Principles of Management live inclass EXAM

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Chapter 6 Organizational Strategy

Resources – the assets, capabilities, processes, employee time, information, and knowledge that an organization controls.

Competitive advantage – providing greater value for customers than competitors can.

Sustainable competitive advantage – a competitive advantage that other companies have tried unsuccessfully to duplicate and have stopped trying to duplicate for the moment.

Hello Class, Today we discuss Chapter 6 Organizational Strategy.

This chapter is also about planning function, same as chapter 5 Planning and decision making.

Ch 5 introduces basic terms about planning while Ch 6 is about strategic management.

Five topics in chapter 6 will be discussed: sustainable competitive advantage, strategy-making process, corporate-level strategies, industry-level strategies, and firm-level strategies.

Resources are critical to organizational strategy because organizations can use resources to improve its effectiveness and efficiency and create and sustain competitive advantage. Resources are the assets, capabilities, processes, employee time, information, and knowledge that an organization controls. We have discussed four types of organizational resources: human, financial, physical, and informational resources in Chapter 1.

Competitive advantage can be achieved if an organization can use its resources to provide greater value for customers than competitors can.

E.g. iPad’s competitive advantage came partly from its sleek, attractive design and partly from the reputation of Apple’s iPod and iPhone as innovative, easy-to-use products. iPad can provide greater value for customers than competitors’ products.

Sustainable competitive advantage is a competitive advantage that other companies have tried unsuccessfully to duplicate and have stopped trying to duplicate for the moment. “Sustainable” does not only mean long lasting competitive advantage, and more importantly it also means that competitors have tried to duplicate the advantage but failed, so that competitors stop trying to duplicate for the moment.

E.g. Microsoft Surface is a competitor for iPad. The Surface has touch screen, a combination cover/detachable keyboard, and two versions of the Windows operating system. However, the Surface has just 47,000 apps compared to over 300,000 apps for the iPad, and had higher price ($999 for a 256 GB Surface Pro with an Intel i7chip versus $929 for a 64 GB iPad with an A7 chip and a high-definition screen). Also, the Window 8 touch interface on the Surface is more difficult to learn and use than the iPad’s.

Therefore, the Surface could not successfully duplicate iPad. Apple still dominates tablet sales with 33.8% of the market since Apple has developed its sustainable competitive advantage.

Achieving Sustainable Competitive Advantage

Valuable resource – a resource that allows companies to improve their efficiency and effectiveness.
Rare resource – a resource that is not controlled or possessed by many competing firms.

Imperfectly imitable resource – a resource that is impossible or extremely costly or difficult for other firms to duplicate.

Non-substitutable resource – a resource that produces value or competitive advantage and has no equivalent substitutes or replacement.

Achieving sustainable competitive advantage

The goal of most organizational strategies is to create and then sustain a competitive advantage.

Four conditions must be met if a firm’s resources are to be used to achieve a sustainable competitive advantage.

The resources must be valuable, rare, imperfectly imitable, and non-substitutable.

Valuable resources are resources that allow companies to improve their efficiency and effectiveness.

E.g. An online check-in system would be a valuable resource for hotels.

E.g. An self-check out system is a valuable resource for retailers.

However, once-valuable resources may become less valuable or even not valuable.

E.g. Netbook sales were brisk at first – in 2009, 7.5 million netbooks were sold in US and over 34 million worldwide.

But all that changed. While it took only 28 days for Apple to sell its first 1 million iPads, netbook sales fell by 40% in one year. Only one year after netbook sales peaked, tablet sales passed them, and netbook sales have been steadily declining ever since.

Rare resources are resources that are not controlled or possessed by many competing firms.

Valuable resources have to be rare resources for firms to sustain a competitive advantage.

E.g. One of Apple’s rare resources is its ability to reconfigure existing technology into a package that is easy to use, elegantly designed, and therefore highly desired by customers. It created a single platform that would give users the same experience across multiple devices, such as iPod, iPhone, and iPad.

