Shana HartfordApril Miller

Brittany SnethkampBrian CoteCarly BuellRyan Buell

Austin Stewart

Business Unit Strategy: Contexts and Special Dimensions

Strategy: A View from the TopChapter 7

Business Unit Strategy:In order to identify a clear business unit

strategy a company must analyze the industry characteristics in which it will be competing. First, we look at three contexts that relate to the

various evolutionary stages of an industry: emerging, growth, and mature and declining.

Next we discuss three industry environments that pose a unique strategic challenges: fragmented, deregulating, and hypercompetitive.Speed and innovation are also discussed as

hypercompetitive characteristics continue to increase in many industries.

Strategy in Emerging IndustriesNew industries emerge in a number of ways.

For example, technological breakthroughs developed a new industry for the telephone industry with cellular devices.

Improvements: Technologies are typically immature meaning

competitors will seek to improve existing designs and processes or even leapfrog them altogether with next generation technology

Costs are typically high and unpredictable, entry barriers are low, supplier relationships are underdeveloped, and distribution channels are just emerging making a lot of room for improvement and market share increases.

Strategy in Emerging Industries (cont.)First Mover Advantage:

The first company to come out with a new product or service has the “first mover advantage”.

Timing is critical!Opportunity to shape customer standards and set the

competitive rules of the game. 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 the leverage access to a core group of early, loyal customers

Strategy in Growth IndustriesCompetitors tend to focus on expanding

their market shares which creates a host of challenges in growing industries. 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.

Strategy in Growth Industries (cont.)During the early growth stages companies

tend to add more products, models, sizes, and flavors to appeal to an increasingly segmented market

Toward the end of the growth stages cost considerations become a priority.Process innovation and redefinitions of supplier

and distributor relations are important dimensions of cost control.

Finally horizontal integration becomes attractive as a way of consolidating a company’s market position

New Entrants in Growing IndustriesNew companies that enter the market

during the final stages of growth are known as “followers”Advantages:

Opportunity to evaluate alternative technologiesDelay investment in risky projectsInitiate or leapfrog superior product and technology

offerings

New Entrants in Growing Industries (cont.)Entrants must decide to enter into a market either

through internal development or acquisition.In order to make this decision companies must

analyze what the structural barriers to entry are as well as how existing firms will react to the intrusion into the marketStructural barriers may include the level of investment

required, access to production or distribution facilities, and the threat of overcapacity

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 and therefore the firm can influence the industry structure and where the benefits of entry exceed costs.

Important issues as maturity sets and decline threatens:Carefully choosing balance between

differentiation and low cost postures Deciding whether to compete in multiple or

single industry segments

Strategy in Mature and Declining Industries

Firms earn profits during the long maturity stage of an industry’s growth if:

1. Concentrate on segments that offer chances for higher growth or higher return

2. Manage product and process innovation aimed at further differentiation , cost reduction, or rejuvenating segment growth

3. Streamline production and delivery to cut costs4. Gradually “harvest” the business in

preparation for a strategic shift to better products or industries

Mature and declining industries contain strategic pitfalls that should be avoided:

1.An overly optimistic view of the industry or the company’s position within it2.Lack of strategic clarity shown by a failure to choose between a broad-based and a focused competitive approach3.Investing too much for too little return = “cash trap”4.Trading market share for profitability in response to short-term performance pressures5.Unwillingness to compete on price6.Resistance to industry structural changes or new practices 7.Placing too much emphasis on new product development compared with improving existing ones8.Retaining excess capacity

Industry Evolution and Functional Priorities

Early development of a product market typically

Has slow growth in salesEmphasis on R&DRapid technological change in the productOperating losses andNeed for slack to support temporarily

unprofitable operationsSuccess at this stage is associated with

Technical skillsBeing the1st in the new marketsMarketing advantage that creates widespread awareness

Rapid Growth brings new competitorsSuccess factors

Brand awarenessProduct differentiationFinancial resources to support:

Heavy marketing expensesPrice competition

Sales growth continues at a decreasing rate into Maturity stage:

- # of industry segments increases, but change in production design slows considerably- Promotional or pricing advantages & differentiation become key strengths- Efficient production is crucial in this stage

When industry moves into the Decline stage…Strengths center on

Cost advantagesSuperior supplierCustomer relationships Financial control

• Competitive advantage can exist if a firm serves gradually shrinking markets that competitors choose to leave.

