Strategic Management and Competiveness

Class Lectures

Strategic Competiveness

Strategic competitiveness is achieved when a company successfully formulates and implements a value-creating strategy. A company's ability to sustain strategic competitiveness—also called competitive advantage—depends on whether or not other companies are able to imitate or duplicate the strategy. The period of time for which a company holds its competitive edge is determined by the speed with which competitors are able to duplicate the leader's value-creating strategy.

What this means is that businesses cannot afford to become complacent. Another company can enter the market with a bigger, better, and cheaper imitation and take over the market, and soon, the new entrant will gain competitive advantage.

When George Zimmer, the CEO of Men's Wearhouse Inc., first started his retail chain in 1973, his goal was to offer men's suits at prices that the average businessman could afford. He wanted to create an alternative to the stuffy department stores and men's boutique stores where prices were high and the atmosphere often uncomfortable. His main strategy was to situate Men's Wearhouse stores in outdoor shopping plazas away from high-rent neighborhoods rather than in malls. Zimmer continues to look for ways to cut expenses, as evidenced by the decision to move the manufacturing of a line of clothing from Italy to Korea. This move enabled him to sell suits for between $250 and $300, which is approximately half the price at specialty stores. Zimmer was not one for complacency. He continued to broaden his clientele and is known to be an

out-of-the-box thinker. Zimmer decided to expand his line to include bridal wear, and started tuxedo rentals in 1999, where anticipated sales in 2004 are $80 million up from $51.5 million the previous year. Zimmer created an empire with overall sales in 2003 totalling $1.4 billion (Eng, 2010).

The ability to create competitive advantage is vital to a company's ability to earn above-average returns. Above-average returns are returns in excess of what investors expected to earn from other investments with a similar amount of risk. Men's Wearhouse Inc. continues to be an example of competitive advantage. As of November 2004, the company's profits jumped 48%. The company's stock, which was trading at approximately $30.50, rose up 22% per year to date, out-performing the 6% increase of Standard and Poor's index of 25 apparel retailers (Pfeffer, 1997).

Without competitive advantage, an investor can at most expect an average return. Companies that return anything below an average return often face the risk of failure. This is particularly true in a global economy where the threat of competition is high.

According to Porter (1992), a leading authority on strategic competition and a professor at Harvard Business School, there are two basic types of competitive advantage:

Cost advantage

Differentiation advantage

These advantages are achieved when a company can deliver the same benefits as its competitors but at lower prices or when a company can deliver benefits that exceed those of their competitors.

Wal-Mart is a case in point. Wal-Mart succeeded in developing competitive advantage over time by delivering goods and services at lower costs and in greater volume than most of its competitors. Regardless of its employment practices or other issues that recently came to light, Wal-Mart continues to be the world's largest business. The company continues to grow and its superstores, which offer fresh produce, deli counters, bakeries, and butcheries, are located across the United States. The reason for the company's success is, in large part, due to its ability to deliver what the consumer wants, in a timely and cost effective manner, and doing it better than its competitors.

Reference:

SUO. (2014). MGT4070: strategic management: Week 2: strategic competiveness. Retrieved

from http://myeclassonline.com

Competitive Rivalry and Dynamics

Competitors engage in competitive rivalry to gain an advantageous market position through competitive behavior—competitive actions and competitive responses—which results in competitive dynamics.

A firm's strategies are dynamic in nature and the actions taken by a firm elicit responses from competitors, which, in turn, typically result in responses from the firm that took the initial action. While attempting to achieve and sustain competitive advantage, the repetitive process of action and reaction may result in lower prices, more product choices, and greater value to customers.

Competitive rivalry affects all types of strategies—corporate, international, and acquisition—and its primary effect is on business-level strategies. The action and reaction process shows that firms are mutually interdependent and that they are affected by each other's actions and responses. The action and reaction process also illustrates that success in the marketplace is a function of individual strategies and their consequences.

The following model illustrates competitive rivalry at the firm level:

Let us begin with the first component of the model—competitor analysis.

Competitor Analysis

Competitor analysis is the first step that a firm takes when it seeks to predict the extent and nature of its rivalry with competitors. The characteristics of competitor rivalry that determine the extent to which firms are competitors include market commonality and resource similarity.

Companies with high market commonality and highly similar resources are recognized as mutually direct competitors. Intense rivalry is not necessarily dictated by direct competition. The drivers of competitive behavior and the actions of a competitor in response to its competitor's actions determine the intensity of rivalry.

