1. valuable resources: allows companies to improve efficiency and effectiveness (apples vast product lines) 2. rare resources: resources that are not controlled or possessed by many competing firms (apples ability to configure their resources into an elegant highly desired designs) 3. imperfectly imitable resources: resources that are impossible or extremely costly to duplicate (apples cloud design) 4. non-substitutable resources: no other resources can replace them and produce similar value or competitive advantage (apples itunes software VS spotifys market share i.e apple wins) “One Million Titles, Consistently Low prices” — The blue underlined text in Amazon’s first homepage in 1995, announced the reason how they were different from others. Tom Alberg, a former executive at McCaw cellular could not believe that the idea of buying books online through this…
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Chapter 6 Organizational Strategy MGMT3 Chuck Williams Designed & Prepared by B-books, Ltd. Sustainable Competitive Advantage Resources The assets, capabilities, processes, information, and knowledge that the organization controls Competitive Advantage Providing greater value for customers than competitors can An organization’s resources are the assets, capabilities, processes, information, and knowledge that the organization controls. Firms use their resources to improve organizational effectiveness and efficiency. Resources are critical to organizational strategy, because they can help companies create and sustain an advantage over competitors. Organizations can achieve a competitive advantage by using their resources to provide greater value for customers than competitors can. A competitive advantage becomes a sustainable competitive advantage when other companies cannot duplicate the value a firm is providing to customers. Importantly, sustainable competitive advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if that advantage still exists after competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it. Sustainable Competitive Advantage A competitive advantage that other companies have tried unsuccessfully to duplicate 1 Requirements for Sustainable Competitive Advantage Valuable Resources Non- Substitutable Resources Imperfectly Imitable Resources Rare Resources 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 nonsubstitutable. Valuable resources allow companies to improve their efficiency and effectiveness. Unfortunately, changes in customer demand and preferences, competitors’ actions, and technology can make once-valuable resources much less valuable. For sustained competitive advantage, valuable resources must also be rare resources. Think about it. How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities? Consequently, rare resources, resources that are not controlled or possessed by many competing firms, are necessary to sustain a competitive advantage. However, for sustained competitive advantage, other firms must be unable to imitate or find substitutes for those valuable, rare resources. Imperfectly imitable resources are impossible or extremely costly or difficult to duplicate. Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also nonsubstitutable resources, meaning that no other resources can replace them and produce similar value or competitive advantage. 1 Strategy-Making Process Assess need for strategic change Conduct a Situational Analysis Choose Strategic Alternatives 2 Assessing the Need for Strategic Change Avoid Competitive Inertia a reluctance to change strategies or competitive practices that have been successful in the past Look for Strategic Dissonance a discrepancy between a company’s intended strategy and the strategic actions managers take when implementing that strategy It might seem that determining the need for strategic change would be easy to do, but in reality, it’s not. There’s a great deal of uncertainty in strategic business environments. Furthermore, top-level managers are often slow to recognize the need for strategic change, especially at successful companies that have created and sustained competitive advantages. Because they are acutely aware of the strategies that made their companies successful, they continue to rely on them, even as the competition changes. In other words, success often leads to competitive inertia—a reluctance to change strategies or competitive practices that have been successful in the past. So, besides being aware of the dangers of competitive inertia, what can managers do to improve the speed and accuracy with which they determine the need for strategic change? One method is to actively look for signs of strategic dissonance. Strategic dissonance is a discrepancy between upper management’s intended strategy and the strategy actually implemented by the lower levels of management. Upper management sets overall company strategy, but middle and lower-level managers must carry out the strategy. Middle and lower-level managers are held directly responsible for meeting customers’ needs and responding to competitors’ actions. While strategic dissonance can indicate that these managers are not doing what they should to carry out company strategy, it can also mean that the intended strategy is out of date and needs to be changed. 