Business Unit
Strategies
Chapter Outline
7-1 Porter’s Generic Strategies
W
I 7-1a Low-Cost (Cost Leadership) Strategy
L 7-1b Focus–Low-Cost Strategy
7-1c Differentiation Strategy (No Focus)
S
7-1d Focus-Differentiation Strategy
O 7-1e Low-Cost–Differentiation Strategy
N 7-1f Focus–Low-Cost/Differentiation Strategy
, 7-1g Multiple Strategies
7-2 Miles and Snow’s Strategy Framework
J7-3 Business Size, Strategy, and Performance
7-4 Assessing Strategies
A
7-5 Global Concerns
M7-6 Summary
I Key Terms
EReview Questions and Exercises
Practice Quiz
5Notes
Reading 7-1
0
5
1
B
U
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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 an organizational entity with its own mission, set of competitors, and industry. A single firm that operates within only one industry is also
considered a business unit. Strategic managers craft competitive strategies for
each business unit to attain
W and sustain competitive advantage, a state whereby its
successful strategies cannot be easily duplicated by competitors.2 In most indusI approaches can be successful, depending on the busitries, different competitive
ness unit’s resources L
Each business competes with a unique competitive strategy. In the interest
S
of simplicity, however, it is useful to categorize different strategies into a limited number of generic
Ostrategies based on their similarities. Generic strategies
emphasize the commonalities among different business strategies, not their
N
differences. Businesses adopting the same generic strategy comprise what is
commonly referred to, as a strategic group.3 In the airline industry, for example, one strategic group may comprise carriers such as Southwest Airlines and
AirTran that offer low fares and no frills on a limited number of domestic routes,
J low-cost structures (see Figure 7-1). A second strategic
thereby maintaining their
group may comprise many
A traditional carriers such as Continental, United, and
American that serve both domestic and international routes and offer extra services such as meals andMmovies on extended flights.
Because industry defi
I nitions and strategy assessments are not always clear,
identifying strategic groups within an industry is often difficult. Even when the
E an industry’s business units may be categorized into
industry definition is clear,
FIGURE
7-1
5
0
5
1
B
U
Strategic Groups in the Air line Industry
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.
7-1 Porter’s Generic Strategies
Michael Porter developed the most commonly cited generic strategy framework.6
According to Porter’s typology, a businessW
unit must address two basic competitive concerns. First, managers must determine
I whether the business unit should
focus its efforts on an identifiable subset of the industry in which it operates or
L
seek to serve the entire market as a whole. For example, specialty clothing stores
Sand concentrate their efforts on limin shopping malls adopt the focus concept
ited product lines primarily intended for a small market niche. In contrast, most
O
chain grocery stores seek to serve the mass market—or at least most of it—by
selecting an array of products and servicesNthat 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.
Second, managers must determine whether the business unit should compete
primarily by minimizing its costs relative J
to those of its competitors (i.e., a lowcost strategy) or by seeking to offer unique or unusual products and services (i.e.,
A two alternatives as mutually exclua differentiation strategy). Porter views these
sive because differentiation efforts tend to
Merode a low-cost structure by raising
production, promotional, and other expenses. In fact, Porter labeled business
I
units attempting to emphasize both cost leadership
and differentiation simulta7
neously as “stuck in the middle.” This is E
not necessarily the case, however, and
the low-cost–differentiation strategy is a viable alternative for some businesses.
Combining the two strategies is difficult, but businesses able to do so can perform exceptionally well.
5
Depending on the way strategic managers in a business unit address the first (i.e.,
0
focus or not) and second (low-cost, differentiation, or low-cost–differentiation)
5
questions, six configurations are possible. A seventh
approach—multiple strategies—
involves the simultaneous deployment of more
than
one of the six configurations
1
(see Table 7-1). The low-cost and differentiation strategies with and without focus
B
comprise those in Porter’s original framework.
U
7-1a Low-Cost (Cost Leadership) Strategy
Businesses that compete with a low-cost strategy produce basic, no-frills products
and services for a mass market of price-sensitive 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 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
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Chapter 7
TA B L E
7-1
G ener ic S tr a teg ies Ba sed o n Po r ter ’ s Ty p o lo g y
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
for “basic” products or services, it is essential that businesses using this strategy
keep their overall costsW
as low as possible. Efficiency is a key to such businesses, as
has been demonstrated by mega-retailer Wal-Mart in recent years.
I
Low-cost businesses tend to emphasize a low initial investment and low operL
ating costs. Such organizations
tend to purchase from suppliers who offer the
lowest prices within a S
basic quality standard. Research and development efforts
are directed at improving operational efficiency, and attempts are made to
enhance logistical andOdistribution efficiencies. Such businesses often but not
always deemphasize the
Ndevelopment of new and improved products or services
that might raise costs, and advertising and promotional expenditures will be minimized (see Strategy at, Work 7-1).
J
A T
W O R K
7 - 1
A
The Low-Cost M
Strategy at Kola Real
revenues on concentrates, the Ananos family makes its
Coca-Cola and PepsiCo enjoy substantial profit margins
I
on their soft drinks in Mexico’s $15 billion market, where own. Whereas Coke and Pepsi spend millions on proE
the two have waged intense battles for market share motion and manage their own fleets of attractive trucks,
S T R A T E G Y
during the past decade. Although Coke usually came
out on top, the two collectively controlled sales and dis5
tribution in almost all of the country’s major markets. In
0
2003, Coke had more than 70 percent of Mexican sales,
and Pepsi had 21 percent. Consumers in Mexico drink
5
more Coke per capita than those in any other nation.
