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Homework must be answered discussion the introduction and conclusion,  four questions must be on bullet points and numbering. Homework Topic overview: Strategic Analysis for an Organization: Strategy tools are vital for business and competitive analysis. These tools vary in terms of the level of analysis as some are found to be more suitable for analyzing the internal environment while others are more practical for the external environment analysis. How useful these strategic tools and models in helping decision-makers at organizations to make a better decision is a noteworthy question for investigation. -This TMA is meant to assess the student’s ability in understanding, and application of the course materials and ideas from external sources, as well as to student’s reflection and critical thinking. It is also intended to test the student’s ability to argue relevantly and to justify a point of view besides, constructing, defending and evaluating an argument, using relevant evidence and giving reasons for conclusions. Homework Topic Renewable and Clean Energy in Automotive industry Today, we are seeing an interest in clean energy procurement pop up in industries ranging from mining to manufacturing, as a result of a variety of motivators. In the beginning, the corporate renewables revolution was confined to the most environmentally progressive companies looking to meet sustainability goals. The increasingly competitive price of renewable energy is now inviting new industries to explore opportunities in the market. One of the most intriguing participants in the long-term renewable energy marketplace is the automotive industry. Renewable and clean energy is powering the future of the automobile industry. Gasoline and diesel may be the reigning champs, but it looks like they’ve got some competition. With growing concerns of the automotive industry’s impact on the environment through carbon emissions, where car owners are seeking alternative energy solutions that offer greater sustainability. Consumer demand for higher environmental consciousness is leading to a rise in sustainable mobility. Automobile manufacturers are witnessing a shift in the energy buying landscape. You should answer the following four questions: Question one: Critically discuss the key factors and forces in the general and industry environments that affect the demand for renewable and clean energy automobiles. (650 words) Question two: Choose any manufacturer from automotive industry and based on your findings in Q one, discuss how these factors and forces affect your chosen manufacturer’s demand for their products and consequently their market position in this emerging industry. (350 words) Question three: Discuss whether chosen manufacturer’s present and future market position is supported by its value chain and other key internal resources. Identify problems you think they are facing to meet these new upcoming challenges in this new emerging industry (650 words) Question four: Critically discuss your chosen Business–Level-strategy. What are the challenges they might face to continue delivering its promises and stay ahead of competitors? Suggest ways by which they may sustain their worldwide market competitive position in future in this emerging industry. (350 words) INSTRUCTIONS: · Homework must be written in ESSAY (discussion) format for the introduction and conclusion, the question most be on bullet points and numbering. · Word count should be exact with 10\% (More/less) tolerance. · You must acknowledge all sources of information using Harvard Style Referencing (In-text referencing plus list of references at the end). Minimum of three references are required. Wikipedia is not recommended as a reference. CHAPTER 3 Assessing the Internal Environment of the Firm Copyright Anatoli Styf/Shutterstock 1 Value-Chain Analysis Value-chain analysis looks at the sequential process of value-creating activities. Value is the amount buyers are willing to pay for what a firm provides. How is value created within the organization? How is value created for other organizations in the overall supply chain or distribution channel? The value received must exceed the costs of production. ©McGraw-Hill Education. SWOT is a good starting point, but it doesn’t give enough guidance regarding the specific action steps needed to enact strategic change. For instance, a firm may have a capability that is a strength, but that, by itself, cannot create or sustain competitive advantage. It’s too easy to become preoccupied with a single dimension or element of what is, essentially, a moving target…MORE analysis may be necessary, which is where the value chain comes in. Value-chain analysis = a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm’s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm’s competitive position. 2 Value-Chain Analysis Primary Activities Primary activities contribute to the physical creation of the product or service; the sale & transfer to the buyer; and service after the sale. Inbound logistics Operations Outbound logistics Marketing & sales Service ©McGraw-Hill Education. Primary activities = sequential activities of the value chain that refer to the physical creation of the product or service, its sale and transfer to the buyer, and its service after sale, including inbound logistics, operations, outbound logistics, marketing and sales, and service. 3 Value-Chain Analysis Support Activities Support activities either add value by themselves or add value through important relationships with both primary activities & other support activities. Procurement Technology development Human resource management General administration ©McGraw-Hill Education. Support activities = activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities; including procurement, technology development, human resource management, and general administration. 