Competitive strategy is about being different It means

“Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value. ” Michael E. Porter

Corporate strategy is basically concerned with the choice of businesses, products and markets. It tries to answer certain key questions: (i) What businesses the firm should be in, in terms of the range of products it supplies. Punjab Tractors is a specialized company. It is involved almost exclusively in the manufacture of tractors. Hindustan Lever Ltd. is highly diversified with interests in soaps, tea, washing powders, detergents, tooth pastes, shampoo, creams, salt, hair oils etc. (ii) What should be the optional geographic spread of activities for the firm? In the restaurant business, most firms serve small local markets, whereas Mc. Donald’s operates in more than one hundred countries throughout the world. (iii) What range of vertically linked activities should the firm encompass? Reliance Industries is a key player in each of the products in the Petrochemical—Fibre intermediate chain (synthetic textiles, PSF, PFY, PTA MEG) (iv) How the corporate office should manage its group of businesses? Corporate strategy spells out the businesses in which the firm will participate, the markets it will serve and the customer needs it will satisfy.

The five Generic Competitive Strategies n Five Competitive Strategies n Low-Cost Provider Strategies n Differentiation Strategies n Best-Cost Provider Strategies n Focused (or Market Niche) Strategies

Long Term Objectives n Quantitative n Challenging n Measurable n Hierarchical n Realistic n Obtainable n Understandable n Congruent Ch 5 -4

Financial vs. Strategic Objectives Financial Objectives n. Growth in revenues n. Growth in earnings n. Higher dividends n. Larger profit margins n. Greater ROI n. Higher earnings per share n. Rising stock price n. Improved cash flow Ch 5 -5

Financial vs. Strategic Objectives n n n n Larger market share Quicker on-time delivery than rivals Shorter design-to-market times than rivals Lower costs than rivals Higher product quality than rivals Wider geographic coverage than rivals Achieving technological leadership Consistently getting new or improved products to market ahead of rivals Ch 5 -6

Not Managing by Objectives n. Managing by Extrapolation – “If it ain’t broke, don’t fix it” n. Managing by Crisis – The true measure of a good strategist is the ability to fix problems n. Managing by Subjectives – “Do your own thing, the best way you know how” n. Managing by Hope – The future is full of uncertainty and if at first you don’t succeed, then you may on the second or third try Ch 5 -7

The Balanced Scorecard Robert Kaplan & David Norton – n. Strategy evaluation & control technique n. Balance financial measures with nonfinancial measures n. Balance shareholder objectives with customer & operational objectives Ch 5 -8

The Balanced Score Card: A Balanced Approach R S Kaplan and D P Norton came out with a popular, balanced score card approach in early 90 s linking corporate goals with strategic actions undertaken at the business unit, departmental and individual level. The score-card allows managers to evaluate a firm complementary perspectives. The arguments run thus: from different (i) A firm can offer superior returns to stockholders if it has a competitive advantage in its product or service offerings when compared to its rivals. (ii) In order to sustain a competitive advantage, a firm must offer superior value to customers. (iii) This, in turn, requires development of operations with necessary capabilities. (iv) In order to develop the needed operational capabilities, a firm requires the services of employees having requisite skills, creativity, Cont…. diversity and motivations. Thus, the performance as assessed in one perspective supports performance in other areas—as shown below:

Four Perspectives of the Balanced Scorecard EVA Financial Profitability Growth Differentiation Customer Cost Quick Response Product Development Operations Demand Management Order Fulfilment Leadership Organisational Learning

Levels of Strategies –Large Company Ch 5 -11

Levels of Strategies –Small Company Ch 5 -12

Strategy and Competitive Advantage n Competitive advantage exists when a firm’s strategy gives it an edge in q Attracting customers and q Defending against competitive forces Key to Gaining a Competitive Advantage n Convince customers firm’s product / service offers superior value q A good product at a low price q A superior product worth paying more for q A best-value product

What Is“Competitive Strategy”? n Deals exclusively with a company’s business plans to compete successfully q q Specific efforts to please customers Offensive and defensive moves to counter maneuvers of rivals q q n Responses to prevailing market conditions Initiatives to strengthen its market position Narrower in scope than business strategy

The Five Generic. Competitive Strategies

Low-Cost Provider Strategies Keys to Success n Make achievement of meaningful lower costs than rivals theme of firm’s strategy n Include features and services in product offering that buyers consider essential n Find approaches to achieve a cost advantage in ways difficult for rivals to copy or match Low-cost leadership means low overall costs, not just low manufacturing or production costs!