Other tablets use Google’s Android and there is little uniformity across various Android devices because Android is an open source and manufacturers can alter the basic operating system in different ways. As a result, one Android tablet might look and work differently than another, and one company might offer an app that will not work on another Android device.

Imperfectly imitable resources are resources that are impossible or extremely costly or difficult for other firms to duplicate. For sustainable competitive advantage, other firms must be unable to imitate or find substitutes for those valuable, rare resources.

E.g. Apple and Google both operate online app stores but there is a big difference between, which is security.

Apple’s App Store is a closed platform. If a software developer wants to sell an app on Apple’s site, the company first puts it through a review process to check for content and security issues.

However, Android is an open platform and Google does not prescreen apps before publishing them. This makes Android devices far more vulnerable to malware and causes more security concerns. By 2013, Android devices were targeted for 92% of all mobile malware threats, compared to 47% in 2011 and 24% in 2010.

It is extremely difficult for competitors to imitate Apple’s closed platform. So Apple is able to sustain its competitive advantages.

Non-substitutable resources are resources that produce value or competitive advantage and has no equivalent substitutes or replacement. Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also non-substitutable resources. No other resources can replace them and produce similar value or competitive advantage.

E.g. Apple’s iTunes software is dominate in the industry. Apple introduced iCloud to provide consumers with an online locker in which they can store music, video, or photo files, as well as apps, to access from multiple devices. iCloud also lets users synchronize other data, like appointments, email, and documents, between their iPhone, iPad, and Mac computers. Apple also launched iTunes Radio, its own streaming music service, and paid $3 billion to acquire Beats Music, a music subscription service.

No other competitors like Spotify, a music streaming services company, could produce as much value as Apple does.

Spotify has over 25 million users with $576 million a year in revenues, compared to Apple’s 575 million users worldwide with $9.3 billion a year in revenue.

In summary, Apple possesses valuable, rare, imperfectly imitable resource, and non-substitutable resources.

That is why Apple is able to create and maintain its sustainable competitive advantage.

Strategy-Making Process

Step 1
Assessing the need for strategic change

Competitive Inertia
a reluctance to change strategies or competitive practices that have been successful in the past.

Strategic Dissonance
a discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy

The first step in strategy-making process is to assess the need for strategic change.

In this step, companies need to avoid competitive inertia and look for strategic dissonance.

Competitive Inertia is a reluctance to change strategies or competitive practices that have been successful in the past. When companies are very successful, they would continue to rely on those strategies, even as the competition changes. This is competitive inertia and it could cost a company dearly.

E.g. Sony is an example of competitive inertia. For three decades, Sony was the world’s premier electronics company, know for innovative products like the Sony Walkman (portable music player), PlayStation (video game console, and Cyber Shot (digital camera). Sony’s different divisions operated independently from each other and this strategy worked for 30 years. But eventually, Sony had too many high-priced products, too many people, and too high costs. Consequently, Sony will lose $6.5 billion this year. Sony’s new CEO Hirai has vowed, “The time for Sony to change is now”. Sony will focus on three areas: mobile products, camera and camcorders, and games.

Strategic Dissonance is a discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy.

E.g. All Nippon Airways (ANA), Japan’s largest airline, needed to cut costs and move quickly to respond to competitors. However, that intended strategy was inconsistent with its long-standing high price, high quality service strategy. So it started two low cost airlines, Peach Aviation and Air Asia Japan. These two new airlines could make decisions much faster than the parent company. So, to overcome strategic dissonance and make sure that its new low cost, speed-to-market strategy is infused through the entire company, All Nippon Airways has now brought both new companies directly into its organizational structure.

Step 2 Conducting Situational Analysis

Situational Analysis (SWOT) – an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment.

Internal Environment Assessment

Distinctive competence – what a company can make, do, or perform better than its competitors.

Core capabilities – the internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs.

The second step in strategy-making process is to conduct situational analysis.

A situational analysis, also called SWOT analysis, is an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment.

SWOT stand for strengths, weaknesses, opportunities, and threats.

An analysis of a company’s strengths and weaknesses often begins with an assessment of its distinctive competencies and core capabilities.

