Notes for midterm2

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Generic Strategies :

Generic Strategies Differentiation Strategy A generic business strategy in which a business produces distinct products or services industrywide for a large market Cost Differentiation Ivory Intro. AA

Generic Strategies :

Generic Strategies Focus Differentiation Strategy Is appropriate for business units that produce highly differentiat ed , need-fulfilling products or services for the speialized needs of a narrow range of customers in a market niche. Cost Differentiation Cray


Differentiation Objective: Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals Uniqueness through: unique product features quality of inputs performance after sale service speed and flexibility image - organizational reputation and brand name

What does it take to be a differentiator?:

What does it take to be a differentiator? Customers should be willing to pay a premium price attributes that make the product unique should be valued by the customer attributes should appeal to large percentage of the market (broad differentiator) Company should be able to communicate its uniqueness Costs of differentiation should not be too high.

The Appeal of Differentiation Strategies:

The Appeal of Differentiation Strategies A powerful competitive approach when uniqueness can be achieved in ways that Buyers perceive as valuable Rivals find hard to copy Can be incorporated at a cost well below the price premium that buyers will pay

Other requirements for differentiation:

Other requirements for differentiation Marketing abilities Product engineering skills Creativity Capability in basic research Loosely structured organization, strong interfunctional coordination Compensation and rewards based on subjective criteria Strengths in marketing, R&D, technology, and innovativeness

Risks of Differentiation Strategy:

Risks of Differentiation Strategy Customers may choose to sacrifice some features. Competitors may imitate the differentiating feature. Not understanding what buyers want or prefer and differentiating on the “wrong” things.

Effective Differentiators can MITIGATE the Five Forces to Earn Above Average Profits.:

8 Can fend off New Entrants because: New products must surpass proven products, or Be equal to performance but offer a lower price Rivalry Among Competing Firms in Industry Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products Well positioned relative to Substitute s because: Brand loyalty tends to reduce new product trial and brand switching Can mitigate Supplier Power by: Absorbing price increases due to higher margins Passing on higher supplier prices because buyers are brand loyal Can mitigate Buyer Power because: Well differentiated products reduce customer sensitivity to price increases Effective Differentiators can MITIGATE the Five Forces to Earn Above Average Profits.

Effective Differentiators can also succeed IN SPITE of unattractive Five Forces:

9 Effective Differentiators can also succeed IN SPITE of unattractive Five Forces New Entrants cannot make a profit compared to Diff as long as the basis for differentiation remains. Substitutes Place a Price Ceiling on the Industry. Diff can profit better than others even as this ceiling is lowered due to more plentiful substitutes as long as the basis for Diff survives. Powerful Buyers can: Demand Lower Prices Demand Higher Quality Diff can absorb these COST increases better than others. Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products Rivals Can’t absorb costs of price wars or marketing blitzes as well as the Diff. Bargaining Power of Buyers Powerful Suppliers can: Raise their Prices Lower their Quality DIFF can absorb these COST increases better than others.


Agenda Focus strategies Best-cost provider strategy Song Airlines

Generic Strategies:

Generic Strategies III. Focus: Serving the needs of a special market segment better than anyone else What does it take to pursue a focus strategy? Ability to segment the market Ability to assess and meet the needs of buyers in a particular segment better than other competitors. Risks: Cost focus - cost leadership Differentiation focus - differentiation The narrow market segment may become like the broader market thus eliminating the need for a focused approach.

Ways Organizations Can Simultaneously Differentiate Their Products and Lower Their Costs :

Ways Organizations Can Simultaneously Differentiate Their Products and Lower Their Costs Dedication to Quality Quality is defined as “the totality of features and characteritics of a product or service that bear on its ability to satisfy needs or implied needs.” Process Innovation A business unit’s activities that increase the efficiency of operations and distribution. Product Innovation A business unit’s activities that enhance the differentiation of its products and services.

Best-Cost Strategy:

Best-Cost Strategy Hybrid strategy: Firm pursues low cost and differentiation simultaneously. High differentiation and low costs can be complementary: Total Quality Management (TQM) High levels of advertising and promotional expenditure (differentiation) --> increased market share --> economies of scale (low costs). Profits generated from pursuit of low costs allow investments in differentiating features.

