Chapter 4 Business Strategy PDF

CHAPTER 4 BUSINESS STRATEGY STRATEGIC MANAGEMENT UAB Index 4.1. The nature and sources of competitive advantage 4.2. Analysis of cost and differentiation competitive advantage 4.2.1. Cost competitive advantage 4.2.2. Differentiation competitive advantage 4.3. The strategic clock 4.4. Life cycle....

CHAPTER 4 BUSINESS STRATEGY STRATEGIC MANAGEMENT UAB Index 4.1. The nature and sources of competitive advantage 4.2. Analysis of cost and differentiation competitive advantage 4.2.1. Cost competitive advantage 4.2.2. Differentiation competitive advantage 4.3. The strategic clock 4.4. Life cycle. Strategies in emerging, mature, and declining industries. 4.5. Innovation strategies 4.1. The nature and sources of competitive advantage ▪ COMPETITIVE ADVANTAGE Any feature of the firm that distinguishes it from other rivals, placing the company in a relatively better position for competing and obtaining higher profitability. BASIC REQUIREMENTS PROFITABILITY! 1. Characteristics related to key success factors in the market 2. Sufficiently substantial 3. Sustainable 4.1. The nature and sources of competitive advantage GENERIC COMPETITIVE STRATEGIES Sources for competitive advantage Differentiation Industry Segment Scope of competition Low cost COST LEADERSHIP DIFFERENTIATION FOCUS Porter (1980) 4.1. The nature and sources of competitive advantage Grant (2010, p. 223) 4.1. The nature and sources of competitive advantage FACTORS FOR CREATING COMPETITIVE ADVANTAGE INTERNAL FACTORS Ability to detect changes Eficiency Quality Respond quickly and flexibly Take advantage of opportunities COMPETITIVE ADVANTAGE Innovation Customer satisfaction RESOURCES AND CAPABILITIES ANTICIPATE EXTERNAL CHANGES EXTERNAL FACTORS 4.1. The nature and sources of competitive advantage FACTORS FOR SUSTAINING COMPETITIVE ADVANTAGE Imitation barriers Competitors’ imitation capability Industry dynamism 4.2. Analysis of cost and differentiation competitive advantage 4.2.1. Cost competitive advantage The firm is able to offer similar products or services than its competitors but at a lower cost. PRICE Cost B MARGIN MARGIN Cost A COST COST Company A Company B Competitive advantage VALUE CHAIN & COST LEADERSHIP Grant (2010) 4.2. Analysis of cost and differentiation competitive advantage 4.2.1. Cost competitive advantage SOURCES OF COST ADVANTAGE •LEARNING EFFECT The time to produce a unit of product decreases when the number of units produced increases •EXPERIENCE EFFECT Generalization of the learning effect, applied to other operating costs ▪OTHER FACTORS: ✓ Economies of scale ✓ Economies of learning ✓ Production techniques and product redesign ✓ Input cost advantages ✓ Firm location ✓ Cooperation agreements ✓ Bargaining power 4.2. Analysis of cost and differentiation competitive advantage 4.2.1. Cost competitive advantage SOURCES OF COST COMPETITIVE ADVANTAGE IN LARGE RETAIL STORES - Important economies of scale - Use of standardized marketing technology - Lower labor costs due to the reduction in the number of jobs - High bargaining power with suppliers - Cooperation agreements with some manufacturers - Located on the outskirts of major cities 4.2. Analysis of cost and differentiation competitive advantage 4.2.1. Cost competitive advantage BARRIERS TO IMITATION CONDITIONS OF APPLICATION - Difficulty to get access to certain cost factors (unique location, agreements with suppliers, etc.) -Impossibility of imitating the sources of cost advantage ✓ Price competence is a key factor of success ✓ The product is standardized and offered by multiple firms ✓ It is difficult to differentiate products ✓ Customers have a high bargaining power 4.2. Analysis of cost and differentiation competitive advantage 4.2.1. Cost competitive advantage ➢It requires investments in new equipments RISKS COST ADVANTAGE ➢ Constant attention to the production process ➢ Quick changes in products, processes, or markets may annul the learning acquired ➢ Quick learning or imitation by competitors ➢ Failure to detect changes in the environment given an excesive focus on costs . ➢ Some clients may prefer differentiated products ➢ Substitute products 4.2. Analysis of cost and differentiation competitive advantage 4.2.2. Differentiation competitive advantage A firm offers a product or service that has certain attributes that make customers perceive it as unique → pay a higher price for it. PRICE A MARGIN PRICE B Cost A Cost B MARGIN COST COST Company A Company B Competitive advantage VALUE CHAIN & DIFFERENTIATION 4.2. Analysis of cost and differentiation competitive advantage 4.2.2. Differentiation competitive advantage PRODUCT CHARACTERISTICS • Physical: Size, shape, technology... • Product performance • Complements: after sales services... MARKET CHARACTERISTICS • Variety of consumer tastes and needs • Product valuation by customers • Intangibles: social, aesthetic... FIRM CHARACTERISTICS OTHER VARIABLES • Way of interacting with customers • Ethic, values, corporate culture • Firm reputation • Time (rapid response) • Social Responsibility criteria 4.2. Analysis of cost and differentiation competitive advantage 4.2.2. Differentiation competitive advantage BARRIERS TO IMITATION ▪ High level of creativity ▪ Complex interrelations of resources and capabilities ▪ Unique location CONDITIONS OF APPLICATION Greater complexity and variety of products and services, customers needs, and characterisctics of the firms offering the product. 