Business Unit Strategies S AChapter Outline U7-1 Porter’s Generic Strategies N 7-1a Low-Cost (Cost Leadership) Strategy D 7-1b Focus–Low-Cost Strategy E 7-1c Differentiation Strategy (No Focus) R 7-1d Focus-Differentiation Strategy S 7-1e Low-Cost–Differentiation Strategy 7-1f Focus–Low-Cost/Differentiation Strategy S7-2 R7-3 . 7-4 , 7-5 7-1g Multiple Strategies Miles and Snow’s Strategy Framework Business Size, Strategy, and Performance Assessing Strategies Global Concerns 7-6 Summary Key Terms GReview Questions and Exercises APractice Quiz RNotes RReading 7-1 Y 2 0 9 0 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 7 150 Chapter 7 A Business Unit An organizational entity with its own unique mission, set of competitors, and industry. Generic Strategies Broad competitive Strategies that can be adopted by business units to guide their organizations. Strategic Group A select group of direct competitors who have similar strategic profiles. fter a firm’s top managers have settled on a corporate-level strategy, their focus then shifts to how the firm’s business or businesses should compete. Whereas the corporate strategy concerns the basic thrust of the firm—where top managers would like to lead the firm—the business or competitive strategy addresses the competitive aspect—who the business should serve, what needs should be satisfied, and how a business should develop core competencies and be positioned to satisfy customers’ needs. Another way of addressing the task of formulating a business strategy is to consider whether a business should concentrate its efforts on exploiting current opportunities, exploring new ones, or attempting to balance the two. Exploitation generates returns in the short term; exploration can create forms of sustainable competitive advantage for the long term. The business strategy developed for an organization seeks, among other things, to resolve this challenge.1 A business unit is anSorganizational entity with its own mission, set of competitors, and industry. A single A firm that operates within only one industry is also considered a business unit. Strategic managers craft competitive strategies for U and sustain competitive advantage, a state whereby its each business unit to attain successful strategies cannot N be easily duplicated by competitors.2 In most industries, different competitive approaches can be successful, depending on the busiD ness unit’s resources E with a unique competitive strategy. In the interest Each business competes of simplicity, however, it is useful to categorize different strategies into a limR ited number of generic strategies based on their similarities. Generic strategies S emphasize the commonalities among different business strategies, not their differences. Businesses adopting the same generic strategy comprise what is commonly referred to as a strategic group.3 In the airline industry, for examS may comprise carriers such as Southwest Airlines and ple, one strategic group AirTran that offer low R fares and no frills on a limited number of domestic routes, thereby maintaining their low-cost structures (see Figure 7-1). A second strategic . traditional carriers such as Continental, United, and group may comprise many American that serve both , domestic and international routes and offer extra services such as meals and movies on extended flights. Because industry definitions and strategy assessments are not always clear, identifying strategic groups G within an industry is often difficult. Even when the industry definition is clear, an industry’s business units may be categorized into FIGURE 7-1 A R S tr a te gic R Y Groups in the Air lin e I n dustr y 2 0 9 0 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies any number of strategic groups depending on the level of specificity desired. One or two competitors may also seem to be functioning between groups and thus be difficult to classify. For these reasons, the concept of strategic groups can be used as a means of understanding and illustrating competition within an industry, but the limitations of the approach should always be considered. The challenging task of formulating and implementing a generic strategy is based on both internal and external factors. Because generic strategies by nature are overly simplistic, selecting generic approach is only the first step in formulating a business strategy.4 It is also necessary to fine-tune the strategy and accentuate the organization’s unique set of resource strengths.5 Two generic strategy frameworks—one developed by Porter and another by Miles and Snow—can serve as good starting points for developing business strategies. S 7-1 Porter’s Generic Strategies A Michael Porter developed the most commonly U cited generic strategy framework.6 According to Porter’s typology, a business unit must address two basic competiN tive concerns. First, managers must determine whether the business unit should focus its efforts on an identifiable subset D of the industry in which it operates or seek to serve the entire market as a whole.EFor example, specialty clothing stores in shopping malls adopt the focus concept and concentrate their efforts on limited product lines primarily intended for aRsmall market niche. In contrast, most chain grocery stores seek to serve the mass S market—or at least most of it—by selecting an array of products and services that appeal to the general public as a whole. The smaller the business, the more desirable a focus strategy tends to be, although this is not always the case. S Second, managers must determine whether the business unit should compete primarily by minimizing its costs relative R to those of its competitors (i.e., a lowcost strategy) or by seeking to offer unique. or unusual products and services (i.e., a differentiation strategy). Porter views these two alternatives as mutually exclu, erode a low-cost structure by raising sive because differentiation efforts tend to production, promotional, and other expenses. In fact, Porter labeled business units attempting to emphasize both cost leadership and differentiation simultaG neously as “stuck in the middle.”7 This is not necessarily the case, however, and A alternative for some businesses. the low-cost–differentiation strategy is a viable Combining the two strategies is difficult, but businesses able to do so can perR form exceptionally well. Rin a business unit address the first (i.e., Depending on the way strategic managers focus or not) and second (low-cost, differentiation, or low-cost–differentiation) Y questions, six configurations are possible. A seventh approach—multiple strategies— involves the simultaneous deployment of more than one of the six configurations (see Table 7-1). The low-cost and differentiation 2 strategies with and without focus comprise those in Porter’s original framework. 0 9 Strategy 7-1a Low-Cost (Cost Leadership) 0 produce basic, no-frills products Businesses that compete with a low-cost strategy and services for a mass market of price-sensitive T customers. Because they attempt to satisfy most or all of the market, these businesses tend to be large and established. Low-cost businesses often succeed S by building market share through low prices, although some charge prices comparable to rivals and enjoy a greater margin. Because customers generally are willing to pay only low to average prices 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 151 152 Chapter 7 TA B L E 7-1 Ge n e r ic S tr a te gie s Ba se d on Por te r ’s Ty pology Emphasis on Low Costs and Differentiation Emphasis on Various Factors Depending on Market Differentiation Strategy Low-Cost– Differentiation Strategy Multiple Strategies FocusDifferentiation Strategy Focus–Low-Cost/ Differentiation Strategy Emphasis on Entire Market or Niche Emphasis on Low Costs Emphasis on Differentiation Entire Market Low-Cost Strategy Niche Focus–LowCost Strategy S A for “basic” products orUservices, it is essential that businesses using this strategy keep their overall costs as low as possible. Efficiency is a key to such businesses, as Nby mega-retailer Wal-Mart in recent years. has been demonstrated Low-cost businessesD tend to emphasize a low initial investment and low operating costs. Such organizations tend to purchase from suppliers who offer the lowest prices within a E basic quality standard. Research and development efforts are directed at improving R operational efficiency, and attempts are made to enhance logistical and distribution efficiencies. Such businesses often but not S development of new and improved products or services always deemphasize the that might raise costs, and advertising and promotional expenditures will be minimized (see Strategy at Work 7-1). S T R S R A T E G Y . A T W O R K The Low-Cost ,Strategy at Kola Real Coca-Cola and PepsiCo enjoy substantial profit margins on their soft drinks in Mexico’s $15 billion market, where G the two have waged intense battles for market share A during the past decade. Although Coke usually came out on top, the two collectively controlled sales and R distribution in almost all of the country’s major markets. RIn 2003, Coke had more than 70 percent of Mexican sales, Y and Pepsi had 21 percent. Consumers in Mexico drink more Coke per capita than those in any other nation. In the early 2000s, however, both well-known colas 2 have been challenged by an unlikely upstart from Peru known as Kola Real (pronounced “ray-’al”). Launched 0 in Mexico in 2001, Kola Real captured 4 percent of the 9 Mexican market in its first two years. Bottled by the Ananos family from Peru, Kola Real 0 lacks all of the frills and endorsements associated T with Coke and Pepsi. The strategy is simple: Eliminate all possible costs and offer large sizes at low prices. S Whereas Coke and Pepsi spend nearly 20 percent of 7 - 1 revenues on concentrates, the Ananos family makes its own. Whereas Coke and Pepsi spend millions on promotion and manage their own fleets of attractive trucks, the Ananos family hires third parties for deliveries— even individuals with dented pickup trucks—and relies primarily on word-of-mouth advertising. Central to Kola Real’s success is the fact that the majority of Mexican cola drinkers are relatively poor and consider price to be a major factor in their purchase decisions. In Brazil, so-called B-brands (i.e., lowcost generic or store brands) now account for almost one-third of the country’s cola sales. Fearing this could happen in Mexico, Coke and Pepsi have fought back with price cuts of their own, although they will not be able to challenge Kola Real’s low-cost position on a large-scale basis. Source: Adapted from D. Luhnow and C. Terhune, “A Low-Budget Cola Shakes Up Markets South of the Border,” Wall Street Journal, 27 October 2003, A1, A18. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 153 A cost leader may be more likely than other businesses to outsource a number of its production activities if costs are reduced as a result, even if modest amounts of control over quality are lost in the process. In addition, the most efficient means of distribution is sought, even if it is not the fastest or easiest to manage. It is worth noting that successful low-cost businesses do not emphasize cost minimization to the degree that quality and service decline excessively. In other words, cost leadership taken to an extreme can result in the production of “cheap” goods and services that nobody is willing to purchase. Low-cost leaders depend on unique capabilities not available to others in the industry such as access to scarce raw materials, large market share, or a high degree of capitalization.8 Manufacturers that employ a low-cost strategy, however, are vulnerable to intense price competition that drives down profit margins and limits their ability to improve outputs, to augment their products with superior services, or to spend moreSon advertising and promotion.9 The prospect of being caught in price wars keeps A many manufacturers from adopting the low-cost strategy, although it can affect other businesses as well. Other U to control quality and distribution. low-cost leaders have bought their suppliers Price cutting in the airline industry led to N the demise of several upstarts even before the events of 9/11, and made it even more difficult to raise fares shortly D thereafter.10 Success with the low-cost strategy can E be short lived, however. Low-cost airline AirTran, for example, boasted a 2003 profit of $101 million while Delta R squabbled with its pilots throughout the year in an effort to reduce costs. Delta Sa hub, but has had difficulty cutting dominates Atlanta where AirTran also has costs. In 2004, however, Delta finally made headway and began cutting many of its fares, some by as much as 50 percent. By 2005, AirTran, along with other lowcost airlines, began to feel the squeeze asSmajor airlines such as Delta became more price competitive.11 R Imitation by competitors can also be a concern when the basis for low-cost . leadership is not proprietary and can be easily duplicated. Lego discovered this fact when Canadian upstart Mega Blocks ,began to steal market share by making colorful blocks that not only look like Legos, but also snap into them and sell for a lower price. Lego responded by launching the Quatro line of oversized blocks aimed at the preschool market and carrying G lower prices than traditional Lego playsets.12 A Low-cost businesses are also particularly vulnerable to technological obsolescence. Manufacturers that emphasize technological stability and do not respond R to new product and market opportunities may eventually find that their products R have become obsolete. Y 7-1b Focus–Low-Cost Strategy 2 overall costs while serving a narrow The focus–low-cost strategy emphasizes low segment of the market, producing no-frills 0 products or services for price-sensitive customers in a market niche. Ideally, the small business unit that adopts the 9 focus–low-cost strategy competes only in distinct market niches where it enjoys a cost advantage relative to large, low-cost competitors. 0 The focus concept is clear in theory, but often confusing in practice. In general, a business rejects a focus approach T when it attempts to serve most of the market. In practice, however, virtually every S business focuses its efforts, at least to some extent. Because most is a subjective term, scholars sometimes disagree on whether a particular business should be classified as focus or not. Focus–Low-Cost Strategy: A generic business unit strategy in which a smaller business keeps overall costs low while producing no-frills products or services for a market niche with elastic demand. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 154 Chapter 7 Aldi is a clear example of a business that pursues a focus–low-cost strategy. Aldi is an international retailer that offers a limited assortment of groceries and related items at the lowest possible prices. Functional operations are tightly coordinated around a single strategic objective: low costs. Efforts are targeted to consumers with low to moderate incomes. Aldi minimizes costs a number of ways. Most products are private label, allowing Aldi to negotiate rock-bottom prices from its suppliers. Stores are modest in size, much smaller than that of a typical chain grocer. Aldi only stocks common food and related products, maximizing inventory turnover. The retailer does not accept credit cards, eliminating the 2 to 4 percent fee typically charged by banks to process the transaction. Customers bag their own groceries and must either bring their own bags or purchase them from Aldi for a nominal charge. Aldi also takes an innovative approach to the use of its shopping carts. S to unlock a cart from the interlocked row of carts Customers insert a quarter located outside the store A entrance. The quarter is returned with the cart when it is locked back into the group. As a result, no employee time is required U a customer is willing to forego the quarter by not to collect stray carts unless returning the cart! N Adding a focus orientation to cost leadership can enable a firm to avoid D direct competition with a mass-market cost leader. In this manner, grocer SaveA-Lot has found a wayEto compete successfully against Wal-Mart Supercenters. Its prices are competitive with those at Wal-Mart, but Save-A-Lot pursues locaR tions in urban areas that Wal-Mart rejected. Save-A-Lot also generates profits S by opening small, inexpensive stores catering to U.S. households earning less than $35,000 a year. Save-A-Lot stocks mostly its own brand of high-turnover goods to minimize costs and eschews cost-inducing pharmacies, bakeries, and S baggers.13 Like low-cost businesses, R those adopting the focus–low-cost strategy are vulnerable to intense price competition that periodically occurs in markets with no-frills outputs. For .instance, several years ago, Laker Airways successfully used the focus–low-cost , strategy by providing the first no-frills, low-priced transAtlantic passenger service. The major airlines responded by dropping prices, eventually driving Laker out of business. The large competitors, because of their greater financialG resources, were able to weather the short-term financial losses and survive the shakeout.14 Southwest Airlines, in contrast, adopted a A similar strategy and has been able to perform well despite competitive pressure from its large rivals. R To deter price competition, businesses employing the focus–low-cost stratR egy must continuously search for new ways to trim costs. The Irish no-frills air Y carrier Ryanair has surpassed Southwest in this regard. Passengers are required to pay for all food, drinks, and newspapers. Employees pay for their own training and uniforms. The airline even incorporates a strict no-refund policy, even if the airline cancels a2 flight. Even with an average ticket price of about $50, Ryanair faces constant0pressure from its large rivals. In 2004, Ireland’s state carrier Aer Lingus added routes and lowered prices in an attempt to model itself 9 after Ryanair.15 Founded in 2003, 0 Hungary’s low-cost airline Wizz Air specializes in transporting Hungarians, Poles, and other Eastern Europeans to Britain and Ireland Tnd better paying jobs. CEO Jozsef Varadi sees buses—not where many seek and fi other airlines—as their S primary competition. Sparked by recent expansion of the European Union, Wizz Air makes economic sense for its customer base when considering fares and travel time.16 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 155 Like low-cost businesses that do not adopt a focus approach, focus–low-cost businesses are particularly vulnerable to technological obsolescence. Businesses that value technological stability and do not respond to new product and market opportunities may eventually find that their products have become obsolete and are no longer desired by customers. 7-1c Differentiation Strategy (No Focus) Businesses that utilize the differentiation strategy produce and market to the entire industry products or services that can be readily distinguished from those of their competitors. Because they attempt to satisfy most or all of the market, these businesses tend to be large and established. Differentiated businesses often attempt to create new product and market opportunities and have access to the latest scientific breakthroughs because technology and flexibility are key factors S developments in their industries. if firms are to initiate or keep pace with new The potential for differentiation is to A some extent a function of its physical characteristics. Tangibly speaking, it is easier to differentiate an automobile than U bottled water. However, intangible differentiation can extend beyond the physical characteristics of a product or service Nto encompass everything associated with the value perceived by customers. Because such businesses’ customers perD ceive significant differences in their products or services, they are willing to pay E average to high prices for them. Of the prospective bases for differentiation, the most obvious is features of the R product (or the mix of products) offered, including the objective and subjective S differences in product attributes. Lexus automobiles, for example, have been differentiated on product features and are well known for their attention to detail, quality, and luxury feel. United and other airlines have attempted to differentiS telephone and e-mail services.17 ate their businesses by offering in-flight satellite Continental even differentiated itself by emphasizing animal cargo.18 R Speed can also be a key differentiator. For example, according to a 2004 survey by Mintel International Group, 64. percent of Americans said that they selected a restaurant based on the amount , of time they had to eat. Speed has been an essential part of the Starbucks competitive strategy, but became a key concern when service slowed after breakfast sandwiches were added to the product line in the mid-2000s. Adding theseG food items broadened the appeal of Starbucks, but slowed service in a segment of the market where seconds count. A In contrast, competitor Caribou Coffee can make a small coffee-of-the-day in 19 only six seconds. R Timing can also be a key factor, because first movers are more able to establish R themselves in the market than those who come later, as was seen for a number of Y of pizza delivery.20 Factors such as years with Domino’s widespread introduction partnerships with other firms, locations, and a reputation for service quality can also be important (see Strategy at Work 7-2). 2 When customers are relatively price insensitive, a business may select a differentiation strategy and emphasize quality throughout its functional areas. Marketing 0 materials may be printed on high-quality paper. The purchasing department 9 of supplies and raw materials over emphasizes the quality and appropriateness their per unit costs. The research and development department emphasizes new 0 product development (as opposed to cost-cutting measures). Tto low-cost competitors offering simiDifferentiated businesses are vulnerable lar products at lower prices, especially when S the basis for differentiation is not well defined or it is not valued by customers. For example, a grocer may emphasize fast checkout, operating on the assumption that customers are willing to pay Differentiation Strategy A generic business unit strategy in which a larger business produces and markets to the entire industry products or services that can be readily distinguished from those of its competitors. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 156 Chapter 7 S T R A T E G Y A T W O R K 7 - 2 The Differentiation Strategy in Residential Real Estate Implementing a differentiation strategy can be difficult in a highly regulated industry in which competitors are forced to follow rules and even work together. Residential real estate is an example of such an industry. In most cases, a real estate agent who lists a home for a seller must work with agents from other firms who represent prospective buyers. Buyers and sellers are interested in working only with agents who can negotiate successfully with other agents to complete S the transaction. When one also considers the myriad of A federal, state, and local regulations concerning property disclosure, confidentiality, and the like, one U can easily see why it is difficult for an agent or real estate N firm to differentiate service. Differentiation in such an industry is possible, howD ever. Boyd Williams Real Estate Company (www.boydE williams.com) operates in the southeastern Mississippi R community of Meridian, a city of about forty thousand people. To distinguish himself from his rivals, Boyd brings his mobile office to clients’ homes, offices, hotel lobbies, and even restaurants over lunch break. He is always equipped with a laptop computer, portable printer, cell phone, and digital camera. Prospective buyers can view full-color pictures of virtually every home in the market from the mobile office. This approach seeks to provide maximum efficiency and convenience to the buyer. Interestingly, commissions available to Boyd Williams are the same as those available to other agents who do not offer the same amenities. Clearly, Williams seeks to finance his additional investment in the mobile office by allowing consumers to move through the buying process more efficiently—saving him time as well—and by increasing his volume. Source: Adapted from Boyd Williams Real Estate Company home page, accessed March 29, 2002, www.boydwilliams.com. S a few cents more for additional cashiers and checkout lanes. If customers tend to S product assortments and prices than with waiting times, be more concerned with they may shop at otherRstores instead. Instituting a change in competitive strategy can be a difficult process, especially when the nature. of the change involves a heightened emphasis on differentiation. For example, , in 2002, Volkswagen entered the luxury market with the Phaeton, complete with doors trimmed in Italian leather, brushed chrome and chestnut, and a price tag of $70,000. Consumers found it difficult to associate Volkswagen with such G refinement and the company sold only about three thousand Phaetons that year. Interestingly, upscale carmakers including such A notables as BMW and Jaguar began to produce smaller, less expensive “luxury” R a greater welcome from consumers.21 cars, a move that received R Y Firms utilizing the focus-differentiation strategy produce highly differentiated 7-1d Focus-Differentiation Strategy Focus-Differentiation Strategy A generic business unit strategy in which a smaller business produces highly differentiated products or services for the specialized needs of a market niche. products or services for the specialized needs of a market niche. At first glance, the focus-differentiation strategy may appear to be a less attractive strategy than 2 the no-focus differentiation strategy, because the former consciously limits the set 0 target. However, unique market segments often require of customers it seeks to distinct approaches. For example, The Limited operates retail outlets to address 9 multiple demographic segments simultaneously. Men are served by its Structure 0 Bryant stores, and children by its Limited Too stores. stores, women by its Lane The Limited even targets T trendy consumers with Express stores. U.S. chain Torrid features fifty-two stores and specializes in plus-size clothing for young, fashionS nonfocused retailers have not filled effectively.22 In conscious women, a niche some cases, however, large business units are simply not interested in serving smaller, highly defined niches. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 157 Firms can focus their efforts in several ways. Popular retailer Cabela’s has even successfully targeted its efforts to men who hate to shop! The Cabela’s in Michigan draws an estimated 6 million visitors to its retail store each year, mixing its outdoorsman-oriented merchandise with an aquarium, indoor waterfall stocked with trout, and realistic nature scenes. As a result, Cabela’s has secured a customer base largely ignored by other retailers.23 In general, high prices are acceptable to certain customers who need product performance, prestige, safety, or security, especially when only one or a few businesses cater to their needs. As such, focus differentiation is most appropriate when market demand is inelastic, because high-cost products are often required to support the specialized efforts to serve a limited market niche. As a result, cost reduction efforts, while always desirable, are not emphasized.24 S 7-1e Low-Cost–Differentiation Strategy A practitioners as to the feasibility of Debate is widespread among scholars and pursuing low-cost and differentiation strategies simultaneously. Porter suggests U that implementing a low-cost–differentiation strategy is not advisable and leaves N designed to support one strategy a business stuck in the middle, because actions could actually work against the other. Simply D stated, differentiating a product generally costs a considerable amount of money, which would erode a firm’s cost leadership basis. In addition, a number ofEcost-cutting measures may be directly related to quality and other bases of differentiation. Following this logic, a busiR ness should choose either a low-cost or a differentiation strategy, but not both.25 S Others contend that the two approaches are not necessarily mutually exclu26 sive. For example, some businesses begin with a differentiation strategy and integrate low costs as they grow, developing economies of scale along the way. S Others seek forms of differentiation that also provide cost advantages, such as R enhancing and enlarging the filter on a cigarette, which reduces the amount of costly tobacco required to manufacture the product. . Perhaps the best example of a business that has successfully combined the , giant was originally known for contwo approaches is McDonald’s. The fast-food sistency from store to store, friendly service, and cleanliness. These bases for differentiation catapulted McDonald’s to market share leader, allowing the firm Gkey materials at the lowest possible to negotiate for beef, potatoes, and other cost. This unique combination of resources A and strategic attributes has placed McDonald’s in an enviable position as undisputed industry leader, although it is Rdifferentiated competitors emphasizfacing increased competitive pressure from ing Mexican, “fresh and healthy,” or otherRdistinct product lines.27 A more recent example of the combination strategy is the relatively young airline JetBlue Airways, launched in 2000 to Y provide economical air service among a limited number of cities. JetBlue distinguished itself by providing new planes, satellite television on board, and leather seating. JetBlue also minimized costs by 2 such measures as squeezing more seats into its planes, selling most of its tickets 0 on the Internet to avoid commissions, shortening ground delays, and serving snacks instead of meals. Hence, JetBlue’s differentiation efforts increased its load 9 factor (i.e., the average percentage of filled seats), also reducing its per-passenger 0 flight costs.28 Changes in the U.S. mobile home industry T in the 2000s also illustrate a link between low cost and differentiation. Traditionally, mobile homes have been posiS to low-income consumers. In 2004, tioned as a low-cost, affordable housing option about 22 million Americans, or 8 percent of the U.S. population, live in manufactured housing. Sales approached almost 400,000 units per year in the late 1990s. Low-Cost– Differentiation Strategy A generic business unit strategy in which a larger business unit maintains low costs while producing distinct products or services industry-wide for a large market with a relatively inelastic demand. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 158 Chapter 7 By 2003, however, sales had declined to about 131,000 units, a year in which about 100,000 units were repossessed from previous customers. Manufacturers such as Clayton Homes responded by targeting customers with moderate incomes, offering homes with upscale features, such as Mohn faucets, porcelain sinks, a woodburning fireplace, and even a high-definition television set.29 Revenue declines within an industry may cause some of its differentiated businesses to cut costs to remain competitive. In the years following the events of 9/11, for example, British Air embarked on an aggressive cost-cutting campaign, ordering replacement jets devoid of the customary special features, trimming the total number of jets in its fleet, cutting fees to travel agents, eliminating 13,000 jobs, and even limiting menu choices for customers. Ticket prices were also reduced so that the airline could become more competitive with low-fare carriers. As a result, British Air has integrated an emphasis on low costs into its S emphasis.30 Indeed, the low-cost–differentiation strattraditional differentiation egy is possible to attain Aand can be quite effective. Porter’s point is well taken, however, because implementing the combination strategy is generally more difU either the low-cost or the differentiation strategy alone. ficult than implementing This strategy begins with N an organizational commitment to quality products or services, thereby differentiating itself from its competitors. Because customers D may be drawn to high quality, demand may rise, resulting in a larger market share E of scale that permit lower per unit costs in purchasand providing economies ing, manufacturing, financing, research and development, and marketing (see R Strategy at Work 7-3). S low costs and differentiation simultaneously through A business can pursue six primary means: commitment to quality, differentiation on low price, process innovations, product innovations, value innovations, and structural innovations S (see Table 7-2). First, commitment to quality throughout the business organization not only improvesR outputs but also reduces costs involved in scrap, warranty, S T R A T E G Y . , A T W O R K 7 - 3 Competitive Strategy in the Fast-Food Industry G Although fast food in the United States has long been considered an economical lunch or dinner option, resA taurants over the years have attempted to differentiate R their products and create brand loyalty among consumers, with varying degrees of success. An advent R of the 1990s was the notion of the “value menu” or Y “99 cents menu,” whereby restaurants offered a limited number of its sandwich and other items at special prices for cost-conscious consumers. Initially, this move 2 was seen as a necessary means of serving consumers 0 during down economic times. The concept stuck, however, and many analysts believe it is here to stay. 9 While offering some sandwiches at or near the one0 dollar price point, many restaurants also offer—and heavily promote—highly differentiated products in T the two- to three-dollar range. Managers hope that many Sto consumers will be lured in for the special prices, only “move up” to the higher priced items when it is time to order. McDonald’s, Burger King, and Wendy’s all follow this approach to some degree on a national level. In 2002, Hardee’s even introduced the “six dollar burger,” a sandwich designed to compete with those offered in the six-dollar range at sitdown restaurants such as Applebee’s, but for only $3.95 at Hardee’s. A new breed of fast-food restaurants is avoiding the value menu concept, however. High-end sandwich chains such as Panera Bread Company and Corner Bakery Café are sticking to a highly differentiated approach, emphasizing fresh bread and ingredients to an increasingly health-conscious market. The various strategies implemented by different, successful fastfood players demonstrate the number of viable market niches available in the industry. Source: Adapted from S. Leung, “Fast-Food Chains Vie to Carve Out Empire in Pricey Sandwiches,” Wall Street Journal, 5 February 2002, A1, A10. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies TA B L E 1. 2. 3. 4. 5. 6. 