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Strategic Management Chapter 1
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Page 1: Strategic Management Chapter 1. Dimensions of Strategic Decisions Strategic issues require top-management decisions Strategic issues require large amounts.

Strategic Management

Chapter 1

Page 2: Strategic Management Chapter 1. Dimensions of Strategic Decisions Strategic issues require top-management decisions Strategic issues require large amounts.

Dimensions of Strategic Decisions• Strategic issues require top-management decisions• Strategic issues require large amounts of the firm’s resources• Strategic issues often affect the firm’s long-term prosperity• Strategic issues are future oriented• Strategic issues usually have multifunctional or multibusiness

consequences• Strategic issues require considering the firm’s external

environment

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Three Levels of StrategyCorporate level: board of

directors, CEO & administration [Highest]

Business level: business and corporate managers [Middle]

Functional level: Product, geographic, and functional area managers [Lowest]

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Characteristics of Strategic Management Decisions: Corporate

Often carry greater risk, cost, and profit potential

Greater need for flexibilityLonger time horizonsChoice of businesses, dividend policies,

sources of long-term financing, and priorities for growth

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Characteristics of Strategic Management Decisions: Business

• Help bridge decisions at the corporate and functional levels

• Less costly, risky, and potentially profitable than corporate-level decisions

• More costly, risky, and potentially profitable than functional-level decisions

• Include decisions on plant location, marketing segmentation, and distribution

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Characteristics of Strategic Management Decisions: Functional

• Implement the overall strategy formulated at the corporate and business levels

• Involve action-oriented operational issues• Relatively short range and low risk• Modest costs: depend upon available resources• Relatively concrete and quantifiable

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Company Mission

Chapter 2

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Four Essential Components:

• Basic Product or Service • Primary Market--WHO• Where• Financial position

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Primary Company Goals

• Survival – A firm that can’t survive can’t satisfy its stakeholders. (Often taken for granted)

• Profitability –the mainstay goal of a business.• Growth –is tied to survival and profitability.

Broadly defined in terms of market share, etc.

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Company Philosophy—BULLETS

Covers • Customers• Employees• Management• Stockholders

Stakeholders • Suppliers• Community

– Social responsibility– Taxes

• Environmental protection

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AGENCY THEORYAgency theory --based on the belief that the separation of the ownership from management creates a situation where managers will spend the stockholders’ money in ways they would not spend their own.

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Agency Costs

The cost of agency problems plus the cost of actions taken to minimize agency problems are collectively termed agency costs.

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How Agency Problems OccurMoral hazard problem--Executives have

disproportionate access to company information.

• Adverse selection--a problem caused by the limited ability of stockholders to determine the competencies and priorities of executives they hire.

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Problems Resulting from AgencyExecutives pursue growth in company

size rather than earningsExecutives attempt to diversify their

corporate riskExecutives avoid healthy riskManagers act to optimize their

personal payoffsExecutives protect their status

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Solutions to Agency ProblemOwners pay executives a premium for their service

to increase loyaltyExecutives receive back-loaded compensation. Creating teams of executives across different units

of a corporation can help to focus performance measures on organizational rather than personal goals.

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Aligning Executive Interests with Owner Interests

• Stock Option Plans• Bonus plans• Incentives for Long-

Term Performance

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Corporate Social Responsibility and Business Ethics

Chapter 3

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Dynamics of Social Responsibility Inside vs. Outside Stakeholders Duty to serve society plus duty to serve

stockholders Flexibility is key Firms differ along:

Competitive Position Industry Country Environmental Pressures Ecological Pressures

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Types of Social Responsibility Economic – the duty of managers, as agents of

the company owners, to maximize stockholder wealth

Legal – the firm’s obligations to comply with the laws that regulate business activities

Ethical – the company’s notion of right and proper business behavior.

Discretionary – voluntarily assumed by a business organization.

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Corporate Social Responsibility & Profitability• Corporate social responsibility (CSR), is the idea

that business has a duty to serve society in general as well as the financial interests of stockholders.

• The dynamic between CSR and success (profit) is complex. They are not mutually exclusive, and they are not prerequisites of each other.

• Better to view CSR as a component in the decision-making process of business that must determine, among other objectives, how to maximize profits.

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Factors Complicating a Cost-Benefit Analysis of CSR:

1. Some CSR activities incur no dollar costs at all. In fact, the benefits from philanthropy can be huge.

2. Socially responsible behavior does not come at a prohibitive cost.

3. Socially responsible practices may create savings, and, as a result, increase profits.

4. Proponents argue that CSR costs are more than offset in the long run by an improved company image and increased community goodwill.

