MGMT 449 Exam #2
Terms in this set (51)
LO: What distinguishes each of the five generic strategies and why some of these strategies work better in certain kinds of competitive conditions than in others.
Deciding which of the five generic competitive strategies to employ - overall low cost, broad differentiation, focused low cost, focused differentiation, or best cost - is perhaps the most important strategic actions a company undertakes and sets the whole tone for pursuing a competitive advantage over rivals.
LO: The major avenues for achieving a competitive advantage based on lower costs.
In employing a low-cost provider strategy and trying to achieve a low-cost advantage over rivals, a company must do better job than rivals of cost-effectively managing value chain activities and/or it must find innovative ways to eliminate cost-producing activities. An effective use of cost drivers is key. Low-cost provider strategies work particularly well when price competition is strong and the products of rival sellers are virtually identical, when there are not many ways to differentiate, when buyers are price-sensitive or have the power to bargain down prices, when buyer switching costs are low, and when industry newcomers are likely to use a low introductory price to build market share.
LO: The major avenues to a competitive advantage based on differentiating a company's product or service offering from the offerings of rivals.
Broad differentiation strategies seek to produce a competitive edge by incorporating attributes that set a company's product or service offering apart from rivals in ways that buyers consider valuable and worth paying for. This depends on the appropriate use of value drivers. Successful differentiation allows a firm to (1) command a premium price for its product, (2) increase unit sales (if additional buyers are won over by the differentiating features), and/or (3) gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products). Differentiation strategies work best when buyers have diverse product preferences, when a few other rivals are pursuing a similar differentiation approach, and when technological change is fast-paced and competition centers on rapidly evolving product features. A differentiation strategy is doomed when competitors are able to quickly copy the appealing product attributes, when a company's differentiation efforts fail to interest many buyers, and when a company overspends on efforts to differentiate its product offering or tries to overcharge for its differentiating extras.
LO: The attributes of a best-cost provider strategy - a hybrid of low-cost provider and differentiation strategies.
A focused strategy delivers competitive advantage either by achieving lower costs than rivals in serving buyers constituting the target market niche or by developing a specialized ability to offer niche buyers an appealingly differentiated offering that meets their needs better than rival brands do. A focused strategy based on either low cost or differentiation become increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential when it is costly or difficult for multi-segment competitors to meet the specialized needs of the target market niche and at the same time satisfy their mainstream customers' expectations, when there are one or more niches that present a good match for a focuser's resources and capabilities, and when few other rivals are attempting to specialize in the same target segment.
A factor that has strong influence on a company's costs.
Essence of this strategy is to offer unique product attributes that a wide range of buyers find appealing and worth paying for.
Best Cost Provider
A hybrid of low-cost provider and differentiation strategies that aims to produce more desirable attributes (quality, features, performance, service) while beating rivals on price.
A factor that can have a strong differentiating effect.
Aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors.
Basis for competitive advantage is lower overall costs than competitors. Successful low-cost leaders, who have the lowest industry costs, are exceptionally good at finding ways to drive costs out of their businesses and still provide a product or service that buyers find acceptable.
Involves offering superior products or services designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers.
LO: Whether and when to pursue offensive or defensive strategic moves to improve a company's market position.
Once a company has settled on which of the five generic competitive strategies to employ, attention turns to how strategic choices regarding (1) competitive actions, (2) timing of those actions, and (3) scope of operations can complement its competitive approach and maximize the power of its overall strategy.
LO: When being a first mover or fast follower or a later mover is most advantageous.
Strategic offensives should, as a general rule, be grounded in a company's strategic assets and employ a company's strengths to attack rivals in the competitive areas where they are weakest.
LO: The advantages and disadvantages of extending the company's scope of pertains via vertical integration.
The purposes of defensive strategies are to lower the risk of being attacked, weaken the impact of any attack that occurs, and influence challengers to aim their efforts at other rivals. Defensive strategies to protect a company's position usually take one of two forms: (1) actions to block challengers or (2) actions to signal the likelihood of strong retaliation.
LO: The strategic benefits and risks of expanding a company's horizontal scope through mergers and acquisitions.
Companies have a number of offensive strategy options for improving their market positions: using a cost-based advantage to attack competitors on the basis of price or value, leapfrogging competitors with next-generation technologies, pursuing continuous product innovation, adopting and improving the best ideas of others, using hit-and-run tactics to steal sales away from unsuspecting rivals, and launching preemptive strikes. A blue-ocean type of offensive strategy seeks to gain a dramatic new competitive advantage by inventing a new industry or distinctive market segment that renders existing competitors largely irrelevant and allows a company to create and capture altogether new demand.
Offers growth in revenues and profits by discovering or inventing new industry segments that create altogether new demand.
* When pioneering is more costly than imitating and offers negligible experience or learning-curve benefits.
* When the products of an innovator are somewhat primitive and do not live up to buyer expectations.
* When rapid market evolution allows fast followers to leapfrog a first mover's products with more attractive next-version products.
* When market uncertainties make it difficult to ascertain what will eventually succeed.
*When customer loyalty is low and first mover's skills, know-how, and actions are easily copied or surpassed.
The extent to which a firm's internal activities encompass the range of activities that make up an industry's entire value chain system, from raw-material production to final sales and service activities.
Involves entry into value chain system activities closer to the end user.
* When pioneering helps build a firm's reputation and creates strong brand loyalty.
* When a first mover's customers will thereafter face significant switching costs.
* When a property rights protections thwart rapid imitation of the initial move.
*When an early lead enables movement down the learning curve ahead of rivals.
* When a first mover can set the technical standard for the industry.
Scope of the Firm
Refers to the range of activities that the firm performs internally, the breadth of its product and service offerings, the extent of its geographic market presence, and its mix of businesses.