Distinctive competence is something that a company can make, do, or perform better than its competitors.

E.g. Toyota can produce cars with better quality, lower cost, less time, and quicker delivery to the market.

So Toyota possess distinctive competence over their competitors.

Core capabilities are the internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs.

Core capabilities produce distinctive competencies.

Distinctive competencies are tangible, for example, a product is better or service is faster.

Core capabilities are less visible, for example, how a company makes decision and solve problems, or what organizational cultures the company has, it is not that visible.

For Toyota to sustain its distinctive competencies, it needs superior core capabilities.

E.g. Toyota has used the lean manufacturing business model, implemented the just in time inventory system, adopted the total quality management approach, and built a long-term relationship with its suppliers.

Those core capabilities allow Toyota to make cars better than its competitors.

External Environment Assessment

Strategic group – a group of companies within an industry against which top managers compare, evaluate, and benchmark strategic threats and opportunities.

Core firms – the central companies in a strategic group.
Secondary firms – the firms in a strategic group that follow strategies related to but somewhat different from those of the core firm.

Transient firms – the firms whose strategies change from one strategic position to another.

The second part of the SWOT analysis is to assess the opportunities and threats in the external environment, this is to look outside the firm. There are two ways to do this – identifying strategic groups and forming shadow-strategy task forces.

Strategic group is a group of companies within an industry against which top managers compare, evaluate, and benchmark strategic threats and opportunities.

Strategic groups are companies – usually competitors – that managers need to closely follow.

Typically managers include companies as part of their strategic group if they compete directly with those companies for customers or if those companies use strategies similar to theirs.

E.g. In the home improvement industry, Home Depot is the largest US home improvement and hardware retailer.

When Home Depot managers assess strategic threats and opportunities, they are likely to compare Home Depot to a strategic group of other major home improvement supply companies, such as Lowe’s, Ace Hardware, and 84 Lumber.

In fact, when scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries as core, secondary, and transient firms.

Core firms are the central companies in a strategic group.

E.g. Home Depot operates over 2,200 stores in 50 states with over 300,000 employees and annual revenues of $78.8 billion. Lowe’s has over 1,830 stores in 50 states with over 260,000 employees and annual revenues of $53.4 billion. Clearly, Lowe’s is the closest competitor to Home Depot and is the core firm in Home Depot’s strategic group.

Secondary firms are the firms in a strategic group that follow strategies related to but somewhat different from those of the core firm.

E.g. Ace Hardware and 84 Lumber are both in the home improvement industry, but Home Depot would most likely classify them as secondary firms in its strategic group analysis.

Ace Hardware has more stores (4,600) than Home Depot and is a multinational company doing business in 70 countries. However, Ace has a different franchise structure and small, individualized stores, and each store has different layout and a different mix of products. So Ace is not a core firm in Home Depot’s strategic group.

84 Lumber has over 250 stores in 30 states and it sells 85% of its products to professional contractors. It does not have the wide variety of products on the shelves or assistance available to the average consumer. Therefore, Home Depot would most likely consider 84 Lumber a secondary firm.

Transient firms are the firms whose strategies change from one strategic position to another.

External Environment Assessment

Shadow strategy task force
A committee within a company that analyzes the company’s own weaknesses and determine how competitors could exploit them for competitive advantage.

The use of shadow strategy task force is another way to identify external threats or opportunities.

Shadow strategy task force is a committee within a company that analyzes the company’s own weaknesses and determine how competitors could exploit them for competitive advantage.

Instead of focusing on competitors in the external environment, this task force focuses on their own company.

This strategy involves a company actively seeking out its own weaknesses and then thinking like its competitors, trying to determine how they can be exploited for competitive advantage. This approach is to identify strategies and competencies that, in the hands of competitors, might be used to attack the firm’s competitive position successfully.

For the shadow strategy task force to work effectively, its members should be independent-minded, come from a variety of company functions and levels, and have the access and authority to question the company’s current strategic actions and intent. This strategy forces managers to relinquish the comfort of the firm’s accepted view of itself. Especially critical on the task force are individuals with insight into how customers, suppliers, and competitors view the firm’s products and services.

