Strategic Choice as a Business Strategy-Activities and Resource Requirements

Letter of Transmittal
Date: 03January.2013 To, Mr. Shamim-ul-Islam Assistant Professor Department of Business Administration ASA University Bangladesh Subject: Report on strategic choice on a business Dear Sir, With due respect, I would like to inform you that the task of preparing this Internship Report on strategic choice on a business that have already been completed. This was possible because of my effort and your perceptive guidance, instruction and advice. I hope it may satisfy your requirement. I am quite sure there are errors of omission in this thesis paper. I will feel my work rewarded if this paper is accepted as a requirement for the degree of BBA. I would like to express my sincere gratitude and thanks to the southeast university authority for conducting as excellent management curriculum which enabled us to learn a current management aspects and multitude dimensions of current global, multinational and revolutionary changes in management arenas. Once again, I remember all the members of Southeast University authority who are involved directly to make a successful business curriculum. Thanking you Sincerely yours

(On behalf of the group)

Md. Nur Nobi Sheikh

Section: FIN-8A

Q : I : What are the three activities or capabilities a firm should possess to support a low-cost leadership? Can you give an example of a company that has done it?

Answer:

A superiority gained by an organization when it can provide the same value as its competitors but at a lower price, or can charge higher prices by providing greater value through differentiation. Competitive advantage results from matching core competencies to the opportunities. Cost leadership or low cost leadership is a concept developed by Michael Porter, used in business strategy. It describes a way to establish the competitive advantage. Cost leadership, in basic words, means the lowest cost of operation in the industry. The cost leadership is often driven by company efficiency, size, scale, scope and cumulative experience (learning curve). A cost leadership strategy aims to exploit scale of production, well defined scope and other economies (e.g. a good purchasing approach), producing highly standardized products, using high technology. For Example in the adult entertainment industry prices are low to attract a 'cheaper' customer base. In the last years more and more companies choose a strategic mix to achieve market leadership. Cost leadership is different from price leadership. A company could be the lowest cost producer, yet not offer the lowest-priced products or services. If so, that company would have a higher than average profitability. However, cost leader companies do compete on price and are very effective at such a form of competition, having a low cost structure and management. Companies that choose a cost-leadership strategy offer relatively standardised products with features or characteristics that are acceptable to customers--in other words, with a minimum level of differentiation--at the lowest competitive price. This means that companies offer standardised products to an industry's typical customer. Customers receive value when a company successfully implements a cost leadership strategy.

Companies that wish to be successful by following a cost-leadership strategy must maintain constant efforts aimed at lowering their costs (relative to competitors' costs) and creating value for customers. Cost-reduction strategies include:

Building efficient-scale facilities Establishing tight control of production and overhead costs Minimising the costs of sales, product research and development, and service Investing in state-of-the-art manufacturing technologies

Implementing and maintaining a cost leadership strategy means that a company must consider its value chain of primary and secondary activities and effectively link those activities, if it is to be successful. The critical focus in successfully implementing a cost leadership strategy is on efficiency and cost reduction, regardless of the value-creating activity. As noted in Figure below, the company's focus throughout each of its primary and secondary value-creating activities is on:

simplification of processes and procedures achieving efficiency and effectiveness reducing costs monitoring the costs of activities provided by others that interface with the company's inbound and outbound logistics

Figure: Cost Leadership Strategies

Figure: Choices that determine costs

However, companies following cost leadership strategies cannot completely ignore sources of differentiation that customers value when producing standardised products. These include styling, minimal levels of service, and product quality.

Differentiating Features That Lower Buyer Costs A company doesn't have to price to make it cheaper for a buyer to use its product. An alternative is to incorporate features and attributes into the company's product/service package that Reduce the buyer's scrap and raw materials waste. Example of differentiating feature: cut-to-size components. Lower the buyer's maintenance and repair costs. Example of differentiating feature: superior product reliability. Lower the buyer's installation, delivery, or financing costs. Example of differentiating feature: 90-day payment same as cash.

Reduce the buyer's need for other inputs (energy, safety equipment, security Lower the buyer's labour costs (less time, personnel, inspection personnel, other less training, lower skill requirements). tools and machinery). Example of Examples of differentiating features: snap- differentiating feature: fuel-efficient power equipment. on assembly features, modular replacement of worn-out components. Raise the trade-in value of used models. Cut the buyer's downtime or idle time. Lower the buyer's replacement or repair Examples of differentiating features: costs if the product unexpectedly fails greater product reliability, ready spare later. Example of differentiating feature: parts availability, or less frequent longer warranty coverage. maintenance requirements. Reduce the buyer's inventory costs. Example of differentiating feature: just-intime delivery. Reduce the buyer's pollution control costs or waste disposal costs. Example of differentiating feature: scrap pickup for use in recycling. Reduce the buyer's procurement and order-processing costs. Example of differentiating feature: computerised online ordering and billing procedures. Lower the buyer's need for technical personnel. Example of differentiating feature: free technical support and assistance. Boost the efficiency of the buyer's production process. Examples of differentiating features: faster processing speeds, better interface with ancillary equipment.

