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Business Strategy
0Chapter Summary
This chapter examines how managers in businesses that have a single or dominant product or
service evaluate and choose their company’s strategy. The two critical areas deserve their
attention: (1) their business’s value chain, and (2) the appropriateness of 12 different grand
strategies based on matching environmental factors with internal capabilities.
0Learning Objectives
0Lecture Outline
I0. Introduction
A0. Strategic analysis and choice continue to form the phase of the strategic management
process in which business managers examine and choose a business strategy that
allows their business to maintain or create a sustainable competitive advantage.
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10. Their starting point is to evaluate and determine which competitive advantages
provide the basis for distinguishing the firm in the customer’s mind from other
reasonable alternatives.
2. Businesses with a dominant product or service line must also choose among
alternate grand strategies to guide the firm’s activities, particularly when they
are trying to decide about broadening the scope of the firm’s activities beyond
its core business.
A. Business managers evaluate and choose strategies that they think will make their
business successful. Businesses become successful because they possess some
advantage relative to their competitors.
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4. The studies mentioned here, and the experience of many other businesses,
indicate that the highest profitability levels are found in businesses that
possess both types of competitive advantage at the same time.
2. Low-cost activities that are sustainable and that provide one or more of these
advantages relative to key industry forces should become a key basis for the
business’s competitive strategy.
(1) When key competitors cannot match prices from the low-cost
leader, customers pressuring the leader risk establishing a price
level that drives alternate sources out of business.
b) Truly sustained low-cost advantages may push rivals into other areas
(1) Intense, continued price competition may be ruinous for all rivals,
as seen occasionally in the airline industry.
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c) New entrants competing on price must face an entrenched cost leader
without the experience to replicate every cost advantage
(1) Firms that emphasize lowest price and can offer it via cost
advantages where product differentiation is increasingly not
considered must truly be convinced of the sustainability of those
advantages.
(2) Particularly with commodity-type products, the low-cost leader
seeking to sustain a margin superior to lesser rivals may encounter
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increasing customer pressure for lower prices with great damage to
both leader and lesser players.
(1) Intense cost scrutiny can build margin, but it can reduce
opportunities for or investment in innovation, processes, and
products.
(2) Similarly, such scrutiny can lead to the use of inferior raw
materials, processes, or activities that were previously viewed by
customers as a key attribute of the original products.
3. Once business managers have evaluated the cost structure of their value
chain, determined activities that provide competitive cost advantages, and
considered their inherent risks, they start choosing the business’s strategy.
Those managers concerned with differentiation-based strategies, or those
seeking optimum performance incorporating both sources of competitive
advantage, move to evaluate their business’s sources of differentiation.
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(b) The sustainability of that differentiation will depend on two
things: a continuation of its high perceived value to buyers
and a lack of imitation by competitors.
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1. Speed-based strategies, or rapid response to customer requests or market and
technological changes, have become a major source of competitive advantage
for numerous firms in today’s intensely competitive global economy.
a) Customer responsiveness
(1) Like development time, companies that can rapidly adapt their
products or services and do so in a way that benefits their
customers or creates new customers have a major competitive
advantage over rivals that cannot do this.
(1) 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 responsiveness.
(1) Speed in sharing information that becomes the basis for decisions,
actions, or other important activities taken by a customer, supplier,
or partner has become a major source of competitive advantage for
many businesses.
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(2) Telecommunications, the Internet, and networks are but a part of a
vast infrastructure that is being used by knowledgeable managers to
rebuild or create value in their businesses via information sharing.
1. Small companies, at least the better ones, usually thrive because they serve
narrow market niches.
2. Market focus allows some businesses to compete on the basis of low cost,
differentiation, and rapid response against much larger businesses with
greater resources.
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b) Low costs can also be achieved, filling niche needs in a buyer’s
operations that larger rivals either do not want to bother with or cannot
do as cost effectively.
c) Cost advantage often centers around the high level of customized service
the focused, smaller business can provide.
d) And perhaps the greatest competitive weapon that can arise is rapid
response.
e) With enhanced knowledge of its customers and intricacies of their
operations, the small, focused company builds up organizational
knowledge about timing-sensitive ways to work with a customer.
f) Often the needs of that narrow set of customers represent a large part of
the small, focused business’s revenues.
g) Exhibit 8.6, Top Strategist, illustrates how Ireland’s Ryanair has
become the European leader in discount air travel via the focused
application of low cost, differentiation, and speed.