Options: Achieving a Low-Cost. Advantage Option 1: Use lower-cost edge to q Underprice competitors and attract price-sensitive buyers in enough numbers to increase total profits Option 2: Maintain present price, be content with present market share, and use lower-cost edge to q Earn a higher profit margin on each unit sold, thereby increasing total profits

Nucor Corporation’s Low-Cost Provider Strategy Eliminate some production processes from value chain used by traditional integrated steel mills; cut investment in facilities and equipment Strive hard for continuous improvement in the efficiency of its plants and frequently invest in state-of-the art equipment to reduce unit costs Carefully select plan sites to minimize inbound and outbound shipping costs and to take advantage of low rates for electricity Hire a nonunion workforce that uses team-based incentive compensation systems Heavily emphasize consistent product quality and maintain rigorous quality systems Minimize general and administrative expenses by maintaining a lean staff at corporate headquarters and allowing only 4 levels of management

Approaches to Securing a Cost Advantage Approach 1 Do a better job than rivals of performing value chain activities efficiently and cost effectively Approach 2 Revamp value chain to bypass costproducing activities that add little value from the buyer’s perspective Control costs! By-pass costs!

Approach 1: Controlling the Cost Drivers n Capture scale economies; avoid scale diseconomies n Capture learning and experience curve effects n Manage costs of key resource inputs n Consider linkages with other activities in value chain n Find sharing opportunities with other business units n Compare vertical integration vs. outsourcing

Approach 2: Revamping the Value Chain n n n Make greater use of Internet technology applications Use direct-to-end-user sales/marketing methods Simplify product design Offer basic, no-frills product/service Shift to a simpler, less capital-intensive, or more flexible technological process Find ways to bypass use of high-cost raw materials

Keys to Success in Achieving Low-Cost Leadership n Scrutinize each cost-creating activity, identifying cost drivers n Use knowledge about cost drivers to manage costs of each activity down year after year n Find ways to restructure value chain to eliminate nonessential work steps and low-value activities n Work diligently to create cost-conscious corporate cultures q q n Feature broad employee participation in continuous costimprovement efforts and limited perks for executives Strive to operate with exceptionally small corporate staffs Aggressively pursue investments in resources and

Characteristics of a Low-Cost Provider n Cost conscious corporate culture n Employee participation in cost-control efforts n Ongoing efforts to benchmark costs n Intensive scrutiny of budget requests Programs promoting continuous cost improvement Successful low-cost producers champion n frugality but wisely and aggressively invest in cost-saving improvements !

When Does a Low-Cost Strategy Work Best? n n n n Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value to buyers Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power Industry newcomers use introductory low

Pitfalls of Low-Cost Strategies n Being overly aggressive in cutting price n Low cost methods are easily imitated by rivals n Becoming too fixated on reducing costs and ignoring q q Declining buyer sensitivity to price q n Buyer interest in additional features Changes in how the product is used Technological breakthroughs open up cost

Differentiation Strategies Objective n Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals Keys to Success n Find ways to differentiate that create value for buyers and are not easily matched or cheaply copied by rivals n Not spending more to achieve differentiation than the price premium that can be charged

Benefits of Successful Differentiation A product / service with unique, appealing attributes allows a firm to è Command è Increase è Build a premium price and/or unit sales and/or Which brand loyalty hat is unique? = Competitive Advantage

Types of Differentiation Themes n n n n n Unique taste -- Dr. Pepper Multiple features -- Microsoft Windows and Office Wide selection and one-stop shopping -- Home Depot and Amazon. com Superior service -- Fed. Ex, Ritz-Carlton Spare parts availability -- Caterpillar More for your money -- Mc. Donald’s, Wal-Mart Prestige -- Rolex Quality manufacture -- Honda, Toyota Technological leadership -- 3 M Corporation Top-of-line image -- Ralph Lauren, Chanel, Cross

Sustaining Differentiation: Keys to Competitive Advantage n Most appealing approaches to differentiation q q n Those hardest for rivals to match or imitate Those buyers will find most appealing Best choices to gain a longer-lasting, more profitable competitive edge q q q New product innovation Technical superiority Product quality and reliability Comprehensive customer service Unique competitive capabilities

Where to Find Differentiation Opportunities in the Value Chain n Purchasing and procurement activities n Product R&D and product design activities n Production process / technology-related activities n Manufacturing / production activities n Distribution-related activities n Marketing, sales, and customer service activities

Where to Find Differentiation Opportunities in the Value Chain Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer/User Value Chains

How to Achieve a Differentiation-Based Advantage Approach 1 Incorporate product features/attributes that lower buyer’s overall costs of using product Approach 2 Incorporate features/attributes that raise the performance a buyer gets out of the product Approach 3 Incorporate features/attributes that enhance buyer satisfaction in non-economic or intangible ways Approach 4 Compete on the basis of superior capabilities

Importance of Perceived Value n Buyers seldom pay for value that is not perceived n Price premium of a differentiation strategy reflects q q n Value actually delivered to the buyer and Value perceived by the buyer Actual and perceived value can differ when buyers are unable to assess their experience with a

Signaling Value as Well as Delivering Value n Incomplete knowledge of buyers causes them to judge value based on such signals as q Price q Attractive packaging q Extensive ad campaigns q Ad content and image q Characteristics of seller n n Facilities Customers Professionalism and personality of employees Signals of value may be as important as actual value when q Nature of differentiation is hard to quantify q Buyers are making first-time purchases q Repurchase is infrequent q Buyers are unsophisticated

When Does a Differentiation Strategy Work Best? n There are many ways to differentiate a product that have value and please customers n Buyer needs and uses are diverse n Few rivals are following a similar differentiation approach n Technological change and product innovation are fast-paced

