Chapter 7 Business Unit Strategy Strategy : A View From the Top

1. Chapter 7Business Unit Strategy Strategy: A View From the Top Kelly Bredensteiner Christine Cox Caitlin Greenwood Michele Haynes

2. Business Unit Strategy • To forecast the relative effectiveness of a strategy a company must analyze the industry characteristics in which it will be competing • First, we look at 3 contexts that relate to the evolutionary stages of an industry: emerging, growth, and mature and declining • Next, we discuss 3 industry environments that pose strategic challenges: fragmented, deregulating, and hypercompetitive

3. Strategy in Emerging Industries • New industries provide new opportunities: • Technologies are typically immature meaning competitors will try to improve existing designs and processes or leapfrog them altogether with next generation technology • Costs are typically high, entry barriers are low, supplier relationships are underdeveloped and distribution channels are just emerging • Timing can be crucial in determining success: • First mover advantage • opportunity to shape customer expectations and set the competitive rules of the game • Exercising leadership can be an effective way to reduce risk: • Ability to control product and process development through superior technology, quality, or customer knowledge • Ability to leverage existing relationships with suppliers and distributors • Ability to leverage access to a core group of customers

4. Strategy in Growth Industries • Growth presents several challenges: • Competitors tend to focus on expanding their market shares • Cost control becomes an important element of strategy as unit margins shrink and new products and applications are harder to find • International markets must be considered as globalization of competition continues to arise • During the early growth stage, companies tend to add more products, models, and sizes to appeal an increasingly segmented market • Toward the end of the growth phase cost considerations become the priority • Process innovation and redefinitions of supplier and distributor relations become important dimensions of cost control • Finally, horizontal integration becomes attractive as a way of increasing a firm’s international presence or consolidating a company’s market position • New companies that enter the market during the final stages of growth are known as followers • Benefits: • Opportunity to evaluate alternative technologies • Delay investment in risky projects • Initiate superior product and technology offerings

5. New Entrants in Growing Industries • Must decide to enter into a market through internal development or acquisition • Two major issues must be analyzed as part of the decision process to enter a market: • What are the structural barriers to entry? • Structural barriers may include the level of investment required, access to production or distribution facilities, and threat of overcapacity • How will incumbent firms react? • Retaliation of competitors is lower in industries where growth is low, products are highly differentiated, and fixed costs are high • New entrants should focus on industries where the reaction may be slow in which the firm can influence the industry structure, and where the benefits of entry exceed the costs

6. Strategy in Mature and Declining Industries • Important issues as maturity sets in and threat declines: • Choosing a balance between differentiation and low cost postures • Deciding whether to compete in multiple or single industry segments • Firms earn profits during the long maturity stage of an industries growth if: • Concentrate on segments that offer chances for higher growth or higher return • Manage product and process innovation aimed at further differentiation, cost reduction, or rejuvenating segment growth • Streamline production and delivery to cut costs • Gradually “harvest” the business in preparation for a strategic shift to better product or industries

7. Industry Evolution and Functional Priorities • Early development of a product usually entails: • Slow growth in sales • Major R&D • Rapid technological change in the product • Operating losses • Need for slack to support temporarily unprofitable operations • Factors of success : • Technical skills • Being 1st in new markets • Marketing advantage that creates widespread awareness • Rapid growth • Brings more competitors • Factors of success: • Brand awareness • Product differentiation • Financial resources support: • Heavy marketing expenses • Price competition

8. Industry Evolution and Functional Priorities Continued • Maturity Stage • Sales growth continues but at a decreasing rate • # of industry segments increases, but change in product design slows • Result: competition becomes more intense and promotional and pricing advantages become key strengths • Decline Stage • Strengths center on: • Cost advantages • Superior supplier relationships • Customer relationships • Financial control • Competitive advantage can exist if a firm serves gradually shrinking markets that competitors choose to leave

9. Strategy in Fragmented Industries • Fragmented industries are those in which no single company or small group of firms has a large enough market share to strongly affect industry structure or outcomes • Includes: retail sectors, distribution businesses, professional services, and small manufacturing • Most prevalent when: • Entry/exit barriers are low • Few economies of scale • Cost structures unattractive • Products and services highly diverse • Fragmented markets require creative strategies • Example: 1971 H. Wayne Huizinga took Waste Management Corporation Public • Hundreds of “mom and pop” garbage companies acquired through stock • Gained capitalization of $5 million, and after Huizinga’s departure in 1984 market value was $3 billion

10. Strategy in Deregulating Industries • 1975 Securities and Exchange Commissions abolished fixed rates for U.S. securities brokers • Airlines, trucking, railroads, banking, and telecommunications followed • The pattern that followed was as such • Large # of new entrants, most failing quickly • Industry profitability decreased rapidly • Pattern of segment profitability altered • Variance in profitability • Two waves - Merger and Acquisition • Consolidation

11. Deregulation of Energy • 1996 saw the Deregulation in Energy markets. • California endured hardships in many of their electric power companies the biggest being PG&E • Two reasons for bankruptcy • First: Couldn’t pay bills, high rates, and lower prices • Second: Couldn’t expand power generators

12. 4 Proven Successful Coping Strategic Postures • Broad-based distributors that offer wide range of products and services • Example AT&T • Low-cost entrants that become niche players • Focused segment marketers to emphasize the company’s value added specific customer groups • Identify the new • Leveraging • Upgrading • Shared utilities focus on making economies of scale available to smaller competitors

13. Pricing in Newly Deregulated Industry • Four Factors that Incumbents should use to adjust their prices correctly after deregulation takes effect • Competitor’s prices • Switching rates • Customer value • Cost to serve