3. The risk of focus is that you attract major competitors who have waited for
your business to “prove” the market.
a) Domino’s proved that a huge market for pizza delivery existed and now
faces serious challenges.
b) Likewise, publicly traded companies built around focus strategies
become takeover targets for large firms seeking to fill out a product
portfolio.
c) And perhaps the greatest risk of all is slipping into the illusion that it is
focus itself, and not some special form of low cost, differentiation, or
rapid response, that is creating the business’s success.
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typical functional capabilities that are often associated with business
success at each of these stages.
(1) Emerging industries of the last decade have been the Internet
browser, fiber optics, solar heating, cellular telephone, and online
service industries.
(1) Technologies that are most proprietary to the pioneering firms and
technological uncertainty about how product standardization will
unfold.
(2) Competitor uncertainty because of inadequate information about
competitors, buyers, and the timing of demand.
(3) High initial costs but steep cost declines as the experience curve
takes effect.
(4) Few entry barriers, which often spurs the formation of many new
firms.
(5) First-time buyers requiring initial inducement to purchase and
customers confused by the availability of a number of nonstandard
products.
(6) Inability to obtain raw materials and components until suppliers
gear up to meet the industry’s needs.
(7) Need for high-risk capital because of the industry’s uncertainty
prospects.
(1) The ability to shape the industry’s structure based on the timing of
entry, reputation, success in related industries or technologies, and
role in industry associations.
(2) The ability to rapidly improve product quality and performance
features.
(3) Advantageous relationships with key suppliers and promising
distribution channels.
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(4) The ability to establish the firm’s technology as the dominant one
before technological uncertainty decreases.
(5) The early acquisition of a core group of loyal customers and then
the expansion of that customer base through model changes,
alternative pricing, and advertising.
(6) The ability to forecast future competitors and the strategies they
are likely to employ.
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(1) This “transition to maturity” is accompanied by several changes in
its competitive environment:
(1) First, they must make a clear choice among the three generic
strategies and avoid a middle-ground approach, which would
confuse both knowledgeable buyers and the firm’s personnel.
(2) Second, they must avoid sacrificing market share too quickly for
short-term profit.
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(3) Finally, they must avoid waiting too long to respond to price
reductions, retaining unneeded excess capacity, engaging in
sporadic or irrational efforts to boost sales, and placing their hopes
on “new” products, rather than aggressively selling existing
products.
a) Declining industries are those that make products or services for which
demand is growing slower than demand in the economy as a whole or is
actually declining.
(1) Focus on segments within the industry that offer a chance for
higher growth or a higher return.
(2) Emphasize product innovation and quality improvement, where this
can be done cost effectively, to differentiate the firm from rivals
and to spur growth.
(3) Emphasize production and distribution efficiency by streamlining
production, closing marginal production facilities and costly
distribution outlets, and adding effective new facilities and outlets.
(4) Gradually harvest the business—generate cash by cutting down on
maintenance, reducing models, and shrinking channels and make
no new investment.
c) Strategists who incorporate one or more of these themes into the strategy
of their business can anticipate relative success, particularly where the
industry’s decline is slow and smooth and some profitable niches
remain.
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a) Fragmented industries are characterized by a need for intense local
coordination, a local management orientation, high personal service, and
local autonomy.
b) Recently, however, successful firms in such industries have introduced a
high degree of professionalism into the operations of local managers.
3. “Formula” facilities
5. Specialization
a) Focus strategies that creatively segment the market can enable firms to
cope with fragmentation. Specialization can be pursued by:
(1) Product type. The firm builds expertise focusing on a narrow range
of products or services.
(2) Customer type. The firm becomes intimately familiar with and
serves the needs of a narrow customer segment.
(3) Type of order. The firm handles only certain kinds of orders, such
as small orders, custom orders, or quick turnaround orders.
(4) Geographic area. The firm blankets or concentrates on a single
area.
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a) A global industry is one that comprises firms whose competitive
positions in major geographic or national markets are fundamentally
affected by their overall global competitive positions.
b) To avoid strategic disadvantages, firms in the global industries are
virtually required to compete on a worldwide basis.