1
In the early 2000s, however, both well-known colas
have been challenged by an unlikely upstart from Peru
B
known as Kola Real (pronounced “ray-’al”). Launched
in Mexico in 2001, Kola Real captured 4 percent ofU
the
Mexican market in its first two years.
Bottled by the Ananos family from Peru, Kola Real
lacks all of the frills and endorsements associated
with Coke and Pepsi. The strategy is simple: Eliminate
all possible costs and offer large sizes at low prices.
Whereas Coke and Pepsi spend nearly 20 percent of
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.
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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 more on advertising and promotion.9 The
prospect of being caught in price wars keeps many manufacturers from adopting the low-cost strategy, although it can affect other businesses as well. Other
low-cost leaders have bought their suppliers
W to control quality and distribution.
Price cutting in the airline industry led to the demise of several upstarts even
I more difficult to raise fares shortly
before the events of 9/11, and made it even
10
thereafter.
L
Success with the low-cost strategy can be short lived, however. Low-cost airS
line AirTran, for example, boasted a 2003 profit of $101 million while Delta
squabbled with its pilots throughout the year
O in an effort to reduce costs. Delta
dominates Atlanta where AirTran also has a hub, but has had difficulty cutting
N
costs. In 2004, however, Delta finally made headway and began cutting many of
, 2005, AirTran, along with other lowits fares, some by as much as 50 percent. By
cost airlines, began to feel the squeeze as major airlines such as Delta became
more price competitive.11
Imitation by competitors can also be aJ concern when the basis for low-cost
leadership is not proprietary and can be easily
A duplicated. Lego discovered this
fact when Canadian upstart Mega Blocks began to steal market share by making
M but also snap into them and sell for
colorful blocks that not only look like Legos,
a lower price. Lego responded by launching
I the Quatro line of oversized blocks
aimed at the preschool market and carrying lower prices than traditional Lego
E
playsets.12
Low-cost businesses are also particularly vulnerable to technological obsolescence. Manufacturers that emphasize technological stability and do not respond
to new product and market opportunities 5
may eventually find that their products
have become obsolete.
0
5
7-1b Focus–Low-Cost Strategy 1
The focus–low-cost strategy emphasizes low
B overall costs while serving a narrow
segment of the market, producing no-frills products or services for price-sensitive customers in a market niche. Ideally, U
the small business unit that adopts the
focus–low-cost strategy competes only in distinct market niches where it enjoys a
cost advantage relative to large, low-cost competitors.
The focus concept is clear in theory, but often confusing in practice. In general, a business rejects a focus approach when it attempts to serve most of the
market. In practice, however, virtually every 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.
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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.
Customers insert a quarter to unlock a cart from the interlocked row of carts
located outside the store entrance. The quarter is returned with the cart when
it is locked back into the group. As a result, no employee time is required
to collect stray carts unless
W a customer is willing to forego the quarter by not
returning the cart!
I
Adding a focus orientation
to cost leadership can enable a firm to avoid
direct competition with
L a mass-market cost leader. In this manner, grocer SaveA-Lot has found a way to compete successfully against Wal-Mart Supercenters.
S
Its prices are competitive with those at Wal-Mart, but Save-A-Lot pursues locations in urban areas that
O Wal-Mart rejected. Save-A-Lot also generates profits
by opening small, inexpensive stores catering to U.S. households earning less
N
than $35,000 a year. Save-A-Lot stocks mostly its own brand of high-turnover
, and eschews cost-inducing pharmacies, bakeries, and
goods to minimize costs
baggers.13
Like low-cost businesses, those adopting the focus–low-cost strategy are vulJ competition that periodically occurs in markets with
nerable to intense price
no-frills outputs. For A
instance, several years ago, Laker Airways successfully
used the focus–low-cost strategy by providing the first no-frills, low-priced transM The major airlines responded by dropping prices,
Atlantic passenger service.
eventually driving Laker
I out of business. The large competitors, because of
their greater financial resources, were able to weather the short-term financial
losses and survive theEshakeout.14 Southwest Airlines, in contrast, adopted a
similar strategy and has been able to perform well despite competitive pressure
from its large rivals.
5
To deter price competition,
businesses employing the focus–low-cost strategy must continuously0search for new ways to trim costs. The Irish no-frills air
carrier Ryanair has surpassed Southwest in this regard. Passengers are required
5
to pay for all food, drinks, and newspapers. Employees pay for their own training and uniforms. The1airline even incorporates a strict no-refund policy, even
if the airline cancels a flight. Even with an average ticket price of about $50,
B
Ryanair faces constant pressure from its large rivals. In 2004, Ireland’s state carrier Aer Lingus addedUroutes and lowered prices in an attempt to model itself
after Ryanair.15
Founded in 2003, Hungary’s low-cost airline Wizz Air specializes in transporting Hungarians, Poles, and other Eastern Europeans to Britain and Ireland
where many seek and find better paying jobs. CEO Jozsef Varadi sees buses—not
other airlines—as their 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
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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
if firms are to initiate or keep pace with new developments in their industries.