Market commonality refers to the number of markets in which a firm and a competitor are involved in and the degree of importance of the individual markets to each. Resource similarity refers to the extent to which a firm's tangible and intangible resources are comparable to a competitor's resources in terms of type and amount.

Now let us discuss the second component of the model—drivers of competitive behavior.

Drivers of Competitive Behavior

Market commonality and resource similarity influence the drivers of competitive behavior—awareness, motivation, and ability. These drivers in turn influence a firm's competitive behavior, as evidenced by the actions and responses it takes while engaged in competitive rivalry.

Awareness

A company needs to be aware of what other firms are doing in order to respond to their actions. Before any action or response is implemented, a company needs to be aware of how its actions and responses are viewed by competitors. The company should also be aware of the consequences of its actions and responses. When a company lacks this awareness, it can become hyper competitive, which may cause problems for its competitors.

Motivation

Firms are motivated to take action or respond to a competitor's actions to achieve gains and avoid losses. Sometimes a company may choose not to respond or take competitive action if it will not result in competitive edge or, at the least, will not negatively impact its position in the market.

Ability

A firm may be aware of the number of markets it shares in common with its competitors, and is motivated to respond to their competitive actions. However the firm may not have the ability to take action. Ability refers to the capability of a firm to take action or to respond to a competitor's action based on its resources and the flexibility of these resources.

Strategic and Tactical Actions

The competitive actions that firms take may be tactical or strategic in nature. A firm takes competitive actions to either build or defend its position in the market. Competitive responses are initiated to counteract the competitive actions taken by competitors. Initiating strategic competitive actions requires strong commitment of organizational resources in a firm. Strategic competitive actions or strategic responses are market-based actions that are not easy to implement and very difficult to reverse. Tactical actions or tactical responses are market-based actions that are taken to fine-tune a strategy. They do not require strong commitment of resources and are easier to implement and to reverse. An example of a strategic action or strategic response is when a company decides to enter a new market. This company will be said to engage in a tactical action or tactical response if it restructures its pricing schedule.

Likelihood of Attack

There are numerous factors that affect the likelihood of a competitor using strategic actions or tactical actions to attack its competitors. In addition to market commonality, resource similarity, and the drivers of awareness, motivations and ability, first mover incentives, organizational size, and quality of product also affect the likelihood of attack. Let's discuss these factors in greater detail.

First Mover Incentives

A firm is referred to as a first mover when it initiates a competitive action with the objective of improving or protecting its competitive advantage. First movers are companies that allocate funds for product innovation and development, aggressive advertising, and advanced research and development (R&D).

Firms that are successful first movers can reap substantial benefits. In fast-cycle markets, where rapid changes are the norm and where it is almost impossible to sustain competitive advantage for any length of time, a first mover may gain five to ten times the valuation and revenue of a second mover. Although first mover benefits are not guaranteed, they are often critical to the success of a firm in industries that experience rapid technological developments and relatively short product life cycles.

First movers often reap the benefit of above-average returns, at the least until its competitors respond. In addition to above-average returns, first movers may also benefit from increased customer loyalty and increased market share. These two benefits are valuable to a first mover as they make it more difficult for a competitor to woo customers away.

A second mover is a firm that responds to the first mover's competitive action, usually through imitation.

A late mover is a firm that responds to a competitive action, but only after a good deal of time has elapsed after the first mover's action and the second mover's response.

Let us now discuss the effect of organizational size and quality.

Reference:

SUO. (2014). MGT4070: strategic management: Week 2: competitive rivalry and dynamics. Retrieved

from http://myeclassonline.com

Organizational Size and Quality

Organizational Size

An organization's size impacts decisions related to competitive actions, the specific type of actions, and their timeline of implementation. Smaller companies tend to be first movers because a small company has the ability to move more quickly and is capable of initiating competitive actions faster than a larger company. Smaller companies can rely on speed and surprise to defend their competitive advantages or develop new advantages while engaged in competitive rivalry, particularly with large companies. Large firms, given their size and organizational structure, tend to take more time to initiate competitive and strategic actions. It is important to analyze total sales revenue or total number of employees when analyzing competition based on organizational size.