3. These unique features and the global competition of global industries require
that two fundamental components be addressed in the business strategy: (1)
the approach used to gain global market coverage and (2) the generic
competitive strategy.
4. Three basic options can be sued to pursue global market coverage:
5. Along with the market coverage decision, strategists must scrutinize the
condition of the global industry features identified earlier to choose among
four generic global competitive strategies:
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IV. Dominant Product/Service Businesses: Evaluating and Choosing to Diversify to Build
Value
A. Many dominant product businesses face the question of whether to focus its core
business using the grand strategies of concentration, market development, and
product development or to diversify into related businesses and vertical integration
as the best grand strategy to build long-term value.
1. One valuable guide to the selection of a promising grand strategy is called the
Grand strategy selection matrix shown in Exhibit 8.8.
a) The basic idea underlying the matrix is that two variable s are or central
concern in the selection process: (1) the principal purpose of the grand
strategy and (2) the choice of an internal or external emphasis for
growth or profitability.
a) Now, most experts agree that strategy selection is better guided by the
conditions of the planning period and by the company strengths and
weaknesses.
b) It should be noted, however, that even the early approaches to strategy
selection sought to match a concern over internal versus external growth
with a desire to overcome weaknesses or maximize strengths.
a) A firm in quadrant I, with “all its eggs in one basket,” often views itself
as over-committed to a particular business with limited growth
opportunities or high risks.
b) One reasonable solution is vertical integration, which enables the firm
to reduce risk by reducing uncertainty about inputs or access to
customers.
c) Another is conglomerate diversification, which provides a profitable
investment alternative with diverting management attention from the
original business.
d) However, the external approaches to overcoming weaknesses usually
result in the most costly grand strategies.
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e) Acquiring a second business demands large investments of time and
sizable financial resources.
f) Thus, strategic managers considering these approaches must guard
against exchanging one set of weaknesses for another.
5. A common business adage states that a firm should build from strength.
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d) Product development also may be based on technological or other
competitive advantages.
e) The final alternative for quadrant III firms is innovation.
f) When the firm’s strengths are in creative product design or unique
production technologies, sales can be stimulated by accelerating
perceived obsolescence.
g) This is the principle underlying the innovative grand strategy.
a) Because the original and newly acquired businesses are related, the
distinctive competencies of the diversifying firm are likely to facilitate a
smooth, synergistic, and profitable expansion.
a) The figure is based on the idea that the situation of a business is defined
in terms of the growth rate of the general market and the firm’s
competitive position in that market.
b) When these factors are considered simultaneously, a business can be
broadly categorized in one of four quadrants:
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c) Each of these quadrants suggests a set of promising possibilities for the
selection of a grand strategy.
a) If a firm has competed long enough to accurately assess the merits of its
current grand strategy, it must determine (1) why that strategy is
ineffectual and (2) whether it is capable of competing effectively.
b) Depending on the answers to these questions, the firm should choose
one of four grand strategy options: formulation or reformulation of a
concentrated growth strategy, horizontal integration, divestiture, or
liquidation.
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5. Strategic managers tend to resist divestiture because it is likely to jeopardize
their control of the firm and perhaps even their jobs.
1. The grand strategy selection matrix and model of grand strategy clusters are
useful tools to help dominant product company managers evaluate and narrow
their choices among alternative grand strategies.
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a) When considering grand strategies that would broaden the scope of their
company’s business activities through integration, diversification, or
joint venture strategies, managers must examine whether opportunities
to build value are present.
b) Opportunities to build value via diversification, integration, or joint
venture strategies are usually found in market-related, operating-related,
and management activities.
c) 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.
d) Major opportunities for sharing and value building as well as ways to
capitalize on core competencies are outlined in the next chapter, which
covers strategic analysis and choice in diversified companies.
1. What are three activities or capabilities a firm should possess to support a low-cost
leadership strategy? Use Exhibit 8.2 to help you answer this question. Can you give an
example of a company that has done this?
Exhibit 8.2 on page 236 portrays the organizational capabilities, the skills, and the value
chain to support a cost leadership strategy. Key skills include: process engineering
skills, low-cost distribution system, products or service designed for ease of
manufacture or delivery. A good use of these skills is seen at Southwest Airlines. It
keeps its operations simple and is highly efficient at execution.
