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McGraw-Hill/Irwin
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Business Strategy
Chapter 8
Learning Objectives
1.
2.
3.
4.
5.
6.
Determine why a business would choose a low-cost,
differentiation, or speed-based strategy
Explain the nature and value of a market focus strategy
Illustrate how a firm can pursue both low-cost and
differentiation strategies
Identify requirements for business success at different
stages of industry evolution
Determine good business strategies in fragmented and
global industries
Decide when a business should diversify
8-3
Evaluating and Choosing Business Strategies: Seeking
Sustained Competitive Advantage

The two most prominent sources of competitive
advantage can be found in the business’s cost
structure and its ability to differentiate the
business from competitors

Businesses that have one or more
sources/capabilities that let them operate at a
lower cost will consistently outperform their rivals
that don’t.
8-4
Evaluating Cost Leadership Opportunities

Business success built on cost leadership
requires the business to be able to provide
its product or service at a cost below what
its competitors can achieve
8-5
Ex. 8.2 Evaluating a Business’s Cost Leadership Opportunities
8-6
Sustainable Low-Cost Activities
1. Some low-cost advantages reduce the likelihood of
buyers’ pricing pressure
2. Truly sustained low-cost advantages may push rivals into
other areas
3. New entrants competing on price must face an
entrenched cost leader
4. Low-cost advantages should lessen the attractiveness of
substitute products
5. Higher margins allow low-cost producers to withstand
supplier cost increases
8-7
Risks of a Cost Leadership Strategy
1. Many cost-saving activities are easily duplicated
2. Exclusive cost leadership can be a trap
3. Obsessive cost cutting can shrink other
competitive advantages
4. Cost differences often decline over time
8-8
Evaluating Differentiation
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Differentiation requires that the business have
sustainable advantages that allow it to provide
buyers with something uniquely valuable to them
Differentiation usually arises from one or more
activities in the value chain that create a unique
value important to buyers
Strategists use benchmarking and consider the 5
forces in considering differentiation
8-9
Ex. 8.3 Evaluating a Business’s Differentiation Opportunities
8-10
Evaluating Speed as a Competitive Advantage
 Speed-based strategies, or rapid
response to customer requests or
market and technological changes,
have become a major source of
competitive advantage for numerous
firms in today’s intensely competitive
global economy
8-11
Ex. 8.5 Evaluating a Business’s Rapid Response (Speed)
Opportunities
8-12
Speed can be created by:

Customer responsiveness

Product development cycles

Product or service improvements

Speed in delivery or distribution

Information Sharing and Technology
8-13
Risks of Speed-based Strategy


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Speeding up activities that haven’t been conducted
in a fashion that prioritizes rapid response should
only be done after considerable attention to
training, reorganization, and/or reengineering
Some industries may not offer much advantage to
the firm that introduces some forms of rapid
response
Customers in such settings may prefer the slower
pace or the lower costs currently available, or they
may have long time frames in purchasing
8-14
Evaluating Market Focus as a Way to Competitive Advantage

Market focus: the extent to which a business
concentrates on a narrowly defined market

Small companies, at least the better ones,
usually thrive because they serve narrow market
niches

Market focus allows some businesses to
compete on the basis of low cost,
differentiation, and rapid response against much
larger businesses with greater resources
8-15
Risks of Market Focus



The risk of focus is that you attract major competitors who
have waited for your business to “prove” the market
Publicly traded companies built around focus strategies
become takeover targets for large firms seeking to fill out a
product portfolio
Slipping into the illusion that it is focus itself, and not low
cost, etc. that is creating the business’s success.
8-16
Stages of Industry Evolution and Business Strategy Choices

The requirements for success in industry segments
change over time

Strategists can use these changing requirements,
which are associated with different stages of
industry evolution, as a way to isolate key
competitive advantages and shape strategic choices
around them
8-17
Emerging Industries
 Emerging industries are newly
formed or re-formed industries that
typically are created by technological
innovation, newly emerging customer
needs, or other economic or
sociological changes
 There are no “rules of the game”
8-18
Business Strategies in Emerging Industries
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Technologies that are most proprietary to the pioneering
firms and technological uncertainty will unfold
Competitor uncertainty because of inadequate
information about competitors, buyers, and the timing of
demand
High initial costs but steep cost declines
Few entry barriers
First-time buyers requiring initial inducement to purchase
Inability to obtain raw materials and components until
suppliers gear up to meet the industry’s needs
Need for high-risk capital because of the industry’s
uncertain prospects
8-19
Emerging Industries