The potential for differentiation is to some extent a function of its physical
characteristics. Tangibly speaking, it is easier to differentiate an automobile than
bottled water. However, intangible differentiation
can extend beyond the physiW
cal characteristics of a product or service to encompass everything associated
I
with the value perceived by customers. Because
such businesses’ customers perceive significant differences in their products
L or services, they are willing to pay
average to high prices for them.
S
Of the prospective bases for differentiation, the most obvious is features of the
product (or the mix of products) offered,O
including the objective and subjective
differences in product attributes. Lexus automobiles, for example, have been difN
ferentiated on product features and are well known for their attention to detail,
quality, and luxury feel. United and other, airlines have attempted to differentiate their businesses by offering in-flight satellite telephone and e-mail services.17
Continental even differentiated itself by emphasizing animal cargo.18
J For example, according to a 2004
Speed can also be a key differentiator.
survey by Mintel International Group, 64Apercent of Americans said that they
selected a restaurant based on the amount of time they had to eat. Speed has
M
been an essential part of the Starbucks competitive
strategy, but became a key
concern when service slowed after breakfast
sandwiches
were added to the prodI
uct line in the mid-2000s. Adding these food items broadened the appeal of
E of the market where seconds count.
Starbucks, but slowed service in a segment
In contrast, competitor Caribou Coffee can make a small coffee-of-the-day in
only six seconds.19
Timing can also be a key factor, because5first movers are more able to establish
themselves in the market than those who come
0 later, as was seen for a number of
years with Domino’s widespread introduction of pizza delivery.20 Factors such as
5
partnerships with other firms, locations, and a reputation for service quality can
1
also be important (see Strategy at Work 7-2).
When customers are relatively price insensitive, a business may select a differenB
tiation strategy and emphasize quality throughout its functional areas. Marketing
Upaper. The purchasing department
materials may be printed on high-quality
emphasizes the quality and appropriateness of supplies and raw materials over
their per unit costs. The research and development department emphasizes new
product development (as opposed to cost-cutting measures).
Differentiated businesses are vulnerable to low-cost competitors offering similar products at lower prices, especially when 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.
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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
the transaction. When one also considers the myriad of
federal, state, and local regulations concerning property disclosure, confidentiality, and the like, one can
W
easily see why it is difficult for an agent or real estate
firm to differentiate service.
I
Differentiation in such an industry is possible, howL
ever. Boyd Williams Real Estate Company (www.boydwilliams.com) operates in the southeastern Mississippi
S
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.
O
N
,
a few cents more for additional
cashiers and checkout lanes. If customers tend to
be more concerned with product assortments and prices than with waiting times,
they may shop at other stores instead.
J in competitive strategy can be a difficult process, espeInstituting a change
cially when the natureAof the change involves a heightened emphasis on differentiation. For example, in 2002, Volkswagen entered the luxury market with
the Phaeton, completeMwith doors trimmed in Italian leather, brushed chrome
and chestnut, and a price
I tag of $70,000. Consumers found it difficult to associate Volkswagen with such refinement and the company sold only about three
E year. Interestingly, upscale carmakers including such
thousand Phaetons that
notables as BMW and Jaguar began to produce smaller, less expensive “luxury”
cars, a move that received a greater welcome from consumers.21
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.
5
0
7-1d Focus-Differentiation
Strategy
Firms utilizing the focus-differentiation
strategy produce highly differentiated
5
products or services for the specialized needs of a market niche. At first glance,
1 strategy may appear to be a less attractive strategy than
the focus-differentiation
the no-focus differentiation
B strategy, because the former consciously limits the set
of customers it seeks to target. However, unique market segments often require
U
distinct approaches. For example, The Limited operates retail outlets to address
multiple demographic segments simultaneously. Men are served by its Structure
stores, women by its Lane Bryant stores, and children by its Limited Too stores.
The Limited even targets trendy consumers with Express stores. U.S. chain Torrid
features fifty-two stores and specializes in plus-size clothing for young, fashionconscious women, a niche nonfocused retailers have not filled effectively.22 In
some cases, however, large business units are simply not interested in serving
smaller, highly defined niches.
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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
7-1e Low-Cost–Differentiation Strategy
Debate is widespread among scholars and practitioners as to the feasibility of
pursuing low-cost and differentiation strategies simultaneously. Porter suggests
W strategy is not advisable and leaves
that implementing a low-cost–differentiation
a business stuck in the middle, because actions
designed to support one strategy
I
could actually work against the other. Simply stated, differentiating a product
L
generally costs a considerable amount of money,
which would erode a firm’s cost
leadership basis. In addition, a number ofScost-cutting measures may be directly
related to quality and other bases of differentiation. Following this logic, a busiO
ness should choose either a low-cost or a differentiation
strategy, but not both.25
Others contend that the two approaches
N are not necessarily mutually exclusive.26 For example, some businesses begin with a differentiation strategy and
, economies of scale along the way.
integrate low costs as they grow, developing
Others seek forms of differentiation that also provide cost advantages, such as
enhancing and enlarging the filter on a cigarette, which reduces the amount of
J
costly tobacco required to manufacture the product.