From Exhibit 8.3 (page 238), it is clear that to support a differentiation strategy an
organization should possess skills such as strong marketing capabilities, product
engineering, strong capabilities in basic research, etc. Rolex (watches) is a good
example to use in this context.
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3. What are three ways a firm can incorporate the advantage of speed in its business? Use
Exhibit 8.4 to help you answer this question. Can you give an example of a company
that has done this?
To support speed as the basis for competitive advantage, qualities that a firm must
possess include (page 241) process engineering skills, high levels of automation,
flexible manufacturing capabilities, etc. Dell Computers excels in the area of speed in
customer service.
A firm that has multiple advantages (cost and differentiation and speed, for example) is
obviously better off than one that has a single source of advantage. However, in looking
at Exhibits 8.2, 8.3, and 8.4, it is clear that the skills required to support each strategy
are quite different. It may be difficult for a firm to compete on all three.
5. How does market focus help a business create competitive advantage? What risks
accompany such a posture?
Companies that use a market focus strategy identify underserved niches and compete in
those niches on cost, differentiation, or speed. In their selected niche, such companies
appeal to customers because their products are better suited for their target market.
The risk of this strategy is that such a company attracts major competitors once the
niche becomes large enough to be profitable. Second, companies using this strategy may
think that their job is done once they identify their niche. It is wrong because the
company has to come up with a way to compete in that niche.
6. Using Exhibits 8.8 and 8.9, describe situations or conditions under which horizontal
integration and concentric diversification would be preferred strategic choices.
According to Exhibit 8.8 (page 252), the strategies of horizontal integration and
concentric diversification make sense when the firm wants to maximize its strengths and
seeks an external solution to this. Thus, a firm may have a strong distribution network
(e.g. Coca-Cola) and leverages this by buying another company in the same industry
that could benefit from its distribution network.
Similarly, according to Exhibit 8.9 (page 254), horizontal integration makes sense when
the firm finds itself in a weak competitive position in a rapidly growing market. The
company would choose concentric diversification when it is in a weak competitive
position and the market is growing slowly.
Case Summary
This case considers recent U.S.-market-entrant DHL, the delivery and logistics company set
to rival FedEx and UPS. The company (and its parent) is based in Germany, and its European
and Asian market shares are strong at 40 percent in each region. Their aggressive ad
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campaigns attack FedEx and UPS head-on, and their goals are realistic rather than lofty. For
instance, they strive to break even next year in 2006, anticipate a low ROI (4%) for the next
few years, but are trying to achieve 12 percent market share in five years’ time. DHL is
seeking to build its presence by expanding its trucking routes, creating air hubs, and
advertising heavily to raise awareness of its brand in the U.S. DHL is heavily investing in the
U.S. business, and can afford its losses the first few years to improve infrastructure. Right
now, its trucking network in some places is lacking, though its air transport infrastructure is
in good shape. The company is focusing on midmarket and smaller businesses by offering
more personal services—face-to-face meetings with a DHL rep are typical. This winning
service can be crucial for some customers.
Analysts and investors are raising substantial doubts about whether DHL can be a viable No.
3 in the U.S. Right now, UPS and FedEx retain 78 percent of the U.S. market. Right now,
ground transport is DHL’s weakest link. But high fuel costs have shifted the parcel market in
the U.S. from air to ground. As Zumwinkel, DHL CEO, says, “it would be very tough for
[DHL] to hold onto [their] No. 1 position in Europe and Asia” without an efficient pickup
and delivery system in the U.S. The company specialized in integration—with over 100
companies integrated through acquisitions. Zumwinkel is assuredly optimistic about the
firm’s profit potential in the U.S., in its ability to establish its ground network in the U.S.,
and the company’s ability to deal with the “simple” realities of the international express
“game.” Because the U.S. is the largest economy in the world, DHL must compete there to be
competitive elsewhere. Globalization, he says, will strengthen and help give DHL the market
it needs.
• Distinguish market focus from other generic strategies. Please refer to the section titled
“Evaluating Market Focus as a Way to Competitive Advantage” on pages 242-245.
• Classify industries according to their evolution and the strategic choices that accompany
those industry settings. Please refer to the section titled “Stages of Industry Evolution and
Business Strategy Choices” on pages 245-250.