A company that successfully implements a cost leadership strategy can earn above-average return even when the five competitive forces are strong. 1. Rivalry with Existing Competitors- Achieving the lowest cost position means that a company's competitors will hesitate to compete on the basis of price because, in the event of a price war, the low cost company will continue to earn profits after its competitors compete away their profits. 2. Bargaining Power of Buyers (Customers) -Achieving the low cost position provides some protection against powerful customers who attempt to drive down prices. If customers attempt to drive prices below the cost of the next most efficient company, that company might choose to exit the market (rather than remain and earn below average profits), leaving the low cost company with a monopoly position. If that happens, customers would lose any bargaining power, as the monopoly company would be in a position to raise prices. 3. Bargaining Power of Suppliers - Because they have achieved the lowest cost position in the industry, the cost leadership strategy enables a company to absorb a greater amount of cost increases from powerful suppliers before it must raise prices charged to customers. This may enable the company to be alone among its competitors in earning aboveaverage returns. In addition, a low-cost leader that also has a dominant market share may be in a position to force suppliers to lower prices or to hold down the level of price increases, and thus reduce the power of suppliers. 4. Potential Entrants- Companies successfully following cost leadership strategies generally must produce and sell in large volumes to earn above-average returns. And, with a continuous focus on efficiency and reducing costs, low-cost leadership companies create barriers to entry. New entrants must either enter the industry at a large scale (large enough to achieve the same economies of scale as the next lowest cost company) or be satisfied with average profits until they move sufficiently far down the experience curve to match the efficiencies of the low-cost leader. 5. Product Substitutes- The low-cost leader is in a more attractive position relative to substitute products than are other companies in the industry. To retain customers, the low-cost leader can more easily reduce prices to maintain the price-value relationship and retain customers. Despite the attractiveness of the cost leadership strategy, it is accompanied by risks. Technological innovations by competitors could eliminate the low-cost leader's cost advantage.

Overly focusing on process efficiency may cause the low-cost leader to overlook significant changes in customer preferences. Competitors may successfully imitate the low-cost leader's value chain configuration.

In the event of any of the above, the low-cost leader is challenged to increase value to customers. This may mean reducing prices or adding product features without raising prices. However, if prices are reduced too low, it may be difficult for the company to earn satisfactory margins and customers may resist any price increases.

Q : II : What are the three activities or capabilities a firm should possess to support a differentiation based strategy? Can you give an example of a company that has done it?

Answer:

Differentiation Strategy:
In contrast to the cost leadership strategy, implementation of a differentiation strategy means that value is provided to customers through the unique features and characteristics of a company's products rather than by the lowest price. Because differentiated products satisfy customers' unique needs or preferences, companies can charge premium prices for differentiated products. For the company to be able to outperform its competitors and earn above-average returns, the price charged for the differentiated product must exceed the cost of differentiation. In other words, the price charged must exceed total product cost. Because of this, the differentiated product's premium prices generally exceed the low price of the standard product. Companies that follow a differentiation strategy concentrate or focus on product innovation and developing product features that customers value rather than on maintaining the lowest competitive price (as is the case for the cost leadership strategy).

Figure: Drivers of Differentiation Strategy

Products can be differentiated in a number of ways so that they stand apart from standardised products:

superior quality unusual or unique features more responsive customer service rapid product innovation advanced technological features engineering design additional features an image of prestige or status

For example Intel uses speed, innovation, and manufacturing techniques as bases of uniqueness. Successfully implementing (and maintaining) a differentiation strategy means that a company must consider its value chain of primary and secondary activities and effectively link those activities as illustrated in Figure

FIGURE: Value-Creating Activities Associated with the Differentiation Strategy

As noted in Figure above, the company's focus throughout its primary and secondary value-creating activities is on establishing the importance of quality, accuracy, speed, and responsiveness. The focus is also on understanding and meeting customers' unique preferences and monitoring the speed, reliability, and quality of activities provided by others that interface with the company's inbound and outbound logistics.

Differentiating Features That Raise the Performance a User Gets To enhance the performance a buyer Meet the buyer's needs and gets from using its product/service, a requirements more completely, compared to competitors' offerings. company can incorporate features and attributes that Give buyers the option to add on or to Provide buyers greater reliability, upgrade later as new product versions durability, convenience, or ease of use. come on the market. Make the company's product/service Give buyers more flexibility to tailor cleaner, safer, quieter, or more their own products to the needs of their maintenance-free than rival brands. customers. Exceed environmental or regulatory Do a better job of meeting the buyer's standards. future growth and expansion requirements.

However, companies following differentiation strategies cannot completely ignore costs and the need for minimal spending on process-related innovations. A company that successfully implements a differentiation strategy can earn above-average returns even when the five competitive forces are strong. 1. Rivalry with Existing Competitors Achieving customer loyalty means differentiating products in ways that are meaningful to customers. Brand loyalty means that customers will be less sensitive to price increases. As long as the company satisfies the differentiated needs of loyal customers, it may be insulated from price-based competition. 2. Bargaining Power of Buyers (Customers) Through meaningful differentiation, companies develop products that are considered unique. This uniqueness may insulate

the company from competitive rivalry and reduce customer sensitivity to price increases (similar to the insulation from rivalry with existing competitors). By satisfying customer preferences in ways that no competitor can, companies also are able to charge higher prices (because there are no comparable product alternatives). 3. Bargaining Power of Suppliers Because the differentiator charges premium prices, they are somewhat insulated from suppliers' price increases (as the differentiator can absorb a greater level of cost increases from powerful suppliers through its higher margins). Alternatively, because of lower price sensitivity by customers, differentiators may be able to raise prices to cover increased supplier-related costs. Because of the differentiator's focus on product quality and responsiveness to customer preferences, suppliers also may be forced to provide differentiators with higher quality materials, components, or services. 4. Potential Entrants The principal barrier to entry is customers' loyalty to the uniquely differentiated brand. This means that a potential entrant must either overcome (or surpass) the uniqueness of existing products or provide similarly differentiated products at a lower price to increase customer value. 5. Product Substitutes Brand loyalty may effectively insulate differentiated products from substitutes. Without brand loyalty, customers may switch to substitutes that offer similar features at a lower price or to products offering more attractive features at the same price. Like the cost leadership strategy, the differentiation strategy also carries risks. Customers may decide that the cost of uniqueness is too high. In other words, the price differential between the standardised and differentiated product is too high. Perhaps the company provides a greater level of uniqueness than customers are willing to pay for. The company's means of differentiation no longer provides value to customers. For instance, what is the value of prestige or exclusivity? And, how long will they last as customers become more sophisticated? Customer learning may reduce the customer's perception of the value of the company's differentiation. Through experience, customers may learn that the extra price paid for a differentiated product no longer has the value that it once did. This loss of value through customer learning or changes in customer perceptions can be illustrated by the experiences of IBM. Initially, the IBM name on a personal computer signalled value to customers; however, clones soon challenged IBM's pre-eminent position in the PC

market. As customers learned that the clone machines offered similar features at lower prices, the value attached to the IBM brand name diminished and IBM's sales continue to suffer. A fourth risk is concerned with counterfeiting. Increasingly, counterfeit goods (products that attempt to convey differentiated features to customers at significantly reduced prices) are a concern for many companies using the differentiated strategy. In the event of any of the above, differentiators are challenged to increase value to customers. This may mean reducing prices, adding product features without raising prices, or developing new efficiencies in its value chain of primary and secondary activities