A that has successfully combined the
Perhaps the best example of a business
two approaches is McDonald’s. The fast-food giant was originally known for conM
sistency from store to store, friendly service, and cleanliness. These bases for
differentiation catapulted McDonald’s to Imarket share leader, allowing the firm
to negotiate for beef, potatoes, and other
E key materials at the lowest possible
cost. This unique combination of resources and strategic attributes has placed
McDonald’s in an enviable position as undisputed industry leader, although it is
facing increased competitive pressure from
5 differentiated competitors emphasizing Mexican, “fresh and healthy,” or other distinct product lines.27
0 strategy is the relatively young airA more recent example of the combination
line JetBlue Airways, launched in 2000 to 5
provide economical air service among
a limited number of cities. JetBlue distinguished itself by providing new planes,
1
satellite television on board, and leather seating.
JetBlue also minimized costs by
such measures as squeezing more seats into
B its planes, selling most of its tickets
on the Internet to avoid commissions, shortening ground delays, and serving
U
snacks instead of meals. Hence, JetBlue’s differentiation efforts increased its load
factor (i.e., the average percentage of filled seats), also reducing its per-passenger
flight costs.28
Changes in the U.S. mobile home industry in the 2000s also illustrate a link
between low cost and differentiation. Traditionally, mobile homes have been positioned as a low-cost, affordable housing option to low-income consumers. In 2004,
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.
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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
traditional differentiation emphasis.30 Indeed, the low-cost–differentiation strategy is possible to attain and can be quite effective. Porter’s point is well taken,
however, because implementing the combination strategy is generally more difficult than implementing
W either the low-cost or the differentiation strategy alone.
This strategy begins with an organizational commitment to quality products or
I
services, thereby differentiating
itself from its competitors. Because customers
may be drawn to high quality,
demand may rise, resulting in a larger market share
L
and providing economies of scale that permit lower per unit costs in purchasS
ing, manufacturing, financing, research and development, and marketing (see
Strategy at Work 7-3). O
A business can pursue low costs and differentiation simultaneously through
N
six primary means: commitment to quality, differentiation on low price, process
,
innovations, product innovations,
value innovations, and structural innovations
(see Table 7-2). First, commitment to quality throughout the business organization not only improves outputs but also reduces costs involved in scrap, warranty,
J
A
S T R A T E G Y
A T
W O R K
7 - 3
M
Competitive Strategy
I in the Fast-Food Industry
Although fast food in the United States has long been
E order. McDonald’s, Burger King, and Wendy’s all follow
considered an economical lunch or dinner option, restaurants over the years have attempted to differentiate
their products and create brand loyalty among con5
sumers, with varying degrees of success. An advent
of the 1990s was the notion of the “value menu”0or
“99 cents menu,” whereby restaurants offered a 5
limited number of its sandwich and other items at special
1
prices for cost-conscious consumers. Initially, this move
was seen as a necessary means of serving consumers
B
during down economic times. The concept stuck, howU
ever, and many analysts believe it is here to stay.
While offering some sandwiches at or near the onedollar price point, many restaurants also offer—and
heavily promote—highly differentiated products in the
two- to three-dollar range. Managers hope that many
consumers will be lured in for the special prices, only to
“move up” to the higher priced items when it is time to
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 a n s o f P urs uing Low Costs and Differentiation
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
product or service that enable it to satisfy stated or implied needs.31 Hence, a
high-quality product or service conforms to a predetermined set of specifications
and satisfies the needs of its users. In this sense, quality is based on perceptions and
is a measure of customer satisfaction with a product over its lifetime, relative to
W offerings.32
customer satisfaction with competitors’ product
Building quality into a product doesI not necessarily increase total costs,
because the costs of rework, scrap, and servicing the product after the sale may
L increased customer satisfaction and
be reduced; and the business benefits from
repeat sales, which can improve economies
S of scale. The emphasis in the 1990s
on quality improvement programs sought to improve product and service quality and increase customer satisfaction by O
implementing a holistic commitment
to quality, as seen through the eyes of the
Ncustomer. Studies suggest that when
properly implemented, an emphasis on quality can improve customer satisfac,
tion while lowering costs.33
Second, a lower than average price may be viewed as a basis for differentiating
one’s products or services. However, low prices should be distinguished from low
J
costs. Whereas price refers to the transaction between the firm and its customers,
cost refers to the expenses incurred in the A
production of a good or service. Firms
with low production costs do not always translate these low costs into low prices.
M
Anheuser Busch, for example, maintains one of the lowest per unit production
I its beers at a low price. However,
costs in the beer industry but does not offer
many firms that achieve low-cost positions
Ealso lower their prices because their
competitors may not be able to afford to match their price level. These firms are
combining low costs with a differentiation based on price.
Third, process innovations increase the5efficiency of operations and distribution. Although these improvements are normally thought of as lowering costs,
0
they can also enhance product or service differentiation.
For example, the recent
emphasis on eliminating processes that do5not 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. 1
Fourth, product innovations are typically
B presumed to enhance differentiation but can also lower costs. For instance, over the years, Philip Morris develU
oped a filter cigarette and, later, cigarettes with low tar and nicotine levels. These
innovations not only differentiated its products, but also allowed the company to
use less tobacco per cigarette to produce a higher quality product at a dramatic
reduction in per unit costs.34
Fifth, firms may engage in value innovations, modifying products, services,
and activities in order to maximize the value delivered to customers.35 Such firms
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.