1. What aspects of DHL’s strategy for entering the United States reflect a low-cost
strategy? A differentiation strategy?
The section in the text titled “Evaluating Cost Leadership Opportunities” (pages 234-
242) will help with this discussion, and identifies ways to achieve low-cost advantages
and how to evaluate differentiation advantages as well. Right now, DHL is a new
entrant into the U.S. market, but it does have significant market shares in both Europe
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and Asia as the dominant provider of its logistics/delivery services in those regions.
DHL’s skills and resources that foster cost leadership include:
• Sustained capital investment and access to more capital from its parent company
• Excellent integration skills and an ability to effectively pursue acquisitions for
expansion
• Tried and proven logistics systems
• Structure within the organization—for one, the company is trying to improve its
services by “hiring the right people” in the first place
• The organization has some quantitative measures of success
20. Are there any aspects that appear to reflect a focus strategy?
Right now, DHL is just trying to get established as a viable carrier in the U.S. markets.
It is focusing on a small market share, but trying to grow that market share as well as it
can. DHL is serving the niche that others have not or do not want to. For instance, it is
willing to send drivers to more remote areas to deliver and pick up packages or provide
logistics services. Right now, the firm is applying elements of the differentiation and
low-cost approaches in combination form to serve a more narrow market niche. While
this is not necessarily its long-term aim (it wants to serve this niche and serve the
broader market), it is part of the current approach.
The company has a corporate reputation in international markets for quality and
leadership. The company is flexible, and has strong financial backing from its parent
company. Its customer service personnel are good at meeting face to face with
customers to provide service and arrange logistics, instead of doing everything online or
via telecommunications options. For more, refer to Exhibit 8.4, “Evaluating a
Business’s Rapid Response (Speed) Opportunities,” on page 241.
4. What appear to be DHL’s most important competitive advantages? Are they best suited
to a mature industry or a growth industry? Which way would you characterize the U.S.
parcel market and the global parcel market?
Right now, DHL’s most important competitive advantages appear to be their strength in
logistics and resources in the airborne parcel market, their strong management
background and success in other international markets, and their willingness to focus on
service for all clients—not just big name companies. Because of globalization and the
substantial increases in demand to make deliveries across international borders around
the world, the global parcel market can be considered a growth industry. DHL’s
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strategic strengths in this market include the ability to establish strong brand
recognition, the ability to scale up to meet demand with its strong capital resources, an
ability to differentiate the firm’s services, and its strong marketing skills. (Refer to
“Competitive Advantages and Strategic Choices in Growing Industries,” page 248.)
The U.S. parcel market is more evolved and is undergoing what is cited in the text as the
“transition to maturity” (page 248). Some growth remains in niche markets that are not
served by either of the big two providers: UPS and FedEx. DHL has identified the
underserved niche and included those individuals and businesses in its marketing
approach. DHL is establishing itself through marketing as a known alternative in the
U.S. market, and is trying to differentiate itself from the domestic carriers as the viable
alternative for domestic and international shipping needs. In this industry, the
company’s horizontal integration skills and international expansion strategies support
the firm’s success.
5. What appears to be the likelihood that DHL will succeed? What key factors will
determine that?
DHL will likely succeed because of several reasons and resources. First, the company
has significant support and resources from its parent company and the strong
management skills of those directing the company. Second, it is very successful—
dominant even—in the two largest international economies after the U.S.—Europe and
Asia. DHL plans to invest heavily in the U.S. and realizes that it must make a long-term
commitment to establishing itself despite the higher costs to penetrate this market in the
face of strong incumbents. Its success will hinge on commitment of financial resources
and the ability to reshape its HR function to hire the “right people” to provide customer
service.
6. DHL comes to you for advice on whether they should continue a global focus on parcels
and express mail or diversify their business activities into other types of businesses.
What would you advise and why?
Because the global parcel and express mail industry offers growth, and because it has
the financial and managerial resources to commit to establishing success in the U.S.
market, DHL should continue its global focus. Because the company is so skilled at
horizontal integration, it should stay within this market focus. The company is not
specialized at other forms of diversification, and their management focus should remain
on the current “U.S. problem” rather than diverting management’s attention to new
business endeavors.
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