Q : III : What are the three ways a firm can incorporate in the advantage of speed in its business? Can you give an example of a company that has done it?

Answer:

While most telecommunication companies have used the last decade to leap aboard the information superhighway, GTE continued its impressive turnaround focusing on its core business- providing local telephone services. Speed Based Strategies: Business strategies built around functional capabilities and activities that allow the company to meet customer needs directly or indirectly more rapidly than its main competitors. Speed based competitive advantage can be created around several activities: Customer responsiveness: All consumers have encountered hassles, delays, and frustration dealing with various businesses from time to time. The same holds true when dealing business to business. Quick response with answer, information, and solution to mistakes can become the basis for competitive advantage- one that builds customer loyalty quickly. Product development cycles: Japanese automakers have focused intensely on the time it makes to create a new model because several experienced disappointing sales growth in the last decade in Europe and North America competing against new vehicles like Fords Explorer and Renaults Megane. VW had recently conceived, prototyped, produced, and marketed a totally new 4-wheel-drive car in Europe within 12 months. Honda, Toyota, and Nissan lowered their product development cycle from 24 months to 9 months from conception to production. Product or service improvement: Like development time, companies that then rapidly adapt their product or services and do so in a way that benefits their customer or creates new customers have a major competitive over rivals that cannot do this. Speed in delivery or distribution: Firms that can get you what you need when you need it, even when that is tomorrow, realize that buyers have come to expect that level of expansiveness. Federal Expresss success reflects the importance customers place on speed in inbound and outbound logistics. Information Sharing and Technology: Speed in sharing information that becomes the basis for decision, action , or other important activities taken by customers, suppliers or partners have become a major source

Figure: Evaluating a Businesss Rapid Response (Speed) Opportunities

Q : IV : Do you think is it better to concentrate on one source of competitive advantage or to nurture all three in a firms operation?
One strategy or mix-up it is a complex to answer, we should fiend the answer in our bellow discussion. Being "stuck-in-the-middle" implies that the company will not be able to manage successfully the five competitive forces and will not achieve strategic competitiveness. In fact, these companies can only earn average profits when industry structure is favourable or when other companies in the industry also are "stuck-in-the-middle." Type of Feature Strategic target Focused Low-Cost and Focused Differentiation A broad A broad crossValueA narrow market niche crosssection of the conscious where buyer needs and section of market. buyers. preferences are the market. distinctively different from the rest of the market. Lower costs An ability to Give customers Lower cost in serving than offer buyers more value for the niche or an ability to competitors. something the money offer niche buyers different from something customised to competitors. their requirements and tastes. A good Many product Good-toCustomised to fit the basic variations, wide excellent specialised needs of the product with selection, strong attributes, target segment. few frills emphasis on the several-to(acceptable chosen many upscale quality and differentiating features. limited features. selection). A Invent ways to Incorporate Tailor-made for the continuous create value for upscale niche. search for buyers; strive features and cost for product attributes at Low-Cost Leadership Broad Differentiation Best-Cost Provider

Basis of competitive advantage

Product line

Production emphasis

Marketing emphasis

reduction without sacrificing acceptable quality and essential features. Try to make a virtue out of product features that lead to low cost.

superiority.

low cost.

Build in whatever features buyers are willing to pay for. Charge a premium price to cover the extra costs of differentiating features. Communicate the points of difference in credible ways. Stress constant improvement and use innovation to stay ahead of imitative competitors. Concentrate on a few keydifferentiating features; tout them to create a reputation and brand image.

Under price rival brands with comparable features.

Communicate the focuser's unique ability to satisfy the buyer's specialised requirements.

Sustaining the strategy

Economical prices/ good value. All elements of strategy aim at contributing to a sustainable cost advantage the key is to manage costs down, year after year, in every area of the business.

Unique Remain totally dedicated expertise in to serving the niche managing costs better than other down and competitors; don't blunt product/ the company's image service calibre and efforts by entering up other segments or simultaneously. adding other product categories to widen market appeal.

Table : Distinctive Features of the Generic Competitive Strategies

The requirements for success in industry segments change over time. Strategists can use these changing requirements lets compare it in industry evolution. This discussion looks at the strategy-making task in nine other commonly encountered situations including

(1) Companies are competing in emerging industries. (2) Companies are competing in turbulent, high-velocity markets. (3) Companies are competing in mature, slow-growth industries. (4) Companies are competing in stagnant or declining industries. (5) Companies are competing in fragmented industries. (6) Companies are in pursuing rapid growth. (7) Companies are in industry leadership positions.

These situations have been selected to shed more light on the factors that managers need to consider in tailoring a companys strategy.

Strategies for Competing in Emerging Industries

1. An emerging industry is one in the formative stage. 2. The business models and strategies of companies in an emerging industry are unproved what appears to be a promising business concept and strategy may never generate attractive bottom-line profitability.