Step 3 Choosing Strategic Alternatives

Risk-Avoiding Strategy – a conservative strategy that aims to protect an existing competitive advantage.

Risk-Seeking Strategy – an aggressive strategy that aims to extend or create a sustainable competitive advantage.

Strategic Reference Points
The strategic targets managers use to determine whether the firm has developed the core competencies it needs to achieve a sustainable competitive advantage.

The third step and last step in the strategy-making process is to choose strategic alternatives.

According to strategic reference point theory, managers choose between two basic alternative strategies.

One alternative is a conservative, risk-avoiding strategy that aims to protect an existing competitive advantage.

Another alternative is an aggressive, risk-seeking strategy that aims to extend or create a sustainable competitive advantage.

Should a company choose to seek risk or avoid risk? Typically, it depends on whether top management views the company as falling above or below strategic reference points.

Strategic Reference Points are the strategic targets managers use to determine whether the firm has developed the core competencies it needs to achieve a sustainable competitive advantage.

Different businesses have different strategic reference points.

E.g. In the hotel business, service, quality, and prices may be key targets to compare.

E.g. Menards is known as the low price leader in the home improvement industry. It wants to beat Home Depot, the industry leader, and it takes a risk-taking strategy and compares its performance with Home Depot on 4 strategic reference points: price for a 100-item shopping cart, products carried per store, sales per square foot, and friendly accessibility.

Strategic Reference Points

As shown in this Exhibit, when a company is performing above or better than its strategic reference points, top management will typically be satisfied with the company’s strategy. This satisfaction tends to make top management conservative and risk-averse.

But, when a company is performing below or worse than its strategic reference points, top management will typically be dissatisfied with the strategy. In this instance, managers are more likely to choose a risk-taking strategy.

Case studies

When eBay’s auction business was shrinking dramatically, few people at eBay saw the problem.

Founder Pierre Omidyar said, “They didn’t seem to see what was going on outside the company in terms of competition. They had lost their ability to innovate, to create new things”. Success had made eBay complacent and risk averse.

After John Donahoe became eBay’s CEO, he raised the standards and changed the strategic reference points to assess its strategic performance. His first week on the job, he told everyone that eBay needed a major turnaround. We had to confront reality. To encourage a daring, offensive-minded strategy, he funded a mobile app team that produced the eBay Red-Laser and eBay Motors apps, which have been downloaded 120 million times. He told his team to find a way to deliver purchased products in one day (called eBay Now). He sent a design team offsite to create a fresh graphics-based look to its aging text-based website.

In the long run, effective organizations will frequently adjust or revise their strategic reference points to better focus managers’ attention on the new challenges and opportunities in their business environments.

Corporate-Level Strategies

Corporate-level strategy – the overall organizational strategy that addresses the question “What businesses are we in or should we be in?”

Single business strategy – a corporate-level strategy for a firm that derives over 95% of its revenue from a single business.

Portfolio strategy – a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines.
Acquisition – the purchase of a company by another company.

To formulate effective strategies, firms need to consider their corporate-level strategies, industry-level strategies, and firm-level strategies. Now we introduce those strategies one by one.

Corporate-level strategy is the overall organizational strategy that addresses the question “What businesses are we in or should we be in?”

Companies can choose to adopt a single business strategy or portfolio strategy, which refers to a firm’s level of diversification.

Single business strategy is a corporate-level strategy for a firm that derives over 95% of its total revenue from a single business. As that percentage decreases, a business is said to be following increasingly diversified strategies.

E.g. Hallmark in the greeting cards and related gifts business is an example of single business strategy.

Case

Krispy Kreme Doughnuts also uses a single business strategy and focuses on the doughnut business. Krispy Kreme is a leading specialty retailer of premium-quality yeast-raised doughnuts with over 1,000 locations.

The company calls its store production operations “doughnut theater” because its physical layout is designed for customers to see and smell the doughnuts being made by its doughnut-making machines.

