds of strategies: corporate-level strategies, business-level strategies, and operational strategies.

Strategy is an Action Managerstake to achieve Superior Performance

Superior performance

requires …

Highprofitability

Growth in profits over

time

Competitive Advantage

• Competitive advantage – an advantage obtained when a firm

outperforms its rivals, and it helps a firm to provide greater

value for customers than its competitors can.

• Distinctive competency – a unique strength (S) that rivals lack

and helps a firm attain a competitive advantage. Core

capabilities are those that produce distinctive competencies

and are less visible.

• A sustained competitive advantage – when a distinctive

competency that rivals cannot easily match or imitate.

Things that Protect Distinctive Competencies of a company: Examples

• Barriers to imitation - factors that make it difficult for a

firm to imitate the competitive position of a rival.

• Legacy constraints - prior investments in a particular way

of doing business that are difficult to change and limit a

firm’s ability to imitate a successful rival.

Competitive Advantage

Distinctivecompetencies

Competitive advantage

Low costs

Productdifferentiation

Superiorperformance

If protected from copying bybarriers to imitation and

legacy constraintscompetitive advantage

will be sustained

Characteristics of the “Distinctive” Resources

Resources (e.g., assets, capabilities, processes, employee time,

information, and knowledge that a firm controls) that help a

firm to outperform its rivals are characterized as follows:

• Owned

• Valuable

• Rare

• Imperfectly imitable

• Non-substitutable

Strategy-Making

The strategy-making typically involves three steps:

1. Assessing need for strategic change

2. Conducting a situational analysis

3. Choosing strategic alternatives

Assess

• The need assessment is difficult because there is a lot of

uncertainty in business.

• Top managers should avoid competitive inertia, since they are

often slow to recognize the need for strategic change.

• Managers must be aware of strategic dissonance.

U.S. Hospitals: An Example

• In the 20th Century, U.S. Hospitals were considered as the

premier, top-notch facilities for healthcare

• 21st Century has brought the competitive pressures from

focused providers

• Result: Competitive disadvantage and the need for change

Situational Analysis

• Strengths

• Weaknesses

• Opportunities

• Threats

Internal Analysis

• An analysis of a company’s strengths (S) and weaknesses (W), often begins with an assessment of its distinctive competencies and core capabilities.

• A distinctive competence is something that a company can make, do, or perform better than competitors and is tangible – for example, a product or service is cheaper, better, or faster.

• A core capability is something that is less visible, such as internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs.

External Analysis

• Environmental scanning

• Strategic group - group of companies within an industry that

top managers choose to compare, evaluate, and benchmark

strategic threats and opportunities

• Competitive intelligence

Choosing Strategic Alternatives

According to strategic reference point theory, managers choose

between two basic alternative strategies:

• Conservative risk-avoiding strategy

• Aggressive risk-taking strategy

Strategic Reference Points

Risk tolerance and StrategicAlternatives: Examples

• In responding to changes in the external environment, managers can choose

between aggressive risk-taking strategy or a conservative risk-avoiding

strategy:

– Prospector

– Analyzer

– Defender

• In terms of your emphasis on growth, managers can choose between:

Growth-oriented strategies

Stability-oriented strategies

Corporate-Level Strategy

Corporate-level strategy concerned with deciding which

industries a firm should compete in and how the firm should

enter or exit industries.

• Portfolio strategy and BCG Matrix

• Diversification

• Vertical integration

• International expansion

BCG Matrix

Diversification

• Diversification – Entry into new business areas.

• Related diversity – Diversification into a business related to

the existing business activities of an enterprise.

• Unrelated diversity – Diversification into a business not

related to the existing business activities of an enterprise.

• Vertical integration – either a backward (upstream)

integration or a forward (downstream) integration.

U-Shaped Relationship between Diversification and Risk

Business-Level Strategy

• Cost leadership

• Differentiation

• Focus

The Low-Cost Value Cycles

Lower costs

Economiesof scale Lower prices

Increaseddemand

Higherprofitabilityand profit

growth

Options for Exploiting Differentiation

Increaseprices morethan costs

Higherprofitabilityand profit

growth

Opti

on 1

Successfuldifferentiation

Moderate orno priceincrease

Increaseddemand

Economies ofscale and

lower costs

Opti

on 2

Choosing Segments to Serve: Focus Strategies

• Markets are characterized by different types of consumers.

• Focus Strategy: Serving a limited number of segments.

• Broad market strategy: Serving the entire market.

Configuring the Value Chain: Operational Strategy

• Primary activities: Activities having to do with the design, creation, and delivery of the product; its marketing; and its support and after sales services.

• Support activities: Activities that provide inputs that allow the primary activities to occur.

• Organization architecture: The operations of the firm are embedded within the internal organization architecture of the enterprise, which includes the organization structure, incentives, control systems, people, and culture of the firm.

Competitive Tactics• Competitive tactics: Actions that managers take to try to

outmaneuver rivals in the market.

• Tactical pricing Decisions– Razor and razor blade pricing– Price war

• Tactical Product decisions:– Product proliferation– Bundling