A. Challenges When Competing in Emerging Industries

1. Competing in emerging industries presents managers with some unique strategy-making challenges: a. Because the market is new and unproved, there may be much speculation about how it will function, how fast it will grow, and how big it will get b. Much of the technological know-how underlying the products of emerging industries is proprietary and closely guarded, having been developed in-house by pioneering firms; patents and unique technical expertise are key factors in securing competitive advantage c. Often there is no consensus regarding which of several competing technologies will win out or which product attributes will proves decisive in winning buyer favor d. Entry barriers tend to be relatively low, even for entrepreneurial start-up companies e. Strong learning and experience curve effects may be present f. Since in an emerging industry all buyers are first-time users, the marketing task is to induce initial purchase and to overcome customer concerns about product features, performance reliability, and conflicting claims of rival firms g. Many potential buyers expect first-generation products to be rapidly improved, so they delay purchase until technology and product design mature h. Sometimes firms have trouble securing ample supplies of raw materials and components i. Undercapitalized companies may end up merging with competitors or being acquired by financially strong outsiders looking to invest in a growth market 2. The two critical strategic issues confronting firms in an emerging industry are: a. How to finance initial operations until sales and revenues take off b. What market segments and competitive advantages to go after in trying to secure a front-runner position 3. A firm with solid resource capabilities, an appealing business model, and a good strategy has a golden opportunity to shape the rules and establish itself as the recognized industry front-runner.

B. Strategic Avenues for Competing in an Emerging Industry

1. Dealing with all the risks and opportunities of an emerging industry is one of the most challenging business strategy problems.

2. To be successful in an emerging industry, companies usually have to pursue one or more of the following strategic avenues: a. Try to win the early race for industry leadership with risk-taking entrepreneurship and a bold creative strategy b. Push to perfect the technology, improve product quality, and develop additional attractive performance features c. As technological uncertainty clears and a dominant technology emerges, adopt it quickly d. Form strategic alliances with key suppliers to gain access to specialized skills, technological capabilities, and critical materials or components e. Acquire or form alliances with companies that have related or complementary technological expertise f. Try to capture any first-mover advantages associated with early commitments to promising technologies g. Pursue new customer groups, new user applications, and entry into new geographical areas h. Make it easy and cheap for first-time buyers to try the industrys first-generation product i. Use price cuts to attract the next layer of price-sensitive buyers into the market 3. The short-term value of winning the early race for growth and market share leadership has to be balanced against the longer-range need to build a durable competitive edge and a defendable market position. The early leaders in an emerging industry cannot rest on their laurels; they must drive hard to strengthen their resource capabilities and build a position strong enough to ward off newcomers and compete successfully for the long haul.

4. Young companies in fast-growing markets face three strategic hurdles: (1) managing their own rapid expansion, (2) defending against competitors trying to horn in on their success, and (3) building a competitive position extending beyond their initial product or market. 5. Up-and-coming companies can help their cause by: (1) selecting knowledgeable members for their boards of directors, (2) hiring entrepreneurial managers with experience in guiding young businesses through the start-up and takeoff stages, (3) concentrating on out-innovating the competition, and (4) merging with or acquiring another firm to gain added expertise and a stronger resource base.

Strategic success in an emerging industry calls for bold entrepreneurship, a willingness to pioneer and take risks, an intuitive feel for what buyers will like, quick responses to new developments, and opportunistic strategy making.

Strategies for Competing in Turbulent, High-Velocity Markets (Growing stage)

More and more companies are finding themselves in industry situations characterized by rapid technological change, short product life cycles because of entry of important new rivals into the marketplace, frequent launches of new competitive moves by rivals, and fastevolving customer requirements and expectations all occurring at once.

A. Strategic Postures for Coping with Rapid Change 1. The central strategy-making challenge in a turbulent market environment is managing change. 2. A company can assume any of three strategic postures in dealing with high-velocity change: a. It can react to change b. It can anticipate change, make plans for dealing with the expected changes, and follow its plans as changes occur c. It can lead change Reacting to change and anticipating change are basically defensive postures; leading change is an offensive posture.

3. The three strategic postures a company can assume when dealing with high-velocity change. 4. As a practical matter, a companys approach to managing change sho uld ideally incorporate all three postures, though not in the same proportion. Industry leaders are proactive agents of change, not reactive followers and analyzers. Moreover, they improvise, experiment, and adapt rapidly. 5. The best performing companies in high-velocity markets consistently seek to lead change with proactive strategies.

B. Strategic Moves for Fast-Changing Markets

1. Competitive success in fast-changing markets tends to hinge on a companys ability to improvise, experiment, adapt, reinvent, and regenerate as market and competitive conditions shift rapidly and sometimes unpredictably. 2. The following five strategic moves seem to offer the best payoffs: a. Invest aggressively in R&D to stay on the leading edge of technological know-how b. Develop quick response capability c. Rely on strategic partnerships with outside suppliers and with companies making tiein products d. Initiate fresh actions every few months not just when a competitive response is needed e. Keep the companys products and services fresh and exciting enough to stand out in the midst of all the change that is taking place 3. Cutting-edge know-how and first-to-market capabilities are very valuable competitive assets in fast-evolving markets.

In fast paced markets, in-depth expertise, speed, agility, innovativeness, opportunism, and resource flexibility are critical organizational capabilities.