Quality

The quality of a firm's goods or services is determined by the degree to which the goods or services meet or exceed customers' expectations. From a strategic perspective, quality is considered the outcome of how a firm completes primary and secondary activities. Quality is subjective and is most likely to be an important goal of the firm when all its employees are committed to the goal. In this case, the goods and services produced by the firm are typically well received by customers.

Likelihood of Response

Let's now discuss the factors that determine how a competitor is likely to respond to competitive actions, such as:

· Type of competitive action

· Actor's reputation

· Market dependence

Type of Competitive Action

There are differences between competitive responses to strategic actions and competitive responses to tactical actions. When a company identifies the action taken against a competitor, it is better able to determine its competitor's response. It is theorized that strategic actions will attract strategic responses and tactical actions will attract tactical responses.

Strategic actions, due to their nature of requiring large commitment of resources and the fact that such actions are difficult to implement, typically receive fewer total competitive responses. In some markets, it is easier for competitors to respond to a tactical action because of the rapid changes that occur when companies use a tactical action. An example would be when a gas station lowers its prices.

Actor's Reputation

In the context of competitive rivalry, an actor is a firm that takes an action or makes a response. A positive reputation can be a source of above-average returns, particularly for producers of consumer goods. A positive corporate reputation is of strategic value and affects competitive rivalry. Given that past behavior is assumed to be a predictor of future behavior, a firm studies the responses of a competitor to predict the likelihood of its response.

Market dependence

Market dependence refers to the extent to which a firm's revenues or profits are derived from a specific market. Firms can generally predict that competitors with high market dependence are likely to respond strongly to attacks that threaten their market position.

Competitive Dynamics

Competitive rivalry is concerned with ongoing actions and responses between a company and its competitors for an advantageous market position. Competitive dynamics refers to the ongoing actions and responses of all the firms that compete within a market. To understand competitive dynamics, you need to understand the effects of varying rates of competitive speed in various markets—slow-cycle,  fast-cycle, and standard-cycle. You also need to understand the behavior—actions and responses—of all the competitors in the market.

Slow-Cycle Markets

Slow-cycle markets are markets where the actions and responses of all competitors are slowed down because of the high cost of imitating goods and services. This enables a company to sustain competitive advantage for longer periods of time.

Fast-Cycle Markets

Fast-cycle markets are markets where a company's competitive advantage is not sustainable because of the ability of competitors to replicate goods and services more quickly and at a lower cost than in a slow-cycle market.

Standard-Cycle Markets

Standard-cycle markets are markets where a company's ability to imitate a competitor's goods or services in a timely and cost effective manner is average.

Reference:

SUO. (2014). MGT4070: strategic management: Week 2:organizational size and quality. Retrieved from

http://myeclassonline.com

Corporate-Level Strategies

Corporate-level strategy is a decision-making process that results in a series of steps that a company takes in order to achieve its goal of gaining competitive advantage. Using a corporate-level strategy, a company identifies and manages various businesses that compete in various industries and product markets to achieve this goal. When a company chooses to expand from operating a business in one industry to operating in several industries, it uses a corporate-level strategy of diversification.

A diversified company uses two levels of strategy, business-level and corporate-level. Each business unit in a diversified company chooses a business-level strategy to compete in a product market. A firm's corporate-level strategy is concerned with two key questions:

· Which businesses should the firm engage in?

· How should the corporate office manage the business groups?

Corporate-level strategies are expected to help earn above-average returns by creating value in the same way a diversified firm's business-level strategies create value. A successful corporate-level strategy creates aggregate returns that exceed what those returns would be without the strategy, across all business units. It also contributes to a firm's strategic competitiveness and its ability to earn above-average returns.

Product diversification is the primary corporate-level strategy. It is concerned with the scope of industries and markets in which a firm competes and how managers buy, create, and sell different businesses to match skills and strengths with opportunities. To engage in product diversification, a firm needs to know what the opportunities are. The company needs to perform an industry environment analysis to determine what opportunities exist and an internal environment analysis to determine its resources, capabilities, and core competencies.

In a global market, diversification is often not a matter of if but a matter of when. Firms that seek to become world leaders compete with large diversified companies. Companies that seek to dominate their industries often regard diversification as a tool to differentiate themselves within their industry and gain a larger market segment. Traditional companies with one product line have crossed over into other types of businesses, serving entirely new market segments with goods and services not typically associated with them. For example, the Gillette Company—originally known for their shaving and grooming products—has diversified over the years. Its businesses now include grooming, batteries, oral care, personal care, and appliances. The company is an industry leader in over a dozen major consumer product categories and continually seeks to introduce new product lines. In the over 100 years of its life span, Gillette has used corporate-level strategies to gain and hold large market positions in all its businesses.

