May 25, 2013

Niche/Focus Competitive Strategy

Niche or focus competitive strategy is attention on a narrow piece of the total market. The narrow piece can be a small geographic area, specialized requirement in using a product, or a special product attribute combination that appeals to only a small segment. Local bakery is a good example of niche market position.  Automobile manufacturers catering to only sports cars is another example of niche strategy.

Niche market positions are attractive when:

The niche is big enough to provide a profitable business opportunity and growth.
The market leaders do not serve the niche and show no intention of serving it.
It is costly for multi-segment players to service the niche.
The industry has more niches

Differentiation Competitive Strategy

Differentiation strategies are attractive in product or service industries whenever buyers' needs and preferences are too diverse and therefore a standard product cannot satisfy the entire market. This gives opportunity for companies to study or research the market and find out a distinct set of buyer-desired product attributes into its product or service offering that are distinct from its rivals. Competitive advantage results once a sufficient number of buyers become strongly attached to the unique set of attributes offered by the company.

Successful differentiation allows the firm to:

charge a premium price
increase sales by making more persons aware of the product
increase sales by more frequent purchase by loyal customers

Differentiation through all Activities of Value Chain

Porter strongly stated that differentiation is not limited to the product alone or marketing and advertising activities. All value chain activities have the potential to provide differentiation benefits to the buyers.

Buyers have to perceive the differentiation features and benefits to pay the premium. Hence the company has to make efforts to make the buyer aware of the differentiation features and benefits.

Corporate Diversification Strategy - Theory - Review Notes

There are many companies that concentrated on a single business and achieved enviable business success over many decades - good examples include McDonald's, Southwest Airlines, Domino's Pizza, Wal-Mart, FedEx, Hershey, Timex, and Ford Motor Company.  But there are successful diversified companies also. So long as a company has its hands full trying to capitalize on profitable growth opportunities in its present business, there is no urgency to pursue diversifaction. Diversification merits strong consideration whenever a single-business company is faced with diminishing market opportunities and stagnating sales in its present business.

The purpose of diversification is to build shareholder value. Diversification builds shareholder value when a diversified group of businesses can perform better under the auspices of a single corporate parent than they would as independent, stand-alone businesses—the goal is to achieve not just a 1 + 1 = 2 result but rather to realize important 1 + 1 = 3 performance benefits. Whether getting into a new business has potential to enhance shareholder value hinges on whether a company's entry into that business can pass the attractiveness test, the cost-of-entry test, and the better-off test.

Entry into new businesses can take any of three forms: acquisition, internal startup, or joint venture/strategic partnership. Each has its pros and cons, but acquisition is the most frequently used; internal start-up takes the longest to produce home-run results, and joint venture/strategic partnership, though used second most frequently, is the least durable.

There are two fundamental approaches to diversification—into related businesses and into unrelated businesses. The rationale for related diversification is strategic: Diversify into businesses with strategic fits along their respective value chains, capitalize on strategic-fit relationships to gain competitive advantage, and then use competitive advantage to achieve the desired 1 + 1 = 3 impact on shareholder value.

The basic premise of unrelated diversification is that any business that has good profit prospects and can be acquired on good financial terms is a good business to diversify into. Unrelated diversification strategies surrender the competitive advantage potential of strategic fit in return for such advantages as (1) spreading business risk over a variety of industries and (2) providing opportunities for financial gain (if candidate acquisitions have undervalued assets, are bargain-priced and have good upside potential given the right management, or need the backing of a financially strong parent to capitalize on attractive opportunities). However, the greater the number of businesses a company has diversified into and the more diverse these businesses are, the harder it is for corporate executives to select capable managers to run each business, know when the major strategic proposals of business units are sound, or decide on a wise course of recovery when a business unit stumbles.

Analyzing how good a company's diversification strategy is a six-step process:

Step 1: Evaluate the long-term attractiveness of the industries into which the firm has diversified. Industry attractiveness needs to be evaluated from three angles: the attractiveness of each industry on its own, the attractiveness of each industry relative to the others, and the attractiveness of all the industries as a group.

Step 2: Evaluate the relative competitive strength of each of the company's business units. Again, quantitative ratings of competitive strength are preferable to subjective judgments. The purpose of rating the competitive strength of each business is to gain clear understanding of which businesses are strong contenders in their industries, which are weak contenders, and the underlying reasons for their strength or weakness. The conclusions about industry attractiveness can be joined with the conclusions about competitive strength by drawing an industry attractiveness–competitive strength matrix that helps identify the prospects of each business and what priority each business should be given in allocating corporate resources and investment capital.

Step 3: Check for cross-business strategic fits. A business is more attractive strategically when it has value chain relationships with sister business units that offer potential to (1) realize economies of scope or cost-saving efficiencies; (2) transfer technology, skills, know-how, or other resource capabilities from one business to another; (3) leverage use of a well-known and trusted brand name; and (4) to build new or stronger resource strengths and competitive capabilities via cross-business collaboration. Cross-business strategic fits represent a significant avenue for producing competitive advantage beyond what any one business can achieve on its own.