Strategies for Competing in Maturing Industries

1. A maturing industry is one that is moving from rapid growth to significantly slower growth. 2. An industry is said to be mature when nearly all potential buyers are already users of the industrys products. In a mature market, demand consists mainly of replacement sales to existing users with growth hinging on the industrys ability to attract the few remaining buyers and convince existing buyers to up their usage. A. Industry Changes Resulting from Market Maturity 1. An industrys transition to maturity does not begin on an easily predicted schedule. 2. When growth rates do slacken, the onset of market maturity usually produces fundamental changes in the industrys competitive environment: a. Slowing growth in buyer demand generates more head-to-head competition for market share b. Buyers become more sophisticated, often driving a harder bargain on repeat purchases c. Competition often produces a greater emphasis on cost and service d. Firms have a topping-out problem in adding new facilities e. Product innovation and new end-use applications are harder to come by f. International competition increases g. Industry profitability falls temporarily or permanently h. Stiffening competition induces a number of mergers and acquisitions among former competitors, drives the weakest firms out of the industry, and produces industry consolidation in general

B. Strategic Moves in Maturing Industries 1. As the new competitive character of industry maturity begins to hit full force, any of several strategic moves can strengthen a firms competitive positions: a. Pruning Marginal Products and Models: Pruning marginal products from the line opens the door for cost savings and permits more concentration on items whose margins are highest and/or where a firm has a competitive advantage.

b. More Emphasis on Value Chain Innovation: Efforts to reinvent the industry value chain can have a fourfold payoff lower costs, better product or service quality, greater capability to turn out multiple or customized product versions, and shorter design-to-market cycles. c. Trimming Costs: Stiffening price competition gives firms extra incentives to drive down unit costs. Company cost reduction initiatives can cover a broad front. d. Increasing Sales to Present Customers: In a mature market, growing by taking customers away from rivals may not be as appealing as expanding sales to existing customers. e. Acquiring Rival Firms at Bargain Prices: Sometimes a firm can acquire the facilities and assets of struggling rivals quite cheaply. f. Expanding Internationally: As its domestic market matures, a firm may seek to enter foreign markets where attractive growth potential still exists and competitive pressures are not so strong. g. Building New or More Flexible Capabilities: The stiffening pressures of competition in a maturing or already mature market can often be combated by strengthening the companys resource base and competitive capabilities. C. Strategic Pitfalls in Maturing Industries 1. Perhaps the biggest mistake a company can make as an industry matures is steering a middle course between low cost, differentiation, and focusing blending efforts to achieve low cost with efforts to incorporate differentiating features and efforts to focus on a limited target market. 2. Other strategic pitfalls include: a. Being slow to mount a defense against stiffening competitive pressures b. Concentrating more on protecting short-term profitability than on building or maintaining long-term competitive position c. Waiting too long to respond to price cutting by rivals d. Over expanding in the face of slowing growth e. Overspending on advertising and sales promotion efforts in a losing effort to combat growth slowdown f. Failing to pursue cost reduction soon enough or aggressively enough One of the greatest strategic mistakes a firm can make in a maturing industry is pursuing a compromise strategy that leaves it stuck in the middle.

Strategies for Firms in Stagnant or Declining Industries

1. Many firms operate in industries where demand is growing more slowly than the economy-wide average or is even declining. 2. Stagnant demand by itself is not enough to make an industry unattractive. Selling out May or may not be practical and closing operations is always a last resort. 3. Businesses competing in stagnant or declining industries must resign themselves to performance targets consistent with available market opportunities. 4. In general, companies that succeed in stagnant industries employ one or more of three strategic themes: a. Pursue a focused strategy aimed at the fastest growing market segments within the industry b. Stress differentiation based on quality improvement and product innovation c. Strive to drive costs down and become the industrys low-cost provider 5. These three strategic themes are not mutually exclusive. 6. The most common strategic mistakes companies make in stagnating or declining markets are: a. Getting trapped in a profitless war of attrition b. Diverting too much cash out of the business too quickly c. Being overly optimistic about the industrys future and spending too much on improvements in anticipation that things will get better 7. Describes the creative approach taken by Yamaha to combat the declining market demand for pianos. Achieving competitive advantage in stagnant or declining industries usually requires pursuing one of three competitive approaches: focusing on growing market segments within the industry, differentiating on the basis of better quality and frequent product innovation, or becoming a lower-cost producer.

Strategies for Competing in Fragmented Industries

1. The standout competitive feature of a fragmented industry is the absence of market leaders with king-sized market shares or widespread buyer recognition. A. Reasons for Supply-Side Fragmentation 1. Any of several reasons can account for why the supply side of an industry is fragmented: a. Market demand is so extensive and so diverse that very larges numbers of firms can easily coexist trying to accommodate the range and variety of buyer preferences and requirements and to cover all the needed geographic locations b. Low entry barriers allow small firms to enter quickly and cheaply c. An absence of scale economies permits small companies to compete on an equal cost footing with larger firms d. Buyers require relatively small quantities of customized products e. The market for the industrys product or service is becoming more global, putting companies in more and more countries in the same competitive market f. The technologies embodied in the industrys value chain are exploding into so many new areas and along so many different paths that specialization is essential just to keep abreast in any one area of expertise g. The industry is young and crowded with aspiring contenders, with no firm having yet developed the resource base, competitive capabilities, and market recognition to command a significant market share 2. Some fragmented industries consolidate over time as growth slows and the market matures. 3. Competitive rivalry in fragmented industries can vary from moderately strong to fierce. 4. Competitive strategies based on either low cost or product differentiation are viable unless the industrys product is highly standardized or a commodity. 5. Focusing on a well-defined market niche or buyer segment usually offers more competitive advantage potential than striving for broader market appeal. B. Strategy Options for a Fragmented Industry

1. Suitable competitive strategy options in a fragmented industry include: a. Constructing and operating formula facilities This strategic approach is frequently employed in restaurant and retailing businesses operating at multiple locations. b. Becoming a low-cost operator When price competition is intense and profit margins are under constant pressure, companies can stress no-frills operations featuring low overhead, high productivity/low-cost labor. c. Specializing by product type When a fragmented industrys products include a range of styles or services, a strategy to focus on one product or service category can be effective. d. Specialization by customer type A firm can stake out a market niche in a fragmented industry by catering to those customers who are interested in low prices, unique product attributes, customized features, carefree service, or other extras. e. Focusing on a limited geographic area Even though a firm in a fragmented industry cannot win a big share of total industrywide sales. It can still try to dominate a local or regional geographic area. 2. In fragmented industries, firms generally have the strategic freedom to pursue broad or narrow market targets and low-cost or differentiation-based competitive advantages. Many different strategic approaches can exist side-by-side.

