Final Exam Review MGT400 PDF

CHAPTER 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the...

CHAPTER 4 Evaluating a Company’s Resources, Capabilities, and Competitiveness ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 1 CORE CONCEPTS: Resource and Capability A resource is a competitive asset that is owned or controlled by a firm; a capability is the capacity of a firm to competently perform some internal activity. Capabilities are developed and enabled through the deployment of a firm’s resources. Resource ( Noun) Capability (Verbs) People innovation Technology Delivery Products Customer oriented ©McGraw-Hill Education. 2 1  TABLE 4.1 Common Types of Tangible and Intangible Resources (1 of 2) Tangible DESCRIPTION Resources Physical State-of-the-art manufacturing plants and equipment, resources efficient distribution facilities, attractive real estate locations, or ownership of valuable natural resource deposits Financial Cash and cash equivalents, marketable securities, and other resources financial assets such as a company’s credit rating and borrowing capacity Technological Patents, copyrights, superior production technology, and assets technologies that enable activities Organizational Information and communication systems (servers, resources workstations, etc.), proven quality control systems, and strong network of distributors or retail dealers ©McGraw-Hill Education. 3 TABLE 4.1 Common Types of Tangible and Intangible Resources (2 of 2) Intangible DESCRIPTION Resources Human assets and An experienced and capable workforce, talented intellectual capital employees in key areas, collective learning embedded in the organization, or proven managerial know-how Brand, image, and Brand names, trademarks, product or company image, reputational assets buyer loyalty, and reputation for quality, superior service Relationships Alliances or joint ventures that provide access to technologies, specialized know-how, or geographic markets, and trust established with various partners Company culture The norms of behavior, business principles, and ingrained beliefs within the company ©McGraw-Hill Education. 4 2  Determining the Competitive Power of a Company’s Resources and Capabilities VRIN Competitive Power Tests Is the resource or capability competitively valuable? Is the resource or capability rare—something rivals lack? Is the resource or capability inimitable or hard to copy? Is the resource or capability vulnerable to substitution from different types of resources and capabilities? ©McGraw-Hill Education. 5 CORE CONCEPTS: VRIN tests for sustainable competitive advantage The VRIN tests for sustainable competitive advantage asks if a resource or capability is valuable, rare, inimitable, and nonsubstitutable. ©McGraw-Hill Education. 6 3  CORE CONCEPTS: Social Complexity and Causal Ambiguity Social complexity and causal ambiguity are two factors that inhibit the ability of rivals to imitate a firm’s most valuable resources and capabilities. Causal ambiguity makes it very hard to figure out how a complex resource contributes to competitive advantage and therefore exactly what to imitate. The cause for success is obscure and not understood well. Because the firm itself does not really know why it has achieved success, it is quite difficult for a competitor to replicate it. ©McGraw-Hill Education. 7 CORE CONCEPT: Resource Bundles Companies that lack a standalone resource that is competitively powerful may nonetheless develop a competitive advantage through resource bundles that enable the superior performance of important cross- functional capabilities. CORE CONCEPT: Dynamic Capability A dynamic capability is the ability to modify, deepen, or reconfigure the company’s existing resources and capabilities in response to its changing environment or market opportunities. ©McGraw-Hill Education. 8 4  CORE CONCEPT: SWOT Analysis SWOT analysis is a simple but powerful tool for sizing up a firm’s internal strengths and competitive deficiencies, its market opportunities, and the external threats to its future well-being. ©McGraw-Hill Education. 9 The Value of a SWOT Analysis The value of a SWOT analysis is in: Drawing conclusions from SWOT listings about the firm’s overall situation and translating those conclusions into effective strategic actions that: Better match the firm’s strategy to its strengths and market opportunities Correct problematic weaknesses Defend against worrisome external threats. ©McGraw-Hill Education. 10 5  TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (1 of 4) Potential Internal Strengths and Competitive Capabilities Core competencies in ____. A strong financial condition; ample financial resources to grow the business. Strong brand name image/company reputation. Economies of scale and/or learning and experience curve advantages over rivals. Proprietary technology/superior technological skills/important patents. Cost advantages over rivals. Product innovation capabilities. Proven capabilities in improving production processes. Good supply chain management capabilities. Good customer service capabilities. Better product quality relative to rivals. Wide geographic coverage and/or strong global distribution capability. Alliances/joint ventures with other firms that provide access to valuable technology, competencies, and/or attractive geographic markets. ©McGraw-Hill Education. 