Best Cost Provider Strategies:

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

How a Best-Cost Strategy Differs from a Low-Cost Strategy:

How a Best-Cost Strategy Differs from a Low-Cost Strategy Aim of a low-cost strategy-- Achieve lower costs than any other competitor in the industry Intent of a best-cost strategy-- Make a more upscale product at lower costs than the makers of other brands with comparable features and attributes A best-cost provider cannot be the industry’s absolute low-cost leader because of the added costs of incorporating the additional upscale features and attributes that the low-cost leader’s product doesn’t have

Example-Toyota’s Lexus Line:

Example-Toyota’s Lexus Line Designing high performance characteristics and upscale features Transferring its low-cost capabilities to making premium quality cars Underprice Mercedes and BMW Established a new network of dealers

Corporate-Level Strategies:

Corporate-Level Strategies


Agenda Defining corporate-level strategy Concentration strategies Integrative strategies Vertical integration Horizontal integration Diversification strategies Related diversification Unrelated diversification Renewal strategies Means to pursue corporate-level strategies Portfolio management

Corporate-Level Strategy:

Corporate-Level Strategy Overall direction of the firm Growth Renewal Optimal mix of businesses Single business Vs. Multiple businesses Allocation of resources between the different businesses of the firm.

Possible Growth Strategies:

Possible Growth Strategies Organizational Growth Concentration Horizontal Integration Diversification Related Unrelated Vertical Integration Backward Forward

Concentration Options:

Concentration Options Customers Product (s) Product/Market Exploitation Market Development Product Development Product/Market Proliferation Current New Current New

Concentration Strategies:

Concentration Strategies Means firm concentrates on its primary business. Is the simplest and the least ambiguous Has four options : 1. Product/Market Exploitation Increasing sales of current products in current markets 2. Product Development developing new products for current customers. New products - improved or modified

Concentration Strategies:

Concentration Strategies 3. Market Development: Selling current products in new markets New markets - additional geographic areas, different market segments 4. Product/Market Proliferation: Expanding both into new products and into new markets

Concentration Strategies:

Concentration Strategies Advantages: Allows the firm to master one business Allows top managers to specialize in one business Allows all organization resources to be allocated to one business and put under less strain Disadvantages: Is risky when environments are unstable Is vulnerable to risks of product obsolescence and industry maturity May lead to cash flow problems

Integrative Growth Strategies:

Integrative Growth Strategies Vertical Integration Backward Forward Horizontal Integration

Horizontal Integration:

Horizontal Integration Means investing in the purchase of one or more competitors. Purpose is to gain market share, expand geographically, augment product or service lines. Example: BMW’s Rover acquisition

Vertical Integration Strategies:

Vertical Integration Strategies Vertical integration extends a firm’s competitive scope within same industry Backward into sources of supply Forward toward end-users of final product Can aim at either full or partial integration Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Appeal of Backward Integration:

Appeal of Backward Integration Reduces risk of depending on suppliers of crucial raw materials / parts / components Ensures smoother and better coordinated operations Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Potential to reduce costs exists when Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met Can produce a differentiation-based competitive advantage when it results in a better quality part

Appeal of Forward Integration:

Appeal of Forward Integration Advantageous for a firm to establish its own distribution network if: Undependable distribution channels undermine steady production operations Integrating forward into distribution and retailing may: be cheaper than going through independent distributors help achieve stronger product differentiation, allowing escape from price competition provide better access to users

Strategic Disadvantages of Vertical Integration:

Strategic Disadvantages of Vertical Integration Locks firm deeper into same industry Poses problems of balancing capacity at each stage of value chain May require radically different skills / capabilities Reduces manufacturing flexibility, lengthening design time and ability to introduce new products

When to Integrate Vertically?:

Are our existing suppliers or customers meeting the final consumers’ needs? How dynamic is the industry? Will vertical integration enhance the business’s position? When to Integrate Vertically?

Competitive Strategy Principle:

Competitive Strategy Principle A vertical integration strategy has appeal ONLY if it significantly strengthens a firm’s competitive position!

Body Glove :

Body Glove Initially, in what steps of the value chain of activities of creating a wet suit was Body Glove involved? Why has this changed? What disadvantages do you think would be associated with Body Glove no longer being backwardly integrated? What advantages are there?