Pitfalls of Differentiation Strategies n Buyers see little value in unique attributes of product n Appealing product features are easily copied by rivals n Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-being n Over-differentiating such that product features exceed buyers’ needs n Charging a price premium buyers perceive is

Best-Cost Provider Strategies n Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation q q n n Make an upscale product at a lower cost Give customers more value for the money Objectives 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 good-to-excellent product attributes, then use cost advantage to underprice comparable

Competitive Strength of a Best-Cost Provider. Strategy n n n 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 performance and features at a lower cost than rivals A best-cost producer can often out-compete both a low-cost provider and a differentiator when q q Standardized features/attributes won’t meet diverse needs of buyers Many buyers are price and value sensitive

Risk of a Best-Cost Provider Strategy n A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies q q Low-cost leaders may be able to siphon customers away with a lower price High-end differentiators may be able to steal customers away with better product attributes

Focus / Niche Strategies n Involve concentrated attention on a narrow piece of the total market Objective n Serve niche buyers better than rivals Keys to Success Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs n Develop unique capabilities to serve needs of target buyer segment

Approaches to Defining a Market Niche n Geographic uniqueness n Specialized requirements in using product/service n Special product attributes appealing only to niche buyers

Examples of Focus Strategies n e. Bay q n Porsche q n Maintenance for motor vehicles Pottery Barn Kids q n Sports cars Jiffy Lube International q n Online auctions Children’s furniture and accessories Bandag q Specialist in truck tire recapping

Focus / Niche Strategies and Competitive Advantage Approach 1 n Achieve lower costs than rivals in serving the segment -A focused low-cost strategy Approach 2 n Offer niche buyers something different from rivals -- Which hat is unique? A focused differentiation strategy

What Makes a Niche Attractive for Focusing? n Big enough to be profitable and offers good growth potential n Not crucial to success of industry leaders n Costly or difficult for multi-segment competitors to meet specialized needs of niche members n Focuser has resources and capabilities to effectively serve an attractive niche n Few other rivals are specializing in same niche

Risks of a Focus Strategy n Competitors find effective ways to match a focuser’s capabilities in serving niche n Niche buyers’ preferences shift towards product attributes desired by majority of buyers – niche becomes part of overall market n Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

Deciding Which Generic Competitive Strategy to Use n n n Each positions a company differently in its market and competitive environment 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,

Deciding Which Generic Competitive Strategy to Use n n n 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 The big risk – Selecting a “stuck in the middle” strategy! This rarely produces a sustainable competitive

Types of Strategies Forward Integration Vertical Integration Strategies Backward Integration Horizontal Integration Ch 5 -50

Vertical Integration Strategies Forward Integration Gaining ownership or increased control over distributors or retailers Backward Integration Seeking ownership or increased control of a firm’s suppliers Horizontal Integration Seeking ownership or increased control over competitors Ch 5 -51

Types of Strategies Market Penetration Intensive Strategies Market Development Product Development Ch 5 -52

Intensive Strategies Market Penetration Seeking increased market share for present products or services in present markets through greater marketing efforts Market Development Introducing present products or services into new geographic areas Product Development Seeking increased sales by improving present products or services or developing new ones Ch 5 -53

Types of Strategies Related Diversification Strategies Unrelated Diversification Ch 5 -54

Diversification Strategies Related Diversification Unrelated Diversification Adding new but related products or services Adding new, unrelated products or services Ch 5 -55

Types of Strategies Retrenchment Defensive Strategies Divestiture Liquidation Ch 5 -56

Defensive Strategies Retrenchment Divestiture Liquidation Regrouping through cost and asset reduction to reverse declining sales and profit Selling a division or part of an organization Selling all of a company’s assets, in parts, for their tangible worth Ch 5 -57

Means for Achieving Strategies Cooperation among competitors n Joint venture / partnering n Merger / acquisition n First mover advantages n Outsourcing n Ch 5 -58

Strategic Management in Nonprofit and Governmental Organizations n. Educational n. Medical Institutions Organizations n. Governmental Agencies and Departments Ch 5 -59

Outsourcing in Indian Companies Industry National Panasonic The company is outsourcing its colour television assembling processes from Salora, preferring to direct its resources to leveraging the equity of its famous brand on breaking into a crowded marketplace. Ciba-Geigy Since marketing has become crucial, the company focuses on it, buying all its bottling, packaging, and stamping since these are commoditised aspects where it can expect to add little value itself. TV Sets Pharmaceuticals Mahindra Ford Indo Rama Jenson & Nicholson Entering a crowded market, it will focus on its core function of assembly, keeping start -up costs as low as possible, and is outsourcing 40 per cent of its components, its warehousing as well as its distribution. With global markets for yarns still expanding, the company had opted to focus on its core strength instead of integrating. Since production is crucial, it outsources marketing, distribution, and ware housing. Intent on catching up with the leaders, the company has invested in marketing and distribution. Unable to integrate backwards, there fore, it has to outsource all its chemicals and raw materials. Automobiles Textiles Paints Cont….