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Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Tomislav Rimac – Fall 2012
Escola Superior de Comerç Internacional - UPF
INTERNATIONAL MANAGEMENT Lecture 7: Organizational Strategy
Tomislav Rimac – Fall 2013
Universitat Autònoma de Barcelona – ADE in English – 3 rd^ year
STRATEGIC MANAGEMENT I Presentation 5 : Business Strategy Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 1
1. CRAFTING BUSINESS STRATEGY
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 2
Define generic strategies and show how they
relate to a firm’s strategic position
Describe the drivers of low-cost, differentiation,
and focus strategic positions
Identify and explain the risks associated with each
generic strategy position
Show how different positions fit with various
stages of the industry life cycle
5 Evaluate the quality of the firm’s strategy
Objectives Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 3 Companies can be classified as:
Drivers
Passengers
Road Kill
Which will get to the future first?
The Race To The Future
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 6 Example – The Global Automobile Industry Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 7
No advantage over
rivals
Advantage over rivals
Low-cost
Differentiation
Description
Produce an essentially
equivalent product at a
lower cost
Produce a differentiated
product and charge suffici-
ently higher prices to more
than off-set the added
costs of differentiation
Gaining Advantage Over Rivals
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 8
PRODUCT DIFFERENTIATION MARKET SEGMENTATION KEY FUNCTIONAL AREAS
Cost Leadership Low (mainly by price) Low (mass market) Manufacturing, services, and logistics
Differentiation High (mainly by uniqueness) High (many market segments) R&D, marketing, and sales
Focus Extremely high Low (one of a few segments) R&D, marketing, and sales
Three Generic Strategies Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 9 Adapted from M. Porter, Competitive strategy , 1980.
Low-cost Differentiation
Strategic advantage
Narrow
(i.e., particular
segment only)
Broad
(i.e., industry
wide)
Broad
differentiation
Focused cost
leadership
Focused
differentiation
Broad low-cost
leadership
The Strategic Positioning Model
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 12
Economies of scale
Learning
Product technology
Product design
Location advantages for
sourcing inputs
Key Drivers Of Cost Advantage Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 13
Economies
of scale
Learning
Economies
of scope
Production
technology
Product
design
Location
Economies of scale exist during a period of time if the average
total cost for a unit of production is lower at higher levels of
output
You must review cost to assess whether economies of scale exist:
Fixed costs remain the same for different levels of
production
Variable costs are the costs of variable inputs (such as raw
materials and labor) and vary directly with output
Marginal cost is the cost of the last unit of production
Total cost is the sum of all production costs and always
increases as output goes up
Average cost is the mean cost of total production during
a given period (say, a year)
Economies Of Scale
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 14
Learning
Economies
of scope
Production
technology
Product
design
Location
Some sources
of economies
R&D spend Advertising spend Specialization of
specific production
processes
Superior inventory
management
Purchasing power
Some sources
of diseconomies
Bureaucracy High labor costs Inefficient operations
Economies
of scale
Diseconomies Of Scale Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 15
Economies
of scale
Learning
Economies
of scope
Production
technology
Product
design
Location
Costs decrease …
as the scale of
operation increases
during any given period
of time
Economies
of scale
with the cumulative
level of production
since the production of
the first unit
Learning
curve
How Learning Differs from Scale
Learning Curve
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 18
Economies
of scale
Learning
Economies
of scope
Production
technology
Product
design
Location
Product design can sometimes
be altered to lower a firm’s
production costs (e.g., Canon
vs. Xerox)
Production Design Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 19
Economies
of scale
Learning
Economies
of scope
Production
technology
Product
design
Location
Sometimes firms try to attain
lower production costs by locating
their operations in cheaper labor
markets (e.g., manufacturing in
China to achieve lower costs than
competitor in the home country)
Location
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 20 Premium brand image Customization Unique styling Speed More convenient access Unusually high-quality To drive up customer’s
willingness to pay and
generate demand
sufficient to:
Recoup added costs
Generate enough