11 TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (2 of 4) Potential Internal Weaknesses and Competitive Deficiencies No clear strategic direction. No well-developed or proven core competencies. A weak balance sheet; burdened with too much debt. Higher overall unit costs relative to key competitors. A product/service with features and attributes inferior to those of rivals. Too narrow a product line relative to rivals. Weak brand image or reputation. Weaker dealer network than key rivals. Behind on product quality, R&D, and/or technological know-how. Lack of management depth. Short on financial resources to grow the business and pursue promising initiatives. ©McGraw-Hill Education. 12 6  TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (3 of 4) Potential Market Opportunities Serving additional customer groups or market segments. Expanding into new geographic markets. Expanding the firm’s product line to meet a broader range of customer needs. Utilizing existing company skills or technological know-how to enter new product lines or new businesses. Falling trade barriers in attractive foreign markets. Acquiring rival firms or companies with attractive technological expertise or capabilities. ©McGraw-Hill Education. 13 TABLE 4.2 Factors to Consider When Identifying a Company’s Strengths, Weaknesses, Opportunities, and Threats (4 of 4) Potential External Threats to a Company’s Future Prospects Increasing intensity of competition among industry rivals—may squeeze profit margins. Slowdowns in market growth. Likely entry of potent new competitors. Growing bargaining power of customers or suppliers. Buyer needs and tastes shift away from the industry’s product. Adverse demographic changes that threaten to curtail demand for the industry’s product. Vulnerability to unfavorable industry driving forces. Restrictive trade policies on the part of foreign governments. Costly new regulatory requirements. ©McGraw-Hill Education. 14 7  Question 3: Are the Company’s Cost Structure and Customer Value Proposition Competitive? Why are both cost structure and value important? Delivering a profitable customer value proposition that maintains a competitive edge of over rivals requires effectively controlling the costs of differentiating features in industries where price competition is a dominant feature. Useful analytical tools: Value chain analysis Benchmarking ©McGraw-Hill Education. 15 CORE CONCEPT: Value Chain A company’s value chain identifies the primary activities that create customer value and related support activities. A value chain describes a company as a series of processes or activities that improve a final product or service Value Chain can be defined as, “A high-level model of how businesses receive raw materials as input, add value to the raw materials through various processes, and sell finished products to customers”. Porter’s Value Chain represents a system that explains how inputs are changed into outputs. Value chain management refers to the strategic process of maximizing value creation while minimizing costs in a company’s series of activities, from product conception to distribution and after-sales service. it involves optimizing the flow of products, services, and information from the producer to the customer. It is based on the understanding that the combined value of these activities will be greater if coordinated in a synergistic manner rather than treated as isolated operational elements. Effective value chain management contributes to a company’s competitive advantage, enhancing efficiency, increasing customer satisfaction, and ultimately, driving business growth. ©McGraw-Hill Education. 16 8 FIGURE 4.1 A Representative Company Value Chain (1 of 2) Jump to Appendix 1 for long description. ©McGraw-Hill Education. 17 FIGURE 4.1 A Representative Company Value Chain (2 of 2) Jump to Appendix 2 for long description. ©McGraw-Hill Education. 18 9  What are the Benefits of Value Chain? 1. EFFICIENCY IMPROVEMENT A thorough understanding of the value chain enables businesses to identify inefficiencies within internal processes and take corrective measures, thereby improving operational efficiency. 2. COST REDUCTION The value chain model aids in pinpointing areas where costs can be minimized without compromising on the quality of products or services. 3. COMPETITIVE ADVANTAGE Through value chain analysis, businesses can differentiate their products or services, providing them with a competitive edge in the market. 4. CUSTOMER SATISFACTION A streamlined value chain not only ensures top-notch product quality but also facilitates timely delivery, leading to enhanced customer satisfaction. 5. STRATEGIC DECISION MAKING Value chain analysis provides valuable insights that assist in making strategic decisions, such as resource allocation and investment planning. 6. INNOVATION By understanding the value chain, opportunities for innovation become apparent, fostering a culture of continuous improvement within the organization. ©McGraw-Hill Education. 