4 The Value Chain Exhibit 3.1 The Value Chain: Primary and Support Activities Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The Free Press. Jump to Appendix 1 for long description. ©McGraw-Hill Education. To get the most out of value-chain analysis, view the concept in its broadest context, without regard to the boundaries of your own organization – place your organization within a more encompassing value chain that includes your firm’s suppliers, customers, and alliance partners. This helps identify how value is created for other organizations in the overall supply chain or distribution channel. For an interesting example, look at Case General Motors. (Remember the strategic groups discussion from Chapter 2? What does GM have to do to compete with other groups in its industry? How important might the value chain be in this industry?) 5 Primary Activity: Inbound Logistics Inbound logistics are primarily associated with receiving, storing & distributing inputs to the product. Material handling Warehousing Inventory control Vehicle scheduling Returns to suppliers Factors to consider include: Location of distribution facilities Warehouse layout ©McGraw-Hill Education. Inbound logistics = receiving, storing, and distributing inputs of a product. Example = Toyota’s just-in-time (JIT) inventory systems where parts deliveries arrive at the assembly plants only hours before they are needed. This allows Toyota to fill a buyer’s new car order in just 5 days. Inbound logistics includes location of distribution facilities, design of material and inventory control systems, warehouse layout and design, and efficient systems to return products to suppliers. 6 Primary Activity: Operations Operations include all activities associated with transforming inputs into the final product form. Machining Packaging & Assembly Testing or quality control Printing Facility operations Factors to consider include: Efficient plant operations & layout Incorporation of appropriate process technology ©McGraw-Hill Education. Operations = all activities associated with transforming inputs into the final product form. Example = Shaw Industries’ ability to reduce expenses associated with the disposal of dangerous chemicals used in the manufacture of floor coverings. Operations includes assessment of efficiency of plant operations, incorporation of appropriate process technology, efficient plant layout and workflow design, degree of automation, extent of appropriate quality control systems. 7 Primary Activity: Outbound Logistics Outbound logistics includes collecting, storing, & distributing the product or service to buyers. Finished goods & warehousing Material handling Delivery vehicle operation Order processing, scheduling & distribution Factors to consider include: Effective shipping processes Minimizing shipping costs by grouping goods into large lot sizes ©McGraw-Hill Education. Outbound logistics = collecting, storing, and distributing the product or service to buyers. Example = Campbell Soup uses an electronic network so retailers can inform Campbell of product needs and inventory levels. This allows Campbell to forecast future demand and determine which products to replenish, delivering inventory the same day. The retailer gains efficiency, and therefore has an incentive to carry a broader line of Campbell products. Outbound logistics includes effective shipping processes to provide quick delivery and minimize damages, efficient finished goods warehousing processes, the ability to ship goods in large lot sizes to minimize transportation costs, and the use of quality material handling equipment. (See also Case Campbell Soup.) 8 Primary Activity: Marketing & Sales Marketing & sales activities involve purchases of products & services by end users and includes how to induce buyers to make those purchases. Advertising & promotion Sales force management Pricing & price quoting Channel selection & channel relations Factors to consider include: Innovative approaches to promotion & advertising Proper identification of customer segments & needs ©McGraw-Hill Education. Marketing and sales = activities associated with purchases of products and services by end users and the inducements used to get them to make purchases. Example = the Mercedes-Benz AMG got premiere “product placement” as a fleet of these showed up to pick up James Bond in the 2016 Spectre movie. Marketing and sales includes the development of a highly motivated and competent sales force, innovative approaches to promotion and advertising, selection of the most appropriate distribution channels, proper identification of customer segments and needs, and effective pricing strategies. 9 Primary Activity: Service Service includes all actions associated with providing service to enhance or maintain the value of the product. Installation & repair Training Parts supply Product adjustment Factors to consider include: Quick response to customer needs Quality of service personnel, ongoing training ©McGraw-Hill Education. Service = actions associated with providing service to enhance or maintain the value of the product. Example = Nordstrom service reps can take control of the customer’s web browser and lead her to the specific product she wants. Service includes effective use of procedures to solicit customer feedback and to act on information, quick response to customer needs and emergencies, ability to furnish replacement parts, effective management of parts and equipment inventory, quality of service personnel and ongoing training, and warranty and guarantee policies. 10 Support Activity: Procurement Procurement involves how the firm purchases inputs used in its value chain. Procurement of raw material inputs Optimizing quality & speed Minimizing associated costs Development of collaborative win-win relationships with suppliers Analysis & selection of alternative sources of inputs to minimize dependence on one supplier ©McGraw-Hill Education. SUPPORT ACTIVITIES are those functions that support the value chain. Each industry might have distinct value activities that are unique to that industry, but here are some common ones. Procurement = the function of purchasing inputs used in the firm’s value chain, including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings. Example = Microsoft does formal reviews of its outside suppliers, including a feedback system that helps clarify expectations. In addition to the above activities, procurement includes effective procedures to purchase advertising and media services, and the ability to make proper lease versus buy decisions. 