profits to make
strategy worthwhile
Key Drivers Purpose
Key Drivers Of Differentiation Advantages Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 21
Low-cost
Differentiation
Economies of scale Learning Economies of scope Superior technology Product design Location
Drivers Threats
New technology Too low-quality Social, political, and
economic risks of
outsourcing
Premium brand image Customization Unique styling Speed Convenient access Unusually high-quality Failure to increase
buyer’s willingness
to pay higher prices
Under estimating
cost of differentiation
Over fulfillment of
buyer’s needs
Lower cost imitation Drivers And Threats To Differentiation And Low-Cost
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 24
Decline
Mature
Embryonic
Growth
Phases of industry life cycle (^) Arenas Vehicles Differentiators Staging Economic Logic Local Internal development Alliances to secure missing inputs or distribution access Target basic needs, minimal differentiation Tactics to gain early footholds Prices tend to be high. Costs are also high Focus is on securing additional capital to fund growth phase. Penetration into adjacent markets Alliances for cooperation Acquisitions in targeted markets Increased efforts toward differentiation Low cost leaders emerge through gaining experience advantages and scale Integrated positions require choice of focusing first on cost or differentiation Margins can improve rapidly because of experience and scale Price premiums accrue to successful differentiators Globalization Diversification Mergers and acquisitions result in consolidation More stable positions emerge across competitors Choosing international markets and new industry diversification; need rational sequencing Consolidation results in fewer competitors (favoring higher margins) but declining growth demands cost containment and rationalization of operations. Some arenas may be abandoned if decline is severe Focus on segments which provide most profitability Acquisitions for diversifying moves Divestitures to exit for some competitors Rationalizing cost Strategies For Different Phases Of The Industry Lifecycle Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 25
Key Evaluation Criteria Sub-questions
1. Does your strategy exploit your key
resources?
With your particular mix of resources, does this strategy give you an
advantageous position relative to your competitors?
Can you pursue this strategy more economically than competitors?
Do you have the capital and managerial talent to do all you
envision?
Are you spread too thin?
2. Does your strategy fit with current
industry conditions?
Is there healthy profit potential where you're headed?
Are you aligned with the key success factors of your industry?
3. Will your differentiators be sustainable?
Will competitors have difficulty imitating you?
If imitation cannot be foreclosed, does your strategy include a
ceaseless regimen of innovation and opportunity creation to keep
distance between you and the competition?
4. Are the elements of your strategy
consistent and aligned with your strategic
position?
Have you made choices of arenas, vehicles, differentiators, and
staging, and economic logic?
Do they all fit and mutually reinforce each other?
6. Can your strategy be implemented?
Will your stakeholders allow you to pursue this strategy?
Do you have the proper complement of implementation levers in
place?
Is the management team able and willing to lead the required
changes?
Testing The Quality Of A Strategy
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 26 2. CRAFTING BUSINESS STRATEGY FOR DYNAMIC CONTEXT Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 27
Distinguish the ways in which firms’ strategies are
related to dynamic contexts
Identify, compare, and contrast the various
routes to revolutionary strategies
Evaluate the advantages and disadvantages of
choosing a first-mover strategy
Recognize when an incumbent is caught off
guard by revolutionary strategy and identify
defensive tactics to reduce the effects of this
competition
Explain the difficulties and solutions to
implementing revolutionary strategies
Objectives
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 30
Phase 1
Discovery
and
competitive
new action
Phase 2
Customer
reaction
Phase 3
Competitor
reaction
Phase 4
Evaluation of
action and
reaction
effectiveness
Source: Adapted from K.G. Smith, W.J. Ferrier, and C.M. Grimm, “King of the Hill: Dethroning the Industry Leader,” Academy of Management Executive 15:2 (2001), 59- 70 Objectives Phases Of Competitive Interaction Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 31
Based on price
Making a choice for a gas station
Commoditization
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 32
“What counts most in expeditionary
marketing is not hitting a bull’s eye
the first time, but how quickly one
can improve one’s aim and get
another arrow on the way to the
target.”