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Sarbanes-Oxley Act of 2002 CEO and CFO must certify every report containing

company’s financial statements Restricted corporate control of executives, acting,

firms, auditing committees, and attorneys Specifies duties of registered public acting firms that

conduct audits Composition of the audit committee and specific

responsibilities Rules for attorney conduct Disclosure periods are stipulated Stricter penalties for violations

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New Corporate Governance Structure

• Restructuring governance structure in American corporations

• Heightened role of corporate internal auditors • Auditors now routinely deal directly with top

corporate officials• CEO information provided directly by the company’s

chief compliance and chief accounting officers

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Social Audit• A social audit is an attempt to measure

a company’s actual social performance against its social objectives.

• The social audit may be used for more than simply monitoring and evaluating firm social performance.

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Management EthicsThe Nature of Ethics in Business:• Belief that managers will behave in an ethical

manner is central to CSR• Ethics – the moral principles that reflect

society’s beliefs about the actions of an individual or a group that are right and wrong

• Ethical standards reflect the end product of a process of defining and clarifying the nature and content of human interaction

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3 BASIC Approaches to Questions of Ethics Utilitarian Approach Moral Rights Approach Social Justice Approach

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The External Environment

Chapter 4

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External Environment

• The factors beyond the control of the firm that influence its choice of direction and action, organizational structure, and internal processes

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Remote Environment

• Economic Factors• Social Factors• Political Factors• Technological Factors• Ecological Factors

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Economic Factors

1. Prime interest rates2. Inflation rates3. Trends in the growth of the gross national product 4. Unemployment rates5. Globalization of the economy6. Outsourcing

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Social Factors

Beliefs & ValuesAttitudes & OpinionsLifestyles

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Demographics

Age Ethnic compositionGender Health considerationsReligionEducationQuality-of-life issues

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Political FactorsLegal & regulatory parameters:

• Fair-trade Decisions• Antitrust Laws• Tax Programs• Minimum Wage Legislation• Pollution and Pricing Policies• Administrative jawboning• Obama care

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Technological Factors• Speed of new developments

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Ecological Factors• Ecology refers to the relationships among

human beings and other living things and the air, soil, and water that supports them.

• Threats to our life-supporting ecology caused principally by human activities in an industrial society are commonly referred to as pollution

• Loss of habitat and biodiversity• Environmental legislation• Eco-efficiency

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International Environment

Monitoring the international environment involves assessing each non-domestic market on the same factors that are used in a domestic assessment.

While the importance of factors will differ, the same set of considerations can be used for each country.

Economic, political, legal, and social factors are used to assess international environments.

One complication to this process is that the interplay among international markets must be considered.

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Ex. 4.8 Forces Driving Industry Competition

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Threats of Entry• Economies of Scale• Product Differentiation• Capital Requirements• Cost Disadvantages Independent of Size• Access to Distribution Channels• Government Policy

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Powerful SuppliersA supplier group is powerful if:• It is dominated by a few companies and is more

concentrated than the industry it sells to • Its product is unique or at least differentiated, or if it

has built-up switching costs • It is not obliged to contend with other products for

sale to the industry • It poses a credible threat of integrating forward into

the industry’s business • The industry is not an important customer of the

supplier group

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Powerful BuyersA buyer group is powerful if: • It is concentrated or purchases in large volumes • The products it purchases from the industry are standard• The products it purchases from the industry form a

component of its product and represent a significant fraction of its cost

• It earns low profits• The industry’s product is unimportant to the quality of the

buyers’ products or services • The industry’s product does not save the buyer money • The buyers pose a credible threat of integrating backward

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Substitute Products• By placing a ceiling on the prices it can charge,

substitute products or services limit the potential of an industry

• Substitutes not only limit profits in normal times but also reduce the bonanza an industry can reap in boom times

• Substitute products that deserve the most attention strategically are those that are – subject to trends improving their price-performance trade-off with

the industry’s product or– produced by industries earning high profits

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Jockeying for PositionIntense rivalry occurs when: Competitors are numerous or are roughly equal Industry growth is slow, precipitating fights for market

share that involve expansion The product or service lacks differentiation or switching

costs Fixed costs are high or the product is perishable, creating

strong temptation to cut prices Capacity normally is augmented in large increments Exit barriers are high Rivals are diverse in strategy, origin, and personality

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The Global Environment

Chapter 5

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Globalization• Globalization refers to the strategy of

pursuing opportunities anywhere in the world that enable a firm to optimize its business functions in the countries in which it operates.

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Why Firms Globalize?

• U.S. firms can reap benefits from industries and technologies developed abroad.

• Direct penetration of foreign markets can drain vital cash flows from a foreign competitor’s domestic operations.