Krispy Kreme has its own secret doughnut recipe and none of its franchisees know the recipe.

The doughnut-making machines are designed and produced by the company itself, no other doughnut maker can imitate its unique cooking methods and create a similar competing product.

Krispy Kreme has successfully developed a niche in the fast-food industry where its superior products command a premium price because of its unique taste and quality.

On the other hand, some companies prefer to enter different businesses or industries and adopt a portfolio strategy. Portfolio strategy is a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines.

E.g. 3M has five different business groups to produce 55,000 products: Consumer Group, Electronics and Energy Group, Health Care Group, Industrial Group, and Safety and Graphics Group. 3M has diversified its investment among different businesses and product lines. This is an example of portfolio strategy.

Companies can develop new businesses internally or look for acquisition. Acquisition is the purchase of a company by another company.

E.g. Oracle Corporation specializes in developing and marketing enterprise software and computer hardware systems. Oracle monetizes opportunities through acquisitions. On the Oracle’s website, there is a Acquisition Catalog that lists about 100 acquisitions Oracle has made. For example, Oracle acquired 8 companies in 2014, such as Datalogic, Front Porch Digital, Micros Systems, and Green Bytes. As Oracle puts it, through our acquisition activities, Oracle seeks to strengthen its product offerings, accelerate innovation, meet customer demand more rapidly, and expand partner opportunities.

Corporate-level Strategies – Diversification

Diversification – a strategy for reducing risk by buying a variety of items (stocks or types of businesses) so that the failure of one stock or one business does not doom the entire portfolio.

Unrelated diversification – creating or acquiring companies in completely unrelated businesses.

Related diversification – creating or acquiring companies that share similar products, manufacturing, marketing technology, or cultures.

Corporate-level Strategies – Diversification

Diversification is a strategy for reducing risk by buying a variety of items (stocks or types of businesses) so that the failure of one stock or one business does not doom the entire portfolio.

If you invest in 6 companies in 6 different industries, you won’t lose your entire investment if one company performs poorly. Also, one company’s losses are likely to be offset by another company’s gains in a different industry.

That is why some companies decide to enter new industries , establish new operating divisions, and make a wider range of products.

Firms can choose between unrelated diversification and related diversification when entering different businesses and industries.

Unrelated diversification is creating or acquiring companies in completely unrelated businesses.

E.g. General Electric (GE) has a presence in a wide range of businesses. It has appliances division, consumer electronics division, lighting division, aviation division, as well as divisions in energy, health care, power and water, mining, transportation, and software etc. GE is extremely diversified and is the largest conglomerate in the world.

Related diversification is creating or acquiring companies that share similar products, manufacturing, marketing technology, or cultures.

Hormel Foods is an example of related diversification in the food business. It manufactures and markets a variety of foods, such as deli meats, ethnic foods, pantry foods, salsa, and SPAM (canned meat).

U-Shaped Relationship
Between Diversification and Risk

Risk

Low

High

Single

Business

Diversification

Unrelated

Diversification

As shown in this Exhibit, there is a U-shaped relationship between diversification and risk.

(M. Lubatkin & P.J. Lane, “Psst…The Merger Mavens Still Have It Wrong!” Academy of Management Executive 10 (1996): 21-39.)

The left side of the curve shows that single businesses with no diversification are very risky because if the single business fails, the entire business fails.

However, the right side of the curve shows that unrelated diversification with completely unrelated businesses are even riskier than single, undiversified businesses.

The best approach is probably related diversification that has the lowest risk. So competing in different yet related businesses can lower risk. The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio.

E.g. VF Corporation is the global apparel and clothing maker. It has acquired a couple of companies that are in related businesses, such as Timberland (footwear and apparel), 7FAM (denim apparel, like jean), and Lucy Activewear (activewear for women, like clothing for yoga), and Majestic Athletic (sports clothing).