2.1 Situational Analysis S W O T Strengths Weaknesses Opportunities Threats Internal External A situational analysis can also help managers determine the need for strategic change. A situational analysis, also called a SWOT analysis for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment. 2.2 Situational Analysis Strengths Opportunities Distinctive Competence Weaknesses Distinctive Competence Core Capability INTERNAL Opportunities Threats Environmental Scanning Strategic Groups EXTERNAL Consequently, an analysis of an organization’s internal environment, that is, a company’s strengths and weaknesses, begins with an assessment of distinctive competencies and core capabilities. A distinctive competence is something that a company can make, do, or perform better than its competitors. While distinctive competencies are tangible—for example, a product or service is faster, cheaper, or better—the core capabilities that produce distinctive competencies are not. Core capabilities are the less visible, internal decision-making routines, problem-solving processes, and organization cultures that determine how efficiently inputs can be turned into outputs. Strategic groups are not “actual” groups, but are selected for study by managers. Environmental scanning involves searching the environment for important events or issues that might affect the organization. A strategic group is a group of other companies within an industry that top managers choose for comparing, evaluating, and benchmarking their company’s strategic threats and opportunities. 2.2 Strategic Groups Core Firms Secondary Firms central companies in a strategic group Secondary Firms firms in a strategic group that follow strategies related to but somewhat different from those of the core firms In fact, when scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries into several kinds of strategic groups: core, secondary, and transient firms. The first kind of strategic group consists of core firms, that is, central companies in a strategic group. Secondary firms are firms that use related but somewhat different strategies than core firms. Managers need to be aware of the potential threats and opportunities posed by secondary firms. However, they spend more time assessing the threats and opportunities associated with core firms. Transient firms are companies whose strategies are changing from one strategic position to another. 2.2 Choosing Strategic Alternatives Risk-Avoiding Strategy protect an existing competitive advantage Risk-Seeking Strategy extend or create a sustainable competitive advantage Strategic Reference Points targets used by managers to determine if the firm has developed the core competencies it needs to achieve a sustainable competitive advantage According to Strategic Reference Point Theory, managers choose between two basic alternative strategies. They can choose a conservative, risk-avoiding strategy that aims to protect an existing competitive advantage. Or, they can choose an aggressive, risk-seeking strategy that aims to extend or create a sustainable competitive advantage. The choice to be risk-seeking or risk-avoiding typically depends on whether top management views the company as falling above or below strategic reference points. Strategic reference points are the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage. However, Strategic Reference Point Theory is not deterministic. Managers are not predestined to choose risk-averse or risk-seeking strategies for their companies. Indeed, one of the most important points in Strategic Reference Point Theory is that managers can influence the strategies chosen at their companies by actively changing and adjusting the strategic reference points they use to judge strategic performance. To illustrate, if a company has become complacent after consistently surpassing its strategic reference points, then top management can change the company’s strategic risk orientation from risk-averse to risk-taking by raising the standards of performance (i.e., strategic reference points). 2.3 Corporate-Level Strategies Strategy The overall organizational strategy that addresses the question “What business(es) are we in or should we be in?” Corporate-level strategy is the overall organizational strategy that addresses the question “What business or businesses are we in or should we be in?” 3 Corporate-Level Strategies Acquisitions, unrelated diversification, related diversification, single businesses BCG Matrix Stars Question marks Cash cows Dogs PORTFOLIO STRATEGY Growth Stability Retrenchment/ recovery GRAND STRATEGIES One of the standard strategies for stock market investors is diversification: buy stocks in a variety of companies in different industries. The purpose of this strategy is to reduce risk in the overall stock portfolio (i.e. the entire collection of stocks). The basic idea is simple: If you invest in ten companies in ten different industries, you won’t lose your entire investment if one company performs poorly. Furthermore, because they’re in different industries, one company’s losses are likely to be offset by another company’s gains. Portfolio strategy is based on these same ideas. Portfolio strategy is a strategy that minimizes risk by diversifying investment among various businesses or product lines. Managers who use portfolio strategy are often on the lookout for acquisitions—other companies to buy. Portfolio strategy can reduce risk even more through unrelated diversification—creating or acquiring companies in unrelated businesses. The BCG Matrix is the best-known portfolio strategy that managers use to categorize their corporation’s businesses. Grand strategies include growth, stability, and retrenchment/recovery. 