11 Support Activity: Technology Development Technology development is related to a wide range of activities. Effective R&D activities for process & product initiatives Collaborative relationships between R&D and other departments State-of-the-art facilities & equipment Excellent professional qualifications of personnel Use of data analytics ©McGraw-Hill Education. Technology development = activities associated with the development of new knowledge that is applied to the firm’s operations. The array of technologies employed in most firms is very broad, ranging from technologies used to prepare documents and transport goods, to those embodied in processes and equipment or the product itself. Technology development related to the product and its features supports the entire value chain, while other technology development is associated with particular primary or support activities. Example = the French firm Techniq is a global leader in the energy industry, focusing on pipelines. In collaboration with Schlumberger, Techniq has developed “intelligent” pipes that add significant value for customers, while increasing Techniq’s margins. Technology development includes activities related to the process as well as the product, such as enhancing the ability to meet critical deadlines. Strategy Spotlight 3.2 discusses how Coca-Cola has used data analytics to meet the taste demands of its global customers. 12 Support Activity: Human Resource Management Human resource management consists of activities involved in recruitment, hiring, training & development, & compensation of all types of personnel. Effective employee recruiting, development, & retention mechanisms Quality relations with trade unions Reward & incentive programs to motivate all employees ©McGraw-Hill Education. Human resource management = activities involved in the recruiting, hiring, training, development and compensation of all types of personnel. It supports both individual primary and support activities such as the hiring of engineers and scientists, as well as supporting the entire value chain through activities such as negotiations with labor unions. Example = JetBlue recruited flight attendants with a one-year contract so they could travel, meet lots of people, then decide what else they might like to do. Human resource management includes creating a quality work environment to maximize overall employee performance and minimize absenteeism. 13 Support Activity: General Administration General administration involves: Effective planning systems to attain overall goals & objectives Excellent relations with diverse stakeholder groups Effective information technology to coordinate & integrate value-creating activities across the value chain Ability of top management to anticipate & act on key environmental trends & events, create strong values, culture & reputation ©McGraw-Hill Education. General administration = general management, planning, finance, accounting, legal and government affairs, quality management, and information systems; activities that support the entire value chain and not individual activities. These activities can be among the most important activities for competitive advantage. Example = how a telephone operating company effectively negotiates and maintains ongoing relations with regulatory bodies. General administration also includes, for instance, the ability to obtain low-cost funds for capital expenditures and working capital. Leadership plays a critical role here as well: Mark Zuckerberg and Jack Ma have been critical to the success of their respective companies, Facebook and Alibaba. 14 Interrelationships Among Value-Chain Activities Managers must not ignore the importance of relationships among value-chain activities. What are the interrelationships among activities within the firm? What are the relationships among activities within the firm and with other stakeholders such as customers & suppliers? Consider integrating customers into the value chain. Creating individualized products Soliciting ideas for products & services ©McGraw-Hill Education. Interrelationships = collaborative and strategic exchange relationships between value-chain activities either (a) within firms or (b) between firms. Strategic exchange relationships involve exchange of resources such as information, people, technology, or money that contribute to the success of the firm. Example = within the firm, how effective human resource practices can support the entire value chain. Example = between the firm and stakeholders, how teaming up with customers through a “prosumer” or crowdsourcing relationship can help the firm gain insight into customer needs and leverage the wisdom of the customer to create value for all. However, be careful, because customers can use this forum to criticize the company and its products. Research has shown that crowdsourcing can backfire half the time. 15 Resource-Based View of the Firm The resource-based view of the firm (RBV) integrates two activities. An internal analysis of phenomena within a company An external analysis of the industry & its competitive environment Resources can lead to a competitive advantage. If they are valuable, rare, hard to duplicate If tangible resources, intangible resources, & organizational capabilities are combined ©McGraw-Hill Education. A firm’s strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a competitive advantage. Resource-based view of the firm (RBV) = perspective that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities. 16 Types of Tangible Firm Resources Tangible resources are assets that are relatively easy to identify. Physical assets: plant & facilities, location, machinery & equipment Financial assets: cash & cash equivalents, borrowing capacity, capacity to raise equity Technological resources: trade secrets, patents, copyrights, trademarks, innovative production processes Organizational resources: effective planning processes, evaluation & control systems ©McGraw-Hill Education. Firm resources are all assets, capabilities, organizational processes, information, knowledge, etc. controlled by a firm – resources that enable it to develop and implement value-creating strategies. Tangible resources = organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources. These include assets that the firm uses to create value for its customers: physical resources such as the plant’s proximity to customers and suppliers; financial resources such as accounts receivables; organizational resources such as employee development, evaluation and reward systems; technological resources such as trade secrets and patents. 