These companies VF Corp acquired all possess core capabilities in one or more specialty areas such as footwear, denim apparel, sports clothing, or activewear for women. As VF’s CEO Eric Wiseman says, the Timberland deal would be a “transformative” acquisition that would add footwear to VF’s fastest-growing division, the outdoor and action sports business. The related diversification through acquisitions enhanced VF Corporation’s core capabilities and its position as a global leader in branded lifestyle apparel and footwear.

Grand Strategies

Grand strategy – a broad corporate-level strategic plan used to help a firm achieve strategic goals and guide the strategic alternatives.

Growth strategy – a strategy that focuses on increasing profits, revenues, market share, or the number of places in which the company does business.

Grand strategies

Grand strategy is a broad corporate-level strategic plan used to help a firm achieve strategic goals and guide the strategic alternatives. Managers of individual businesses or subunits may use grand strategies to guide their decision about what businesses they should be in.

There are three kinds of grand strategies: growth, stability, and retrenchment/recovery.

Growth strategy is a strategy that focuses on increasing profits, revenues, market share, or the number of places in which the company does business.

Companies can grow externally and internally.

An external growth can be achieved through mergers or acquisitions in the same or different businesses.

E.g. AT&T is growing slowly at 3% per year. DirectTV is growing at less than 1% a year.

To accelerate growth in both firms, AT&T acquired DirectTV for $48.5 billion. So both firms are able to combine and discount their services for consumers. DirecTV’s 20 million customers and AT&T’s 107 million customers would be able to buy Internet, TV, and wireless phone services together in a discounted bundle.

Another way for a firm to grow is internally, directly expanding the company’s existing business or creating and growing new businesses.

E.g. Nestle, the world’s largest food company, had to find a way to grow while facing record-high prices for cocoa and sugar, two key ingredients for its chocolate products. To boost growth, Nestle spent $24 million to promote Aero, a chocolate bar filled with bubbles of air. The bubbles give the chocolate a creamier texture and also help bulk up the candy bar without adding more ingredients. Nestle’s promotional emphasis successfully increased Aero sales by 20% from the previous year.

Grand Strategies (continue)

Stability strategy – a strategy that focuses on improving the way in which the company sells the same products or services to the same customers.

Retrenchment strategy – a strategy that focuses on turning around very poor company performance by shrinking the size or scope of the business.

Recovery – the strategic actions that a firm takes to return to a growth strategy.

Another grand strategy is stability strategy.

Stability strategy is a strategy that focuses on improving the way in which the company sells the same products or services to the same customers.

Companies choose a stability strategy for different reasons.

If a firm wants to continue doing what the firm has been doing, just doing it better, it may use a stability strategy.

E.g. ABM Industries in San Francisco uses a stability strategy and keeps improving the way they serve their customers. ABM has focused on providing facility services to businesses since 1909. It offers facility services management for electrical and lighting solutions, energy management, building maintenance and repair, janitorial services, landscape and ground maintenance, security, and parking services in the US and other 20 countries.

ABM has reduced costs by keeping businesses’ facilities safe, clean, comfortable, and energy efficient.

If firms are satisfied with the status quo, they attempt to hold and maintain their present size or to grow slowly, they use a stability strategy.

E.g. WD-40 Company produces WD-40 lubricant and it pursues a stability strategy as it has “slowly” or steadily added products over the years.

Sometimes, companies choose a stability strategy when their external environment does not change much or after they have struggled with periods of explosive growth.

Both growth strategy and stability strategy may improve the way the company does business. The difference is that growth strategy involves a big growth in some aspects of the firm’s business while stability strategy refers to steady growth (a little or no growth).

The last kind of grand strategy is retrenchment strategy, which is a strategy that focuses on turning around very poor company performance by shrinking the size or scope of the business.

A typical retrenchment strategy may involve two steps: cutting costs and recovery.

Firms often reduce costs by laying off employees, closing poorly performing plants, offices, or stores, and selling off entire lines of products or services.

E.g. Barclays, a London-based bank for over 300 years, began an aggressive retrenchment strategy in 2014 after numerous financial scandals and poor financial performance. Barclays will layoff 19,000 employees by 2016, exit commodities trading, sell half of its investment bank, and sell its retail banking operations in France, Spain, and Italy.