7-2 159 M e an s o f P u r s u in g Low Costs a n d Diffe re n tia tion Si m u l t an e o u s ly Commitment to quality Differentiation on low price Process innovations Product innovations Value innovations Structural innovations and service after the sale. Quality refers to the features and characteristics of a 31 product or service that enable it to satisfy S stated or implied needs. Hence, a high-quality product or service conforms to a predetermined set of specifications A quality is based on perceptions and and satisfies the needs of its users. In this sense, is a measure of customer satisfaction withUa product over its lifetime, relative to customer satisfaction with competitors’ product offerings.32 Building quality into a product doesNnot necessarily increase total costs, because the costs of rework, scrap, and servicing the product after the sale may D be reduced; and the business benefits from increased customer satisfaction and E of scale. The emphasis in the 1990s repeat sales, which can improve economies on quality improvement programs soughtRto improve product and service quality and increase customer satisfaction by implementing a holistic commitment S to quality, as seen through the eyes of the customer. Studies suggest that when properly implemented, an emphasis on quality can improve customer satisfaction while lowering costs.33 S Second, a lower than average price may be viewed as a basis for differentiating R should be distinguished from low one’s products or services. However, low prices costs. Whereas price refers to the transaction . between the firm and its customers, cost refers to the expenses incurred in the production of a good or service. Firms , with low production costs do not always translate these low costs into low prices. Anheuser Busch, for example, maintains one of the lowest per unit production costs in the beer industry but does not offer its beers at a low price. However, Galso lower their prices because their many firms that achieve low-cost positions competitors may not be able to afford to match A their price level. These firms are combining low costs with a differentiation based on price. Third, process innovations increase theRefficiency of operations and distribution. Although these improvements are normally thought of as lowering costs, R they can also enhance product or service differentiation. For example, the recent emphasis on eliminating processes that doYnot add value to the end product has not only cut costs for many businesses, but also increased production and delivery speed, a key form of differentiation. 2 Fourth, product innovations are typically presumed to enhance differentia0 over the years, Philip Morris develtion but can also lower costs. For instance, oped a filter cigarette and, later, cigarettes with low tar and nicotine levels. These 9 innovations not only differentiated its products, but also allowed the company to use less tobacco per cigarette to produce 0 a higher quality product at a dramatic reduction in per unit costs.34 T Fifth, firms may engage in value innovations, modifying products, services, S delivered to customers.35 Such firms and activities in order to maximize the value seek to provide maximum value by differentiating products and services only to the extent that any associated cost hikes can be justified by increases in overall Quality The features and characteristics of a product or service that allow it to satisfy stated or implied needs. Process Innovations A business unit’s activities that increase the efficiency of operations and distribution. Product Innovations A business unit’s activities that enhance the differentiation of its products or services. Value Innovations Modifying products, services, and activities in order to maximize the value delivered to customers. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 160 Chapter 7 Structural Innovations Modifying the structure of the organization and/or the business model to improve competitiveness. Business Web A system of internetworked, fluid, specialized businesses that come together to create value for customers. Focus–Low-Cost/ Differentiation Strategy A generic strategy in which a smaller business produces highly differentiated products or services for the specialized needs of a select group of customers while keeping its costs low. Multiple Strategies A strategic alternative for a larger business unit in which the organization simultaneously employs more than one of the generic business strategies. value and by pursing cost reductions that result in minimal if any reductions in value. By focusing on value instead of low cost or differentiation, a firm can offer the overall combination of cost minimization and differentiation in an industry. Finally, the importance of structural innovations, modifying the structure of the organization or the business model to improve competitiveness, has been highlighted in recent years. Recent approaches to structural innovation include the virtual corporation, outsourcing, and the Japanese kieretsu. The notion of business webs, or systems of internetworked, fluid, specialized businesses that come together to create value for customers, has gained prominence among strategic thinkers. Within the business web model, organizations do not focus solely on their own activities, but consciously develop partnerships with other businesses, each focusing on its own core competence to better achieve its mission.36 S 7-1f Focus–Low-Cost/Differentiation Strategy A a focus–low-cost/differentiation strategy produce highly Business units that adopt differentiated products Uor services for the specialized needs of a select group of customers while keeping their costs low. Businesses utilizing this strategy share all N previous strategies. The focus–low-cost/differentiation the characteristics of the strategy is difficult to implement because the niche orientation limits prospects D for economies of scale and opportunities for structural innovations. Many small, E such as those specializing in ethnic or international independent restaurants cuisine adopt this approach, constantly seeking a balance of cost reductions R and uniqueness targeted at a specific group of consumers. For example, many S eateries that emphasize a unique specialty—such as university towns have small Garibaldi’s barbeque pizza in Memphis, Tennessee—while also minimizing costs to remain affordable to the price-conscious college student. S R 7-1g Multiple Strategies In some cases, business . units utilize multiple strategies, or more than one of the six strategies identified in sections 7-1a through 7-1f, simultaneously. Unlike , the combination low-cost–differentiations strategy, multiple strategies involve the simultaneous execution of two or more different generic strategies, each tailored to the needs of a distinct market or class of customer. For this reason, large businesses are more likely G than small ones to adopt this approach. Hotels, for example, utilize multiple strategies when they offer basic rooms to most guests but A reserve suites on the top floor for others. R A multiple strategy approach can be difficult to implement and confusing to R utilize multiple strategies when they offer both highly customers. Many airlines differentiated (and high-priced) service via first-class seating and economical, Y limited-frills service in coach. To distinguish between these two classes of customers, airlines typically provide separate customer service counters, different boarding times and procedures, 2 and better food for their first-class passengers. While this approach is not optimal in theory, it enables airlines to satisfy the needs of 0 segment without flying additional aircraft. more than one traveling 9 7-2 Miles and 0 Snow’s Strategy Framework T A second commonly used S framework introduced by Miles and Snow considers four strategic types: prospectors, defenders, analyzers, and reactors.37 Miles and Snow’s typology is an alternative to Porter’s approach to generic strategy. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies Prospectors perceive a dynamic, uncertain environment and maintain flexibility to combat environmental change. Prospectors introduce new products and services, and design the industry. Thus, prospectors tend to possess a loose structure, a low division of labor, and low formalization and centralization. While a prospector identifies and exploits new product and market opportunities, it accepts the risk associated with new ideas. For example, Amazon.com’s initial launch of its Web bookstore was a major risk, one that resulted in much greater success for the company than with literally hundreds of other Internet start-ups in the late 1990s. Prospectors typically seek first-mover advantages derived from being first to market. First-mover advantages can be strong, as demonstrated by products widely known by their original brand names, such as Kleenex and Chap Stick. Being first, however, can be a risky proposition, and research has shown that competitors may be able to catch up quickly and effectively.38 As a result, prospectors must develop expertise in innovation andS evaluate risk scenarios effectively. Prospectors are typically focused on A corporate entrepreneurship, or intrapreneurship. Whereas entrepreneurship focuses on the development of U an organization, intrapreneurship new business ventures as a means of launching involves the creation of new business ventures N within an existing firm. Established firms seeking to foster a culture that encourages the type of innovative activity D often seen in upstarts must provide time, resources, and rewards to employees E the organization. who develop new venture opportunities for It can be argued that all businesses should be prospectors, at least to some R extent. For example, Kraft revenues from traditional and “new and improved” S Jell-O, and other brand products versions of its Ritz, Kool-Aid, Maxwell House, began to slip in the early 2000s. Kraft fired its CEO, Betsy Holden, in late 2003 in an effort to place a greater emphasis on new products instead of more conservaS tive brand extensions.39 Defenders are almost the opposite of prospectors. They perceive the environR ment to be stable and certain, seeking stability and control in their operations . incorporate an extensive division of to achieve maximum efficiency. Defenders labor, high formalization, and high centralization. The defender concentrates , on only one segment of the market. Analyzers stress stability and flexibility, and attempt to capitalize on the best of the prospector and defender strategy types. GTight control is exerted over existing operations with loose control for new undertakings. The strength of the anaA lyzer is the ability to respond to prospectors (or imitate them) while maintaining efficiency in operations. An analyzer mayRfollow a prospector’s successful lead, modify the product or service offered by the prospector, and market it more R effectively. In effect, an analyzer is seeking a “second-mover” advantage.40 Copying successful competitors can beYa successful strategy when both organizations share the resources needed to effectively implement similar programs. After sales slumped in 2000 at Taco Bell, president Emil Brolick acknowledged 2 noting Wendy’s ability to gain market plans to model the restaurant after Wendy’s, share without slashing prices. In 2001, Taco 0 Bell began appealing to a more mature market with additional pricey items and fewer promotions. Although the product lines are substantially different, 9 Brolick hopes that a similar approach for Taco Bell can produce similar results.410 Reactors lack consistency in strategic choice and perform poorly. The reactor T organization lacks an appropriate set of response mechanisms with which to confront environmental change. The reactor S strategic type also lacks strength. In some respects, Porter’s typology and Miles and Snow’s typology are similar. For example, Miles and Snow’s prospector business is likely to emphasize 161 First-Mover Advantages Benefits derived from being the first firm to offer a new or modified product or service. Intrapreneurship The creation of new business ventures within an existing firm. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 162 Chapter 7 Case Analysis 7-1 Step 10: What Is the Current Business-Level Strategy? One needs to examine each major business unit (if there is more than one) and identify which generic strategy best describes the strategy of each business unit. Both strategy typologies (e.g., Porter, Miles and Snow) should be applied, but additional support should also be provided. Each business has its own unique strategy based on its own combination of resources. Hence, it is also important to discuss how the organization’s business-level strategy differs from others in the industry that might share the same generic strategy. What makes the organization unique? This phase of the strategy management process is critical and often neglected. The notion of business-level strategy cannot be understood independent of industry definition becauseS an organization’s business-level strategy is expressed in terms relative to others in the A industry. For example, the competitive strategy for retailing giant Wal-Mart might be considered that of differentiation or low-cost–differentiation strategy if the industryUis defined “discount retailers,” whereas it might be considered as low cost if the industry N is defined more broadly as “department stores.” D E the defender business typically emphasizes low costs. differentiation, whereas These tendencies notwithstanding, fundamental differences exist between R the typologies. Porter’s approach is based on economic principles associated S with the cost-differentiation dichotomy, whereas the Miles and Snow approach describes the philosophical approach of the business to its environment (see Case Analysis 7-1). 