19 Benchmarking: A Tool for Assessing Whether a Company’s Value Chain Activities Are Competitive Benchmarking entails comparing how different firms perform various value chain maintenance and then making cross-firm comparisons of the costs and effectiveness of these activities. How materials are purchased How inventories are managed How products are assembled How customer orders are filled and shipped How maintenance is performed ©McGraw-Hill Education. 20 10  Core Concept: Benchmarking Benchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques (or “best practices”) to improve the cost and effectiveness of a company’s own internal activities. ©McGraw-Hill Education. 21 FIGURE 4.2 Representative Value Chain for an Entire Industry Jump to Appendix 3 for long description. ©McGraw-Hill Education. 22 11  The Value Chain System for an Entire Industry The value chains of forward channel partners are relevant because: Costs and margins of the activities of distributors and retail dealers are part of the price the consumer pays and can strongly affect a firm’s customer value proposition. Accurately assessing the competitiveness of a firm’s cost structure and value proposition helps its managers understand both an industry’s value chain system and its internal value chain. ©McGraw-Hill Education. 23 Strategic Options for Remedying a Cost or Value Disadvantage There are three main areas of a firm’s overall value chain where cost differences with rivals can occur. 1. A firm’s own internal activities 2. Value chain activities performed by suppliers 3. Value chain activities performed by forward channel allies ©McGraw-Hill Education. 24 12  Improving Internally Performed Value Chain Activities Implement the use of best practices throughout the firm. Eliminate cost-producing activities by revamping value chain. Relocate high-cost internal activities to lower-cost areas. Outsource internal activities to vendors or contractors to perform them more cheaply than in-house. Invest in productivity-enhancing, cost-saving technology. Find ways around activities or items where costs are high. Redesign products and/or components to economize on manufacturing or assembly costs. Reduce costs in supplier or forward portions of value chain system to make up for higher internal costs. ©McGraw-Hill Education. 25 Improving Supplier-Related Value Chain Activities Remedying Supplier-Related Cost Disadvantages Pressure suppliers for lower prices. Switch to lower-priced substitutes. Collaborate closely with suppliers to identify mutual cost- saving opportunities. Integrate backward into business of high-cost suppliers. Enhancing the Customer Value Proposition Select and retain best-quality performing suppliers. Provide quality-based incentives to suppliers. Integrate suppliers into the product design process. ©McGraw-Hill Education. 26 13  Improving Value Chain Activities of Forward Channel Allies Combat forward channel cost disadvantages by: Pressuring dealer-distributors and other forward channel allies to reduce their costs and markups Working with forward channel allies to identify win-win opportunities to reduce costs Changing to a more economical distribution strategy or integrate forward into company-owned retail outlets Improve the customer value proposition by: Engaging in cooperative advertising and promotions Providing training for dealers, distributors, or retailers to improve the purchasing experience or customer service Creating and enforcing operating standards for resellers or franchisees to ensure consistent store operations ©McGraw-Hill Education. 27 CHAPTER 5 The Five Generic Competitive Strategies ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 28 14  Strategy and the Value Proposition Competing to successfully gain a competitive advantage involves giving buyers what they perceive as superior value proposition by offering: A good product at a lower price A superior product that is worth paying more for A best-value product that represents an attractive combination of price, features, quality, service, and other appealing attributes ©McGraw-Hill Education. 29 Competitive Strategies and Market Positioning Competitive Strategy Deals exclusively with the specifics of management’s game plan for competing successfully in securing a particular competitive advantage over rivals that offers superior value to customers, strengthens its market position, and counters the maneuvers of its rivals The two principal factors that distinguish one competitive strategy from another are: 1. Whether a firm’s market target is broad or narrow 2. Whether the firm is pursuing a competitive advantage linked to lower costs or differentiation ©McGraw-Hill Education. 30 15  CORE CONCEPT: Competitive Strategy A competitive strategy concerns the specifics of management’s game plan for competing successfully and securing a competitive advantage over rivals in the marketplace. FIGURE 5.1 The Five Generic Competitive Strategies ©McGraw-Hill Education. 