17 Types of Intangible Firm Resources Intangible resources are difficult for competitors to account for or imitate. They are embedded in unique routines & practices. Human resources: trust, experience & capabilities of employees; managerial skills & effectiveness of work teams, firm specific practices & procedures Innovation resources: technical & scientific expertise & ideas; innovation capabilities Reputation resources: brand names, reputation for fairness with suppliers, non-zero sum relationships; reputation for reliability & product quality with customers ©McGraw-Hill Education. Intangible resources = organizational assets that are difficult to identify and account for, and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources. Example = Harley-Davidson’s strong brand image. A firm’s specific practices and procedures, and the firm’s culture, may also be resources that provide competitive advantage. 18 Types of Firm Resources: Organizational Capabilities Organizational capabilities are competencies or skills that a firm employs to transform inputs into outputs. It is the capacity to combine tangible & intangible resources to attain desired ends. Outstanding customer service Excellent product development capabilities Superb innovation processes & flexibility in manufacturing processes Ability to hire, motivate, & retain human capital ©McGraw-Hill Education. Organizational capabilities = the competencies and skills that a firm employs to transform inputs into outputs. Capabilities involve an organization’s capacity to deploy tangible and intangible resources over time and generally in combination, and to leverage those capabilities to bring about a desired end. Example = Apple’s ability to combine and package technological components in new and innovative ways while also seeking to integrate the value chain. See Case Apple. 19 Firm Resources and Sustainable Competitive Advantages Strategic resources have four attributes. Valuable in formulating & implementing strategies to improve efficiency or effectiveness Rare or uncommon; difficult to exploit Difficult to imitate or copy due to physical uniqueness, path dependency, causal ambiguity, or social complexity Difficult to substitute with strategically equivalent resources or capabilities ©McGraw-Hill Education. Strategic resources (also firm resources or organizational resources) = firms’ capabilities that are valuable, rare, costly to imitate, and costly to substitute. Firm attributes must be valuable in order to be considered resources and potential sources of competitive advantage. These valuable resources enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. If competitors or potential competitors also possessed the same valuable resource, it is not a source of competitive advantage unless it is uncommon or rare. Inimitability or being difficult to imitate is the key to value creation because it constrains competition. Having a resource that competitors can easily copy generates only temporary value. Non-substitutability means there is no strategically equivalent valuable resources that are themselves not rare or inimitable. However, even though a company cannot exactly imitate someone else’s resource, it may be able to develop an equivalent resource from another source, such as Amazon internet capabilities allows it to compete against prime brick-and-mortar Barnes & Noble locations. 20 Sources of Inimitability Physical uniqueness are resources that are physically unique, therefore impossible to duplicate. Path dependency: hard to duplicate because of all that has happened along the path followed in the development and/or accumulation of resources. Causal ambiguity: impossible to explain what caused a resource to exist or how to re-create it. Social complexity: resources that result from social engineering such as interpersonal relations, culture. ©McGraw-Hill Education. Physical uniqueness = a beautiful resort location, mineral rights, or patents. Path dependency = a characteristic of resources that is developed and or accumulated through a unique series of events. See Strategy Spotlight 3.4 for an example. Causal ambiguity = a characteristic of the firm’s resources that is costly to imitate because a competitor cannot determine what the resource is and/or how it can be re-created. Google is given as an example. Social complexity = a characteristic of a firm’s resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers. 21 Criteria for Sustainable Competitive Advantage Is a resource or capability . . . Valuable? Rare? Difficult to Imitate? Without Substitutes? Implications for Competitiveness? No No No No Competitive disadvantage Yes No No No Competitive parity Yes Yes No No Temporary competitive advantage Yes Yes Yes Yes Sustainable competitive advantage Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications Source: Adapted from Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17:99 – 120. ©McGraw-Hill Education. Resources and capabilities must be rare and valuable as well as difficult to imitate or substitute in order for a firm to attain competitive advantages that are sustainable over time. If resources and capabilities do not meet any of the four criteria it would be difficult to develop any type of competitive advantage in the short or long run. If resources and capabilities are not difficult for competitors to imitate or substitute firms could attain some level of competitive parity. Only when all four criteria are satisfied will competitive advantages be sustained over time. 22 Evaluating Firm Performance Balanced Scorecard Analysis Employees Owners Customer satisfaction Internal processes Innovation, learning & improvement activities Financial perspectives ©McGraw-Hill Education. Financial ratio analysis = a technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation. When performing a financial ratio analysis, you must take into account the firm’s performance from a historical perspective (not just at one point in time) as well as how it compares with both industry norms and key competitors. Balanced scorecard = a method of evaluating a firm’s performance using performance measures from the customers’ perspectives, as well as internal, innovation and learning, and financial perspectives. 