In fragmented industries competitors usually have wide enough strategic latitude (1) to either compete broadly or focus and (2) to pursue a low-cost, differentiation-based or bestcost competitive advantage.

Strategies for Sustaining Rapid Company Growth

1. Companies that are focused on growing their revenues and earnings at a rapid or aboveaverage pace year after year generally have to craft a portfolio of strategic initiatives covering three horizons: a. Horizon 1: Short-jump strategic initiatives to fortify and extend the companys position in existing businesses b. Horizon 2: Medium-jump strategic initiatives to leverage existing resources and capabilities by entering new businesses with promising growth potential

c. Horizon 3: Long-jump strategic initiatives to plant the seeds for ventures in businesses that do not yet exist 2. The three strategy horizons.

A. The Risks of Pursuing Multiple Strategy Horizons 1. There are risks to pursuing a diverse strategy portfolio aimed at sustained growth: a. A company cannot place bets on every opportunity that appears lest it stretch its resources too thin b. Medium-jump and long-jump initiatives can cause a company to stray far from its core competencies and end up trying to compete in businesses for which it is ill suited c. It can be difficult to achieve competitive advantage in medium- and long-jump product families and businesses that prove not to mesh well with a companys present businesses and resource strengths

Strategies for Industry Leaders

The two best tests of success of a stay-on-the-defensive strategy are (1) the extent to which it keeps rivals in a reactive mode, struggling to keep up and (2) whether the leader is growing faster than the industry as a whole and wresting market share from rivals.

1. The competitive positions of industry leaders normally range from stronger than average to powerful. 2. Leaders are typically well known and strongly entrenched leaders have proven strategies. 3. The main strategic concern for a leader revolves around how to defend and strengthen its leadership position, perhaps becoming the dominant leader as opposed to just a leader. 4. The pursuit of industry leadership and large market share is primarily important because of the competitive advantage and profitability that accrue to being the industrys biggest company. 5. Three contrasting strategic postures are open to industry leaders: a. Stay-on-the-defensive strategy: The central goal of a stay-on-the-defensive strategy is to be a first-mover. It rests on the principle that staying a step ahead and forcing rivals into a catch-up mode is the surest path to industry prominence and potential market

dominance. Being the industry standard setter entails relentless pursuit of continuous improvement and innovation. The array of options for a potent stay-on-the-defensive strategy can include initiatives to expand overall industry demand. b. Fortify-and-defend strategy: The essence of fortify-and defend is to make it harder for challengers to gain ground and for new firms to enter. Specific defensive actions can include: (1) attempting to raise the competitive ante for challengers and new entrants via increased spending for advertising, higher levels of customer service, and bigger R&D outlays, (2) introducing more product versions or brands to match the product attributes that challenger brands have or to fill vacant niches that competitors could slip into, (3) adding personalized services and other extras that boost customer loyalty and make it harder and more costly for customers to switch to rival products, (4) keeping prices reasonable and quality attractive, (5) building new capacity ahead of market demand to discourage smaller competitors from adding capacity of their own, (6) investing enough to remain cost-competitive and technologically progressive, (7) patenting the feasible alternative technologies, and (8) signing exclusive contracts with the best suppliers and dealer distributors. A fortify-anddefend strategy best suits firms that have already achieved industry dominance and do not wish to risk antitrust action. A fortify-and-defend strategy always entails trying to grow as fast as the market as a whole and requires reinvesting enough capital in the business to protect the leaders ability to compete. c. Muscle-flexing strategy: Here a dominant leader plays a competitive hardball when smaller rivals rock the boat with price cuts or mount any new market offensives that directly threaten its position. Specific responses can include quickly matching or exceeding challengers price cuts, using large promotional campaigns to counter challengers moves to gain market share, and offering better deals to their major customers. The leader may also use various arm-twisting tactics to pressure present customers not to use the products of rivals. The obvious risks of a muscle-flexing strategy are running afoul of the antitrust laws, alienating customers with bullying tactics, and arousing adverse public opinion.

Industry leaders can strengthen their long-term competitive positions with strategies keyed to aggressive offense, aggressive defense, or muscling smaller rivals and customers into behaviors that bolster its own market standing.

10 Commandments for Crafting Successful Business Strategies

The 10 commandments that serve as useful guides for developing sound strategies include: a. Place top priority on crafting and executing strategic moves that enhances the companys competitive position for the long term b. Be prompt in adapting to changing market conditions, unmet customer needs, buyer wishes for something better, emerging technological alternatives, and new initiatives of competitors c. Invest in creating a sustainable competitive advantage d. Avoid strategies capable of succeeding only in the most optimistic circumstances e. Do not underestimate the reactions and the commitment of rival firms f. Consider that attacking competitive weakness is usually more profitable and less risky than attacking competitive strength g. Be judicious in cutting prices without an established cost advantage h. Strive to open up very meaningful gaps in quality or service or performance features when pursuing a differentiation strategy i. Avoid stuck-in-the-middle strategies that represent compromise between lower costs and greater differentiation and between broad and narrow market appeal j. Be aware that aggressive moves to wrest market share away from rivals often provoke retaliation in the form of a price war

Matching Strategy to Any Industry and Company Situation

1. Aligning a companys strategy with its overall situation starts with a quick diagnosis of the industry environment and the firms competitive standing in the industry. 2. In crafting the overall strategy, there are several pitfalls to avoid: a. Designing an overly ambitious strategic plan b. Selecting a strategy that represents a radical departure from or abandonment of the cornerstones of the companys prior success c. Choosing a strategy that goes against the grain of the organizations culture or conflicts with the values and philosophies of the most senior executives d. Being unwilling to commit wholeheartedly to one of the five competitive strategies.

Q :V: How does market focus help a business create competitive advantage? What risks accompany such a posture?