A firm that performs value chain activities along more than one stage of an industry's value chain system.
Involves contracting out certain value chain activities that are normally performed in-house to outside vendors.
A company that is quick to follow first movers.
The range of product and service segments that a firm serves within its focal market.
Involves entry into activities previously performed by suppliers or other enterprises positioned along earlier stages of the industry value chain system;
A formal agreement between two or more separate companies in which they agree to work cooperatively toward some common objective.
LO: The primary reasons companies choose to compete in international markets.
Competing in international markets allows a company to (1) gain access to new customers, (2) achieve lower costs through greater economies of scale, learning and increased purchasing power, (3) gain access to low-cost inputs of production, (4) further exploit its core competencies, and (5) gain access to resources and capabilities located outside the company's domestic market.
LO: How and why differing market conditions across countries influence a company's strategy choices in international markets.
Strategy making is more complex for five reasons: (1) Different countries have home-country advantages in different industries; (2) there are location-based advantages to performing different value chain activities in different parts of the world; (3) varying political and economic risks make the business climate of some countries more favorable than others; (4) companies face the risk of adverse shifts in exchange rates when operating in foreign countries; and (5) differences in buyer tastes and preferences present a conundrum concerning the trade-off between customizing and standardizing products and services.
LO: The three main strategic approaches for competing internationally.
There are five strategic options for entering foreign markets. These include maintaining a home-country production base and exporting goods to foreign markets, licensing foreign firms to produce and distribute the company's products abroad, employing a franchising strategy, establishing a foreign subsidiary via an acquisition or greenfield venture, and using strategic alliances or other collaborative partnerships.
LO: The five major strategic options for entering foreign markets.
The strategies of firms that expand internationally are usually ground in home-country advantages concerning demand conditions, factor conditions, related and supporting industries, and firm strategy, structure, and rivalry, as described by the Diamond of National Competitive Advantage framework.
Diamond of National Competitive Advantage
- Demand Conditions: Home-market size and growth rate; buyers' tastes
- Firm Strategy, Structure, and Rivalry: Different styles of management and organization; degree of local rivalry
- Factor Conditions: Availability and relative prices of inputs (e.g., labor, materials)
- Related and Supporting Industries: Proximity of suppliers, end users, and complementary industries
Stem from instability or weakness in national governments and hostility to foreign business.
Stem from the stability of a country's monetary system, economic and regulatory policies, and the lack of property rights protections.
A subsidiary business that is established by setting up the entire operation from the ground up.
One in which a company employs the same basic competitive approach in all countries where it operates, sells standardized products globally, strives to build global brands, and coordinates its actions worldwide with strong headquarters control. It represents a think-global, act-global approach.
A think-global, act-local approach that incorporates elements of both multidomestic and global strategies.
One in which a company varies its product offering and competitive approach from country to country in an effort to be responsive to differing buyer preferences and market conditions. It is a think-local, act-local type of international strategy, facilitated by decision making decentralized to the local level.
LO: When and how business diversification can enhance shareholder value.
The purpose of diversification is to build shareholder value. Diversification builds shareholder value when a diversified group of businesses can perform better under the auspices of a single corporate parent than they would as independent, stand-alone businesses - the goal is to achieve not just a 1 + 1 = 2 result but, rather, to realize important 1 + 1 = 3 performance benefits. Whether getting into a new business has the potential to enhance shareholder value hinges on whether a company's entry into that business can pass the three tests of corporate advantage: the industry-attractiveness test, the cost of entry test, and the better-off test.
LO: The merits and risks of unrelated diversification strategies.
There are two fundamental approaches to diversification - into related businesses and into unrelated businesses. The rational for related diversification is to benefit from strategic fit: Diversify into businesses with commonalities across their respective value chains, and then capitalize on the strategic fit by sharing or transferring the resources and capabilities across matching value chain activities to gain competitive advantages.
LO: The analytical tools for evaluating a company's diversification strategy.
Unrelated diversification strategies surrender the competitive advantage potential of strategic fit at the value chain level in return for the potential that can be realized from superior corporate parenting or the sharing and transfer of general resources and capabilities. An outstanding corporate parent can benefit its businesses through (1) providing high-level oversight and making available other corporate resources, (2) allocating financial resources across the business portfolio, and (3) restructuring underperforming acquisitions.
LO: What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance.
Related diversification provides a stronger foundation for creating shareholder value than does unrelated diversification, since the specialized resources and capabilities that are leverage in related diversification tend to be more valuable competitive assets than the general resources and capabilities underlying unrelated diversification, which in most cases are relatively common and easier to imitate.
Tests of Corporate Advantage
To add shareholder value, a move to diversify into a new business must pass three tests:
1. The Industry Attractiveness Test
2. The Cost of Entry Test
3. The Better-off Test
Creating added value for shareholders via diversification requires building a multibusiness company in which the whole is greater than the sum of its parts - such 1 + 1 = 3 effects are known as this.
Otherwise known as control premium. The amount by which the price offered exceeds the pre-acquisition market value of the target company.
The costs of completing a business agreement or deal, over and above the price of the deal. They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction.
Related & Unrelated Businesses
Related possess competitively valuable cross-business value chain and resource commonalities. Unrelated have dissimilar value chains and resource requirements, with no competitively important cross-business commonalities at the value chain level.
Exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.
Economies of Scope
Cost reductions that flow from operating in multiple businesses (a larger scope of operation). This is in contrast to economies of scale, which accrue from a larger-sized operation.
Refers to the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of general resources and capabilities such as long-term planning systems, business development skills, management development processes, and incentive systems.
A corporate brand name that can be applied to a wide assortment of business types. As such, it is a type of general resource that can be leveraged in unrelated diversification.