Business strategists suggest that a firm should diversify into additional markets only when it has excess resources, capabilities, and core competencies with multiple value-creating uses. Companies can choose from among various levels of diversification ranging from low to high.

Let's next discuss the levels and types of diversification.

Levels and Types of Diversification

Diversified firms differ in their level of diversification and connections among their businesses. There are five categories of businesses based on their levels of diversification.

Low Levels of Diversification

A company that pursues a low level of diversification uses either of the following diversification strategies:

· Single business: More than 95% of revenue comes from a single business.

· Dominant business: Between 70% and 95% of revenue comes from a single business.

Moderate to High Levels of Diversification

A company that pursues a high level of diversification uses either of the following diversification strategies:

· Related constrained: Less than 70% of revenue comes from the dominant business, and all businesses share product, technological, and distribution linkages.

· Related linked (mixed related and unrelated): Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses.

Very High Levels of Diversification

A company that pursues a very high level of diversification uses the following diversification strategy:

· Unrelated: Less than 70% of revenue comes from the dominant business, and there are no common links between businesses.

There are numerous reasons firms use a corporate-level diversification strategy. This strategy is generally used to increase a firm's value by improving its overall performance. Value is created through related diversification or unrelated diversification when the strategy enables a firm's business units to increase revenues or reduce costs while implementing the business-level strategy. Another reason is to gain market power relative to competitors. Diversification does not always increase a firm's value; it may have a neutral effect, increase costs, or reduce revenues and value. The reason a firm would go for diversification is to try and neutralize the market power of a competitor.

Related Diversification

Companies that use the related diversification strategy build on or extend their resources, capabilities, and core competencies to create value. Using this strategy, a company seeks to develop and exploit economies of scope—cost savings created by successfully transferring some capabilities and competencies that were developed in one of the firm's business units to another of its businesses. Let's discuss the types of related diversification.

Operational Relatedness: Sharing Activities

Firms can create operational relatedness by sharing either a primary activity such as an inventory delivery system or a support activity such as a purchasing activity. Companies with multiple business units routinely share activities to reduce costs, which gives the customer more power as a buyer. It also enables a firm, if it so chooses, to pass on some of those savings to their customers, which can result in greater customer loyalty and increased revenues.

Corporate Relatedness: Transferring of Core Competencies

Over time, a firm's intangible resources such as knowledge become the foundation for core competencies. Corporate core competencies are complex sets of resources and capabilities that link various businesses, primarily through managerial and technological knowledge, experience, and expertise. Related linked companies often transfer competencies between businesses, which creates value in two ways:

· The expense of developing a competence is incurred only in one business unit. When it is transferred to a second business unit, it is already a source of value because the second business unit does not need to allocate resources to develop the competence.

· Intangible resources, which are difficult for competitors to understand and therefore imitate, are the second source of value created through corporate relatedness. There are many examples of corporate relatedness in companies, such as Virgin Industries, Honda, and Coopers Industries (Whittingdon & Mayer, 2002).

Market Power

Related diversification can also gain market power. A firm has market power when it is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level or when it can do both. There are several approaches to gaining market power through diversification, such as:

· Multipoint competition: This exists when two or more diversified firms simultaneously compete in the same product areas or geographic markets. Two obvious examples are FedEx and UPS. DHL, the strongest shipping company in Europe, entered the US market, leading to more competition in this industry.

· Vertical integration: This exists when a company produces its own inputs or owns its own source of distribution, for example, Apple.

Unrelated Diversification

A company can use an unrelated diversification strategy to create value through two types of financial economies, which are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.

· Efficient internal capital market allocation: This financial economy results from efficient internal capital allocations. This approach is used to reduce risk among the firm's business units.

· Restructuring: This financial economy deals with purchasing other corporations and restructuring their assets. In this approach, a diversified firm buys another company, restructuring that company's assets in ways that enable it to operate more efficiently and profitably, and then selling the company for a profit in the external market.

Reference:

SUO. (2014). MGT4070: strategic management: Week 2: corporate-level strategies. Retrieved from

http://myeclassonline.com