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For success in this industry setting, business strategies
require one or more of these features:
The ability to shape the industry’s structure
The ability to rapidly improve product quality and
performance features
Advantageous relationships with key suppliers and
promising distribution channels
The ability to establish the firm’s technology as the
dominant one
The early acquisition of a core group of loyal customers
and then the expansion of that customer base
The ability to forecast future competitors
8-20
Competitive Advantages and Strategic Choices in Growing
Industries

Rapid growth brings new competitors into the
industry

At this stage, growth industry strategies that
emphasize brand recognition, product differentiation,
and the financial resources to support both heavy
marketing expenses and the effect of price
competition on cash flow can be key strengths
8-21
Growth Industries

For success in this industry setting, business strategies
require one or more of the following features:
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The ability to establish strong brand recognition
The ability and resources to scale up to meet increasing demand
Strong product design skills to be able to adapt products and
services
The ability to differentiate the firm’s product[s] from competitors
entering the market
R&D resources and skills to create product variations
The ability to build repeat buying from established customers
Strong capabilities in sales and marketing
8-22
Competitive Advantages and Strategic Choices in
Mature Industries

As an industry evolves, its rate of growth eventually
declines

Firms working with the mature industry strategies
sell increasingly to experienced, repeat buyers who
are now making choices among known alternatives

Competition becomes more oriented to cost and
service as knowledgeable buyers expect similar
price and features
8-23
Mature Industries
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Strategy elements of successful firms in maturing
industries often include the following:
Product line pricing
Emphasis on process innovation that permits low-cost
product design, manufacturing methods, and distribution
synergy
Emphasis on cost reduction
Careful buyer selection to focus on buyers who are less
aggressive, more closely tied to the firm, and able to buy
more from the firm
Horizontal integration to acquire rival firms whose
weaknesses can be used to gain a bargain price
International expansion to markets where attractive growth
and limited competition still exist
8-24
Competitive Advantages and Strategic Choices in Declining
Industries
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Declining industries are those that make products
or services for which demand is growing slower
than demand in the economy as a whole or is
actually declining
Focus on higher growth or a higher return
Emphasize product innovation and quality
improvement
Emphasize production and distribution efficiency
Gradually harvest the business
8-25
Competitive Advantage in Fragmented Industries

A fragmented industry is one in which no firm
has a significant market share and can strongly
influence industry outcomes

Tightly managed decentralization

“Formula” facilities

Increased value added

Specialization

Bare bones/no frills
8-26
Competitive Advantage in Global Industries

A global industry is one that comprises firms
whose competitive positions in major geographic
or national markets are fundamentally affected by
their overall global competitive positions

License foreign firms to produce and distribute
the firm’s products

Maintain a domestic production base and
export products to foreign countries

Establish foreign-based plants and distribution
to compete directly in the markets of one or
more foreign countries
8-27
Four Generic Global Competitive Strategies
 Broad-line global competition
 Global focus strategy
 National focus strategy
 Protected niche strategy
8-28
Ex. 8.10
Grand Strategy Selection Matrix
8-29
Ex. 8.11
Model of Grand Strategy Clusters
8-30
Building Value as a Basis for Choosing Diversification
or Integration

The grand strategy selection matrix and
model of grand strategy clusters are useful
tools to help dominant product company
managers evaluate and narrow their choices
among alternative grand strategies

Dominant product company managers who
choose diversification or integration
eventually create another management
challenge
8-31
Key Terms
 Concentrated growth
 Emerging industry
 Concentric diversification
 Fragmented industry
 Conglomerate diversification
 Global industry
 Declining industry
 Grand strategy clusters
 Differentiation
 Grand strategy selection matrix
 Divestiture
 Growth industry strategies
 Horizontal acquisition
8-32
Key Terms (contd.)
 Innovation
 Mature industry strategies
 Joint ventures
 Product development
 Liquidation
 Retrenchment
 Low-cost strategies
 Speed-based strategies
 Market development
 Strategic alliances
 Market focus
 Vertical acquisition
8-33