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CHAPTER 7
Strategic Analysis and Choice in
Single- or Dominant-Product
Businesses: Building Sustainable
Competitive Advantages
McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Chapter Topics
Evaluating and Choosing Business Strategies:
Seeking Sustained Competitive Advantage
Selected Industry Environments and Business
Strategy Choices
Dominant Product/Service Businesses: Evaluating
and Choosing to Diversify to Build Value
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Key Issues: Strategic Analysis and
Choice
1. What strategies are most effective at building
sustainable competitive advantages for single business
units?
2. Should dominant-product/service businesses diversify
to build value and competitive advantage? What grand
strategies are most appropriate?
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Prominent Sources of Competitive
Advantage
Cost leadership
Differentiation
Speed
Market focus
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Ex. 7-2: Evaluating a Businesss Cost
Leadership Opportunities
A. Skills and Resources
Sustained capital investment
and access to capital
Process engineering skills
Intense supervision of labor or
core technical operations
Products or services designed
for ease of manufacture or
delivery
Low-cost distribution systems
B. Organizational Requirements
Tight cost control
Frequent, detailed control
reports
Continuous improvement and
benchmarking orientation
Structured organization and
responsibilities
Incentives based on meeting
strict, usually quantitative
targets
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Ex. 7-2 (contd.)
Product redesign to reduce
number of components
Technology
development
Safety training for all employees reduces absenteeism,
downtime, and accidents
Process innovation
Lowering production costs
HRM
Computerized, integrated info. systems
Reduces errors and costs
General
administration
Favorable long-term contracts; captive suppliers or
key customer for supplier
Procurement
Global, online
suppliers provide
automatic
restocking of
orders based on
sales
I nbound logistics
Economy of scale
in plant reduces
equipment costs
and depreciation
Operations
Computerized
routing lowers
transportation
expense
Outbound logistics
Cooperative
advtg. creates
local cost
advantage in
buying media
space/time
Mkt & sales
Subcontracted
service techs.
Repair products
correctly first
time or bear
costs
Service
Reduced level of management
cuts corporate overhead
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Advantages of a Cost Leadership
Strategy
Low-cost advantages reduce likelihood of pricing pressure
from buyers
Sustained low-cost advantages may push rivals into other
areas, lessening price competition
New entrants must face an entrenched cost leader without
experience to replicate cost advantages
Low-cost advantages should lessen attractiveness of
substitutes
Higher margins allow low-cost producers to withstand
supplier cost increases
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Key Risks of Cost Leadership
Many cost-saving activities are easily duplicated
Exclusive cost leadership can become a trap
Obsessive cost cutting can shrink other
competitive advantages involving key product
attributes
Cost differences often decline over time
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Ex. 7-3: Evaluating a Businesss
Differentiation Opportunities
A. Skills and Resources
Strong marketing abilities
Product engineering
Creative talent and flair
Strong capabilities in basic
research
Corporate reputation for quality
or technological leadership
Long tradition in an industry or
unique combination of skills
Strong cooperation from
channels/suppliers
B. Organizational Requirements
Strong coordination among
functions in R&D, product
development, and marketing
Subjective measurement and
incentives instead of quantitative
measures
Amenities to attract highly skilled
labor, scientists, and creative
people
Tradition of closeness to key
customers
Some personnel skilled in sales and
operations technical and
marketing
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Ex. 7-3 (contd.)