Answer: Focus Strategies

By implementing a cost leadership or differentiation strategy, companies choose to compete by exploiting their core competencies on an industry-wide basis and adopt a broad competitive scope. Alternatively, companies can choose to follow a focus strategy by seeking to use their core competencies to serve the needs of a particular customer group in an industry. In other words, companies focus on specific, smaller segments (or niches) of customers rather than across the entire market. Focused Business Level Strategies involve the same basic approaches as Broad Market Strategies. However, opportunities may exist because:

Large companies may overlook small niches Company may lack resources to compete industry-wide May be able to serve a narrow market segment more effectively than industry wide competitors Focus can allow you to direct resources to certain value chain activities to build competitive advantage May be able to retrofit old factories to keep costs down Minimise R&D costs by copying innovators Focused Differentiators may thrive by selecting a small market that is underserved by large players

Companies may choose to follow a focus strategy because:

they are able to serve a narrow segment more effectively than competitors that choose to compete industry wide the narrow segment's needs are so special that industry-wide competitors choose not to meet them certain narrow segments are being poorly served by industry-wide competitors the company has a unique ability to identify the needs or preferences of narrow segments that its core competencies will enable it to meet better than its competitors

Focus strategies can be based either on cost leadership or differentiation .

Focused Cost Leadership Strategy Companies that compete by following cost leadership strategies to serve narrow market niches generally target the smallest buyers in an industry (those who purchase in such small quantities that industry-wide competitors cannot serve them at the same low cost). Global furniture retailer Ikea provide customers with affordable solutions for better living through use of the focused cost leadership strategy. The company offers home furnishings that combine good design, function, and quality with low prices. Ikea does this by offering low-cost, modular furniture (assembled by customers), using self-service as an alternative to having sales associates follow and pressure customers to buy. Ikea displays its products in room-like settings so that customer can view different combinations of furniture, eliminating the need for assistance from sales associates or decorators to visualise the setting and reducing employee costs. Customers also pick up their own purchases to reduce the company's costs. Finally, stores address the needs of shoppers (e.g., extended hours and in-store childcare) while they shop. Focused Differentiation Strategy Companies following focused differentiation strategies produce customised products for small market segments. They can be successful when either the quantities involved are too small for industry-wide competitors to handle economically, or when the extent of customisation (or differentiation) requested is beyond the capabilities of the industry-wide differentiator. For example, Manufacturers such as Ferrari, Aston Martin, and Lamborghini compete in the tiny super car category with prices starting at $150,000 and running as high as $600,000. These cars are more than just transportation. Just as was noted for industry-wide differentiators and low-cost producers, companies choosing to focus must be particularly adept at completing primary and secondary value chain activities in a superior way. Issues related to the five competitive forces are similar to those discussed for the differentiation and cost leadership strategies, except that the competitive scope of the focus is on a narrow segment rather than the industry. You should review Figures 4-2 and 4-3 (Value-Creating Activities) as well as the earlier discussion of the five competitive forces for the cost leadership and differentiation strategies.

Competitive Risks of Focus Companies

The competitive risks of focus companies are similar to those previously noted for the cost leadership and differentiation strategies with the following additions: Competitors may successfully focus on an even smaller segment of the market, "out focusing" the focuser, or focus only on the most profitable slice of the focuser's chosen segment. An industry-wide competitor may recognise the attractiveness of the segment served by the focuser and mobilise its superior resources to better serve the segment's needs. Preferences and needs of the narrow segment may become more similar to the broader market, reducing or eliminating the advantages of focusing

Q: VI : Describe situations or conditions under which horizontal integration and concentric diversification would be preferred strategic choice?

Answer:

Overcome Weakness

1. Turnaround or retrenchment 2. Divestiture 3. Liquidation Internal (Redirected resources Within the firm) 1. Concentrated growth 2. Market development 3. Product development 4. Innovation Maximize Strength iv i iii ii

1.Vertical integration 2. Conglomerate diversification

External (acquisition or merger for resource capability) 1. Horizontal integration 2. Concentric diversification 3. Joint venture

Exhibit 8.8

Grand Strategy Selection Matrix Rapid market

Horizontal Integration
Much more common and simpler than vertical integration, Horizontal integration (also known as lateral integration) simply means a strategy to increase your market share by taking over a similar company. This take over / merger / buyout can be done in the same geography or probably in other countries to increase your reach. Examples of Horizontal Integration are many and available in plenty. Especially in case of the technology industry, where mergers and acquisitions happen in order to increase the reach of an entity. As per me an apt example of Horizontal Integration will be You Tube, which was taken over my Google primarily because it had a strong and loyal user base. Business Situation Having spent ten years at the Department of Indian Affairs and Northern Development, I was asked to look at the issue. Certainly the constitutional, legal and socioeconomic position of Aboriginal people was understood; but, as a relative newcomer to the CCRA, I did not fully understand the Agencys culture and perspective. The Canada Customs and Revenue Agency is organized into four program branches, roughly approximating the business flow, and other coordinating branches: Assessment and Collections (A&C) responsible for processing returns, collecting outstanding debt and providing client assistance. Verification, Enforcement and Compliance Research (VECR) responsible for verifying, auditing returns and reassessing taxpayers based on a risk assessment model. Appeals responsible for reviewing and making decisions on objections raised by taxpayers. Customs and Trade Administration Branch (CTAB) responsible for processing travellers and commercial activity crossing the border and for preventing contraband from entering and leaving the country. In addition, the Policy and Legislation Branch (P&L) a corporate branch, is responsible for policy development and recommending legislative change as well as monitoring excise duties. In general, each branch works in a vertical mode with horizontal integration provided in the field operations and in a variety of senior committees at Headquarters (HQ). As the Agency is largely focused on processing individual files, cross-program problems require special attention. The issue of non-compliance of some Indians was raised as a concern of sufficient importance to require all program branches which shared responsibility for the issue to come together to assess its breadth and scope. Therefore, a group within HQ representing all program branches was created. The initial goal was to create an inventory of the types of problems the CCRA was experiencing related to section 87 to verify whether the tax at risk was widely dispersed or whether there were pockets of tax loss localized to specific geographic areas