The next step in a retrenchment strategy is recovery. Recovery consists of the strategic actions that a firm takes to return to a growth strategy. Retrenchment and recovery together are often called turnaround strategy.

Companies may pursue all three grand strategies at the same time for its different businesses, divisions, or product lines. E.g. Ford uses a growth strategy in China by doubling its production and sales outlets but pursues a retrenchment strategy in Europe by closing factories due to high costs and stagnant economies there.

Industry-Level Strategies
Porter’s Five Industry Forces

Bargaining
Power of
Suppliers

Bargaining
Power of
Buyers

Threat of

Substitutes

Threats of
New Entrants

Character
of

Rivalry

Industry-level strategies address the question “How should we compete in this industry?”

We’ll discuss two sub-topics: Porter’s five industry forces, and positioning strategies.

Harvard business professor Michael Porter develops a well-known model that helps managers focus on the five most important competitive forces, or potential threats, in the external environment. These five forces determine an industry’s overall attractiveness and potential for long-term profitability. The stronger these forces, the less attractive the industry becomes to corporate investors, because it is more difficult for companies to be profitable.

The five industry forces are discussed below.

Character of the rivalry is a measure of the intensity of competitive behavior between companies in an industry. When rivalry is cutthroat, both industry attractiveness and profitability decrease. The term of hyper-competition applies to industries that are characterized by permanent, ongoing, intense competition.

E.g. Campbell Soup and General Mills compete with each other. When General Mills developed more healthful kinds of soups, this increased rivalry and lowered Campbell’s sales and profits until it successfully developed new lines of healthful soups.

The threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. If it is easy for new companies to get started in the industry, then competition will increase and prices and profits will fall.

E.g. Both Hewlett-Packard, which makes PC and network computers, and Cisco Systems, which makes the routers and systems for the Internet and corporate networks, are each investing $1 billion to develop cloud software and data centers. They are the threat of new entrants in the industry.

The threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry’s products or services. If customers can easily find substitute products or services, the competition will be greater and profits will be lower. If there are few or no substitutes, competition will be weaker and profits will be higher.

E.g. When you buy gifts for your friends, you can buy flowers or candies. These are substitute products from different industries.

Bargaining power of suppliers is a measure of the influence that suppliers have on the prices of these inputs. If an industry has numerous suppliers to provide parts, materials, and services, companies (buyers) will be able to bargain with suppliers to keep prices low.

E.g. Many Asian suppliers want to get Nike’s business, those suppliers have low bargaining power with Nike.

Bargaining power of buyers is a measure of the influence that customers have on the firm’s prices. If a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices.

E.g. In Australia, the big four trading houses control 60% of the wheat bought and shipped from Australia. As buyers, they have incredible bargaining power. So Australian farmers end up with much smaller prices for their agriculture products.

Industry-Level Strategies: Positioning Strategies

Cost leadership – Producing a product or service of acceptable quality at consistently lower production costs than competitors can, so the firm can offer the lowest price in the industry.

Differentiation – providing a product or service that is sufficiently different from competitors’ offerings that customers are willing to pay a premium price for it.

Focus strategy – using cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment.

Positioning strategies are industry-level strategies. Michael Porter identifies three positioning strategies.

Cost leadership means producing a product or service of acceptable quality at consistently lower production costs than competitors can, so the firm can offer the lowest price in the industry.

E.g. Idaho-based WinCo Foods brands itself as “The Supermarket Low Price Leader.” While many supermarkets strive to keep within a few percentage points of Walmart Stores’ prices, WinCo Foods often undersells the massive discount chain. How? With minimalist stores, WinCo does not accept credit cards (saving 3% per transaction), buys directly from farms and factories, and lets customers bag their groceries. So they can keep their prices even lower than Walmart’s.

Differentiation means providing a product or service that is sufficiently different from competitors’ offerings that customers are willing to pay a premium price for it.

