Unit 5: Business and Multi-Business Strategy
Chapter Eight: Business Strategy
After reading and studying this chapter, you should be able to
1. Determine why a business would choose a low-cost, differentiation, or speed-based strategy.
2. Explain the nature and value of a market focus strategy.
3. Illustrate how a firm can pursue both low-cost and differentiation strategies.
4. Identify requirements for business success at different stages of industry evolution.
5. Determine good business strategies in fragmented and global industries.
6. Decide when a business should diversify.
Strategic analysis and choice is the phase of the strategic management process in which business managers examine and choose a business strategy that allows their business to maintain or create a sustainable competitive advantage. Their starting point is to evaluate and determine which competitive advantages provide the basis for distinguishing the firm in the customer’s mind from other reasonable alternatives. Businesses with a dominant product or service line must also choose among alternate grand strategies to guide the firm’s activities, particularly when they are trying to decide about broadening the scope of the firm’s activities beyond its core business. This chapter examines strategic analysis and choice in single- or dominant-product/service businesses by addressing two basic issues:
1. What strategies are most effective at building sustainable competitive advantages for single business units? What competitive strategy positions a business most effectively in its industry? For example, Scania, the most productive truck manufacturer in the world, joins its major rival Volvo as two anchors of Sweden’s economy. Scania’s return on sales of 9.9 percent far exceeds Mercedes (2.6 percent) and Volvo (2.5 percent), a level it has achieved most of the last 60 years. Scania has built a sustainable competitive advantage with a strategy of focusing solely on heavy transport vehicles in three geographic markets—Europe, Latin America, and Asia—by providing vehicles customized to specific tasks yet built using modularized components (20,000 components per vehicle versus 25,000 for Volvo and 40,000 for Mercedes). Scania is a low-cost producer of a differentiated heavy transport vehicle that can be custom-manufactured quickly and sold to a regionally focused market.
2. Should dominant-product/service businesses diversify to build value and competitive advantage? For example, Dell and Coca-Cola managers have examined the question of diversification and apparently concluded that continued concentration on their core products and services and development of new markets for those same core products and services are best. IBM and Pepsi examined the same question and concluded that concentric diversification and vertical acquisition were best. Why?
EVALUATING AND CHOOSING BUSINESS STRATEGIES: SEEKING SUSTAINED COMPETITIVE ADVANTAGE
Business managers evaluate and choose strategies that they think will make their business successful. Businesses become successful because they possess some advantage relative to their competitors. The two most prominent sources of competitive advantage can be found in the business’s cost structure and its ability to differentiate the business from competitors. DisneyWorld in Orlando offers theme park patrons several unique, distinct features that differentiate it from other entertainment options. Costco offers retail customers the lowest prices on popular consumer items because they have created a low-cost structure that results in a competitive advantage over most competitors.
Businesses that create competitive advantages from one or both of these sources usually experience above-average profitability within their industry. Businesses that lack a cost or differentiation advantage usually experience average or below-average profitability. Two well-recognized studies found that businesses that do not have either form of competitive advantage perform the poorest among their peers, while businesses that possess both forms of competitive advantage enjoy the highest levels of profitability within their industry.1
The average return on investment for more than 2,500 businesses across seven industries looked like this:
Initially, managers were advised to evaluate and choose strategies that emphasized one type of competitive advantage, often referred to as generic strategies. Firms were encouraged to become either a differentiation-oriented or low-cost-oriented company. In so doing, it was logical that organizational members would develop a clear understanding of company priorities and, as these studies suggest, likely experience profitability superior to competitors without either a differentiation or low-cost orientation.
The studies mentioned here, and the experience of many other businesses, indicate that the highest profitability levels are found in businesses that possess both types of competitive advantage at the same time. In other words, businesses that have one or more resources/capabilities that truly differentiate them from key competitors and also have resources/capabilities that let them operate at a lower cost will consistently outperform their rivals that don’t. Southwest Airlines has followed a low-cost strategy by simplifying reservations, eliminating reserved seats, not serving meals, and cutting operating costs by flying only 737 aircraft. It has simultaneously emphasized differentiation by creating a fun experience for customers, unique commercials, baggage flying for free, and an unusual culture that customers can see and “feel.” So the challenge for today’s business managers is to evaluate and choose business strategies based on core competencies and value chain activities that sustain both types of competitive advantage simultaneously. Exhibit 8.1, Top Global Strategist, describes how Facebook founder Mark Zuckerberg and COO Sheryl Sandberg are charting a Facebook course that is pursuing a strategy that includes both low-cost and differentiation elements, which they strongly feel will help Facebook achieve long-term success and viability in the Web-based business environment of 2030.