Strategy in Fragmented IndustriesFragmented Industries

Retail sectors, Distribution businesses, Professional service, Small manufacturing

Work best when:Entry/exit barriers are lowFew economies of scaleCost structures unattractiveProduct services highly diverseLocal control

Entrepreneurial VentureH. Wayne Huizinga

Waste Management Corporation went public in 1971Hundreds of “Mom-and-Pop” garbage companies

acquired through stockGained capitalization of $5 million, and after

Huizinga’s departure in 1984, market share was $3 billion

Strategy in Deregulating Industries• Deregulation- shaped many industries,

important dynamic is strategic move timing• Developed Pattern:– 1. Large number of entrants rush in– 2. industry profitability deteriorated– 3. pattern of segmented profitability altered– 4. Variance in profitability– 5. 2 waves of merges and acquisitions– 6. few competitors remained

Deregulation of Energy Markets• Competitors faced loss and opportunities• Deregulation began in 1996– Destroyed most California electrical power

companies• Pacific Gas and Electric– Reported $9 billion worth in debt and filed chapter 11

bankruptcy– 2 primary reasons:» 1. PG&E incurred billion in debt and weren’t able to

pass it along to customers» 2. provision of deregulation disallowed company

from expanding power generators to other regions of US, making power travel further and costs increased

Deregulation Challenges4 distinct strategic postures:

1. broad based distribution companies2. low cost entrants3. focused segment marketers4. shared utilities

Pricing in Newly Deregulated IndustriesResearch by Florissen, Maurer, Schmidt,

VahlenkampFound 4 factors Incumbents should use to adjust

prices correctly after deregulation1. Competitors Prices2. Switching Rates3. Customer Value4. Cost to Serve

Strategy in Hypercompetitive IndustriesHypercompetitive industries are

characterized by intense rivalry. Hypercompetitive strategies are designed

to enable the company to gain a quick advantage over competitors by disrupting the market with quick and innovative change.

Strategy in Hypercompetitive IndustriesThe intense rivalry in a hypercompetitive

environment often results in short product life cycles, the emergence of new technologies, competition from unexpected players, repositioning by current players, and major shifts in market boundaries.

In a hypercompetitive market, successful companies are able to manipulate competitive conditions to create advantage for themselves and destroy the advantages enjoyed by others.

Success in a Hypercompetitive Environment Three major qualities:

Speed and innovationSuperior short-term strategic focusStrong market awareness

Over the long term, sustainable profits are possible only when entry barriers restrict competition.

Competitive Reactions Under Extreme Competition

Six actions that established companies can consider to counter the fresh, aggressive, and innovative moves of competitors.

1. Retool strategy and restore its importance

2. Manage transition economics3. Fight aggregation with disaggregation4. Seek out new demand and new growth5. Use a portfolio of initiatives to increase

speed and flexibility6. Count on strategic risk

SpeedSpeed is emerging as a key success factor in a

growing number of industriesThe pace of progress that a company displays in

responding to current or anticipated business needs

Newest and least understood of the critical success factors

Multiplying business applications of the Internet have led to the elevation of speed

Speed merchants- Merchants who built their strategies on the rapid pace of their operationsAAA, Dell, Domino’s

Pressures to SpeedPressures come from:

Customers- Demand responsiveness. New emphasis on getting products quickly

Need for creating a new basis for competitive advantage- Increasing the speed on which products are innovated, developed, manufactured, and distributed

Competitive pressures- Competitive viability often mandates changes for the acceleration of speed

Industry shifts- Speed is important to survival in industries with short product life cycles

Requirements of SpeedA speed initiative requires that every aspect of

an organization be focused on the pace at which work is accomplished

Refocusing the Business Mission- Articulate a long-term vision for a speed-oriented company

Creating a Speed Compatible Culture- A company can facilitate speed by adopting an evaluation system that rewards those that can increase the organizations speed

Upgrading Communication- All parties expect instantaneous communication between everyone

Requirements of SpeedRefocusing Business Process

Reengineering- Used to eliminate barriers that create distance between employees and customers