31 The Five Generic Competitive Strategies 1. A low-cost provider strategy—striving to achieve lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals 2. A broad differentiation strategy—seeking to differentiate the firm’s product or service from rivals’ in ways that will appeal to a broad spectrum of buyers 3. A focused low-cost strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by having lower costs than rivals and thus being able to serve niche members at a lower price 4. A focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) and outcompeting rivals by offering niche members customized attributes that meet their tastes and requirements better than rivals’ products 5. A best-cost provider strategy—giving customers more value for the money by satisfying buyers’ expectations on key quality/features/performance/service attributes while beating their price expectations. This option is a hybrid strategy that blends elements of low-cost provider and differentiation strategies; the aim is to have the lowest (best) costs and prices among sellers offering products with comparable differentiating attributes ©McGraw-Hill Education. 32 16  1. Low-Cost Provider Strategies CORE CONCEPT: Low-Cost Leader A low-cost leader’s basis for competitive advantage is lower overall costs than competitors. Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing “nonessential” activities and/or outmanaging rivals in performing essential activities. A powerful competitive approach with price-sensitive buyers when a firm’s offering: Has meaningfully lower costs than rivals—but not necessarily the absolutely lowest possible cost Includes features and services that buyers consider essential Is viewed by buyers as offering equivalent or higher value even if priced lower than competing products ©McGraw-Hill Education. 33 Translating a Low-Cost Strategy into Attractive Profit Performance Option 1: Use a lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold ©McGraw-Hill Education. 34 17  The Two Major Avenues for Achieving Low-Cost Leadership 1. Performing essential value chain activities more cost- effectively than rivals 2. Revamping the firm’s overall value chain to eliminate or bypass some cost-producing activities altogether CORE CONCEPT: Cost Driver A cost driver is a factor having a strong effect on the cost of a company’s value chain activities and cost structure. ©McGraw-Hill Education. 35 Cost-Efficient Management of Value Chain Activities Striving to capture all available Using communication systems economies of scale. and information technology to achieve operating efficiencies. Taking full advantage of experience and learning curve Using the company’s bargaining effects. power vis-à-vis suppliers to gain concessions. Trying to operate facilities at full capacity. Being alert to the cost advantages of outsourcing and vertical Substituting lower-cost inputs integration. whenever there is little or no sacrifice in product quality or Pursuing ways to boost labor product performance. productivity and lower overall compensation costs. Employing advanced production technology and process design to improve overall efficiency. ©McGraw-Hill Education. 36 18  FIGURE 5.2 Important Cost Drivers in a Firm’s Value Chain Jump to Appendix 2 for long description. ©McGraw-Hill Education. 37 Revamping the Value Chain Reengineering the firm’s value chain by: Selling directly to consumers and cutting out the activities and costs of distributors and dealers Streamlining operations by eliminating low value-added or unnecessary work steps and activities Collaborating with suppliers to improve supply chain efficiency by reducing materials handling, shipping and inventory costs ©McGraw-Hill Education. 38 19  When a Low-Cost Strategy Works Best 1. Price competition among rival sellers is especially vigorous. 2. The products of rival sellers are essentially identical and are readily available from several sellers. 3. There are few ways to achieve product differentiation that have value to buyers. 4. Buyers incur low costs in switching their purchases from one seller to another. 5. The majority of industry sales are made to a few, large- volume buyers. 6. Industry newcomers use introductory low prices to attract buyers and build a customer base. ©McGraw-Hill Education. 39 Pitfalls to Avoid in Pursuing a Low-Cost Provider Strategy Overly Aggressive Price Cutting Price cutting results in lower margins, no increase in sales volume and lower profitability. Relying on easily imitated cost reductions The value of a cost advantage depends on its sustainability. Becoming too fixated on cost reduction Buyer interest in additional features might be ignored. Declining buyer sensitivity to price might be overlooked. Technological breakthroughs might nullify cost advantages. ©McGraw-Hill Education. 40 20  Broad Differentiation Strategies Attractive competitive approaches to use whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product or service. Involves offering differentiating features that clearly set the firm’s products or services apart from rivals Enhances profitability whenever the extra price the product commands outweighs the added costs of achieving the differentiation that is not easily copied or matched by rivals CORE CONCEPT: Broad Differentiation Strategy The essence of a broad differentiation strategy is to offer unique product or service attributes that a wide range of buyers find appealing and worth paying for. ©McGraw-Hill Education. 41 Benefits of Successful Differentiation Successful execution of a differentiation strategy allows a firm to: Command a premium price. Increase its unit sales. Gain buyer loyalty to its brand. ©McGraw-Hill Education. 