• The resulting lost opportunities, reduced income, and limited production can impair the competitor’s ability to invade U.S. markets. Question: Should firms be proactive or reactive?

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Reasons for Going GlobalPROACTIVE

Additional resourcesLowered costsIncentivesNew, expanded marketsExploitation of firm-specific

advantagesTaxesEconomies of scaleSynergyPower and prestigeProtect home market

REACTIVETrade barriersInternational customersInternational competitionRegulationsChance

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4 Strategic Orientations of Global Firms

• Ethnocentric orientation – When the values and priorities of the parent

organization guide the strategic decision making of all its international operations

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4 Strategic Orientations of Global Firms (contd.)

• Polycentric orientation– When the culture of the country in which the

strategy is to be implemented is allowed to dominate a company’s international decision making process

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4 Strategic Orientations of Global Firms (contd.)

• Regiocentric orientation– When a parent company blends its own

predisposition with those of its international units to develop region-sensitive strategies.

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4 Strategic Orientations of Global Firms (contd.)

• Geocentric orientation– When an international firm adopts a systems

approach to strategic decision making that emphasizes global integration.

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Competitive Strategies for Firms in Foreign Markets

1. Niche Market Exporting2. Licensing and Contract Manufacturing3. Franchising4. Joint Ventures5. Foreign Branching6. Acquisition7. Wholly Owned SubsidiaryLOOK UP EACH OF THESE AND UNDERSTAND

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Internal Analysis

Chapter 6

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SWOT AnalysisA traditional approach to internal analysis: • SWOT is an acronym for the internal Strengths

and Weaknesses of a firm and the environmental Opportunities and Threats facing that firm.

• SWOT analysis is a historically popular technique through which managers create a quick overview of a company’s strategic situation.

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SWOT Components An opportunity is a major favorable situation

in a firm’s environment A threat is a major unfavorable situation in a

firm’s environment A strength is a resource or capability relative

to its A weakness is a limitation or deficiency in a

firm’s resources or capabilities relative to its competitors

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S.W.O.T. Analysis• S.W.O.T. information is only as important as the analysis

derived from it.• There is no magic number of strengths or weaknesses

compared to a magic number of opportunities and threats. • Do you have the strengths to: 1. Take advantage of new

opportunities? Or 2. Survive a threat? Or 3. To compensate for your weaknesses?

• To appropriately use the S.W.O.T. study the following slide

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Ex. 6.2 SWOT Analysis Diagram

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Value Chain

• A perspective in which business is seen as a chain of activities that transforms inputs into outputs that customers value.

• Examines the contributions of different activities within the business that create customer value

• A process point of view

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Value Chain Analysis (contd.)

• Primary Activities– The activities in a firm of those involved in the

physical creation of the product, marketing and transfer to the buyer, and after-sales support

• Support Activities– The activities in a firm that assist the firm as a

whole by providing infrastructure or inputs that allow the primary activities to take place on an ongoing basis

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Ex. 6.3 The Value Chain

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Resource-Based View (RBV)

1. RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles

2. The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources

3. Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages

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Three Basic TYPES of Resources

1. Tangible assets are the easiest “resources” to identify and are often found on a firm’s balance sheet

2. Intangible assets are “resources” such as brand names, company reputation, organizational morale, technical knowledge, patents and trademarks, and accumulated experience

3. Organizational capabilities are not specific “inputs.” They are the skills that a company uses to transform inputs into outputs

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What makes a resource VALUABLE?

4 Guidelines:1. Is the resource or skill critical to fulfilling a

customer’s need better than that of the firm’s competitors?

2. Is the resource scarce? Is it in short supply or not easily substituted for or imitated?

3. Appropriability: Who actually gets the profit created by a resource?

4. Durability: How rapidly will the resource depreciate?

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Elements of Scarcity • Short Supply• Availability of Substitutes• Imitation

• Isolating Mechanisms: – Physically Unique Resources– “Path-Dependent” Resources– Casual Ambiguity– Economic Deterrence

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Using RBV in Internal Analysis

It is helpful to: • Disaggregate resources• Utilize a functional perspective• Look at organizational processes• Use the value chain approach

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Long-Term Objectives and Strategies

Chapter 7

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Long-Term Objectives• Strategic managers recognize that short-run profit

maximization is rarely the best approach to achieving sustained corporate growth and profitability

• To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas: – Profitability – Productivity– Competitive Position – Employee Development– Employee Relations -- Tech Leadership

– Public Responsibility

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Qualities of Long-Term Objectives S.M.A.R.T.