7-3 S R Business . Size, Strategy, and Performance , Researchers examining the relationship between a business unit’s size and its performance, relative to those of its competitors, have interesting observations. Midsize business unitsG often perform poorly in comparison with small or large competitors, because they A typically do not possess the advantages associated with being flexible like their small rivals or possessing substantial resources like their R small businesses enjoy flexibility in meeting specific large rivals.42 Specifically, market demands and R a potentially quicker reaction to environmental changes. Because of their lower investments, they may be able to make strategic moves and Y pursue more limited revenue opportunities that would be unprofitable for midsize or large businesses. Likewise, large businesses can translate their economies of scale into lower costs per unit and may be better able to bargain with their 2 suppliers or customers, or to win industry price wars. 0 units tend to lack the advantages of either small or Because midsize business large rivals, many choose to become larger or smaller to capitalize on advantages 9 of their competitors. Specifically, they may seek to expand their operations (i.e., increase their size) to 0 take advantage of scale economies, or they may retrench (i.e., decrease their size) T to avail themselves of the advantages possessed by small companies. Either option can be difficult and may not even be feasible, depending on various competitiveSand industry forces.43 It is not suggested that all midsize businesses perform poorly and should aggressively attempt to increase or decrease size. Nonetheless, strategic managers should understand the relationships between 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies FIGURE 7-2 Po r t e r ’s G e n e r ic S tr a te gy M a tr ix S A U N D size and performance and consider them when evaluating the specific needs of E their business units. R 7-4 Assessing Strategies S Although the distinctions between such strategies as cost leadership and differentiation or prospectors and differentiators are readily made in theory, they are S not always easy to assign in practice. Considering Porter’s typology, cost leadership R extremes on a continuum. Likewise, and differentiation may be viewed as opposite focus and no focus can also be seen as opposite . extremes. Figure 7-2 illustrates this approach with a hypothetical industry containing six rivals. Company A is the only , C—generally seen as part of the same focus–low-cost competitor. Companies B and strategic group—are slightly less focused than A; both B and C are more differentiated than A, but C is more differentiated than B. Companies D and E—clearly G members of the same strategic group—employ low-cost (no-focus) strategies, whereas company E follows a differentiation (no-focus) approach. Viewing generic A strategies as a matter of degree enables analysts to illustrate relatively minor distincR generic strategy. This approach can tions between businesses employing the same also be applied to the Miles and Snow typology, with prospectors and defenders R anchoring ends of a continuum and analyzers in the middle.44 Yis not easy and can be somewhat subCategorizing businesses in such a matrix jective. Consider Wal-Mart as an example. Traditionally, the retailer has eschewed a focus approach in favor of a one-size-fits-all approach geared at selling to most 2 consumers. Although this approach was successful for a while, sales growth in the United States began to decline in the 0 early 2000s. In 2006, the retailer began modifying its product mixes in many of its U.S. stores to target six groups: African 9 Americans, the affluent, empty-nesters, Hispanics, suburbanites, and rural residents.45 On the one hand, this move reflects0an attempt by Wal-Mart to concentrate its efforts on specific markets, an approachTconsistent with Porter’s focus strategy. On the other hand, the six groups identified together comprise the majority of the S competitive strategy does not qualify U.S. population, suggesting that Wal-Mart’s as a focus strategy, but as a no-focus strategy with some degree of tailoring each store to the needs of its clientele. Although it might not be appropriate to reclassify 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 163 164 Chapter 7 Case Analysis 7-2 Step 11: What Business-Level Strategies Are Presently Being Employed by Competitors? To analyze all the competitive options available to a business, one needs to understand the strategic approach of competitors. Because obtaining detailed information about all competitors is often difficult, a focus on the primary competitors utilizing at least one of the business strategy typologies is appropriate. The key here is to understand how different competitors in the industry utilize various strategic means to serve customers and pursue profitability. It is helpful to identify how the companies are similar and different in their strategic approaches. This insight can help strategic managers predict how competitors might respond to a change in strategy. S A Wal-Mart strategy as a focus U approach because of this strategic shift, a modest move toward the focus end of the continuum may be warranted. N an effective competitive strategy is almost impossible In addition, formulating without a clear understanding of the primary competitors and their strategies. D Specifically, it is important to comprehend how rivals compete, what they are E (i.e., their goals), what assumptions they hold concernattempting to accomplish ing the industry, and what R their unique strengths and weaknesses are relative to others in the industry. Developing this understanding not only helps top managSto position a business in the industry, but can also help ers formulate strategies them forecast any competitive responses that rivals might make if a major strategic change is implemented (see Case Analysis 7-2). S are not instituted by businesses when they anticipate a Many strategic moves competitor’s activities,Rbut in response to moves that have already been implemented. For example, by 2003, online hospitality sites Hotels.com and Expedia.com . had teamed up with franchise hotels with unused capacity to fill extra rooms , a result, consumers were able to secure high-quality at discounted rates. As accommodations at substantial savings. The hotel chains associated with these franchised units earn substantial profits from their reservation services and G franchisees from offering rates at Web sites lower than therefore began to restrict those offered by the hotel A chain’s site. As one executive put it, “If we are not careful, these wholesalers will become…so big and powerful that we will have to work with them . . . And youRwill have to pay a premium to be on their shelves.”46 Taking advantage ofRa competitor’s misfortune is not always easy, however. In 2000, Bridgestone’s Firestone unit was forced to recall 6.5 million tires linked to fatal accidents on FordYExplorers in a widely publicized challenge to its credibility. Goodyear, however, was unable to meet the sudden increase in demand for its tires and responded by raising prices. Although sales stabilized at Bridgestone 2 in the early 2000s at a market share about 2 percent lower than before the recall, Goodyear’s market share 0 had declined back to its pre-recall levels by 2003. Hence, Goodyear was unable to respond effectively to Bridgestone’s woes.47 9 0 7-5 Global Concerns T strategy of a business operating in global markets can Identifying the competitive be a complex task. Unfortunately, no simple formula exists for developing and S implementing successful business strategies across national borders. A popular approach to this challenge is to think globally, but act locally. Following this logic, 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies a business organization would emphasize the synergy created by serving multiple markets globally, but formulate a distinct competitive strategy for each specific market that is tailored to its unique situation. Others argue that consistency across global markets is critical, citing examples such as Coca-Cola, whose emphasis on quality, brand recognition, and a small world theme has been successful in a number of global markets. These two approaches represent distinct perspectives on what it takes to be successful in foreign markets. Consider several examples. Coca-Cola’s global approach to marketing the popular soft drink has been relatively consistent across borders. Some product differences exist, however, due to availability and cost factors. In Mexico, for example, Coke contains readily available cane sugar. In the United States, where customers are not believed to perceive a major difference in sweeteners, Coke changed to high-fructose corn syrup, a less expensive alternative.48 Compared to Coca-Cola, Yum Brands S takes a more localized approach with its KFC business unit. KFC emphasizes chicken A in its host country—the United States—but added fish sandwiches to menus at its Malaysian outlets in early 2006. U According to KFC Holdings (Malaysia) executive director and chief operating officer To Chun Wah, “As much as our N customers love our chicken products, they also want a greater variety of meat products at KFC. Our market surveys D show that our customers want more than just tasty, high quality and affordable E for new and interesting things to chicken but are also constantly on the lookout eat.” This move reflects a clear plan to localize business strategies along the lines R of taste. Outlets in Malaysia are not required to carry the fish sandwich, however. Fish sandwiches had already proven to be S successful in other Asian markets, such as Beijing, Shanghai, and Taipei.49 Yum Brands took localization another step further in 2004 when it launched S East Dawning, a bright, clean fast-food restaurant in Shanghai. East Dawning operates like Yum’s KFC restaurants except that its menu and décor are Chinese. R Menu offerings include Chinese favorites such as noodles, rice, soy milk, fried dough, and plum juice. Yum hopes to turn. East Dawning into China’s largest fastfood restaurant one day. Yum is also considering launching an Indian fast-food , restaurant in India.50 Consider Swedish home furnishings designer Ikea. Responding to frugality in the local market, Ikea sells many of its G products in China at prices well below those in other parts of the world. The Beijing store, opened in 2006, is its second A largest store in the world, behind Ikea’s Stockholm store, and draws an estimated three times as many visitors as its other outlets. R Ikea has experienced success selling to the growing middle class in China, but at prices that would be considered R bargains elsewhere in the world.51 Y perspectives—localizing and mainThere is wisdom in both global strategy taining consistency across borders—although the most effective approach will depend on the mission, goals, and characteristics of the organization. In practice, businesses rarely operate at2 one extreme or the other. Hence, these alternative approaches can be viewed 0 as opposite ends of a continuum. Regardless of choice, there are costs and trade-offs associated with every posi9 tion along the continuum. Tailoring a business strategy to meet the0unique demands of a different market can be especially challenging because it requires that top managers understand the similarities