Step 4: Check whether the firm's resource strengths fit the resource requirements of its present business lineup. Resource fit exists when (1) businesses add to a company's resource strengths, either financially or strategically, (2) a company has the resources to adequately support the resource requirements of its businesses as a group without spreading itself too thin, and (3) there are close matches between a company's resources and industry key success factors. One important test of financial resource fit involves determining whether a company has ample cash cows and not too many cash hogs.

Step 5: Rank the performance prospects of the businesses from best to worst and - determine what the corporate parent's priority should be in allocating resources to its various businesses. The most important considerations in judging business-unit performance are sales growth, profit growth, contribution to company earnings, and the return on capital invested in the business. Sometimes, cash flow generation is a big consideration. Normally, strong business units in attractive industries have significantly better performance prospects than weak businesses or businesses in unattractive industries. Business subsidiaries with the brightest profit and growth prospects and solid strategic and resource fits generally should head the list for corporate resource support.

Step 6: Crafting new strategic moves to improve overall corporate performance. This step entails using the results of the preceding analysis as the basis for devising actions to strengthen existing businesses, make new acquisitions, divest weak- performing and unattractive businesses, restructure the company's business lineup, expand the scope of the company's geographic reach multinationally or globally, and otherwise steer corporate resources into the areas of greatest opportunity. Once a company has diversified, corporate management's task is to manage the collection of businesses for maximum long-term performance. There are five different strategic paths for improving a diversified company's performance: (1) stick with the existing business lineup, (2) broadening the firm's business base by diversifying into additional businesses, (3) retrenching to a narrower diversification base by divesting some of its present businesses, (4) restructuring the company's business lineup with a combination of divestitures and new acquisitions to put a whole new face on the company's business makeup, and (5) pursuing multinational diversification and striving to globalize the operations of several of the company's business units.
Powerpoint Presentation

Globallization Strategy - Review Notes

Most issues in competitive strategy that apply to domestic companies apply also to companies that compete internationally. But there are four strategic issues unique to competing across national boundaries:

Whether to customize the company's offerings in each different country market to match the tastes and preferences of local buyers or offer a mostly standardized product worldwide.

Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country to fit the specific market conditions and competitive circumstances it encounters.

Where to locate the company's production facilities, distribution centers, and customer service operations so as to realize the greatest locational advantages.

How to efficiently transfer the company's resource strengths and capabilities from one country to another in an effort to secure competitive advantage.

Why Companies Expand into Foreign Markets?
1. To gain access to new customers.
2. To achieve lower costs and enhance the firm's competitiveness
3. To capitalize on its core competencies
4. To spread its business risk across a wider market base.

Strategy options for competing in world markets include maintaining a national (one-country) production base and exporting goods to foreign markets, licensing foreign firms to use the company's technology or produce and distribute the company's products, employing a franchising strategy, using strategic alliances or other collaborative partnerships to enter a foreign market or strengthen a firm's competitiveness in world markets, following a multicountry strategy, or follow a global strategy.

Strategic alliances with foreign partners have appeal from several angles: gaining wider access to attractive country markets, allowing capture of economies of scale in production and/or marketing, filling gaps in technical expertise and/or knowledge of local markets, saving on costs by sharing distribution facilities and dealer networks, helping gain agreement on important technical standards, and helping combat the impact of alliances that rivals have formed.

Multicountry competition refers to situations where competition in one national market is largely independent of competition in another national market—there is no "international market," just a collection of self-contained country (or maybe regional) markets. Global competition exists when competitive conditions across national markets are linked strongly enough to form a true world market and when leading competitors compete head-to-head in many different countries.

Once a company has chosen to establish international operations, it has three basic options: (1) a think-local, act-local approach to crafting a strategy; (2) a think-global, act-global approach to crafting a strategy; and (3) a combination think-global, act-local approach. A think-local, act-local strategy is appropriate for industries where multicountry competition dominates; a localized approach to strategy making calls for a company to vary its product offering and competitive approach from country to country in order to accommodate differing buyer preferences and market conditions. A think-global, act-global approach works best in markets that are globally competitive or beginning to globalize; global strategies involve employing the same basic competitive approach (low-cost, differentiation, best-cost, focused) in all country markets and marketing essentially the same products under the same brand names in all countries where the company operates. A think-global, act-local approach can be used when it is feasible for a company to employ essentially the same basic competitive strategy in all markets but still customize its product offering and some aspect of its operations to fit local market circumstances.

There are three ways in which a firm can gain competitive advantage (or offset domestic disadvantages) in global markets. One way involves locating various value chain activities among nations in a manner that lowers costs or achieves greater product differentiation. A second way involves efficient and effective transfer of competitively valuable competencies and capabilities from its domestic markets to foreign markets. A third way draws on a multinational or global competitor's ability to deepen or broaden its resource strengths and capabilities and to coordinate its dispersed activities in ways that a domestic-only competitor cannot.