14. Strategy In Hypercompetitive Industries • Hypercompetitive industries • Intense rivalry • Successful Strategies • Take competitor by surprise • Then move on when competition tries to recover • Designed to enable the company to gain an advantage over competitors by disrupting the market with quick innovative change. • Has short product life cycles • Make sure to Strong Market Awareness

15. Competitive Reactions Under Extreme Competition • Six actions that established companies can consider to counter the fresh, aggressive, and innovative moves of competitors: • Retool strategy and restore its importance • Manage transition economics • Fight aggregation with disaggregation • Seek out new demand and new growth • Use a portfolio of initiatives to increase speed and flexibility • Count on strategic risk

16. Speed • pace of progress that a company displays in responding to current or anticipated business needs • Newest and least understood of the critical success factors • Internet business applications led to the elevation of speed • Speed merchants • Build their strategies on the rapid pace of their operations • AAA, Dell, Domino’s

17. Pressures to speed • Come from • Customers • Need for creating a new basis for competitive advantage • Competitive pressures • Industry shifts

18. Requirements of Speed • every aspect of an organization needs to be focused on the pace of work • Refocusing the Business Mission • Creating a Speed Compatible Culture • Upgrading Communication • Refocusing Business Process Reengineering • Committing to New Performance Metrics • Methods to Speed

19. Methods of Speed • Companies first analyze determine where speed exist and where it does not. Then they look to eliminate speed gaps by: • Streamlining Operations • Upgrading Technology • Forming Partnerships

20. Forming Partnerships • Proven way to shorten time needed to improve market responsiveness • Ex: Ford + GM + Daimler Chrysler • Shares business burden

21. Creating Value Through Innovation • Value creation greatly depends on innovation • Companies recognize that they need to generate more value from core businesses and leverage their core • Innovators’ Dilemma • Innovation is a major strategic challenge for most companies • “Innovators’ Dilemma”- describes how successful companies with established products can keep from being pushed aside by competitors with newer, cheaper products, that will, over time, get better and become a serious threat.

22. What is Innovation? • Innovation is a product of anticipating, assessing, and fulfilling potential customer needs in a creative manner. • Ex: 3M succeeded because its business model is based on a culture that is geared toward producing innovative products

23. How 3M Succeeded • Six mandates that drove innovation for 3M: • Support innovation from research and development to customer sales and support. • Understand the future by trying to anticipate and analyze future trends. • Establish stretch goals. It is a measure that encourages growth. • Empower employees to meet goals. • Support broad networking across the company. • Recognize and reward innovative people.

24. Sustaining and Disruptive Innovation • Industry leaders and competitors mostly engage in sustaining innovation- innovation that focuses on “better” products. • Private companies often have better opportunities to invest for the long term and pursue disruptive innovations, which require a long time to develop and mature and might produce short-term losses in the early stages of the development • New entrants and challengers have greater freedom to engage in disruptive innovation- launching products that may not be as good as the existing products and, therefore, not attractive to current customers, but that are simple, and often more affordable. • Ex: Wireless handheld devices, such as blackberries and iPhones, disrupted notebook computers.

25. Creating a Culture of Innovation • Strategic planning too often centers on existing or closely related products and services rather than on opportunity to drive future demand. • Fostering a culture of innovation takes time and effort. • There are five common characteristics to creating a culture of innovation: • First, a business needs a top-level commitment to innovation • Second, they need a long-term focus • Third, a business needs a flexible organization structure • Fourth, a business needs a combination of loose and tight planning and control • Last, they need to create an environment for innovation and appropriate incentives

26. Relationship Between Innovation and Performance • Evidence on the relationship between research and development (R&D), innovation, and financial performance is inconsistent. • Research has been done by: • Booz Allen Hamilton (“The Global Innovation 1000” study) • Boston Consulting Group (“Innovation 2006” study) • Monitor Group (“The Innovation Premium Study”)

27. Results of the Studies • Booz Allen Hamilton • Study done in 2006 • Study analyzed 1,000 public companies that spent the most on R&D • There was no correspondence between R&D and financial gain • Boston Consulting Group (BCG) • Study done in 2006 • Analyzed the 25 most innovative companies • Found that innovation translates into superior long-term stock market performance • Monitor Group • Published in 1999 • Demonstrated a strong positive correlation between a company’s effective focus on innovation and organic growth, and its future shareholder returns.

28. Innovation and Profitability • Research suggests that executives lack confidence in their companies’ ability to use innovation to drive profit. • The reason for the lack of success in translating innovation into profitable performance surfaced in a study of the growth records of the Fortune 50. • The study concluded that the single biggest growth inhibitor for large companies was “mismanagement of the innovation process.” • Another explanation for the lack of success in innovation is the lack of measurement metrics or the failure to implement the metrics effectively. • Half of all companies do not closely track the efficiency of their innovation process

29. Innovation and Profitability Cont. • R&D investments fail to generate successful products and financial gains for three main reasons: • Failure to develop truly innovative products • Failure to successfully commercialize innovative products once they are on the market • Failure to market innovative products in a timely manner

30. Recommendations for Improving Performance Through Innovation • Six recommendations for strategic managers to improve performance through innovation: • Plan synergy between strategy and innovation • Areas where new opportunities and competitive advantage exist provide a firm’s best chances to profit from innovative • Profits from innovation in business systems can match those from product development • Look outside of the company’s internal environment to increase the likelihood of success and reduce the risk of innovation • Alliances and corporate venture capital programs allow a firm to share the risks associated with exploration investments. • Involve customers early and often in the innovation process