and differences between Tthe markets from both industry and cultural perspectives. For example, since S the 1970s, Japanese automobile manufacturers have sought to blend a distinctively Japanese approach to building cars with a sensitivity to North American and European values. Honda, the first 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 165 166 Chapter 7 Japanese manufacturer to operate a facility in the United States, has been most aggressive in this regard. In 2000, Mitsubishi was aggressively redesigning the Montero Sport to make it a “global vehicle” that could sell effectively in world markets. In 2001, however, the car maker dropped its one-size-fits-all approach and began to emphasize design factors unique to the critical U.S. market.52 Given the intense competition in most markets in the developed world, strategic managers must remain abreast of opportunities that may exist in emerging economies. India, for example, has enjoyed considerable growth in recent years. Some firms have outsourced jobs in technical areas to India where trained workers are available at considerably lower wages. Economic liberalization in the country has invited additional foreign investment into the country. India’s Tata Motors helped overcome the country’s reputation for poor production quality by exporting an estimated twenty thousand CityRovers to the United Kingdom in 2004.53 India, however, has S received only a small fraction of the level of foreign investment made in China, A which boasts the world’s largest population and has been tabbed as a world economic leader within the next few decades. China’s entrance U into the World Trade Organization, declining import tariffs, and increasing consumer incomes suggestNa bright future for the nation. At present, China remains a mix of the traditional lifestyle based in socialism and its own form of a neoD Western economic development. Nowhere is this friction seen best than on the E where crowds of bicycles attempt to negotiate traffic roads of the capital, Beijing, with buses and a rapidly increasing number of personal automobiles. U.S.-style R traffic reports have even become pervasive in a country where the world’s largest S for a stake in what many experts believe will be a conautomakers are fighting sumer automobile growth phase of mammoth proportions.54 When a Western firm seeks to conduct business with one of its Chinese counterS firms must recognize the cultural differences between parts, managers from both the two nations. Recently, R a number of consulting and management development organizations in both China and the West have been busy training managers to become aware of such .differences and take action to minimize misunderstandings that can arise from them. , For example, Chinese managers are more likely than Americans to smoke during meetings and less likely to answer e-mail from international partners. In the United States, it is more common to emphasize subordinate contributions to solving Gproblems, whereas Chinese managers are more likely to respect the judgment of their superiors without subordinate involvement.55 A Western manufacturers such as Eastman Kodak, Proctor & Gamble, Group Danone of France, and R Siemens AG of Germany have already established a strong presence in China. A number of Western restaurants and retailers have R also begun to expand aggressively into China, including U.S.-based McDonald’s, Popeye’s Chicken, andYWal-Mart. As the CEO of Yum, owner of KFC, Pizza Hut, and Taco Bell, put it, “China is an absolute gold mine for us.”56 French-based Carrefour is the largest foreign retailer in China with ninety hypermarkets in about two dozen cities.2Product mixes in the Chinese stores tend to be similar to those in the domestic market, with adjustments made for local preferences. For a 0 number of firms, the only attractive prospects for growth lie in emerging econo9 and Mexico.57 mies such as China, Brazil, 0 7-6 Summary T At the business level,Stop managers determine how the organization is to compete effectively. According to Porter’s framework, managers must decide whether to focus on a segment of the market—a strategy often appropriate for small businesses—and whether to emphasize low costs or differentiation. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 167 Each approach has its own set of advantages and challenges. Business units may also seek to combine the low-cost and differentiation strategies, although this approach can be difficult to implement effectively. According to Miles and Snow’s framework, managers may select a prospector, an analyzer, a defender, or a reactor strategy. Each of the first three approaches can serve as an effective approach, whereas the reactor strategy is a suboptimal choice. Top managers should also consider the roles of business size, the strategies of rivals, and opportunities in emerging markets when seeking to develop business strategies. Key Terms business unit business webs differentiation strategy first-mover advantages focus-differentiation strategy focus–low-cost/differentiation strategy S focus–low-cost strategy Astrategies generic intrapreneurship U low-cost–differentiation strategy N low-cost strategy D multiple strategies E R Review Questions and Exercises S 1. What is the difference between a corporate strategy and a business strategy? S 2. Identify the generic business strategy configurations available to strategic managers, according R to Porter’s typology. . 3. Is it possible for a business to differentiate its outputs and lower its costs simultaneously? Explain., 4. Identify the generic business strategy configurations available to strategic managers, according to Miles G and Snow’s typology. A Practice Quiz R R True or False 1. The focus-differentiation strategy emphasizes Ylow over2. 3. 4. 5. 6. all costs while serving a narrow segment of the market. Businesses that utilize the focus strategy produce and market to the entire industry products 2 or services that can be readily distinguished from those of 0 their competitors. The combination strategy can also be referred 9 to as multiple strategies. 0 There is no advantage to the reactor strategic type. Tby Porter The generic strategy typologies developed similarities and by Miles and Snow possess both S and differences. Midsize businesses tend to be outperformed by their smaller and larger counterparts. process innovations product innovations quality strategic group structural innovations value innovations 5. How are the business strategy typologies by Porter and those by Miles and Snow similar? How are they different? 6. Why might one expect the performance level of midsize business units to be lower than the performance level of either small or large business units? Multiple Choice 7. Businesses adopting the same generic strategy are referred to as A. low-cost businesses. B. differentiated businesses. C. a strategic group. D. none of the above 8. A no-frills product targeted at the market at large is consistent with the A. low-cost strategy. B. differentiation strategy. C. focus strategy. D. none of the above 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 168 Chapter 7 9. Which of the following is not a key advantage of the low-cost–differentiation strategy? A. It enables the business to compete from a cost leadership position. B. It is easier to implement than either the lowcost or the differentiation strategy. C. It allows the business to distinguish its products from the competition. D. It offers the prospects of high profitability. 10. Modifying the structure of the organization and/or the business model to improve competitiveness is consistent with A. the low-cost strategy. S B. the focus strategy. A C. the differentiation strategy. U D. none of the above N D Notes E 1. Z. He and P. Wong, “Exploration vs. Exploitation: An Empirical R Test of the Ambidexterity Hypothesis,” Organization Science 15 (2004): 481–494. S 2. I. M. Cockburn, R. M. Henderson, and S. Stern, “Untangling the Origins of Competitive Advantage,” Strategic Management Journal 21 (2000): 1123–1145. 3. T. D. Ferguson, D. L. Deephouse, and W. L. Ferguson, “Do Strategic Groups Differ in Reputation?” Strategic Management Journal 21 (2000): 1195–1214. 4. R. S. Kaplan and D. P. Norton, “Having Trouble with Your Strategy? Then Map It,” Harvard Business Review 78(5) (2000): 167–176. 5. C. Campbell-Hunt, “What Have We Learned about Generic Competitive Strategy? A Meta-Analysis,” Strategic Management Journal 21 (2000): 127–154. 6. M. E. Porter, Competitive Strategy (New York: Free Press, 1980). 7. Porter, 41. 8. H. Rudnitsky, “The King of Off-Price,” Forbes (31 January 1994): 54–55; J. A. Parnell, “New Evidence in the Generic Strategy and Business Performance Debate: A Research Note,” British Journal of Management 8 (1997): 175–181. 9. R. D. Buzzell and B. T. Gale, The PIMS Principles (New York: Free Press, 1987); R. Luchs, “Successful Businesses Compete on Quality–Not Costs,” Long Range Planning 19(1) (1986): 12–17. 10. K. Stringer, “Airlines Now Offer ‘Last Minute’ Fare Bargains Weeks before Flight,” Wall Street Journal (15 March 2002): B1. 11. E. Perez and N. Harris, “Despite Early Signs of Victory, Discount Airlines Get Squeezed,” Wall Street Journal (17 January 2005): A1, A6; E. Perez, “Fare War Menaces Air Industry,” Wall Street Journal (6 January 2005): C1, C5; A. Johnson, “Airlines Cut Prices on Overseas Fares,” Wall Street Journal (11 January 2005): D1, D5. 12. J. Pereira and C.J. Chipello, “Battle of the Building Blocks,” Wall Street Journal (4 February 2004): B1, B4. S R . , G A R R Y 2 0 9 0 T S 11. Analyzers A. seek first-mover advantages. B. control a distinct segment of the market. C. display some of the characteristics of both prospectors and defenders. D. none of the above 12. Emerging markets are often more attractive than developed ones because A. competition is not as intense. B. consumer incomes in emerging markets are not a concern. C. the infrastructure in emerging markets is already developed. D. none of the above 13. J. Adamy, “To Find Growth, No-Frills Grocer Goes Where Other Chains Won’t,” Wall Street Journal (30 August 2005): A1, A8. 14. “The Collapse of Laker Airways,” Workers World Online, accessed April 12, 2002, www.workers.org/marcy/economy/ crisis04.html. 15. K. Johnson and D. Michaels, “Big Worry for No-Frills Ryanair: Has It Gone as Low as It Can Go?” Wall Street Journal (1 July 2004): A1, A10. 16. D. Michaels, “Growth Market for Airlines: Cheap Travel for Immigrants,” Wall Street Journal (7 March 2007): A1, A15. 17. S. Carey, “United to Install In-Flight E-Mail by End of Year,” Wall Street Journal (17 June 2003): D1, D2; S. McCartney, “New InFlight E-Mail Falls Short,” Wall Street Journal (31 March 2004): D1, D3; D. Michaels, “New Look for Cattle Class,” Wall Street Journal (8 December 2004): B1, B2. 18. S. McCartney, “Carrier Caters to Critters,” Wall Street Journal (29 October 2003): B1–B2. 19. S. Gray, “Coffee on the Double,” Wall Street Journal (12 April 2005): B1, B7. 20. M. B. Lieberman and D. B. Montgomery, “First-Mover Advantages,” Strategic Management Journal 9 (1988): 41–58. 21. N. E. Budette, “Volkswagen Stalls on Several Fronts after Luxury Drive,” Wall Street Journal (8 May 2003): A1, A17. 22. S. Kang, “Retailer Prospers with Sexy Clothers for the PlusSized,” Wall Street Journal (27 April 2004): A1, A8. 23. K. Helliker, “Rare Retailer Scores by Targeting Men Who Hate to Shop,” Wall Street Journal (17 December 2002): A1, A11. 24. J. Kickul and L. K. Gundry, “Prospecting for Strategic Advantage: The Proactive Entrepreneurial Personality and Small Firm Innovation,” Journal of Small Business Management 40 (2002): 85–97. 25. Porter, Competitive Strategy. 