3 BCG Matrix Market Growth Relative Market Share Small Large Low High Question Marks Stars Dogs Cash Cows The BCG matrix is a portfolio strategy that managers use to categorize their corporation’s businesses by growth rate and relative market share, helping them decide how to invest corporate funds. The matrix, shown in Exhibit 6.4, separates businesses into four categories based on how fast the market is growing (high-growth or low-growth) and the size of the business’s share of that market (high or low). Stars are companies that have a large share of a fast-growing market. To take advantage of a star’s fast-growing market and its strength in that market (large share), the corporation must invest substantially in it. However, the investment is usually worthwhile, because many stars produce sizable future profits. Question marks are companies that have a small share of a fast-growing market. If the corporation invests in these companies, they may eventually become stars, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in stars. Cash cows are companies that have a large share of a slow-growing market. Companies in this situation are often highly profitable, hence the name “cash cow.” Finally, dogs are companies that have a small share of a slow-growing market. As the name “dogs” suggests, having a small share of a slow-growth market is often not profitable. 3.1 BCG Matrix companies with a large share of a fast-growing market Stars companies with a small share of a fast-growing market Question Marks companies with a large share of a slow-growing market Cash Cows companies with a small share of a slow-growing market Dogs 3.1 BCG Matrix Market Growth Relative Market Share Small Large Low High Question Marks Company A Company B Stars Company C Company D Dogs Company H Company G Cash Cows Company F Company E Exhibit 6.4: Arrow 1: While the substantial cash flows from cash cows last, they should be reinvested in stars. Arrow 2: Over time, as their market growth slows, some stars may turn into cash cows. Arrow 3: Cash flows should also be directed to some question marks because of greater potential in a fast-growing market. Arrow 4: Some question marks will become stars over time, as their small markets become larger ones. Arrow 5: Because dogs lose money, they should “find a new owner” or be “taken to the pound” (sold or closed down and liquidated for their assets). 3.1 Adapted from Exhibit 6.3 Diversification and Risk Low High Single Business Related Diversification Unrelated Relationship Between Diversification and Risk Source: M. Lubatkin and P.J. Lane, “Psst…The Merger Mavens Still Have It Wrong!” Academy of Management Executive 10 (1996): 21-39. While the BCG matrix and other forms of portfolio strategy are relatively popular among managers, portfolio strategy has some drawbacks. The most significant is that the evidence does not support the usefulness of acquiring unrelated businesses. As shown in Exhibit 6.5, there is a U-shaped relationship between diversification and risk. The left side of the curve shows that single businesses with no diversification are extremely risky (if the single business fails, the entire business fails). So, in part, the portfolio strategy of diversifying is correct—competing in a variety of different businesses can lower risk. However, portfolio strategy is partly wrong, too—the right side of the curve shows that conglomerates composed of completely unrelated businesses are even riskier than single, undiversified businesses. 3.1 Problems with Portfolio Strategy Unrelated diversification does not reduce risk. Present performance is used to predict future performance. Cash cows fail to aggressively pursue opportunities and defend themselves from threats. Being labeled a “cash cow” can hurt employee morale. Companies often overpay to acquire stars. Acquiring firms often treat stars as “conquered foes.” Retrenchment Strategy Grand Strategies Growth Strategy focuses on increasing profits, revenues, market share, or number of places to do business Stability Strategy focuses on improving the way the company sells the same products or services to the same customers Retrenchment Strategy focuses on turning around very poor company performance by shrinking the size or scope of the business A grand strategy is a broad strategic plan used to help an organization achieve its strategic goals. Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use. There are three kinds of grand strategies: growth, stability, and retrenchment/recovery. The purpose of a growth strategy is to increase profits, revenues, market share, or the number of places (store, offices, locations) in which the company does business. Companies can grow in several ways. They can grow externally by merging with or acquiring other companies. The purpose of a stability strategy is to continue doing what the company has been doing, but just do it better. Consequently, companies following a stability strategy try to improve the way in which they sell the same products or services to the same customers. The purpose of a retrenchment strategy is to turn around very poor company performance by shrinking the size or scope of the business. The first step of a typical retrenchment strategy might include significant cost reductions, layoffs of employees, closing of poorly performing stores, offices, or manufacturing plants, or closing or selling entire lines of products or services. After cutting costs and reducing a business’s size or scope, the second step in a retrenchment strategy is recovery. Recovery consists of the strategic actions that a company takes to return to a growth strategy. This two-step process of cutting and recovery is analogous to pruning roses. 3.2 Industry-Level Strategies Five Industry Forces Positioning Strategies Adaptive Strategies Industry-level strategy is a corporate strategy that addresses the question “How should we compete in this industry?” 4 Porter’s Five Industry Forces Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitutes Threats of New Entrants Character of Rivalry According to Harvard professor Michael Porter, five industry forces—character of rivalry, threat of new entrants, threat of substitute products or services, bargaining power of suppliers, and the bargaining power of buyers—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. Character of the rivalry is a measure of the intensity of competitive behavior between companies in an industry. Is the competition among firms aggressive and cutthroat, or do competitors focus more on serving customers than attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat. 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. 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. Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. If an industry has numerous suppliers from whom to buy parts, materials, and services, companies will be able to bargain with suppliers to keep prices low. 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. By contrast, if a company sells a popular product or service to multiple buyers, then the company has more power to set prices. 4.1 Positioning Strategies Cost Leadership Differentiation After analyzing industry forces, the next step in industry-level strategy is to effectively protect your company from the negative effects of industry-wide competition and to create a sustainable competitive advantage. According to Michael Porter, there are three positioning strategies: cost leadership, differentiation, and focus. Cost leadership means producing a product or service of acceptable quality at consistently lower production costs than competitors so that the firm can offer the product or service at the lowest price in the industry. Cost leadership protects companies from industry forces by deterring new entrants who will have to match low costs and prices. Cost leadership also forces down the prices of substitute products and services, attracts bargain-seeking buyers, and increases bargaining power with suppliers, who have to keep their prices low if they want to do business with cost leader. Differentiation means making your product or service sufficiently different from competitors’ offerings that customers are willing to pay a premium price for the extra value or performance that it provides. Differentiation protects companies from industry forces by reducing the threat of substitute products. A focus strategy means that 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. Focus strategies typically work in market niches that competitors have overlooked or have difficulty serving. Focus Strategy 4.2 Adaptive Strategies Defenders Prospectors Reactors Analyzers 4.3 seek moderate growth retain customers Prospectors seek fast growth emphasize risk-taking & innovation Analyzers blend of defender & prospector strategies imitate others’ successes Reactors use an inconsistent strategy respond to changes Adaptive strategies are another set of industry-level strategies. While the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment. There are four kinds of adaptive strategies: defenders, analyzers, prospectors, and reactors. Defenders seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers. In other words, defenders aggressively defend their current strategic position by doing the best job they can to hold on to customers in a particular market segment. Prospectors seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market. Analyzers are a blend of the defender and prospector strategies. Analyzers seek moderate, steady growth and limited opportunities for fast growth. Analyzers are rarely first to market with new products or services. Instead, they try to simultaneously minimize risk and maximize profits by following or imitating the proven successes of prospectors. Finally, unlike defenders, prospectors, or analyzers, reactors do not follow a consistent strategy. Furthermore, rather than anticipating and preparing for external opportunities and threats, reactors tend to react to changes in their external environment after they occur. Not surprisingly, reactors tend to be poorer performers than defenders, prospectors, or analyzers. 