Exhibit 8.1: Top Global Strategist: Zuckerberg and Sandberg Choose Differentiation and Long-Term Low Costs to Build Facebook’s Long-Term Business Strategy
Mark Zuckerberg, CEO, Facebook, and Sheryl Sandberg, COO, Facebook
A dramatic emphasis on cutting expenses and forgoing growth took place in 2009—even in Silicon Valley. Not at Facebook. Founder and CEO Mark Zuckerberg, along with COO Sheryl Sandberg, are emphasizing accelerated growth in their worldwide user base to build a site for the next 30 years while also creating a basis to significantly differentiate Facebook from current social networking business models.
LOW-COST LEADERSHIP
Facebook’s emphasis on aggressively pursuing sustained user growth, even during a global depression, is—at its heart—a way to build economies of scale years out that will allow Facebook to be a cost leader among social networking sites in the value it can offer advertisers and other customers desiring to get the widest audience exposure per dollar spent within a social networking venue. Rather than being someone in social networking for a fast buck, says Sheryl Sandberg, “We’re in this game for 20 to 30 years.” So, in the face of a global economic depression, Facebook is not cutting costs, but rather taking developers off ad revenue generation and instead cooking up versions in languages like French Canadian, Tagalog, Xhosa, and Arabic. Says Zuckerberg, “A social networking site that can connect people with friends in Saudi Arabia or the Phillipines or Tonga is simply more valuable than one that can’t.” So Facebook is also aggressively looking for acquisitions of sites in Brazil, Germany, India, and Japan as “a way for us to acquire a geography or a demographic,” says CFO Gideon Yu. Ultimately, if it works, Facebook will have a size advantage that will allow it to offer advertisers an unparalleled cost advantage in reaching social network users on a broad global basis, or in narrower geographic or demographic settings.*
DIFFERENTIATION—FACEBOOK STYLE
Facebook is creating a business model designed to go beyond traditional online advertising. It seeks to have ad business, but also to create interactive ads that are more like digital bulletin boards than traditional banner ads. Called engagement ads, such advertising would seek comments on a Tropic Thunder movie trailer or thoughts about other advertisers linked to Facebook through individual connections and messages. A second leg of the “new” Facebook expects to differentiate itself by including e-commerce—selling digital items and virtual gifts, which sell for modest amounts like $1 a pop. Sending digital flowers, guitars, and other virtual gifts from one Facebook user to another via Facebook is rapidly growing as a revenue source and, more importantly, a way to differentiate the Facebook social network user experience, which in turn creates a different milieu for commercial advertisers. Third, Facebook has opened itself to software developers/entrepreneurs who can make applications to be used on Facebook with advertisers paying the developers (where relevant) and Facebook taking a cut.
* “Facebook Lures Advertisers at MySpace’s Expense,” BusinessWeek, July 9, 2009; “Zuckerberg on Facebook’s Future,” BusinessWeek.com , March 6, 2008; and “Facebook’s Sheryl Sandberg,” BusinessWeek.com , April 9, 2009.
Evaluating Cost Leadership Opportunities
Business success built on cost leadership requires the business to be able to provide its product or service at a cost below what its competitors can achieve. And it must be a sustainable cost advantage. Through the skills and resources identified in Exhibit 8.2, a business must be able to accomplish one or more activities in its value chain activities—procuring materials, processing them into products, marketing the products, and distributing the products or support activities—in a more cost-effective manner than that of its competitors or it must be able to reconfigure its value chain so as to achieve a cost advantage. Exhibit 8.2 provides examples of such low-cost strategies .
(Pearce 230-234)
Pearce, John, Richard Robinson. Strategic Management, 13th Edition. McGraw-Hill Learning Solutions, 2016-01-02. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.