26. Parnell, “New Evidence in the Generic Strategy and Business Performance Debate”; Parnell, “Reframing the Combination 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. Strategy Debate: Defining Different Forms of Combination,” Journal of Applied Management Studies 9(1) (2000): 33–54; C. W. L. Hill, “Differentiation versus Low Cost or Differentiation and Low Cost: A Contingency Framework,” Academy of Management Review 13 (1988): 401–412. R. Papiernik, “McDonald’s Shows It Can Market Well with Numbers, Knack for Good Timing,” Nation’s Restaurant News (1 May 2000): 15–16; J. F. Love, McDonald’s: Behind the Arches (New York: Bantam Press, 1995). S. Carey, “Costly Race in the Sky,” Wall Street Journal (9 September 2002): B1, B3. J. R. Hagerty, “Mobile-Home Industry Tries to Haul Itself out of Big Slump,” Wall Street Journal (30 March 2004): A1, A12. D. Michaels, “As Airlines Suffer, British Air Tries New Strategy,” Wall Street Journal (22 May 2003): A1, A5. ANSI/ASQC, Quality Systems Terminology, American National Standard (1987), A3-1987. D. A. Garvin, Managing Quality (New York: Free Press, 1988). United States General Accounting Office, “Management Practices: U.S. Companies Improve Performance through Quality Efforts,” GAO/NSIAD-91-190, May 1991. A. Farnham, “America’s Most Admired Companies,” Fortune (7 February 1994): 50–54; R. H. Miles, Coffin Nails and Corporate Strategies (Englewood Cliffs, NJ: Prentice Hall, 1982). W. C. Kim and R. Mauborgne, “Value Innovation: The Strategic Logic of High Growth,” Harvard Business Review 82(4) (2004): 172–180. D. Tapscott, D. Ticoll, and A. Lowy, Digital Capital (Boston: Harvard Business School Press, 2000). R. E. Miles and C. C. Snow, Organizational Strategy, Structure, and Process (New York: West, 1978); M. Forte, J. J. Hoffman, B. T. Lamont, and E. N. Brockmann, “Organizational Form and Environment: An Analysis of Between-Form and Within-Form Responses to Environmental Change,” Strategic Management Journal 21 (2000): 753–773. J. A. Matthews, “Competitive Advantages of the Latecomer Firm: A Resource-Based Account of Industrial Catch-Up Strategies,” Asia Pacific Journal of Management 19 (2002): 467–488. S. Ellison, “Kraft’s Stale Strategy,” Wall Street Journal (18 December 2003): B1, B6. H. C. Hoppe and U. Lehmann-Grube, “Second-Mover Advantages in Dynamic Quality Competition,” Journal of Economics & Management Strategy 10 (2001): 419–434. J. Ordonez, “Taco Bell Chief Has New Tactic: Be Like Wendy’s,” Wall Street Journal (23 February 2001); B1, B4. D. B. Audretsch and J. A. Elston, “Does Firm Size Matter? Evidence from the Impact of Liquidity Constraints on Firm Investment Behavior in Germany,” International Journal of S A U N D E R S S R . , G A R R Y 169 Industrial Organization 20 (2002): 1–138. 43. P. Chan and T. Sneyoski, “Environmental Change, Competitive Strategy, Structure, and Firm Performance: An Application of Data Development Analysis,” International Journal of Systems Science 22 (1991): 1625–1636. 44. Some scholars might reject this approach, arguing that each generic strategy in a given typology represents a qualitatively distinct strategy. While this is arguably true, considering generic strategy as a matter of degree rather than kind is a useful means of illustrating strategic variations in an industry. 45. A. Zimmerman, “To Boost Sales, Wal-Mart Drops One-SizeFits-All Approach,” Wall Street Journal (7 September 2006): A1, A17. 46. J. Angwin and M. Rich, “Big Hotel Chains Are Striking Back against Web Sites,” Wall Street Journal (14 March 2003): A7, A71; R. Lieber, “When Hotel Discounts Are No Bargain,” Wall Street Journal (6 August 2003): D1, D9. 47. T. Aeppel, “How Goodyear Blew Its Change to Capitalize on a Rival’s Woes,” Wall Street Journal (19 February 2003): A1, A10. 48. C. Terhune, “U.S. Thirst for Mexican Cola Poses Sticky Problem for Coke,” Wall Street Journal (11 January 2006): A1, A10. 49. P. Nambiar, “Grab a Fish Sandwich—at KFC,” New Strait Times (5 January 2006): B24. 50. J. Adamy, “One U.S. Chain’s Unlikely Goal: Pitching Chinese Food in China,” Wall Street Journal (20 October 2006): A1, A8. 51. M. Fong, “Ikea Hits Home in China,” Wall Street Journal (3 March 2006): B1, B4. 52. N. Shirouzu, “Tailoring World’s Cars to U.S. Tastes,” Wall Street Journal (15 January 2001): B1. 53. J. Slater and J. Solomon, “With a Small Car, India Takes Big Step onto Global Stage,” Wall Street Journal (5 February 2004): A1, A9; C. Karmin, “India, Poised for Growth, Merits Closer Look,” Wall Street Journal (19 February 2004): C1, C18; S. Thurm, “Lesson in India: Some Jobs Don’t Translate Overseas,” Wall Street Journal (3 March 2004): A1, A10. 54. K. Leggett and T. Zaun, “World Car Makers Race to Keep Up with China Boom,” Wall Street Journal (13 December 2002): A1, A7; K. Chen, “Beyond the Traffice Report,” Wall Street Journal (2 January 2003): A1, A12. 55. M. Fong, “Chinese Charm School,” Wall Street Journal (13 January 2004): B1, B6. 56. L. Chang and P. Wonacott, “Cracking China’s Market,” Wall Street Journal (9 January 2003): B1. 57. L. Chang, “Western Stores Woo Chinese Wallets,” Wall Street Journal (26 November 2002): B1, B6; B. Saporito, “Can Wal-Mart Get Any Bigger?” Time (13 January 2003): 38–43. 2 0 9 0 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 170 Chapter 7 R E A D I N G 7 - 1 Insight from strategy+business Leadership and innovation may be appealing concepts, but they are not always crucial to strategic success. This chapter’s strategy+business reading refers to the alternative approach as imitation and notes that doing so reduces risk and can increase efficiency. As Carr puts it, “Innovation has its place…but it’s not every place.” Mastering Imitation For every thousand flowers that bloom, a million weeds surface. Best to cultivate from the greats. S A anagement thinking has for some time U been dominated by two big themes: leadN ership and innovation. It’s not hard to see why. Both are important yet amorphous D subjects. As resistant to definition as they are essential E to business success, they offer unbounded opportunities R for exposition and exploration to researcher, philosopher, and charlatan alike. S They have something else in common, too. It’s come By Nicholas G. Carr M to be assumed that leadership and innovation are universally good qualities to which all should aspire. Through S high-minded training programs, reward systems, and R communication efforts, companies today routinely seek to democratize innovativeness and leadership—to drive . them into every nook and cranny of their organization. In , one way, this phenomenon seems yet another manifestation of the peculiarly American assumption that what’s good small doses must be great in large quantities. In another way, it appears to spring out of the shift fromG a manufacturing to a service economy, with the attendant A weakening of traditional management hierarchies. R But is the phenomenon as salutary as it first appears? Is it really in the best interest of companies to try to turn R all their employees into leaders, all their units into hotY beds of creativity? I’m not convinced. The cult of leadership seems especially, even insidiously, dangerous. Too often, it ends up promoting an insipid textbook form of 2 leadership, a “five keys to success” pantomime. At worst, 0 it breeds a particularly insufferable kind of despot—the boss who, like David Brent in the BBC series The Office, 9 feels compelled to flourish his entirely imaginary “lead0 ership qualities” in front of his beleaguered staff. The result, inevitably, is organizational cynicism. T The cult of innovation seems healthy on the face of it. In a free market, after all, innovation underpins competitive advantage, which in turn undergirds profitability. Being indistinguishable from everyone else means operating with a microthin profit margin, if not outright losses. So why not try to innovate everywhere—to let, as Chairman Mao famously put it, a thousand flowers bloom? Here’s why not: For every thousand flowers, you get a million weeds. Innovation is by its very nature wasteful. It demands experimentation, speculative investment, and failure, all of which entail high costs anti risks. Indeed, it is innovations intrinsic uncertainty that gives it its value. High risks and costs form the barriers to competition that give successful innovators their edge. If innovation were a sure thing, everyone would do it equally well, and its strategic value would be neutralized. It would become just another cost of doing business. But the high costs and risks also make discretion and prudence paramount. The most successful companies know when to take a chance on innovation, but they also know when to take the less glamorous but far safer route of imitation. Although imitation is often viewed as innovation’s homely sibling, it’s every bit as central to business success. Indeed, it’s what makes innovation economically feasible. Deliberate but Dicey So the critical first question for any would-be innovator should not be How? but Where? Deciding where to innovate—and where not to—is fundamentally a strategic exercise, requiring a clear understanding of a company’s existing and potential sources of competitive advantage. S Source: Reprinted with permission from strategy+business, the award-winning management quarterly published by Booz Allen Hamilton. http://www.strategy-business.com. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies If corporate innovation involves a deliberate but dicey attempt to create a new product or practice with commercial value, then the target should be one in which a company has an opportunity to establish a meaningful and defensible point of differentiation from its competitors. A meaningful point of differentiation is one that, to paraphrase Michael Porter, translates into either lower-cost operations or higher-value products, the two linchpins of outstanding profitability. A defensible point of differentiation is one that is resistant to rapid competitive replication. Defensible doesn’t mean permanent; competition eventually erases all S differences. What’s important is to be able to sustain theAdifferentiation long enough at least to offset the up-front costs U and risks of innovation. The proper focus of innovation will vary N greatly from company to company, but at a high level successful D businesses can be divided into two camps: process innovators and product innovators. Process Einnovators distinguish themselves by being more efficient in how R they work; they produce fairly standardized products S them to at a lower cost than competitors do, enabling earn relatively high profits at prevailing market prices (or drive competitors out of business through ruthless disS largest of counting). Process innovators tend to be the all companies, dominating big, mature markets. R Product innovators, on the other hand, make their mark by offering customers particularly attractive goods .or services— those that offer superior functionality, more, fashionable designs, or simply more enticing brand names or packaging. Their supranormal profitability, as an economist would put it, derives from the premium prices G they can charge. Product innovators tend to pioneer new markets A or to hold lucrative niches in older industries. In the personal computer market, Dell R stands as a classic process innovator. Its products are nothing R special—they’re essentially commodities that meet the Ythe relentprevailing needs of most buyers. But through less fine-tuning of its supply, assembly, and distribution operations, Dell has gained a wide cost advantage over 2 most profits rivals that has made it the fastest-growing, itable company in its industry—by far. Apple,0 on the other hand, is the model of an effective product innovator. It 9 business has carved out a profitable niche in a cutthroat by offering distinctive and stylish products that 0 a sizable set of buyers are willing to pay more for. What’s especially noteworthy about DellTand Apple is the discipline they bring to innovation. They S innovate where creativity will buttress their core advantages, and 171 they imitate elsewhere. You could argue, in fact, that to be a successful product innovator you need to be an adept process imitator, and to be a winning process innovator you need to be a good product imitator. Dell, for instance, is skilled at quickly copying products and product features, which has enabled it to apply its superior process skills to a series of new markets, from servers to storage drives