Crafting business stratergy

THE RACE TO THE FUTURE IS ON 

Companies can be classified as: Drivers,Passengers,Road Kill 

Which will get to the future first?

STRATEGIC POSITIONING SHOULD IMPROVE PROFITABILITY 

Definition: Where managers of a company situate that company relative to its rivals along important competitive dimensions 

Purpose: To reduce the effects of rivalry and thereby improve profitability

A FIRM CAN GAIN ADVANTAGE OVER RIVALS IN TWO WAYS 

Advantage over rivals 

Differentiation: Produce a differentiated product and charge suffici- ently higher prices to more than off-set the added costs of differentiation 

Low-cost: Produce an essentially equivalent product at a lower cost 

LOW-COST LEADERSHIP AND DIFFERENTIATION OFFER GREATER MARKET SHARE AND/OR PROFITS 

Low-cost leadership: • Capture market share by offering lower-price or Earn higher by maintaining price parity (example: Pacific Cycle, Gallo Wines, Wal-Mart, Southwest Airlines, Home Depot)

Differentiation: • Capture market share by offering higher quality at same price or Earn higher margins by raising prices over competitors (example: Trek Bicycles, Coca-Cola and Pepsi, Mercedez Benz, Honda, Yamaha, and Suzuki motorcycles, Stouffers (frozen foods)

KEY DRIVERS OF COST ADVANTAGE 

Economies of scale: 

Economies of scale exist during a period of time if the average total cost for a unit of production is lower at higher levels of output.

You must review cost to assess whether economies of scale exist:

Fixed costs remain the same for different levels of production

Variable costs are the costs of variable inputs (such as raw materials and labor) and vary directly with output

Marginal cost is the cost of the last unit of production

Total cost is the sum of all production costs and always increases as output goes up

Average cost is the mean cost of total production during a given period (say, a year) 

Some sources of economies

• R&D spend

• Advertising spend

• Specialization of specific production processes

• Superior inventory management 

• Purchasing power 

Some sources of diseconomies:

• Bureaucracy

• High labor costs

• Inefficient operations

Learning: 

Economies of scale: Costs decrease as the scale of operation increases during any given period of time. 

Learning curve: Costs decrease with the cumulative level of production since the production of the first unit 

Economies of scope:  

If a firm produces two or more products and can share resources among two or more of these (e.g., share manufacturing machines) - thereby lowering the costs of each product - it benefits from economies of scope 

Product technology: 

Often, a new entrant who wants to compete against industry incumbents with significant scale and experience advantages, tries to match or beat incumbents 'costs by introducing a production technology that is subject to different economics (e.g., Jet Blue, Nucor Steel) 

Product design: 

Product design can sometimes be altered to lower a firm's production costs (e.g., Canon vs. Xerox) 

Location advantages for sourcing inputs:  

Sometimes firms try to attain lower production costs by locating their operations in cheaper labor markets (e.g., Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek who manufactures in the US) 

KEY DRIVERS OF DIFFERENTIATION ADVANTAGES 

Key Drivers:  

• Premium brand image

• Customization

• Unique styling 

• Speed

• More convenient access

• Unusually high-quality

Purpose: 

To drive up customer's willingness to pay and generate demand sufficient to: Recoup added costs and Generate enough profits to make strategy worthwhile 

DRIVERS AND THREATS TO DIFFERENTIATION AND LOW-COST ADVANTAGE:

Low-cost:  

Drivers: 

• Economies of scale 

• Learning 

• Economies of scope 

• Superior technology 

• Product design 

• Location  

Threats: 

• New technology 

• Too low-quality 

• Social, political, and economic risks of outsourcing 

Differentiation: 

Drivers: 

• Premium brand image 

• Customization 

• Unique styling 

• Speed 

• Convenient access 

• Unusually high-quality 

Threats: 

• Failure to increase buyer's willingness to pay higher prices 

• Under estimating cost of differentiation 

• Over fulfillment of buyer's needs 

• Lower cost imitation 

INDUSTRY LIFE CYCLE: 

Embryonic:  

Niche market - selected products for selected markets 

Participants emphasize problem solving - product as "solution" 

Technological uncertainty 

Growing:  

Market expands beyond niche 

More competitors enter 

Customers become better informed 

Mature:  

Proliferation of products and markets served 

Market volatility and beginnings of industry consolidation 

Aggressive customers

Decline:  

Product/market contraction 

Further consolidation and industry regeneration 

TESTING THE QUALITY OF A STRATEGY 

1. Does your strategy exploit your key resources? 

Subquestion: 

• With your particular mix of resources, does this strategy give you an advantageous position relative to your competitors? 

• Can you pursue this strategy more economically than competitors? 

• Do you have the capital and managerial talent to do all you envision? 

• Are you spread too thin? 

2. Does your strategy fit with current industry conditions? 

Subquestion: 

• Is there healthy profit potential where you're headed? 

• Are you aligned with the key success factors of your industry?

3. Will your differentiators be sustainable? 

Subquestion: 

• Will competitors have difficulty imitating you? 

• If imitation cannot be foreclosed, does your strategy include a ceaseless regimen of innovation and opportunity creation to keep distance between you and the competition? 

4. Are the elements of your strategy consistent and aligned with your strategic position? 

Subquestion: 

• Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic? 

• Do they all fit and mutually reinforce each other? 

5. Can your strategy be implemented? 

Subquestion:  

• Will your stakeholders allow you to pursue this strategy? 

• Do you have the proper complement of implementation levers in place? 

• Is the management team able and willing to lead the required changes?