23 The Balanced Scorecard A meaningful integration of many issues that come into evaluating performance Four key perspectives: How do customers see us? (customer perspective) What must we excel at? (internal perspective) Can we continue to improve and create value? (innovation & learning perspective) How do we look to shareholders? (financial perspective) ©McGraw-Hill Education. Balanced scorecard = a method of evaluating a firm’s performance using performance measures from the customers’ perspectives, as well as internal, innovation and learning, and financial perspectives. It includes financial measures that reflect the results of actions already taken, but it complements these indicators with measures of customer satisfaction, internal processes, and the organization’s innovation and improvement activities – operational measures that drive future financial performance. The balanced scorecard approach recognizes how the interests of a variety of stakeholders can be interrelated. 24 Customer Perspective vs. Internal Business Perspective Managers articulate goals for customer concerns. Time versus Quality Performance and service versus Cost Then focus on those critical internal operations that enable them to satisfy customer needs. Business processes Cycle time, quality, employee skills, productivity Decisions Coordinated actions Key resources and capabilities ©McGraw-Hill Education. Customer perspective = measures of firm performance that indicate how well firms are satisfying customers’ expectations. Managers must translate their general mission statements on customer service into specific measures that reflect the factors that really matter to customers. Internal business perspective = measures of firm performance that indicate how well a firm’s internal processes, decisions, and actions are contributing to customer satisfaction. Customer-based measures are important, however they must be translated into indicators of what the firm must do internally to meet customer’s expectations. The internal measures should reflect business processes that have the greatest impact on customer satisfaction. 25 Innovation and Learning Perspective Managers must make frequent changes to existing products & services as well as introduce entirely new products with extended capabilities. This requires: Human capital (skills, talent, knowledge) Information capital (information systems, networks) Organization capital (culture, leadership) ©McGraw-Hill Education. Innovation and learning perspective = measures of firm performance that indicate how well firms are changing their product and service offerings to adapt to changes in the internal and external environments. A firm’s ability to improve, innovate, and learn is tied directly to its value. Simply put, only by developing new products and services, creating greater value for customers, and increasing operational efficiencies can a company penetrate new markets, increase revenues and margins, and enhance shareholder value. A firm’s ability to do well from an innovation and learning perspective is more dependent on its intangible than tangible assets. 26 Financial Perspective Managers must measure how the firm’s strategy, implementation, and execution are indeed contributing to bottom line improvement. Financial goals include: Profitability, growth, shareholder value This should lead to: Improved sales Increased market share Reduced operating expenses Higher asset turnover ©McGraw-Hill Education. Financial perspective = measures of firms financial performance that indicate how well strategy, implementation and execution are contributing to bottom-line improvement. Periodic financial statements remind managers that improved quality, response time, productivity, and innovative products benefit the firm only when they result in improved sales, increased market share, reduced operating expenses, or higher asset turnover. 27 Limitations of the Balanced Scorecard Not a “quick fix” – needs proper execution Needs a commitment to learning Needs employee involvement in continuous process improvement Needs cultural change Needs a focus on nonfinancial rather than financial measures Needs data on actual performance ©McGraw-Hill Education. There is general agreement that there is nothing inherently wrong with the concept of the balanced scorecard. The key limitation is that some executives may view it as a “quick fix” that can be easily installed. Implementing a balanced metrics system is an evolutionary process. It is not a one-time task that can be quickly checked off as completed. If managers do not recognize this from the beginning and fail to commit to it long-term, the organization will be disappointed. Poor execution becomes the cause of such performance outcomes. And organizational scorecards must be aligned with individuals’ scorecards to turn the balanced scorecards into a powerful tool for sustained performance. (For a variation on the balanced scorecard concept, see the Malcolm Baldrige National Quality Award at https://www.nist.gov/baldrige/baldrige-criteria-commentary. This award encourages organizations to focus on critical aspects of managing and performing as an organization, using an integrated performance management framework that addresses innovation management, intelligent risk, and strategic priorities; social media; operational effectiveness; and work systems and core competencies. Through a self-study process, organizations can submit their findings for the award in business/non profit, education, and healthcare categories.) 28 CHAPTER 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages Copyright Anatoli Styf/Shutterstock 1 Sustaining a Competitive Advantage Business-level strategies require a choice. How to overcome the five forces and achieve competitive advantage? Suggestion – Use Porter’s three generic strategies. Overall cost leadership Differentiation Focus ©McGraw-Hill Education. Business-level strategy is a strategy designed for a firm or a division of the firm that competes within a single business. Generic strategies = basic types of business level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness). 