4.3 Firm-Level Strategies Basics of Direct Competition Strategic Moves in Direct Competition Firm-level strategy addresses the question “How should we compete against a particular firm?” 5 Firm-Level Strategies DIRECT COMPETITION Market commonality Resource similarity STRATEGIC MOVES OF DIRECT COMP. Attack Response Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions. 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, that is, similar assets, capabilities, processes, information, and knowledge used to create and sustain an advantage over competitors. From a competitive standpoint, resource similarity means that the strategic actions that your company takes can probably be matched by your direct competitors. Firms in direct competition can make two basic strategic moves: attacks and responses. 5 Firm-Level Strategies Market Commonality Resource Similarity Entering market is most forceful attack. Exiting market is clear defensive signal of retreat. Entrepreneurship is strategy of entering established markets or developing new market. Firm A Firm B Attack Response 5 Direct Competition Market Commonality Resource Similarity Low High I II III IV McDonald’s Burger King Wendy’s Luby’s Cafeteria Subway The shaded area in each quadrant depicts market commonality. The larger the shaded area, the greater the market commonality. Shapes depict resource similarity, with rectangles representing one set of competitive resources and triangles representing another. Quadrant I shows two companies in direct competition because they have similar resources at their disposal and a high degree of market commonality as they try to sell similar products and services to similar customers. In Quadrant II, the shaded parts of the triangle and rectangle show two companies going after similar customers with some similar products or services but do so with different competitive resources. In Quadrant III, the very small shaded overlap shows two companies with different competitive resources and little market commonality. Finally, in Quadrant IV, the small shaded overlap between the two rectangles shows two companies competing with similar resources but with little market commonality. 5.1 Strategic Moves of Direct Competition Attack A competitive move designed to reduce a rival’s market share or profits. Response A competitive countermove, prompted by a rival’s attack, to defend or improve a company’s market share or profit. While corporate-level strategies help managers decide what business to be in and business-level strategies help them determine how to compete within an industry, firm-level strategies help managers determine when, where, and what strategic actions should be taken against a direct competitor. Firms in direct competition can make two basic strategic moves: attacks and responses. An attack is a competitive move designed to reduce a rival’s market share or profits. A response is a countermove, prompted by a rival’s attack, designed to defend or improve a company’s market share or profit. Attacks and responses can include smaller, more tactical moves, like price cuts, specially advertised sales or promotions, or improvements in service. However, they can also include resource-intensive strategic moves, such as expanding service and production facilities, introducing new products or services within the firm’s existing business, or entering a completely new line of business for the first time. Of these, market entries and exits are probably the most important kinds of attacks and responses. Entering a new market is a clear offensive signal to an attacking or responding firm that your company is committed to gaining or defending market share and profits at their expense. By contrast, exiting a market is an equally clear defensive signal that your company is retreating. 5.2 Strategic Moves of Direct Competition Types of Responses 1. Match or mirror your competitor’s move. 2. Respond along a different dimension from your competitor’s move or attack. 5.2 Strategic Moves of Direct Competition Competitor Analysis Interfirm Rivalry: Action & Response Strong Market Commonality Less Likelihood of an Attack Weak Market Greater Likelihood of an Attack Strong Resource Less Likelihood of a Response Low Resource Greater Likelihood of a Response Source: M. Chen, “Competitor Analysis and Interfirm Rivalry: Toward a Theoretical Integration, Academy of Management Review 21 (1996): 100-134. Market commonality and resource similarity determine the likelihood of an attack or response. When market commonality is strong and companies have overlapping products in multiple markets, there is less motivation to attack and more motivation to respond to an attack. The reason: when firms are direct competitors in a large number of markets they have a great deal at stake. 5.2 |
Is a competitive advantage that other companies have tried unsuccessfully
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