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
7-1f Focus–Low-Cost/Differentiation Strategy
Business units that adopt a focus–low-cost/differentiation strategy produce highly
differentiated products or services for the specialized needs of a select group of
Wtheir costs low. Businesses utilizing this strategy share all
customers while keeping
the characteristics of the
I previous strategies. The focus–low-cost/differentiation
strategy is difficult to implement because the niche orientation limits prospects
for economies of scaleLand opportunities for structural innovations. Many small,
independent restaurants
S such as those specializing in ethnic or international
cuisine adopt this approach, constantly seeking a balance of cost reductions
O at a specific group of consumers. For example, many
and uniqueness targeted
university towns have small
N eateries that emphasize a unique specialty—such as
Garibaldi’s barbeque pizza in Memphis, Tennessee—while also minimizing costs
, the price-conscious college student.
to remain affordable to
7-1g Multiple Strategies
Multiple Strategies
A strategic alternative
for a larger business
unit in which the organization simultaneously
employs more than one
of the generic business
strategies.
J
In some cases, business units utilize multiple strategies, or more than one of
Aed in sections 7-1a through 7-1f, simultaneously. Unlike
the six strategies identifi
the combination low-cost–differentiations
strategy, multiple strategies involve the
M
simultaneous execution of two or more different generic strategies, each tailored
I market or class of customer. For this reason, large busito the needs of a distinct
nesses are more likely E
than small ones to adopt this approach. Hotels, for example, utilize multiple strategies when they offer basic rooms to most guests but
reserve suites on the top floor for others.
A multiple strategy 5
approach can be difficult to implement and confusing to
customers. Many airlines utilize multiple strategies when they offer both highly
0
differentiated (and high-priced) service via first-class seating and economical,
limited-frills service in 5
coach. To distinguish between these two classes of customers, airlines typically provide separate customer service counters, different board1
ing times and procedures, and better food for their first-class passengers. While
B
this approach is not optimal
in theory, it enables airlines to satisfy the needs of
more than one traveling
segment
without flying additional aircraft.
U
7-2 Miles and Snow’s Strategy
Framework
A second commonly used 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 and evaluate risk scenarios effectively.
Prospectors are typically focused on corporate entrepreneurship, or
intrapreneurship. Whereas entrepreneurship focuses on the development of
new business ventures as a means of launching
W an organization, intrapreneurship
involves the creation of new business ventures within an existing firm. Established
I
firms seeking to foster a culture that encourages
the type of innovative activity
often seen in upstarts must provide time,Lresources, and rewards to employees
who develop new venture opportunities for the organization.
S
It can be argued that all businesses should be prospectors, at least to some
extent. For example, Kraft revenues fromOtraditional and “new and improved”
versions of its Ritz, Kool-Aid, Maxwell House, Jell-O, and other brand products
N
began to slip in the early 2000s. Kraft fired its CEO, Betsy Holden, in late 2003 in
, products instead of more conservaan effort to place a greater emphasis on new
tive brand extensions.39
Defenders are almost the opposite of prospectors. They perceive the environJ
ment to be stable and certain, seeking stability
and control in their operations
to achieve maximum efficiency. Defenders
incorporate
an extensive division of
A
labor, high formalization, and high centralization. The defender concentrates
M
on only one segment of the market.
Analyzers stress stability and flexibility, and
I attempt to capitalize on the best of
the prospector and defender strategy types. Tight control is exerted over existing
E
operations with loose control for new undertakings.
The strength of the analyzer is the ability to respond to prospectors (or imitate them) while maintaining
efficiency in operations. An analyzer may follow a prospector’s successful lead,
modify the product or service offered by5the prospector, and market it more
effectively. In effect, an analyzer is seeking0a “second-mover” advantage.40
Copying successful competitors can be a successful strategy when both orga5
nizations share the resources needed to effectively implement similar programs.
After sales slumped in 2000 at Taco Bell,1president Emil Brolick acknowledged
plans to model the restaurant after Wendy’s, noting Wendy’s ability to gain market
B
share without slashing prices. In 2001, Taco Bell began appealing to a more
Uand fewer promotions. Although the
mature market with additional pricey items
product lines are substantially different, Brolick hopes that a similar approach
for Taco Bell can produce similar results.41
Reactors lack consistency in strategic choice and perform poorly. The reactor
organization lacks an appropriate set of response mechanisms with which to confront environmental change. The reactor 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 because an organization’s business-level strategy is expressed in terms
relative to others in the industry. For example, the competitive strategy for retailing
giant Wal-Mart might be considered that of differentiation or low-cost–differentiation
strategy if the industryW
is defined “discount retailers,” whereas it might be considered
as low cost if the industry is defined more broadly as “department stores.”
I
L
differentiation, whereas
S the defender business typically emphasizes low costs.
These tendencies notwithstanding, fundamental differences exist between
O approach is based on economic principles associated
the typologies. Porter’s
with the cost-differentiation
N dichotomy, whereas the Miles and Snow approach
describes the philosophical approach of the business to its environment (see
Case Analysis 7-1). ,
J Size, Strategy,
7-3 Business
A
and Performance
M
Researchers examining the relationship between a business unit’s size and its
performance, relative Ito those of its competitors, have interesting observations.
Midsize business unitsEoften perform poorly in comparison with small or large
competitors, because they typically do not possess the advantages associated with
being flexible like their small rivals or possessing substantial resources like their
large rivals.42 Specifically,
5 small businesses enjoy flexibility in meeting specific
market demands and a potentially quicker reaction to environmental changes.