- Hamel and Prahalad The Importance Of Speed Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 33 High And Low-End Disruption
Strategy that may result in
huge new markets in which
new players redefine industry
rules to unseat the largest
incumbents
Strategy that appears at the
low end of industry offerings,
targeting the least desirable
of incumbents’ customers
High-end
Low-end
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Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 36
Strategic group
and
Industry
Industry segments
Buyers
Business model
Time
Product and
service offerings
Emphasizes competitive position
within group and segments
Emphasizes rivalry
Emphasizes better buyer service
Emphasizes efficient operation
of the model
Emphasizes adaptation and capa-
bilities that support competitive
retaliation
Emphasizes product or service value
and offerings within industry
definition
Dimensions
of competition Head-to-Head competition^ New-market creation
Looks across groups and
segments
Emphasizes substitutes across
industries
Emphasizes redefinition of the
buyer and buyer’s preferences
Emphasizes rethinking of the
industry business model
Emphasizes strategic intent-
seeking to shape the external
environment over time
Emphasizes complementary
products and services within and
across industries and segments
Conventional Vs. New Market-Creation Strategic Mindset Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 37
Rapid technology advances allow a
fast-follower to leapfrog the first
mover
It achieves absolute cost advantage
The first mover’s offering strikes a
chord but is flawed
Its reputation and image
advantages
are hard to copy
The first mover lacks a key
complement (e.g., channel access)
that the follower possesses
Its customers are locked in (i.e.,
switching costs exist)
First-mover costs outweigh the
advantages of being the first-move
Scale of the first move makes
imitation unlikely
A first-follower is often better off than
a first mover when:
A first-mover is often better off than
a fast follower when:
Pros And Cons Of First Movers
Universidad Autònoma de Barcelona – ADE – Tomislav Rimac
Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 38 Product Pioneer(s) Imitators/fast followers Comments Automated teller machines (ATMs) DeLaRue (1967) Docutel (1969) Diebold (1971) IBM (1973) NCR (1974) The first movers were small entrepreneurial upstarts that faced two types of competitors: (1) larger firms with experience selling to banks and (2) the computer giants. The first movers did not survive Ballpoint pens Reynolds (1945) Eversharp (1946) Parker (1954) Bic (1960) The pioneers disappeared when the fad first ended in the late 1940s. Parker entered 8 years later. Bic entered last and sold pens as cheap disposables Commercial jets DeHaviland (1952) Boeing (1958) Douglas (1958) The pioneers rushed to market with a jet that crashed frequently. Boeing and Douglas (later known as McDonnell- Douglas) followed with safer, larger, and more powerful jets unsullied by tragic crashes Credit cards Diners club (1950) Visa/Master-Card (1966) American Express (1968) The first mover was undercapitalized in a business in which money is the key resource. American Express entered last with funds and name recognition from its traveler’s check business Diet soda Kirsch’s No-Cal (1952) Royal Crown’s Diet Rite Cola (1962) Pepsi’s Patio Cola (1963) Coke’s Tab (1964) Diet Pepsi (1964) Diet Coke (1982) The first mover could not match the distribution advantages of Coke and Pepsi. Nor did it have the money or marketing expertise needed for massive promotional campaigns A Gallery Of First-Movers And Fast Followers Universidad Autònoma de Barcelona – ADE – Strategic Management I Tomislav Rimac – Fall 2013 39 Source: Adapted from S. Schnaars, Managing Imitation Strategies (New York Free Press, 1994), 37- 43 Product Pioneer(s) Imitators/fast followers Comments Light beer Rheingold’s and Gablinger’s (1968) Meister Brau Lite (1967) Miller Lite (1975) Natural light (1977) Coors light (1978) Bud light (1982) The first movers entered 9 years before Miller and 16 years before Budweiser, but financial problems drove both out of business. Marketing and distribution determined the outcome. Costly legal battles, again requiring access to capital, were commonplace PC operating systems CP/M (1974) Microsoft DOS (1981) Microsoft Windows (1985) The first mover set the early industry standard but did not upgrade for the IBM PC. Microsoft bought an imitative upgrade and became the new standard. Windows entered later and borrowed heavily from predecessors (and competitor Apple), then emerged as the leading interface Video games Magnavox’s Odyssey (1972) Atan’s Pong (1972) Nintendo (1985) Sega (1989) Microsoft (1998) The market went from boom to bust to boom. The bust occurred when home computers seemed likely to make video games obsolete. Kids lost interest when games lacked challenge. Price competition ruled. Nintendo rekindled interest with better games and restored market order with managed competition. Microsoft entered with its Xbox when perceived gaming to be a possible component of its wired world A Gallery Of First-Movers And Fast Followers