42 21  Approaches to Differentiation Companies pursuing differentiation: Unique taste: Red Bull, Doritos Multiple features: Microsoft Office, Apple iPhone Wide selection and one-stop shopping: Home Depot, Amazon.com Superior service: Ritz-Carlton, Nordstrom Spare parts availability: Caterpillar Engineering design and performance: Mercedes-Benz, BMW Luxury and prestige: Rolex, Gucci, Chanel Product reliability: Whirlpool and Bosch Quality manufacture: Michelin, Toyota and Honda Technological leadership: 3M Corporation Full range of services: Charles Schwab in stock brokerage Complete line of products: Campbell soups, Frito-Lay snack foods ©McGraw-Hill Education. 43 CORE CONCEPT: Uniqueness Driver A uniqueness driver is a value chain activity or factor that can have a strong effect on customer value and creating differentiation. Easy-to-copy differentiating features cannot produce sustainable competitive advantage; differentiation based on hard-to-copy competencies and capabilities tends to be more sustainable. Differentiation can be based on tangible or intangible features and attributes. ©McGraw-Hill Education. 44 22  FIGURE 5.3 Important Uniqueness Drivers in a Firm’s Value Chain Jump to Appendix 3 for long description. ©McGraw-Hill Education. 45 Managing the Value Chain in Ways That Enhance Differentiation Activities That Enhance Differentiation Seeking out high-quality inputs Striving for innovation and technological advances Creating superior product features, design, and performance Production-related research and development activities Pursuing continuous quality improvement Emphasizing human resource management activities Emphasizing marketing and brand-building activities Improving customer service or adding additional services ©McGraw-Hill Education. 46 23  Revamping the Value Chain System to Increase Differentiation Approaches to enhancing differentiation through changes in the value chain system Coordinating with downstream channel allies to enhance customer value Coordinating with upstream suppliers to better address customer needs ©McGraw-Hill Education. 47 Delivering Superior Value via a Differentiation Strategy 1. Include product attributes and user features that lower the buyer’s costs 2. Incorporate tangible features that improve product performance 3. Incorporate intangible features that enhance buyer satisfaction in noneconomic ways ©McGraw-Hill Education. 48 24  Perceived Value and the Importance of Signaling Value A differentiation strategy’s price premium reflects the value actually delivered to the buyer and the value perceived by the buyer. It is important to signal value when: The nature of differentiation is subjective. Buyers are making a first-time purchase. Repurchase is infrequent. Buyers are unsophisticated. ©McGraw-Hill Education. 49 When a Differentiation Strategy Works Best 1. Buyer needs and uses of the product are diverse. 2. There are many ways to differentiate the product or service that have value to buyers. 3. Few rival firms are following a similar differentiation approach. 4. Technological change is fast-paced and competition revolves around rapidly evolving product features. ©McGraw-Hill Education. 50 25  Pitfalls to Avoid in Pursuing a Differentiation Strategy 1. Pursuing a differentiation strategy keyed to product or service attributes that are easily and quickly copied 2. Offering product features or unique attributes in which buyers see little value or are easily copied by rivals 3. Overspending on efforts to differentiate that erode profitability 4. Not establishing meaningful gaps in quality or service or performance features over the products of rivals 5. Over-differentiating so that product quality or service levels exceed buyers’ needs 6. Trying to charge too high a price premium ©McGraw-Hill Education. 51 Focused (or Market Niche) Strategies Focused strategies are developed especially for competing in a narrow piece of the total market as defined by geographic uniqueness or special product attributes. Focused strategies are appealing to smaller and medium-sized firms that may lack the breadth and depth of resources to tackle going after a whole market customer base. ©McGraw-Hill Education. 52 26  A Focused Low-Cost Strategy A strategy that aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and a lower price than rival competitors. A strategy that achieves its cost advantage in the same way as for low-cost leadership—by outmanaging rivals in keeping costs low and bypassing or reducing nonessential activities. ©McGraw-Hill Education. 53 Focused Differentiation Strategy Focused differentiation strategy is keyed to offering carefully designed products or services to appeal to the unique preferences and needs of a narrow, well- defined group of buyers (as opposed to a broad differentiation strategy aimed at many buyer groups and market segments). ©McGraw-Hill Education. 54 27  When a Focused Low-Cost or Focused Differentiation Strategy Is Viable The target market niche is big enough to be profitable and offers good growth potential. Market leaders have chosen not to compete in the niche— focusers can avoid battling head-to-head against the biggest and strongest competitors. It is costly or difficult for multi-segment competitors to meet the specialized needs of niche buyers and at the same time satisfy the expectations of mainstream customers. The market has many different niches and segments, allowing a focuser to pick a niche suited to its strengths and capabilities. Few rivals attempt to specialize in the same target segment. ©McGraw-Hill Education. 