Because of their lower 0
investments, they may be able to make strategic moves and
pursue more limited revenue
opportunities that would be unprofitable for mid5
size or large businesses. Likewise, large businesses can translate their economies
1 per unit and may be better able to bargain with their
of scale into lower costs
suppliers or customers,Bor to win industry price wars.
Because midsize business units tend to lack the advantages of either small or
U
large rivals, many choose to become larger or smaller to capitalize on advantages
of their competitors. Specifically, they may seek to expand their operations (i.e.,
increase their size) to take advantage of scale economies, or they may retrench
(i.e., decrease their size) to avail themselves of the advantages possessed by small
companies. Either option can be difficult and may not even be feasible, depending
on various competitive and 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
Porter ’s Generic Str ategy Matr ix
W
I
size and performance and consider themLwhen evaluating the specific needs of
their business units.
S
O
7-4 Assessing Strategies
N
Although the distinctions between such strategies as cost leadership and differ, are readily made in theory, they are
entiation or prospectors and differentiators
not always easy to assign in practice. Considering Porter’s typology, cost leadership
and differentiation may be viewed as opposite extremes on a continuum. Likewise,
J
focus and no focus can also be seen as opposite extremes. Figure 7-2 illustrates this
A
approach with a hypothetical industry containing
six rivals. Company A is the only
focus–low-cost competitor. Companies B and C—generally seen as part of the same
M
strategic group—are slightly less focused than A; both B and C are more differentiated than A, but C is more differentiatedI than B. Companies D and E—clearly
members of the same strategic group—employ
low-cost (no-focus) strategies,
E
whereas company E follows a differentiation (no-focus) approach. Viewing generic
strategies as a matter of degree enables analysts to illustrate relatively minor distinctions between businesses employing the same
5 generic strategy. This approach can
also be applied to the Miles and Snow typology, with prospectors and defenders
0 in the middle.44
anchoring ends of a continuum and analyzers
Categorizing businesses in such a matrix
5 is not easy and can be somewhat subjective. Consider Wal-Mart as an example. Traditionally, the retailer has eschewed
1 approach geared at selling to most
a focus approach in favor of a one-size-fits-all
consumers. Although this approach was B
successful for a while, sales growth in
the United States began to decline in the early 2000s. In 2006, the retailer began
U
modifying its product mixes in many of its U.S. stores to target six groups: African
Americans, the affluent, empty-nesters, Hispanics, suburbanites, and rural residents.45 On the one hand, this move reflects an attempt by Wal-Mart to concentrate
its efforts on specific markets, an approach consistent with Porter’s focus strategy.
On the other hand, the six groups identified together comprise the majority of the
U.S. population, suggesting that Wal-Mart’s competitive strategy does not qualify
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
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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.
Wal-Mart strategy as a focus approach because of this strategic shift, a modest move
toward the focus end ofW
the continuum may be warranted.
In addition, formulating an effective competitive strategy is almost impossible
I
without a clear understanding of the primary competitors and their strategies.
L to comprehend how rivals compete, what they are
Specifically, it is important
attempting to accomplish
S (i.e., their goals), what assumptions they hold concerning the industry, and what their unique strengths and weaknesses are relative to
others in the industry. O
Developing this understanding not only helps top managers formulate strategies
Nto position a business in the industry, but can also help
them forecast any competitive responses that rivals might make if a major strate, (see Case Analysis 7-2).
gic change is implemented
Many strategic moves are not instituted by businesses when they anticipate a
competitor’s activities, but in response to moves that have already been impleJ 2003, online hospitality sites Hotels.com and Expedia.com
mented. For example, by
had teamed up with franchise
hotels with unused capacity to fill extra rooms
A
at discounted rates. As a result, consumers were able to secure high-quality
M
accommodations at substantial savings. The hotel chains associated with these
franchised units earnI substantial profits from their reservation services and
therefore began to restrict franchisees from offering rates at Web sites lower than
E
those offered by the hotel 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 you5will have to pay a premium to be on their shelves.”46
Taking advantage of a competitor’s misfortune is not always easy, however. In
0
2000, Bridgestone’s Firestone
unit was forced to recall 6.5 million tires linked to
fatal accidents on Ford5Explorers in a widely publicized challenge to its credibility. Goodyear, however, was unable to meet the sudden increase in demand for
its tires and responded1by raising prices. Although sales stabilized at Bridgestone
in the early 2000s at a market
share about 2 percent lower than before the recall,
B
Goodyear’s market share had declined back to its pre-recall levels by 2003. Hence,
Urespond effectively to Bridgestone’s woes.47
Goodyear was unable to
7-5 Global Concerns
Identifying the competitive strategy of a business operating in global markets can
be a complex task. Unfortunately, no simple formula exists for developing and
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 takes a more localized approach with
its KFC business unit. KFC emphasizes chicken in its host country—the United
States—but added fish sandwiches to menus at its Malaysian outlets in early 2006.
According to KFC Holdings (Malaysia) executive
director and chief operating
W
officer To Chun Wah, “As much as our customers love our chicken products,
they also want a greater variety of meat Iproducts at KFC. Our market surveys
show that our customers want more thanLjust tasty, high quality and affordable
chicken but are also constantly on the lookout for new and interesting things to
S
eat.” This move reflects a clear plan to localize business strategies along the lines
of taste. Outlets in Malaysia are not required
O to carry the fish sandwich, however.