Companies racing for global leadership have to consider competing in emerging markets like China, India, Brazil, Indonesia, and Mexico—countries where the business risks are considerable but the opportunities for growth are huge. To succeed in these markets, companies often have to (1) compete on the basis of low price, (2) be prepared to modify aspects of the company's business model or strategy to accommodate local circumstances (but not so much that the company loses the advantage of global scale and global branding), and/or (3) try to change the local market to better match the way the company does business elsewhere. Profitability is unlikely to come quickly or easily in emerging markets, typically because of the investments needed to alter buying habits and tastes and/or the need for infrastructure upgrades. And there may be times when a company should simply stay away from certain emerging markets until conditions for entry are better suited to its business model and strategy.

Local companies in emerging country markets can seek to compete against multinational companies by (1) developing business models that exploit shortcomings in local distribution networks or infrastructure, (2) utilizing understanding of local customer needs and preferences to create customized products or services, (3) taking advantage of low-cost labor and other competitively important qualities of the local workforce, (4) using economies of scope and scale to better defend against expansion-minded multinationals, or (5) transferring company expertise to cross-border markets and taking initiatives to compete on a global level themselves.
Powerpoint presentation

Analysis of Firm's Internal Capabilities

There are five key questions to consider in analyzing a company's own particular competitive circumstances and its competitive position vis-à-vis key rivals:

How well is the present strategy working?

This involves evaluating the strategy from a qualitative standpoint (completeness, internal consistency, rationale, and suitability to the situation) and also from a quantitative standpoint (the strategic and financial results the strategy is producing). The stronger a company's current overall performance, the less likely the need for radical strategy changes. The weaker a company's performance and/or the faster the changes in its external situation (which can be gleaned from industry and competitive analysis), the more its current strategy must be questioned.

What are the company's resource strengths and weaknesses, and its external opportunities and threats?

A SWOT analysis provides an overview of a firm's situation and is an essential component of crafting a strategy tightly matched to the company's situation. The two most important parts of SWOT analysis are (1) drawing conclusions about what story the compilation of strengths, weaknesses, opportunities, and threats tells about the company's overall situation, and (2) acting on those conclusions to better match the company's strategy, to its resource strengths and market opportunities, to correct the important weaknesses, and to defend against external threats. A company's resource strengths, competencies, and competitive capabilities are strategically relevant because they are the most logical and appealing building blocks for strategy; resource weaknesses are important because they may represent vulnerabilities that need correction. External opportunities and threats come into play because a good strategy necessarily aims at capturing a company's most attractive opportunities and at defending against threats to its well-being.

The final piece of SWOT analysis to support crafting strategy is to translate the diagnosis of the company's situations into actions for improving the companies strategy to improve business prospects.

Are the company's prices and costs competitive?

One telling sign of whether a company's situation is strong or precarious is whether its prices and costs are competitive with those of industry rivals. Value chain analysis and benchmarking are essential tools in determining whether the company is performing particular functions and activities cost-effectively, learning whether its costs are in line with competitors, and deciding which internal activities and business processes need to be scrutinized for improvement.

Value chain is a concept that looks at company as a collection of value activities. Value chain analysis teaches that how competently a company manages its value chain activities relative to rivals is a key to building a competitive advantage based on either better competencies and competitive capabilities or lower costs than rivals.

Is the company competitively stronger or weaker than key rivals?

The key appraisals here involve how the company matches up against key rivals on industry key success factors and other chief determinants of competitive success and whether and why the company has a competitive advantage or disadvantage. Quantitative competitive strength assessments indicate where a company is competitively strong and weak, and provide insight into the company's ability to defend or enhance its market position. As a rule a company's competitive strategy should be built around its competitive strengths and should aim at shoring up areas where it is competitively vulnerable. When a company has important competitive strengths in areas where one or more rivals are weak, it makes sense to consider offensive moves to exploit rivals' competitive weaknesses. When a company has important competitive weaknesses in areas where one or more rivals are strong, it makes sense to consider defensive moves to curtail its vulnerability.

What strategic issues and problems merit front-burner managerial attention?

This analytical step zeros in on the strategic issues and problems that stand in the way of the company's success. It involves using the results of both industry and competitive analysis and company situation analysis to identify a "worry list" of issues to be resolved for the company to be financially and competitively successful in the years ahead. The worry list always centers on such concerns as "how to . . . ," "what to do about . . . ," and "whether to . . ."—the purpose of the worry list is to identify the specific issues/problems that management needs to address. Actual deciding on a strategy and what specific actions to take is what comes after the list of strategic issues and problems that merit front-burner management attention is developed.

Good company situation analysis, like good industry and competitive analysis, is a valuable precondition for good strategy making. A competently done evaluation of a company's resource capabilities and competitive strengths exposes strong and weak points in the present strategy and how attractive or unattractive the company's competitive position is and why. Managers need such understanding to craft a strategy that is well suited to the company's competitive circumstances.
Powerpoint presentation