55 The Risks of a Focused Low-Cost or Focused Differentiation Strategy Competitors will find effective ways to match a focuser’s capabilities in serving the target niche. The preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. The segment may become so attractive it is soon inundated with competitors, intensifying rivalry, and splintering segment profits. ©McGraw-Hill Education. 56 28  Best-Cost Provider Strategies A hybrid of low-cost provider and differentiation strategies that: Involves giving customers more value for money by satisfying buyer expectations on key quality/features/ performance/service attributes while exceeding customer expectations on price Creates a powerful competitive approach with value- conscious buyers looking for a good-to-very-good product or service at an economical price Creates a “best-cost” status as the low-cost provider of a product or service with upscale attributes ©McGraw-Hill Education. 57 CORE CONCEPT: Best-Cost Provider Strategies Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at satisfying buyer expectations on key quality, features, performance, and service attributes while beating customer expectations on price. ©McGraw-Hill Education. 58 29  Employing Best-Cost Strategies Profitable best-cost strategies are contingent on the firm having the capability to deliver attractive or upscale attributes at a lower cost than rivals through: 1. A superior value chain configuration that eliminates or minimizes activities that do not add value. 2. Unmatched efficiency in managing essential value chain activities. 3. Core competencies that allow differentiating attributes to be incorporated at a low cost. ©McGraw-Hill Education. 59 When a Best-Cost Provider Strategy Works Best A best-cost provider strategy works best in markets where: Product differentiation is the norm. Large numbers of value-conscious buyers can be induced to purchase economically-priced mid-range products and services, especially during recessionary times. A provider can offer either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher-than-average price. ©McGraw-Hill Education. 60 30  The Danger of an Unsound Best-Cost Provider Strategy Losing at both ends of the market: Dual vulnerability to both low-cost providers and high-end differentiators in not having the requisite core competencies and efficiencies in managing value chain activities to offer significantly differentiating product attributes. features at attractive lower prices without significantly increasing costs. ©McGraw-Hill Education. 61 Core Concept: Competitive Strategy (2 of 2) A company’s competitive strategy should be well matched to its internal situation and predicated on leveraging its collection of competitively valuable resources and competencies. ©McGraw-Hill Education. 62 31  Chapter 8 Corporate Strategy : Diversification and the Multi- business Company 8-63 ©McGraw-Hill Education. 63 Strategic Options for Diversified Corporations What is diversification? Business diversification refers to the strategic expansion of a company into new products, services, or markets to reduce risk, capture new opportunities, and enhance overall business resilience. The goal of diversification is often to reduce the overall risk of the business and to generate new sources of revenue. A good diversification strategy can kick-start a struggling business. It can also extend the success of already profitable companies. 8-64 ©McGraw-Hill Education. 64 32  Strategic Options for Diversified Corporations Why is diversification important in business? There are four key reasons why businesses adopt a diversification strategy: The company wants more revenue The company wants less economic risk The company’s core business is in decline The company wants to exploit potential synergies Diversification is important because it helps a business spread its risk across different areas, reducing dependency on a single market or product. It can lead to increased revenue streams and improved long- term sustainability. 8-65 ©McGraw-Hill Education. 65 Types of business diversification Examples of business diversification strategies: Product diversification: A company that primarily sells clothing might expand into selling home goods and accessories. Market diversification: A company that sells only in the domestic market might expand into international markets. Industry diversification: A company that operates in the tech industry might diversify into the healthcare industry. Service diversification: A company that provides only consulting services might diversify into offering training services. Mergers & Acquisitions: A company might diversify by acquiring or merging with another company that operates in a different product, service, market, or industry. Joint ventures: A company might diversify by forming a joint venture with another company to jointly develop and market new products or services. Diversifying into new geographic regions: A company that operates in only one region might expand into new geographic areas. 8-66 ©McGraw-Hill Education. 