Fish sandwiches had already proven to be successful in other Asian markets, such
N
as Beijing, Shanghai, and Taipei.49
Yum Brands took localization another ,step further in 2004 when it launched
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.
Menu offerings include Chinese favoritesJsuch as noodles, rice, soy milk, fried
dough, and plum juice. Yum hopes to turnA
East Dawning into China’s largest fastfood restaurant one day. Yum is also considering launching an Indian fast-food
M
restaurant in India.50
Consider Swedish home furnishings designer
Ikea. Responding to frugality
I
in the local market, Ikea sells many of its products in China at prices well below
E store, opened in 2006, is its second
those in other parts of the world. The Beijing
largest store in the world, behind Ikea’s Stockholm store, and draws an estimated
three times as many visitors as its other outlets. Ikea has experienced success selling to the growing middle class in China, 5
but at prices that would be considered
bargains elsewhere in the world.51
0
There is wisdom in both global strategy perspectives—localizing and main5
taining consistency across borders—although the most effective approach
will depend on the mission, goals, and1characteristics of the organization.
In practice, businesses rarely operate at one extreme or the other. Hence,
B
these alternative approaches can be viewed as opposite ends of a continuum.
Regardless of choice, there are costs andUtrade-offs associated with every position along the continuum.
Tailoring a business strategy to meet the unique demands of a different market
can be especially challenging because it requires that top managers understand
the similarities and differences between the markets from both industry and
cultural perspectives. For example, since 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
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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 received only a small fraction of the level of foreign investment made in China, which boasts the world’s largest population and has been
tabbed as a world economic leader within the next few decades. China’s entrance
into the World Trade Organization,
declining import tariffs, and increasing conW
sumer incomes suggest a bright future for the nation. At present, China remains
I lifestyle based in socialism and its own form of a neoa mix of the traditional
Western economic development.
Nowhere is this friction seen best than on the
L
roads of the capital, Beijing, where crowds of bicycles attempt to negotiate traffic
S
with buses and a rapidly increasing number of personal automobiles. U.S.-style
traffic reports have even
Obecome pervasive in a country where the world’s largest
automakers are fighting for a stake in what many experts believe will be a conN
sumer automobile growth phase of mammoth proportions.54
, seeks to conduct business with one of its Chinese counterWhen a Western firm
parts, managers from both firms must recognize the cultural differences between
the two nations. Recently, a number of consulting and management development
organizations in both J
China and the West have been busy training managers to
become aware of such A
differences and take action to minimize misunderstandings
that can arise from them. For example, Chinese managers are more likely than
M meetings and less likely to answer e-mail from internaAmericans to smoke during
tional partners. In the United
States, it is more common to emphasize subordinate
I
contributions to solving problems, whereas Chinese managers are more likely to
Etheir superiors without subordinate involvement.55
respect the judgment of
Western manufacturers such as Eastman Kodak, Proctor & Gamble, Group
Danone of France, and Siemens AG of Germany have already established a
5 A number of Western restaurants and retailers have
strong presence in China.
also begun to expand 0
aggressively into China, including U.S.-based McDonald’s,
Popeye’s Chicken, and Wal-Mart. As the CEO of Yum, owner of KFC, Pizza Hut,
5
and Taco Bell, put it, “China is an absolute gold mine for us.”56 French-based
1 foreign retailer in China with ninety hypermarkets in
Carrefour is the largest
about two dozen cities. Product mixes in the Chinese stores tend to be similar to
B
those in the domestic market, with adjustments made for local preferences. For a
U attractive prospects for growth lie in emerging econonumber of firms, the only
mies such as China, Brazil, and Mexico.57
7-6 Summary
At the business level, top 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
focus–low-cost strategy
generic strategies
intrapreneurship
W
low-cost–differentiation strategy
I strategy
low-cost
multiple
L strategies
S
O
Review Questions and Exercises
N
1. What is the difference between a corporate strategy
,
and a business strategy?
2. Identify the generic business strategy configurations
available to strategic managers, according to Porter’s
J
typology.
3. Is it possible for a business to differentiate A
its outputs
and lower its costs simultaneously? Explain.
M
4. Identify the generic business strategy configurations
I to Miles
available to strategic managers, according
and Snow’s typology.
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?
E
Practice Quiz
5
0
The focus-differentiation strategy emphasizes low overall costs while serving a narrow segment of 5
the market.
Businesses that utilize the focus strategy
1 produce
and market to the entire industry products or servBthose of
ices that can be readily distinguished from
their competitors.
U
True or False
1.
2.
3. The combination strategy can also be referred to as
multiple strategies.
4. There is no advantage to the reactor strategic type.
5. The generic strategy typologies developed by Porter
and by Miles and Snow possess both similarities
and differences.
6. Midsize businesses tend to be outperformed by
their smaller and larger counterparts.
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.
B. the focus strategy.
C. the differentiation strategy.
D. none of the above
W
I
L
Notes
S
1. Z. He and P. Wong, “Exploration vs. Exploitation: An Empirical
Test of the Ambidexterity Hypothesis,” Organization Science
O
15 (2004): 481–494.
2. I. M. Cockburn, R. M. Henderson, and S. Stern, “UntanglingN
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.