Cutting-edge production technology and product features
to maintain a distinct image and actual product
Technology
development
Programs to ensure technical competence of sales
staff and a marketing orientation of service personnel
HRM
Comprehensive, personalized database to build knowledge of customers
to be used in customizing how products are sold, serviced, replaced
General
administration
Quality control presence at key supplier facilities; work with
suppliers new product development activities
Procurement
Purchase superior
quality well-
known
components,
raising
quality/image of
final products
I nbound logistics
Careful inspection
of products at each
step to improve
product
performance and
lower defect rate
Operations
JIT coordination
with buyers; use
of own/captive
transportation
service to ensure
timeliness
Outbound logistics
Expensive,
informative
advertising
and
promotion to
build image
Mkt & sales
Service
personnel have
considerable
discretion to
credit
customers
for repairs
Service
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Advantages of a Differentiation
Strategy
Rivalry is reduced when a business successfully
differentiates itself
Buyers are less sensitive to prices for effectively
differentiated products
Brand loyalty is hard for new entrants to overcome
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Key Risks of Differentiation
Imitation narrows perceived differentiation,
rendering differentiation meaningless
Technological changes that nullify past
investments or learning
Cost difference between low-cost competitors and
the differentiated business becomes too great for
differentiation to hold brand loyalty
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Creating a Competitive Advantage
Based on Speed
Has become a major source of competitive
advantage for many firms
Involves the availability of a rapid response to
customers by
Providing current products quicker
Accelerating new product development or improvement
Quickly adjusting production processes
Making decisions quickly
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Ex. 7-4: Evaluating a Businesss Rapid
Response Opportunities
A. Skills and resources
Process engineering skills
Excellent inbound and outbound
logistics
Technical people in sales and
customer service
High levels of automation
Corporate reputation for quality or
technical leadership
Flexible manufacturing capabilities
Strong downstream partners
Strong cooperation from suppliers
of major components
B. Organizational Requirements
Strong coordination among functions
in R&D, product development, and
marketing
Major emphasis on customer
satisfaction in incentive programs
Strong delegation to operating
personnel
Tradition of closeness to key
customers
Some personnel skilled in sales and
operations technical and marketing
Empowered customer service
personnel

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Ex. 7-4 (contd.)
Use of companywide technology sharing activities and
autonomous product dev. teams to speed new product dev.
Technology
development
Develop self-managed work teams and decision-
making at the lowest levels to increase responsiveness
HRM
Highly automated and integrated information processing system. Include
major buyers in the system on a real-time basis
General
administration
Preapproved, online suppliers integrated into production Procurement
Working very
closely with
suppliers to
include their
choice of
warehouse to
minimize
delivery time
I nbound logistics
Standardize dies,
etc. and prod.
equipment to allow
quick changeover
to new or special
order
Operations
JIT delivery plus
partnering with
express mail
services to ensure
very rapid delivery
Outbound logistics
Use of
laptops
linked
directly to
operations to
speed order
process
Mkt & sales
Locate service
technicians at
customer
facilities that are
geographically
close
Service
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Activities Conducive to Building
Speed-Based Competitive Advantage
Product or
service
improvements
Customer
responsiveness
Product
development
cycles
Information
sharing and
technology
Speed in
delivery or
distribution
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Advantages of a Speed-Based Strategy
Creates a way to lessen rivalry because firm has the
availability of something a rival may not
Allows firm to charge buyers more, engender loyalty, or
enhance its position relative to its buyers
Generates cooperation and concessions from suppliers
since they benefit from increased revenues
Substitutes and new entrants are trying to keep up with the
rapid changes rather than introducing them
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Key Risks of a Speed-Based Strategy
Speeding up activities that have not been conducted in a
fashion prioritizing rapid response should only be done after
attention to training, reorganization, and/or reengineering
Some industries stable, mature ones may not offer much
advantage to a firm introducing some forms of rapid response
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Creating Competitive Advantage Based
on Market Focus
Involves building cost, differentiation, and/or speed
competitive advantages targeted to a narrow, market niche
Allows a firm to
Learn its target customers
Build up organizational knowledge of ways to satisfy its target
market better than larger rivals
Risks of focus strategies
Can attract major competitors to the segment
Believing a focus, by itself, creates success, rather than a form of
low cost, differentiation, or speed
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Typical Industry Settings
Emerging Industries
Industries Transitioning to Maturity
Mature and Decline Industries
Fragmented Industries
Global Industries
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Characteristics of Markets in Emerging
Industries
Proprietary technology and technological uncertainty