2 Three Generic Strategies (1 of 3) Exhibit 5.1 Three Generic Strategies Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter, 1980, 1998, Free Press. Jump to Appendix 1 for long image description. ©McGraw-Hill Education. The overall cost leadership and differentiation strategies strive to attain advantages industrywide, while focusers have a narrow target market in mind. Generic strategies are plotted on two dimensions: competitive advantage and market served. 3 Three Generic Strategies (2 of 3) Overall cost leadership is based on: Creating a low-cost position relative to a firm’s peers Managing relationships throughout the entire value chain to lower costs Differentiation implies: Products and/or services that are unique & valued Emphasis on nonprice attributes for which customers will gladly pay a premium A focus strategy requires: Narrow product lines, buyer segments, or targeted geographic markets Advantages obtained either through differentiation or cost leadership ©McGraw-Hill Education. Overall cost leadership = a firm’s generic strategy based on appeal to the industrywide market using a competitive advantage based on low-cost. Differentiation = a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industrywide as unique and valued by customers. Focus = a firm’s generic strategy based on appeal to a narrow market segment within an industry. 4 Three Generic Strategies (3 of 3) Exhibit 5.2 Competitive Advantage and Business Performance Particulars Differentiation and Cost Differentiation Cost Differentiation and Focus Cost and Focus Stuck in the Middle Return on Investment (\%) 35.5 32.9 30.2 17.0 23.7 17.8 Sales growth (\%) 15.1 13.5 13.5 16.4 17.5 12.2 Gain in market share (\%) 5.3 5.3 5.5 6.1 6.3 4.4 Sample Size 123 160 100 141 86 105 ©McGraw-Hill Education. Both casual observation and research supports the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not. According to the above study, businesses combining multiple forms of competitive advantage (differentiation and overall cost leadership) outperformed businesses that used only a single form. The lowest performers were those that did not identify with any type of advantage. They were classified as “stuck in the middle.” 5 Overall Low-Cost Leadership (1 of 2) Overall cost leadership involves Aggressive construction of efficient scale facilities Vigorous pursuit of cost reductions from experience Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising ©McGraw-Hill Education. Overall cost leadership = a firm’s generic strategy based on appeal to the industrywide market using a competitive advantage based on low-cost. Cost leadership requires a tight set of interrelated tactics, including close scrutiny of the value chain. See Exhibit 5.3. 6 Overall Low-Cost Leadership (2 of 2) Cost leadership requires learning to lower costs through experience: the experience curve. With experience, unit costs of production processes decline as output increases. This strategy also requires competitive parity. Being “on par” with competitors with respect to low-cost, differentiation, or other strategic product characteristics Permits cost leaders to translate cost advantages directly into higher profits ©McGraw-Hill Education. Experience curve = the decline in unit costs of production as cumulative output increases. A business can learn to lower costs as it gains experience with production processes. Among the most common factors producing the experience curve are workers getting better at what they do, product designs being simplified as the product matures, and production processes being automated and streamlined. However experience curve gains will only be the foundation for a cost advantage if the firm knows the source of the cost reduction and can keep those gains proprietary. Competitive parity = a firm’s achievement of similarity or being “on par” with competitors with respect to low-cost, differentiation, or other strategic product characteristics. Competitive parity on the basis of differentiation permits the cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns. A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals. This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. However such a strategy may fail if the firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes. 7 Improving Competitive Position vis-à-vis the Five Forces: Cost Leadership An overall low-cost position Protects a firm against rivalry from competitors Protects the firm against powerful buyers Provides more flexibility to cope with demands from powerful suppliers who want to increase input costs Provides substantial entry barriers due to economies of scale and cost advantages Puts the firm in a favorable position with respect to substitute products ©McGraw-Hill Education. An overall low cost position enables the firm to achieve above average returns despite strong competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry. Buyers can exert power to drive down prices only to the level of the next most efficient producer because there are relatively few competitors that can provide a comparable cost/value proposition. Because the cost advantage can be applied across all operations, a low-cost position puts the firm in a favorable position with respect to substitute products introduced by new and existing competitors. 8 Pitfalls of Cost Leadership Too much focus on one or a few value chain activities Increase in the cost of the inputs on which the advantage is based Strategy can be too easily imitated A lack of parity on differentiation Reduced flexibility Obsolescence of the basis of a cost advantage ©McGraw-Hill Education. Firms need to pay attention to all activities in the value chain. Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions. Firms can also be vulnerable to price increases in the factors of production. A firm’s strategy may consist of value-creating activities that are easy to imitate. Firms striving to attain cost leadership advantages must obtain a level of parity on differentiation. Building a low-cost advantage often requires significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As result, firms often find that these investments limit their flexibility. As a result they have difficulty responding to changes in the environment. Ultimately, the foundation of the firm’s cost advantage may become obsolete. In these circumstances, other firms develop new ways of cutting costs, leaving the old cost-leaders at a significant disadvantage. See Cases: General Motors, & Ford. 9 Differentiation (1 of 2) A differentiation strategy can take many forms: Prestige or brand image Quality Technology Innovation Features Customer service Dealer network ©McGraw-Hill Education. Differentiation strategy = a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industrywide as unique and valued by customers. Firms may differentiate themselves in both primary and support activities (see Exhibit 5.4). Firms achieve and sustain differentiation advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique. 10 Differentiation (2 of 2) Differentiation requires: A level of cost parity relative to competitors Integration of multiple points along the value chain Superior material handling operations to minimize damage Low defect rates to improve quality Accurate and responsive order processing Personal relationships with key customers Rapid response to customer service requests Differentiation along several different dimensions at once ©McGraw-Hill Education. Firms achieve and sustain differentiation advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique, but a differentiator cannot ignore cost. Differentiators must reduce costs in all areas that do not affect differentiation. 11 Improving Competitive Position vis-à-vis the Five Forces: Differentiation An overall differentiation strategy Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power Reduces buyer power because buyers lack suitable alternatives Establishes customer loyalty and hence less threat from substitutes ©McGraw-Hill Education. Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs, therefore creating higher entry barriers and reducing the threat from substitutes. The resulting higher margins and lack of comparable alternatives avoids the need for a low-cost position. 12 Pitfalls of Differentiation Uniqueness that is not valuable Too much differentiation Too high a price premium Differentiation that is easily imitated Dilution of brand identification through product line extensions Perceptions of differentiation may vary between buyers and sellers ©McGraw-Hill Education. It’s not enough just to be different. A differentiation strategy must provide unique bundles of products and/or services that customers value highly. Firms may also strive for quality of service that is higher than customers desire, thus they become vulnerable to competitors who provide an appropriate level of quality at a lower price. In addition customers may desire the product but are repelled by the price premium. Differentiation advantages can be eroded through imitation. Firms may also erode their quality brand image by adding products or services with lower prices and less quality, thus confusing the customer. Companies must also realize that although they may perceive their products and services as differentiated, their customers may view them as commodities. 13 Focus (1 of 2) A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm selects a segment or group of segments (or niche) and tailors its strategy to serve them. A firm achieves competitive advantages by dedicating itself to these segments exclusively. ©McGraw-Hill Education. Focus strategy = a firm’s generic strategy based on appeal to a narrow market segment within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. 14 Focus (2 of 2) A focus strategy has two variants. Cost focus Creates a cost advantage in its target segment Exploits differences in cost behavior Differentiation focus Differentiates itself in its target market Exploits the special needs of buyers ©McGraw-Hill Education. A narrow focus by itself is not sufficient for above average performance. Firms must choose either a cost or a differentiation focus. But both variants of the focus strategy rely on providing better service than broad-based competitors who are trying to serve the focuser’s target segment. Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in other segments. See Strategy Spotlight 5.3 for the example of a luxury goods provider. 15 Improving Competitive Position vis-à-vis the Five Forces: Focus An overall focus strategy Creates higher entry barriers due to cost leadership or differentiation or both Can provide higher margins that enable the firm to deal with supplier power Reduces buyer power because the firm provides specialized products or services Focused niches less vulnerable to substitutes ©McGraw-Hill Education. Focus requires that a firm either have a low cost position with its strategic target, high differentiation, or both. These positions provide defenses against each competitive force because of higher margins or more specialized products or services. Focus is also used to select niches that are least vulnerable to substitutes or where competitors are weakest. 16 Pitfalls of Focus Erosion of cost advantages within the narrow segment Highly focused products and services still subject to competition from new entrants and from imitation Focusers too focused to satisfy buyer needs ©McGraw-Hill Education. The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. University of Phoenix is given as an example. Some firms adopting a focus strategy may enjoy temporary advantages because they select a small niche with few rivals. However, this strategy can be imitated. Finally, some firms attempting to attain advantages through a focus strategy may have too narrow a product or service. 