E.g. Norwex Company uses a differentiation strategy. It makes premium-priced cleaning products that clean your house with water and no chemicals or cleaning agents. For instance, Norwex microfiber cloths capture dirt, grease, and moisture, and help remove microorganisms, including viruses and bacteria. But the prices are very high: $113 for a mop, or $26.99 for a polishing cloth.

Focus strategy is when a company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment.

E.g. Axe company began selling body spray since 2002 and now it is a global brand with a 72% market share in the men’s body spray market. Axe’s products only target at men ages 20-25 and it conducts extensive research in college towns and urban settings about this age group. This is an example of focus strategy.

Diversification and Risk

Risk

Low

High

Single

Business

Diversification

Unrelated

Diversification

Relationship Between
Diversification and Risk

Case studies – Sear’s vs. Wal-Mart.

When companies develop its positioning strategy, the basic and important questions they need to ask are What can we offer to customers? Why we are a better choice than others? How do we make money?

If a company cannot answer those questions clearly and does not have a clear positioning strategy, either cost leadership or differentiation, the company is stuck in the middle. Sear’s was in a dilemma in positioning.

Sear’s changed its strategies a number of times and those strategies did not work out very well.

Sear’s used to be known as a hardware and tools store but it changed to soft series and removed the sign of Appliances & Hardware” from its stores. Now Sear’s put the sign back on some of its stores again.

Sear’s changed its strategies from diversification (expanding into different businesses) to divestiture (selling off its non-central businesses like financial services and real estate businesses).

Sear’s also changed its practices from all in display to specialty stores, and from selling off catalog to resuming it.

Since Sear’s positioning strategies did not work out well, the company is still struggling now.

Companies may revise its positioning strategies, it is repositioning.

Wal-Mart with over 6,000 stores worldwide has repositioned itself twice successfully in its history of over 50 years. Wal-Mart first repositioned itself from rural to metropolitan area and eventually replaced Sear’s to become the leader in the retailing industry. Then Wal-Mart entered groceries, it soon became the largest US grocer.

Now Wal-Mart is doing its third repositioning to appeal to relatively higher income consumers. It set up an office in Manhattan fashion district, and run ads on fashion in Vogue magazine, and run fashion shows in New York.

Time can tell whether Wal-Mart’s repositioning strategy would work this time.

Firm-Level Strategies

Firm-level strategy – a corporate strategy that addresses the question “How should we compete against a particular firm?”

Direct competition – the rivalry between two firms that offer similar products and services, acknowledge each other as rivals, and act and react to each other’s strategic actions.
Market commonality – the degree to which two companies have overlapping products, services, or customers in multiple markets.
Resource similarity – the extent to which a competitor has similar amounts and kinds of resources.

Firm-level strategies address the question “How should we compete against a particular firm?”

Most companies do not compete directly with all the firms in their industry.

E.g. McDonald’s and Red Lobster are both in the restaurant business, but they are not really competitors to each other. McDonald’s offers low-cost, convenient fast food in a seat-yourself restaurant, while Red Lobster offers mid-priced seafood dinners complete with servers and a bar.

Instead of competing with an entire industry, most firms compete directly with just a few companies within the industry. Direct competition is the rivalry between two firms that offer similar products and services, acknowledge each other as rivals, and act and react to each other’s strategic actions.

E.g. McDonald’s and Burger King have direct competition and both are in the fast food business.

Two factors determine the extent to which firms will be in direct competition with each other:

market commonality and resource similarity.

Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies.

Resource similarity is the extent to which a competitor has similar amounts and kinds of resources, such as similar assets, capabilities, processes, information, and knowledge that are used to create and sustain an advantage over competitors. Firms with similar types and amounts of resources tend to have similar strengths and weaknesses and use similar strategies.

E.g. McDonald’s and Burger King have similar resources at their disposal and high market commonality. They both sell similar products and services to similar customers. Burger King has partnered with Seattle’s Best Coffee, owned by Starbucks, to add premium coffee, lattes, hot chocolate, and iced coffee drinks to its breakfast menu to compete with McDonalds McCafe specialty coffees and drinks. Both firms’ resources are comparable to each other in terms type and amount.