or particular taxes. At that meeting, it became clear that some areas of the Agency had given much thought to this issue while others had not. However, there was little enthusiasm to look at this issue as a corporate group. Subsequent to the meeting, attendees were persuaded to complete a listing of issues from each programs perspective. However, it was apparent that there was no common understanding of the issue or any corporate idea of its scope. The next step was to call a meeting of representatives from the field, the front line officers who brought a practical view to the exercise. The difference between the field meeting and the HQ meeting was striking. In a very dynamic atmosphere, the field officers described a very different view of the issue of Indian Act tax exemption compliance. Field officers outlined the daily problems, drew a picture of growing non-compliance and voiced concerns about managing this sensitive non-compliance area. Further, the potential for impact on the integrity of the tax system was perceived as a real and pressing problem. As a result of this meeting, it was evident that the misuse of the Indian Act tax exemption was real, that noncompliance was growing and that those in the field were keen to work on these files. Given that program differentiation is more pronounced at HQ, and in the absence of an integrating mechanism, it is often impossible to generalize the scope of a branch issue to the whole Agency. HQ depends on risk assessment models to identify emerging trends, but the analysis is geared to industry sectors and economic activity by specialized areas in the economy, making it difficult to pick up some types of problems. On the other hand, at the field level, in the Tax Services Offices (TSO) all program lines are delivered from one location, although it is fair to say horizontal integration even in the TSO is sometimes challenging. Nevertheless, the field is often better able to pick up cross-program compliance trends based on work activity rather than risk models. The field, however, is very sensitive about actively pursuing files that could result in media attention without strong support from the whole organization. Performance indicators are also structured in a manner that discourages involvement in lengthy case work whose outcome is potentially unproductive. As Indian property located on reserve is protected from seizure under section 89 of the Indian Act, many were concerned that action on these files would result in large, uncollectible assessments. There was also confusion about the benefits conferred by section 87 and the scope of those benefits. Furthermore, most staff were not equipped to deal with these issues without a better understanding of Aboriginal culture and history, the nature of the federal governments relationship with Aboriginal people, and the legal implications of treaties and legislation. Knowledge on these points was critical. Providing this knowledge to participants took the form of a three-day workshop with presentations by experts in various aspects of Aboriginal affairs.

Speakers included: An Aboriginal individual who presented the Aboriginal perspective, The Privy Council Office which presented the federal governments policy perspective, The Department of Indian Affairs and Northern Development which provided an update on self government and land claims, The Department of Finance which provided an update of the federal governments Indian taxation policy, The Department of Justice which presented overall trends in Native law, and The Legal Services Branch from the CCRA which presented legal trends from an Agency perspective. The workshop was a success and resulted in increased awareness for all participants. Indeed, many exclaimed that the sessions had changed their perspective dramatically, particularly in understanding the Indian perspective and in realizing the complexities of the law. This session was a significant step in providing the knowledge which was considered integral to achieving the desired results of the project. The session clarified many aspects of government policy and the law which had previously intimidated those trying to apply the revenue acts to Indian people. By the fall of 1995, after a year of work, the group had a good grasp of the problem, its importance and a knowledge base. More importantly, we had a core group committed to looking at the issue. At this point, the problem was clearly articulated as compliance related to the misapplication of the Indian Act tax exemption, section 87, and subsequent revenue loss. Defining the problem was critical to the groups thinking. It needed to be certain that the Agency was not targeting Indian people. Rather, the CCRA was targeting the revenue lost through activities of certain Indian individuals or bands or businesses which had misapplied the Indian Act tax exemption provisions or who were passing on their tax exemption inappropriately to non-Indians. The key challenges the Agency faced in formulating a strategy included specialized program administration, limited cross-program linkage, reticence to enforce the law given the highly sensitive nature of Indian taxation, and lack of knowledge about Indians and their place in Canadian society. Outside the Agency, there was little understanding of Indian tax-related rights and obligations by Indians and non-Indians alike, minimal comprehension of compliance issues by other federal departments, and a growing sense of anger by non-Indians directed towards the CCRA. The participants concluded that the integrity of the tax system was at stake as Indians and nonIndians seeking to exploit the legitimate tax exemption for

Indians publicly challenged the CCRAs authority and refused to comply with the law sometimes out of ignorance or conviction but often in a deliberate attempt to subvert the law for personal gain. This resulted in economic inequities that were distressing to many businesses near reserves which could not compete and which raised the issue. Task was to take ownership of the initiative and implement the strategy that had emerged from the lengthy lead-up process. The strategy consisted of the following five elements: Horizontal program integration, Responsible enforcement, Outreach/education/communications, Research, and Liaison with other federal departments and the provinces. Each element will be described according to the goals established by the Committee, the actions taken and the results. Results of implementing horizontal program strategy: Three years after its inception, an evaluation of the implementation of the strategy is warranted what has been achieved and what more needs to be done. There is little doubt that the implementation of the strategy has had its intended effect: The management framework provided the infrastructure to support implementation. Enforcement actions have resulted in key issues being addressed. Cases are progressing through the courts at the trial level. Outreach/education programs are under way. Research has been initiated. Important partnerships have been established to ensure horizontal integration beyond the CCRAs mandate. At the field level, the cross-program input throughout the processing of these files profoundly affected program delivery.

Concluded Decision: It is important to take stock of the lessons learned from this long and sometimes arduous process. The process of implementing horizontal integration is inherently difficult. What appears rational and obvious in theory is much more difficult to bring to fruition in practice. The greatest challenge to the success of the project was convincing the Directors General and Directors at On a personal level, individual members were concerned about investing too much scarce time to a new process that might not work. Therefore, it is important to go slowly and earn support by articulating an approach within which all parties can identify with a shared outcome and have a stake in the projects success.