4.2. Analysis of cost and differentiation competitive advantage 4.2.2. Differentiation competitive advantage RISKS DIFFERENTIATION ADVANTAGE ➢ The price difference between competitors may be too high for customers. ➢ Customers may not feel the need for differentiation ➢ Imitation by competitors. ➢ Competitors with a segmentation strategy may achieve higher differentiation for the market segments they target. 4.2. Analysis of cost and differentiation competitive advantage 4.2.2. Differentiation competitive advantage COMPETITIVE STRATEGIES: EL CORTE INGLÉS & DIA • Attractive facilities • Variety of products and brands • Attractive arrangement of products on the selves • Home delivery • Specialized staff • Personalized customer care • Additional services such as car parking El Corte Inglés • Simple facilities • Only basic products, and only two brands per product, with one being DIA’s own brand. • Home delivery not always available • Staff has multiple duties • Parking as an additional service not available (excepte in Maxi DIA supermarkets) Día Guerras y Navas (2018) 4.3. The strategic clock • Basic premise: Customers buy a product or a service in one firm or another according to two criteria: a) Price (price differences between competitors). b) Perceived added value (customers’ appreciation). Combining these two criteria, it is possible to obtain 8 competitive strategies, that can be grouped into 4 strategic groups 4.3. The strategic clock STRATEGIES FOCUSED ON LOW PRICES Option 1: “No frills” Option 2: Low price STRATEGIES FOCUSED ON DIFFERENTIATION ADDED VALUE PERCEIVED Option 4: Differentiation Option 5: Focused differentiation HYBRID STRATEGIES STRATEGIES DESTINED TO FAIL Options 6,7,8 PRICE Guerras y Navas (2018) 4.4. Life cycle. Strategies for emerging, mature, and declining industries OBJETIVE To adapt competitive strategies to different types of industries, depending on their level of maturity → emerging, growth, mature, and declining. Emergence Growth Maturity Decline 4.4. Life cycle. Strategies for emerging, mature, and declining industries Evolution of Industry Structure over the Life Cycle INTRODUCTION Affluent buyers GROWTH Increasing penetration TECHNOLOGY Rapid product innovation Product and Incremental process innovation innovation PRODUCTS Wide variety, Standardization rapid design change Commoditization Continued commoditization MANUFACTURING Short-runs, skill intensive Deskilling Overcapacity DEMAND TRADE Capacity shortage, mass-production MATURITY Mass market replacement demand DECLINE Knowledgeable, customers, residual segments Well-diffused technology -----Production shifts from advanced to developing countries----- COMPETITION Technology- Entry & exit KSFs Product innovation Process technology. Design for Shakeout & consolidation Cost efficiency Price wars, exit Overhead reduction, rationalization, low cost sourcing Grant (2010) 4.4. Life cycle. Strategies for emerging, mature, and declining industries NEW OR EMERGING INDUSTRIES ✓Recently created ✓Linked to new innovations, or changes in customers’ needs CHARACTERISTICS STRATEGIES - High initial costs - Slow growth in demand - High risk due to uncertainty and instability - Risk management (eg. Cooperation, rules of the game). - Timing entry 4.4. Life cycle. Strategies for emerging, mature, and declining industries MATURE INDUSTRIES ✓Low levels of demand growth, or even null. As a result, firm’s growth opportunities decrease. CHARACTERISTICS - Overcapacity installed - Appearance of new competitors. - Difficulties to innovate - Customers’ bargaining power - Gaining a substantial competitive advantage: cost leadership, product differentiation STRATEGIES -Redefining business scope: diversification, external growth strategies, internationalization 4.4. Life cycle. Strategies for emerging, mature, and declining industries DECLINING INDUSTRIES ✓ Characterized by a constant decrease in demand CHARACTERISTICS STRATEGIES - Large manufacturing overcapacity - Aggressive price competition -Absence of technological changes -High average age of resources - Industry leadership - Segmentation - Harvest - Quick divestment 4.5. Innovation strategy ▪ Inventions result from combinations of new or existing knowledge ▪Innovation involves the commercialization of an invention KNOWLEDGE INVENTION Innovation is a costly process… Strategy: Innovators or followers? INNOVATION 4.5. Innovation strategy According to OBJECT Types of innovation According to INTENSITY Product innovation Process innovation Radical innovation Incremental innovation REFERENCES • GRANT, R. (2016). Contemporary Strategy Analysis, Text and Cases. 9th edition, Wiley: London. • NAVAS, J.E.; GUERRAS, L.A. (2018). Fundamentals of Strategic Management. 2nd edition, Thomson ReutersCivitas: Madrid.