Committing to New Performance Metrics- Sales volume, innovation rate, customer satisfaction, processing time, cost controls, and marketing specifics

Methods to Speed- Three major categories: streamlining operations, upgrading technology, and forming partnerships

Methods to SpeedStreamlining Operations

Many companies enter new markets with insufficient information

With a speed-enhanced ability to obtain post-implementation feedback and to respond with unparalleled speed, successful innovations no longer need to be flawless at introduction

Upgrading TechnologyUsing the latest informational technologies to create speed,

companies are able to roll out new product information faster

Common goal is to connect manufacturers with retailers to enhance information sharing and accelerate product distribution

Forming PartnershipsSharing business burdens is a way to shorten the time

needed to improve market responsivenessFord’s partnership with General Motors and DaimlerChrysler

Creating Value Through Innovation

Sustaining Innovation-Innovation that focuses on “better” products.Incumbent industry leaders and competitors

mostly engage in this.Some sustaining innovations are simple,

incremental, year-to-year improvements.Others are dramatic, breakthrough

technologies ex. Transition from analog to digital and from digital to optical.

These innovations provided a better product and allowed companies to receive higher profit margins through sales.

Creating Value Through InnovationDisruptive Innovation-Launching

products that may not be as good as the existing products.They come off not attractive to current

customers.Most times these products are simple and

affordable.Referred to as disruptive innovation because

it disrupts the established basis of competition.

Strong evidence suggests that the only way to survive a disruptive attack is by creating a separate unit.

Creating Value Through InnovationIBM is a good example of surviving a

disruptive attack.Mainframe computers were disrupted by the

minicomputer, so IBM created a separate business unit in Minnesota.

PC later disrupted the minicomputer, so IBM set up a separate business unit in Florida.

Creating Value Through InnovationMinnesota Mining & Manufacturing’s

(3M) reasons for success.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 (a measure that

encourages growth).Empower employees to meet goals.Support board networking across the

company.Recognize and reward innovative people.

Creating Value Through InnovationSuccessful companies common

characteristics for creating a innovating environment.Top-level commitment to innovationLong-term focusFlexible organization structureCombination of loose and tight planning

controlA system of appropriate incentives

Relationship Between Innovation and PerformanceEvidence on the relationship between R&D, innovation, and financial performance is inconsistent. Booz Allen Hamilton: found no significant statistical relationship.Boston’s Consulting Group: found that innovation translates into superior long-term stock market performance.Monitor Group: found a strong positive correlation between innovation and long-term financial performance.

Innovation and Profitability Research suggest that executives lack

confidence in their companies‘ ability to use innovation to drive profits.EX: 67% of manufacturing firms considered

themselves more innovative than competitors, butOnly 7% actually meet their innovative

performance goals. Reasons for the lack of success in translating

innovation into profitable performance:Study concluded the single biggest growth

inhibitor for large companies was “mismanagement of the innovation process.”

Another explanation is the lack of measurement metrics or the failure to implement them effectively.

Main Reasons For R&D Failures 1. Failure to develop truly innovative

products2. Failure to successfully commercialize

innovative products once they are on the market

3. Failure to market innovative products in a timely manner

— Probability of success with innovation is small.

Reasons New Products Fail It is estimated that it takes 125 to 150 new

initiatives to generate one marketplace success. Koudal and Coleman found that more than 85%

of new product ideas never make it to market—of those that do make it 50% - 70% fail.

• Stevens and Burley found overall success rate of 60% from 360 industrial firms launching 576 new products.

• Ogawa and Pillar confirmed problems of new product commercialization—new products suffer failure rates of 50% or greater.

• Delays in getting product to market can be extremely costly. McKinsey & Co. found a product 6 months late to market misses out on 33% of potential profits for product’s lifetime.

Recommendations for Improving Performance Through Innovation1. Plan synergy between strategy and innovation.2. Areas where new opportunities and competitive

advantage exist provide a firm’s best chances to profit from innovation.

3. Profits from innovation in business systems can match those from product development.

4. Look outside of the company’s internal environment to increase the likelihood of success and reduce the risks of innovation.

5. Alliances and corporate venture capital programs allow a firm to share risks associated with exploration investments.

6. Involve customers early and often in the innovation process