Diversification and Corporate Strategy :

Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business A diversified company needs a multi-industry, multi-business strategy

Types of Diversification:

Types of Diversification Related Related to WHAT? Unrelated

Types of Related Diversification:

Types of Related Diversification Related Diversification Product Similarities Operational Skills/ Capabilities Similar Technology Distribution Channels Customer Use

Common Responses to: Why Diversify?:

Common Responses to: Why Diversify? Reduce risk Increase CEO’s Wealth Ego/Prestige Other reasons?

Winter: Snowmobiles:

Winter: Snowmobiles Time Cash Flow Snowmobiles

Summer: Jet Skis:

Summer: Jet Skis Time Cash Flow Jet skis

Together—Cancels “Risk”:

Together—Cancels “Risk” Time Cash Flow Snowmobiles Jet skis

Slide 41:

Why Diversify?

Why Diversify?:

Why Diversify? To build shareholder value Make 2 + 2 = 5 Diversification is capable of increasing shareholder value if it passes three tests: 1. Attractiveness Test 2. Cost of Entry Test 3. Better-Off Test

When to Diversify? :

The attractiveness test: Are the industries chosen for diversification structurally attractive or capable of being made attractive? The-cost-of entry test: The cost of entry must not capitalize all the future profits. The better-off test: Will the diversified business or the core business or both become more profitable? When to Diversify?

When to Diversify? :

The better-off test: Diversifications are successful when they produce one or more of the following: Economies of scope: Share tangible resources & human resources : Share intangible resources : Share Capabilities Market Power - predatory pricing Balancing financial resources Reducing risk due to volatile earnings counter cyclical businesses Related diversification yields superior results compared to unrelated diversification. When to Diversify?

Concept: Economies of Scope:

Concept: Economies of Scope Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains

Capturing Benefits of Economies of Scope:

Capturing Benefits of Economies of Scope Benefits don’t occur by themselves! Businesses with sharing potential must be reorganized to coordinate activities Means must be found to make skills transfer effective

Types of Diversification:

Types of Diversification Related Unrelated Next

What Is Unrelated Diversification?:

Involves diversifying into businesses with No strategic fit No meaningful value chain relationships Approach is to venture into “any business in which we think we can make a profit” Firms pursuing unrelated diversification are often referred to as conglomerates What Is Unrelated Diversification?

Basic Premise of Unrelated Diversification:

Basic Premise of Unrelated Diversification Any company that can be acquired on good financial terms and offers good prospects for profitability is a good business to diversify into!

Appeal of Unrelated Diversification:

Appeal of Unrelated Diversification Spreading business risk over different industries Stability of profits -- Hard times in one industry may be offset by good times in another industry If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced Capital resources can be directed to those industries offering best profit prospects

Drawbacks of Unrelated Diversification:

Drawbacks of Unrelated Diversification Tends to be less profitable than related diversification. Difficulties of competently managing many diverse businesses Opportunities for economies of scope are much less Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)

Diversification and Firm Performance:

52 Diversification and Firm Performance Performance Level of Diversification Dominant/Single Business Unrelated Businesses Related Businesses

Problems with Unrelated Diversification:

Problems with Unrelated Diversification Places significant demands on executives due to increased complexity. Conglomerate discount: The stock of a conglomerate sells less than the total of individual stocks would sell for if each business in the corporation sold its stock separately.


Agenda Designing the organization to capture economies of scope/synergy Means to pursue growth strategies: Strategic partnerships Mergers & Acquisitions Internal development Renewal strategies

Capturing Benefits of Economies of Scope:

Capturing Benefits of Economies of Scope Benefits don’t occur by themselves! Businesses with sharing potential must be reorganized to coordinate activities Means must be found to make skills transfer effective

Rosabeth Moss Kanter’s Video:

Rosabeth Moss Kanter’s Video Clear focus on and understanding of their strengths. Flexible enough to exploit opportunities as they arise and willing to modify their organization. Open to collaborations with other organizations. Move quickly to develop new business ideas. Three mechanisms: Synergies Alliances or partnerships New ventures


Synergy Whole of a company is worth more than sum of its parts Cowboy management


Questions How did Nichols Institute attain synergies? How about Ford Motor Company? How did Banc One develop synergies through acquisitions? What is American Express’ “One Enterprise” program? How did GE attain synergies?