66 33  Approaches to Diversifying the Business Lineup Options for entering new industries and lines of business Diversification by Entering a new line Using joint ventures to acquisition of an of business through achieve diversification existing business internal development 8-67 ©McGraw-Hill Education. 67 Diversification by Acquisition of an Existing Business Quick and effective way to hurdle target market entry barriers related to: Acquiring technological know-how Establishing supplier relationships Achieving scale economies Building brand awareness Securing adequate distribution access The big dilemma: Whether to pay a premium price to buy a successful firm or to buy a struggling firm at a bargain price. ©McGraw-Hill Education. 68 34  Choosing the Diversification Path: Related Versus Unrelated Businesses Related Businesses Have value chains with competitively valuable cross-business relationships that present opportunities for the businesses to perform better operating under the same corporate umbrella than they could as stand-alone entities. Unrelated Businesses Have value chains and resource requirements are so dissimilar that no competitively valuable cross- business relationships are present. ©McGraw-Hill Education. 69 ©McGraw-Hill Education. 70 35  The Case For Related Diversification Strategic Fit Strategic fit exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing. Exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities for: Transferring competitively valuable resources, expertise, technological know-how, or other capabilities from one business to another. Cost sharing between separate businesses where value chain activities can be combined. Brand sharing between business units that have common customers or that draw upon common core competencies. ©McGraw-Hill Education. 71 Strategic Fit and Economies of Scope Economies of scope are cost reductions stemming from strategic fit along the value chains of related businesses (thereby, a larger scope of operations), whereas economies of scale accrue from a larger operation. Scope-related cost savings stemming from the strategic fit of the value chains of related businesses: Operating businesses under same corporate umbrella. Taking shared advantage of the inter-relationships anywhere along the value chains of different businesses. Advantage: The greater the cross-business economies associated with cost- saving strategic fit, the greater the potential for a related diversification strategy to yield a competitive advantage based on lower costs than rivals. ©McGraw-Hill Education. 72 36  THE BALANCED SCORECARD The Balanced Scorecard is a framework to implement and manage strategy by linking a vision and mission to strategic priorities, objectives, measures, and initiatives. It integrates financial measures with other objectives and key performance indicators related to customers, internal business processes, and organizational capacity. It is a methodology that identifies of a small number of financial and non- financial objectives related to strategic priorities. ©McGraw-Hill Education. 73 THE FOUR PERSPECTIVES OF THE BALANCED SCORECARD 1. Financial – The high level financial objectives and financial measures of the organisation that help answer the question – How do we look to our shareholders? 2. Customer – Objectives and measures that are directly related to the organisations customers, focusing on customer satisfaction. To answer the question – How do our customers see us? 3. Internal Business Process – Objectives and measures that determine how well the business is running and whether the products or services conform to what is required by the customers, in other words, what should we be best at? 4. Learning & Growth– Objectives and measures concerning how well our people perform, their skills, training, company culture, leadership and knowledge base. This area also includes infrastructure and technology ©McGraw-Hill Education. 74 37  CORE CONCEPT: Balanced Scorecard The balanced scorecard is a widely used method for combining the use of both strategic and financial objectives, tracking their achievement, and giving management a more complete and balanced view of how well an organization is performing. ©McGraw-Hill Education. 75 CORE CONCEPTS: Financial Objectives, and Strategic Objectives Objectives are an organization’s performance targets—results management wants to achieve. Financial objectives relate to the financial performance targets management has established for the organization to achieve. Strategic objectives relate to target outcomes that indicate a company is strengthening its market standing, competitive vitality, and future business prospects. ©McGraw-Hill Education. 76 38 ©McGraw-Hill Education. 77 Example KPIs for the Four Perspectives  Financial Perspective  Business Process Perspective  Gross Profit Margin  On time delivery  Operating Profit Margin manufacture  Inventory Stock Turn  Scrap and rework  Return on Investment  Yield Management/Utilization  Customer Perspective  Learning and Growth Perspective  On time delivery to  No of training days customer performance  Employee Turnover  Customer Retention  Skill Level of Staff  Quote Conversion Ratio  Employee suggestion  Customer initiatives Satisfaction ©McGraw-Hill Education. 78 39