Competitor uncertainty regarding inadequate information
High initial cost structure
Few entry barriers
First-time buyers require initial inducements
Inability to easily obtain raw materials and components
Need for high-risk capital

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Strategic Options for Emerging
Industries
1. Ability to shape industrys structure
2. Ability to rapidly improve product quality
3. Establish favorable relations with key suppliers
4. Ability to establish technology as dominant
force
5. Acquire a core group of loyal customers
6. Ability to forecast future competitors
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Characteristics of Industries
Transitioning to Maturity
Intense competition for market share
Increased sales to experienced, repeat buyers
Greater emphasis on cost and service
Industry capacity tops out
New products and new applications harder to
come by
Increase in international competition
Declining profitability
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Strategic Options for Maturing
Industries
Prune the product line
Emphasize process innovation
Emphasize cost reductions
Focus on selecting loyal buyers
Pursue horizontal integration
Expand internationally
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Pitfalls to Avoid in Competing in
Maturing Industries
A middle-ground approach to selecting a generic
competitive strategy
Sacrificing market share for short-term profits
Waiting too long to respond to price reductions
Retaining unneeded excess capacity
Engaging in sporadic or irrational efforts to boost sales
Placing hopes on new products
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Characteristics of Mature/Declining
Industries
Demand grows more slowly than economy, or
even declines
Slowing growth is caused by
Technological substitution
Demographic shifts
Shifts in consumer needs
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Strategic Options for Mature/Declining
Industries
Focus on key market segments offering growth
opportunity
Emphasize product innovation and quality
improvement
Emphasize production and distribution efficiency
Gradually harvest the business
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Pitfalls to Avoid in Competing in
Mature/Declining Industry
Being overly
optimistic about
prospects for an
industry revival
Getting trapped in a
profitless war of attrition
Harvesting
from a weak
position
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Characteristics of Fragmented
Industries
No firm has a significant market share
No firm can significantly influence industry
outcomes
Examples
Professional services
Retailing
Wood and metal fabrication
Agricultural products
Funeral industry
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Strategic Options for Fragmented
Industries
Tightly managed decentralization
Intense local coordination, high personal service, local autonomy
Formula facilities
Standardized, efficient, low-cost facilities at multiple locations
Increased value added
Difficult to differentiate products/services
Specialization
Product type, customer type, type of order, geographic areas
Bare bones/no frills
Intense low margin competition (low overhead, minimum wage)
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Characteristics of Global Industries
Differences in prices and costs among countries due to
Currency exchange fluctuations
Differences in wage and inflation rates
Other economic factors
Differences in buyer needs across countries
Differences in competitors and ways of competing among
countries
Differences in trade rules and governmental regulations
across countries
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Key Components of Competing in
Global Industries
Approach to gain
global market
coverage
Generic
competitive
strategy
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Strategic Options: Pursuing Global
Market Coverage
License foreign firms to produce and distribute a
firms products
Maintain a domestic production base and export
products
Establish foreign-based plants and distribution in
foreign countries
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Strategic Options: Choosing a Generic
Competitive Strategy
1. Broad-line global competition
2. Global focus strategy
3. National focus strategy
4. Protected niche strategy
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Ex. 7-9: Grand Strategy Selection
Matrix
I II
III IV
Overcome weaknesses
Maximize strengths
Internal
(redirected
resources
within the
firm)
External
(acquisition
or merger
for resource
capability)
Turnaround or
retrenchment
Divestiture
Liquidation
Vertical integration
Conglomerate diversification
Concentrated growth
Mkt. Development
Prod. Development
Innovation
Horizontal integration
Concentric diversification
Joint venture
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Ex. 7-10: Model of Grand Strategy
Clusters
I II
IV III
Rapid market growth
Slow market growth
Strong
competitive
position
Weak
competitive
position
1. Concentrated
growth
2. Vertical
Integration
3. Concentric
diversification
1. Reformulation of
concentrated growth
2. Horizontal integration
3. Divestiture
4. Liquidation
1. Concentric
diversification
2. Conglomerate
diversification
3. Joint venture
1. Turnaround or
retrenchment
2. Concentric diversification
3. Conglomerate
diversification
4. Divestiture
5. Liquidation
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Opportunities to Build Value
Opportunities to build value via diversification, integration,
or joint venture strategies are usually found in market-
related, operating-related, and management activities. Such
opportunities center around reducing costs, improving
margins, or providing access to new revenue sources more
cost effectively than traditional internal growth options via
concentration, market development, or product development