Synergy Failures:

Synergy Failures Excessive in-house competition “not invented here” Competitive myopia Waste of resources Problems of chimneys Loss of opportunity: don’t look at environment Cannibalization Higher costs Slow decisions


Synergy You can build synergies within any company, small or large Developing synergies is especially important with acquisitions Synergies are also important in decentralized businesses The biggest synergy challenge is the corporation in many different industries

Forms of Synergy:

Forms of Synergy Resource Economies Purchasing volume Distribution networks and channels Shared utilities Marketing Cross-marketing Data bases Product bundling Joint promotions Corporate image / umbrella image campaigns Technology, products, innovation Joint research Technology transfer Environmental scanning Management competence, expertise Learning from other units’ experience Systematic transfer of best ideas, best practices Talent pool

Approaches for Synergies:

Approaches for Synergies “One company” identification campaigns Conferences for information, idea sharing Councils on broad issues Corporate office as synergy identifier, facilitator Task forces “Mentor units” Job rotations, career paths, etc. Internal benchmarking Common training in shared values, standards, methods

Incentives for Synergies:

Incentives for Synergies Benefits from overall corporate results Career paths with mobility across units Resource pools for synergy projects Rewards and recognition for synergy contributions. Strong personal ties, relationships Spirit of cooperation

Means to Pursue Growth Strategies:

Means to Pursue Growth Strategies Mergers and Acquisitions Strategic Alliances Internal Development

Slide 65:

Merger: A legal transaction in which two or more organizations combine operations through an exchange of stock, but only one organization will actually remain. Acquisition: Purchase of an organization that is already in operation by another. Benefits: Quick Lower cost of entry Limitations: High takeover premiums High turnover Mergers and Acquisitions

Strategic Alliances:

Strategic Alliances Arrangements in which two or more corporations join forces to form cooperative partnerships. Major form - Joint-Ventures When: each party has strengths to offset the others’ weaknesses Benefits: Less risky, lower investments, easier to finance. Limitations: difficult to coordinate

Internal Development:

Internal Development Building new businesses from the ground up. Choice depends on: height of entry barriers relatedness of the new business to existing ones speed and development costs risks stage of the industry life cycle

Rosabeth Moss Kanter’s Video Alliances & Partnerships:

Rosabeth Moss Kanter’s Video Alliances & Partnerships Alliances and partnerships are very powerful ways to stretch capacity and exploit new opportunities when a company doesn’t have all the resources or answers on its own. Importance of complementary strengths in successful alliances. 3 types of alliances: Consortium Joint-venture Stakeholder alliance

Slide 69:

Three Types Of Alliances Nonequity Alliance Contracts • licensing • supply & distribution agreements Joint Venture Equity Alliance Cross Equity Holdings • partners own stakes in eachother Joint Equity Holdings • independent firm is created

Slide 70:

How Strategic Alliances Create Value Improve Current Operations Shaping the Competitive Environment Facilitating Entry and Exit Value Creation

Slide 71:

Challenges to Value Creation and Allocation Three Forms of Misappropriating Value Adverse Selection Moral Hazard Holdup misrepresenting the value of inputs providing inputs of lesser value than promised exploiting the transaction- specific investment of partners

Deal Busters:

Deal Busters Strategic shifts Internal politics Uneven commitment levels Power imbalances Benefits imbalances Premature trust Conflicting loyalties Undermanagement Hedging on resources, people, time for partnership

Qualities of Successful Alliances:

Qualities of S uccessful Alliances Importance Interdependence Investment Information Integration Institutionalization

Renewal Strategies:

Renewal Strategies Involves decisions to reduce operations and cut back to gain efficiencies and to improve performance. Retrenchment: Downsizing Shutting down unprofitable plants Outsourcing unprofitable activities Implementing tighter cost and quality controls Changes in the organizational structure

Slide 75:

More dramatic renewal strategies: Divestment Spin-off Liquidation Renewal Strategies

Corporate Strategy Alternatives:

Corporate Strategy Alternatives Vertical Integration Single Business Concentration Diversify into Related Businesses Diversify into Unrelated Businesses Diversify into Related & Unrelated Businesses Make new acquisitions Divest weak units Restructure portfolio Retrench Liquidate Post-Diversification Strategic Alternatives

Portfolio Management:

Portfolio Management Aids in managing the mix of businesses in the corporate portfolio. 2 models: The Boston Consulting (BCG) Matrix The GE Nine-Cell Matrix

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