to switches. In some cases, it simply contracts with existing suppliers to provide it with commodity products to push through its distribution system. In challenging Hewlett-Packard in the lucrative market for printers, Dell is buying its products from Lexmark and rebranding them as its own. It thus avoids high research and development expenditures, further reinforcing its cost advantage. As for Apple, its resurgence since the late 1990s has been as attributable to emulating processes as to churning out breakthrough products like the iMac and iBook. Soon after Steve Jobs returned as CEO in 1996, for example, he hired an operations ace, IBM and Compaq veteran Timothy Cook, to retool the company’s rusty supply chain. By copying the best practices pioneered by companies like Dell, Mr. Cook dramatically reduced Apple’s in-channel inventory, and the savings in working capital provided an immediate boost to profitability. On the distribution end, Apple has successfully copied efficient direct-to-customer channels such as online sales and dedicated stores. Compare Dell’s and Apple’s highly disciplined innovation efforts to Gateway’s shoot-anything-that-approach. Gateway started as a process innovator, becoming, with Dell, a pioneer of direct distribution, but it also tried to be a product differentiator, maintaining relatively high-cost manufacturing plants, investing more than Dell in R&D, and launching expensive brand-advertising campaigns. It innovated aggressively on the retailing end as well, pioneering the exclusive stores that Apple would later (and more successfully) copy. It even tried to be a service innovator, pursuing a highly publicized “beyond the box” strategy involving the provision of various consulting services to small businesses. By trying to innovate everywhere, Gateway failed to build a strong competitive advantage anywhere. It was unable to distinguish its products enough to escape the industry price wars, and its operating costs remained much higher than Dell’s. Today, it is struggling to survive. For purposes of illustration, I’ve drawn clear lines between products and processes and between innovation and imitation. In practice, those lines are usually 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 172 Chapter 7 blurred. A new industrial chemical, for example, will often arise as much through process advances in the manufacturing plant as through product breakthroughs in the research and development lab. Even the most amazing new products will often incorporate ideas and components filched from others. In creating the iPod, its latest hit, Apple borrowed the major components from outside suppliers—the basic circuitry from PortalPlayer, the tiny hard drive from Toshiba, the battery from Sony, the digital-to-analog converter from Wolfson. It concentrated its innovation in its core S strengths of engineering, design, marketing, partnering, and, most important of all, the integration of hardware A and software. It’s hard to think of another company that U has the skill and business model required to tie together a handheld music player (iPod), an elegant PC appliN cation for playing and organizing music files (iTunes), D and an online store filled with songs from all the major recording studios (iTunes Music Store). E The lesson is clear: Innovate passionately in those R places where you can separate yourself from the competition. Where differentiation promises to be elusive S or fleeting, be a cold-blooded imitator. Creativity Kills Competence S Beyond the dubious economics, one of the biggest R problems with unconstrained innovation is that it can . end up devaluing competence. It says to employees, It’s not enough to do your job extremely well: You’re only , truly valuable if you “think outside the box” or “push the envelope” or—pick your cliché. That can lead to distorted measurement and reward systems, misdirected activity, G and ultimately the disenfranchisement of a company’s A best workers. A few years ago, a firm I’m familiar with got the innovaR tion religion, and suffered mightily as a result. After nearly R a decade of strong growth, the company’s sales had gone Y soft and its margins had narrowed. It realized, correctly, that it required an infusion of new thinking. But rather than concentrate its efforts in the two areas that might 2 have made a real difference to its business—new product development and branding—it took an unfocused, more0 is-more approach. It democratized innovation by putting it 9 at the heart of its annual incentive-compensation program. To earn a decent bonus, each employee had to demonstrate some form of creativity in his or her work, and each business unit had to provide examples and measures of its innovativeness. The company’s intentions were noble, but the program backfired. Dozens of piecemeal innovation initiatives were launched; even the IT help desk and the reception staff strove to reinvent their functions. The management and measurement of all these efforts required a cumbersome new bureaucracy and a small mountain of paperwork. Little thought was given to the actual business impact of the individual programs—creativity had become a good in its own right. Not surprisingly, employees and managers let their attention drift away from their day jobs, which suddenly seemed like secondary concerns, and the company’s core business suffered. The effect of the effort on individual employees was particularly distressing. The least talented workers actually embraced the program with the greatest fervor; it provided them with a respite from what they saw as the drudgery of their regular work. They became fonts of new and largely useless ideas, meticulously documenting their every passing fancy. The most competent employees, in contrast, treated the whole project as a silly game. They went through the motions, all the while complaining to one another about the emptiness of the exercise. Believing the company was rewarding smart talk over real accomplishment, they were slowly drained of their morale and motivation, and many of them ended up heading for the exit. Creativity had trumped competence, and performance took a hit. Innovation has its place—a very, very important place but it’s not everyplace. Creativity should not be allowed to shoulder competence to the verges. Acts of innovation may determine what companies do, but it’s competence that determines how well they do it. Let a half-dozen flowers bloom, and keep the weeds in check. Nicholas G. Carr (ncarr@mac.com) a contributing editor to strategy+business and a former executive editor of Harvard Business Review, is the author of Does IT Matter? Information Technology and the Corrosion of Competitive Advantage (Harvard Business School Press, 2004). 0 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Functional Strategies S AChapter Outline U8-1 Marketing N 8-1a Pricing Strategies D 8-1b Promotion Strategies E 8-1c Product/Service Strategies R 8-1d Place (Distribution) Strategies S8-2 Finance 8-3 Production 8-3a Quality Considerations S 8-3b Research and Development R8-4 Purchasing . 8-5 Human Resources , 8-5a Human Capital and Knowledge Management 8-5b Knowledge and Competitive Advantage 8-6 Information Systems Management G8-7 Summary AKey Terms RReview Questions and Exercises RPractice Quiz YNotes Reading 8-1 2 0 9 0 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 8 174 Chapter 8 C Functional Strategies The strategies pursued by each functional area of a business unit, such as marketing, finance, or production. TA B L E 8-1 Strategy Marketing orporate-level and business-level strategies can only be successful if they are supported by strategies at the business unit’s functional levels, such as marketing, finance, production, purchasing, human resources, and information systems. Each functional area should integrate its activities with those of the other functional departments because a change in one department can affect both the manner in which other departments operate and the overall performance of the business unit. Indeed, the extent to which all of the business unit’s functional strategies integrate can determine the effectiveness of the unit’s business-level and firm-level strategies. Although functional strategies are formulated after the corporate and business strategies have already been established, it is a good idea to consider the capabilities of functional areas while debating higher level strategies. For example, an airline considering expansion through additional international routes should Sthe need for additional personnel and the organization’s consider factors such as A U In t e g r at i n g B u s i n e s s a n d FunN ction a l S tr a te gie s D Low-Cost E Differentiation Emphasize low-cost distriEmphasize differentiated bution and low-cost adver-R distribution and advertising tising and promotion. promotion on a large S and scale. Lower financial costs by S borrowing when credit costs are low and issuing stock when the market is R strong. . Emphasize operation efficiencies through learning,, economies of scale, and capital-labor substitution possibilities. G Purchase at low costs through quantity discounts.A Operate storage and wareR house facilities and control inventory efficiently. R Finance Production Purchasing Research and Development (R&D) Human Resource Management Information Systems Emphasize obtaining resources and funding output improvements or innovations, even when financial costs may be high. Emphasize quality in operations even when the cost of doing so is high. Purchase high-quality inputs, even if they cost more. Conduct storage, warehouse, and inventory activities with extensive care, even if costs are higher. Emphasize product/service R&D aimed at enhancing the outputs of the business. Emphasize reward systems that encourage innovation. Emphasize process R&D Y aimed at lowering costs of operation and distribution. Emphasize reward sys- 2 tems that encourage cost 0 reductions. Emphasize timely and per- 9 Emphasize timely and pertinent information on costs tinent information on the 0 ongoing processes that yield of operations. unique products/services. T S Low-Cost–Differentiation Emphasize differentiated distribution and advertising and promotion on a large scale at the lowest cost possible. Emphasize obtaining resources and funding output improvements or innovations at the lowest possible cost. Emphasize quality in operations when the cost of doing so is relatively low. Purchase high-quality inputs, but only if costs are low. Conduct storage, warehouse, and inventory activities with care, but only if costs are relatively low. Emphasize both product/ service R&D and process R&D. Emphasize reward systems that encourage cost reductions and innovation. Emphasize both timely and pertinent information on costs of operations and innovation processes that are meant to yield unique products/services. Source: Adapted from P. Wright, M. Kroll, and J. A. Parnell, Strategic Management: Concepts (Upper Saddle River, NJ: Prentice Hall, 1998). 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Functional Strategies ability to finance additional airplanes before settling on the expansion plan as the preferred strategic option. Unfortunately, managers in each functional area may not fully appreciate the interrelationships among the functions. Marketers who do not understand production may promise customers product features that the production department cannot readily or economically integrate into the product’s design. Production managers who do not understand marketing may insist on production changes that result in relatively minor cost changes but fail to satisfy customer needs. For this reason, managers in all functional areas should understand how the areas integrate, and they should work together to formulate functional strategies that fit together and support the corporate- and business-level strategies. This chapter examines functional strategies in the areas of marketing, finance, S and information systems. Although production, purchasing, human resourc...
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