• There are five criteria that should be used in preparing long-term objectives: – Specific—clear about outcomes desired– Measurable—able to quantify– Attainable—able to achieve with current

resources– Realistically challenging—provide stimulation

to achieve– Timed—stating the time frame in which the

objective will be accomplished

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The Balanced Scorecard

• The balanced scorecard is a set of four measures that are directly linked to the company’s strategy

allows managers to evaluate the company from four perspectives:

financial performance customer knowledge internal business processes learning and growth

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Generic Strategies

• A long-term or grand strategy must be based on a core idea about how the firm can best compete in the marketplace. The popular term for this core idea is generic strategy.

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The 4 GENERIC Strategies1. Striving for overall low-cost leadership in the

industry. 2. Striving to create and market unique products for

varied customer groups through differentiation. 3. Striving to have special appeal to one or more

groups of consumers or industrial buyers, focus on their cost or differentiation concerns.

4. SPEED rapid response to customer requests or market and technological changes

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GRAND Strategies Grand strategy

A master long-term plan that provides basic direction for major actions for achieving long-term business objectives

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Grand StrategiesConcentrated growth the strategy that directs resources to the growth of a dominant product, in a dominant market, with a dominant technologyMarket development consists of marketing present products to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion Product development substantial modification of existing products or the creation of new but related products that can be marketed to current customers through established channels

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Grand StrategiesInnovation companies seek high profits associated with customer acceptance of a new or greatly improved product—search for other original or novel ideas—seek to create a new product life cycle and make similar existing products obsolete Horizontal acquisition—growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain

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Grand StrategiesVertical acquisition—BACKWARD—acquire firms that supply it with inputs (such as raw materials) or FORWARD—are customers for its outputs (such as warehouses for finished products)Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products Conglomerate diversification—gives little concern to creating product-market synergy with existing businesses

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Grand StrategiesTurnaround—Cost reduction—Asset reductionDivestiture strategy the sale of a firm or a major

component of a firmLiquidation the firm typically is sold in parts for its

tangible asset value and not as a going concern

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– Chapter 7 Liquidation bankruptcy—agreeing to a complete distribution of firm assets to creditors, most of whom receive a small fraction of the amount they are owed

• Chapter 11 Reorganization bankruptcy—the managers believe the firm can remain viable through reorganization—management runs the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.

Bankruptcy

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Grand StrategiesJoint ventures relationship between two or more

parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations

Strategic alliances is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity—

Company A & B form Company C

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Business Strategy

Chapter 8

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Sustainable Low-Cost Activities1. Some low-cost advantages reduce the likelihood of

buyers’ pricing pressure2. Truly sustained low-cost advantages may push rivals into

other areas 3. New entrants competing on price must face an

entrenched cost leader4. Low-cost advantages should lessen the attractiveness of

substitute products 5. Higher margins allow low-cost producers to withstand

supplier cost increases

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Risks of a Cost Leadership Strategy

1. Many cost-saving activities are easily duplicated 2. Exclusive cost leadership can be a trap 3. Obsessive cost cutting can shrink other

competitive advantages4. Cost differences often decline over time

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Ex. 8.2 Evaluating a Business’s Cost Leadership Opportunities

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Evaluating Differentiation

Differentiation requires that the business have sustainable advantages that allow it to provide buyers with something uniquely valuable to them

Differentiation usually arises from one or more activities in the value chain that create a unique value important to buyers

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RISKS ASSOCIATED WITH A DIFFERENTIATION STRATEGY• Competitors may be able to imitate the unique

features, • Customers may lose interest in the unique features,

or• Low cost competitors may be able to undercut

prices & erode brand loyalty.

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Ex. 8.3 Evaluating a Business’s Differentiation Opportunities

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Evaluating Speed as a Competitive Advantage • 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

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Risks of Speed-based Strategy

Speeding up activities that haven’t been conducted in a fashion that prioritizes rapid response should only be done after considerable attention to training, reorganization, and/or reengineering

Some industries may not offer much advantage to the firm that introduces some forms of rapid response

Customers in such settings may prefer the slower pace or the lower costs currently available, or they may have long time frames in purchasing

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Ex. 8.5 Evaluating a Business’s Rapid Response (Speed) Opportunities

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Evaluating Market Focus as a Way to Competitive Advantage • Market focus: the extent to which a business

concentrates on a narrowly defined market • Small companies, at least the better ones,

usually thrive because they serve narrow market niches

• 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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Risks of Market Focus• The risk of focus is that you attract major competitors who

have waited for your business to “prove” the market • Publicly traded companies built around focus strategies

become takeover targets for large firms seeking to fill out a product portfolio

• Slipping into the illusion that it is focus itself, and not low cost, etc. that is creating the business’s success.


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