17 Industry Life Cycle Stages (1 of 2) The industry life cycle Introduction Growth Maturity Decline Generic strategies, functional areas, value-creating activities, and overall objectives all vary over the course of an industry life cycle. ©McGraw-Hill Education. Industry life cycle = the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry. Managers must become even more aware of their firm’s strengths and weaknesses in many areas to attain competitive advantages. Factors such as generic strategies, market growth rate, intensity of competition, and overall objectives can change over the course of an industry life cycle. Managers must strive to emphasize the key functional areas during each of the four stages and to attain a level of parity in all functional areas and value-creating activities. Note: products and services go through many cycles of innovation and renewal. Typically, only fad products have a single lifecycle. Maturity stages of an industry can be transformed or followed by the stage of rapid growth if consumer tastes change, technological innovations take place, or new developments occur. 18 Industry Life Cycle Stages (2 of 2) Exhibit 5.6 Stages of the Industry Life Cycle Factor Introduction Growth Maturity Decline Generic strategies Differentiation Differentiation Differentiation Overall cost leadership Overall cost leadership Focus Market growth rate Low Very large Low to moderate Negative Number of segments Very few Some Many Few Intensity of competition Low Increasing Very intense Changing Emphasis on product design Very high High Low to moderate Low Emphasis on process design Low Low to moderate High Low Major functional area(s) of concern Research and development Sales and marketing Production General management and finance Overall objective Increase market awareness Create consumer demand Defend market share and extend product life cycles Consolidate, maintain, harvest, or exit ©McGraw-Hill Education. Industry life cycle = the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry. 19 Strategies in the Introduction Stage The introduction stage is when: Products are unfamiliar to consumers. Market segments are not well-defined. Product features are not clearly specified. Competition tends to be limited. Strategies: Develop a product and get users to try it. Generate exposure so the product becomes “standard.” ©McGraw-Hill Education. Introduction stage = the first stage of the industry life cycle, characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support. Since there are few players and not much growth, competition tends to be limited. Success requires an emphasis on research and development and marketing activities to enhance awareness. The challenge becomes one of developing the product and finding a way to get users to try it, and generating enough exposure so the product emerges as the “standard” by which all other rivals’ products are evaluated. There’s an advantage to being the “first mover” in a market. 20 Strategies in the Growth Stage The growth stage is: Characterized by strong increases in sales Attractive to potential competitors When firms can build brand recognition Strategies: Create branded differentiated products Stimulate selective demand Provide financial resources to support value-chain activities ©McGraw-Hill Education. Growth stage = the second stage of the product life cycle, characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development. In the growth stage, the primary key to success is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value chain activities such as marketing and sales, and research and development. Efforts in the growth stage are directed towards stimulating selective demand in which a firm’s products offerings are chosen instead of a rival’s. Revenues can increase at an accelerating rate because new consumers are trying the product and a growing proportion of satisfied consumers are making repeat purchases. 21 Strategies in the Maturity Stage The maturity stage is when: Aggregate industry demand slows Market becomes saturated, few new adopters Direct competition becomes predominant Marginal competitors begin to exit Strategies: Create efficient manufacturing operations Lower costs as customers become price-sensitive Adopt reverse or breakaway positioning ©McGraw-Hill Education. Maturity stage = the third stage of the product life cycle, characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations. As markets become saturated, there are few new adopters. Rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive. It also becomes more difficult for firms to differentiate their offerings because users have a greater understanding of products and services. Firms can affect consumers’ mental shifts through (A) reverse positioning = a break in industry tendency to continuously augment products, characteristics of the product life cycle, by offering products with fewer product attributes and lower prices; or (B) breakaway positioning = a break in industry tendency to incrementally improve products along specific dimensions, characteristic of the product life cycle, by offering products that are still in the industry but that are perceived by customers as being different. 22 Strategies in the Decline Stage The decline stage is when: Industry sales and profits begin to fall. Price competition increases. Industry consolidation occurs. Strategies: Maintaining the product position Harvesting profits and reducing costs Exiting the market Consolidating or acquiring surviving firms ©McGraw-Hill Education. Decline stage = the fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation. Firms must face up to the fundamental strategic choices of either exiting or staying and attempting to consolidate their position in the industry. In the decline stage, a firm’s strategic options become dependent on the actions of rivals. If many competitors leave the market, sales and profit opportunities increase. On the other hand, prospects are limited if all competitors remain. Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market. A harvesting strategy = a strategy of bringing as much profit as possible out of the business in the short to medium term by reducing costs. Exiting the market involves dropping the product from the firm’s portfolio. A consolidation strategy = a firm’s acquiring or merging with other firms in an industry in order to enhance market power and gain valuable assets. Firms can also resurrect old technologies by retreating to more defensible ground, using the new to improve the old, or improving the price-performance trade-off. 23