J
A
M
I
E
5
0
5
1
B
U
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
W
I
L
S
O
N
,
J
A
M
I
E
5
0
5
1
B
U
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.
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.
By Nicholas G. Carr
M
anagement thinking has for some time
W
been dominated by two big themes: leadership and innovation. It’s not hard to see
I
why. Both are important yet amorphous
L
subjects. As resistant to definition as they are essential
to business success, they offer unbounded opportunities
S
for exposition and exploration to researcher, philosopher,
O
and charlatan alike.
They have something else in common, too. It’s come
N
to be assumed that leadership and innovation are univer,
sally good qualities to which all should aspire. Through
high-minded training programs, reward systems, and
communication efforts, companies today routinely seek
J
to democratize innovativeness and leadership—to drive
them into every nook and cranny of their organization.A
In
one way, this phenomenon seems yet another manifesM
tation of the peculiarly American assumption that what’s
good small doses must be great in large quantities. IIn
another way, it appears to spring out of the shift fromEa
manufacturing to a service economy, with the attendant
weakening of traditional management hierarchies.
But is the phenomenon as salutary as it first appears?
5
Is it really in the best interest of companies to try to turn
0
all their employees into leaders, all their units into hotbeds of creativity? I’m not convinced. The cult of leader5
ship seems especially, even insidiously, dangerous. Too
1
often, it ends up promoting an insipid textbook form of
B
leadership, a “five keys to success” pantomime. At worst,
it breeds a particularly insufferable kind of despot—the
U
boss who, like David Brent in the BBC series The Office,
feels compelled to flourish his entirely imaginary “leadership qualities” in front of his beleaguered staff. The
result, inevitably, is organizational cynicism.
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.
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 differences.
What’s important is to be able to sustain the differentiation long enough at least to offset the up-front costs
and risks of innovation.
W
The proper focus of innovation will vary greatly from
company to company, but at a high levelI successful
businesses can be divided into two camps:
L process
innovators and product innovators. Process innovators
S in how
distinguish themselves by being more efficient
they work; they produce fairly standardized
O products
at a lower cost than competitors do, enabling them to
N
earn relatively high profits at prevailing market prices (or
drive competitors out of business through ,ruthless discounting). Process innovators tend to be the largest of
all companies, dominating big, mature markets. Product
J by offerinnovators, on the other hand, make their mark
ing customers particularly attractive goods A
or services—
those that offer superior functionality, more fashionable
M or packdesigns, or simply more enticing brand names
aging. Their supranormal profitability, as an
I economist
would put it, derives from the premium prices they can
E markets
charge. Product innovators tend to pioneer new
or to hold lucrative niches in older industries.
In the personal computer market, Dell stands as a
classic process innovator. Its products 5
are nothing
special—they’re essentially commodities that
0 meet the
prevailing needs of most buyers. But through the relent5
less fine-tuning of its supply, assembly, and distribution
operations, Dell has gained a wide cost advantage
over
1
its rivals that has made it the fastest-growing, most profB
itable company in its industry—by far. Apple, on the other
hand, is the model of an effective productU
innovator. It
has carved out a profitable niche in a cutthroat business
by offering distinctive and stylish products that a sizable
set of buyers are willing to pay more for.
What’s especially noteworthy about Dell and Apple
is the discipline they bring to innovation. They 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
strengths of engineering, design, marketing, partnering,
and, most important of all, the integration of hardware
and software. It’s hard to think of another company that
has the skill and business model required to tie together
W
a handheld music player (iPod), an elegant PC appliI
cation for playing and organizing music files (iTunes),
and an online store filled with songs from all the major
L
recording studios (iTunes Music Store).
S
The lesson is clear: Innovate passionately in those
places where you can separate yourself from the comO
petition. Where differentiation promises to be elusive or
N
fleeting, be a cold-blooded imitator.
Creativity Kills Competence
,
Beyond the dubious economics, one of the biggest
J
problems with unconstrained innovation is that it can
end up devaluing competence. It says to employees, It’s
A
not enough to do your job extremely well: You’re only
M
truly valuable if you “think outside the box” or “push the
envelope” or—pick your cliché. That can lead to distorted
I
measurement and reward systems, misdirected activity,
E
and ultimately the disenfranchisement of a company’s
best workers.
A few years ago, a firm I’m familiar with got the innova5
tion religion, and suffered mightily as a result. After nearly
a decade of strong growth, the company’s sales had gone
0
soft and its margins had narrowed. It realized, correctly,
5
that it required an infusion of new thinking. But rather
than concentrate its efforts in the two areas that might
1
have made a real difference to its business—new product
B
development and branding—it took an unfocused, moreis-more approach. It democratized innovation by puttingU
it
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).
9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning
Functional Strategies
Chapter Outline
8-1 Marketing
W
I 8-1a Pricing Strategies
L 8-1b Promotion Strategies
8-1c Product/Service Strategies
S
8-1d Place (Distribution) Strategies
O8-2 Finance
N8-3 Production
, 8-3a Quality Considerations
8-3b Research and Development
J8-4 Purchasing
8-5 Human Resources
A
8-5a Human Capital and Knowledge Management
M 8-5b Knowledge and Competitive Advantage
I 8-6 Information Systems Management
E8-7 Summary
Key Terms
5Review Questions and Exercises
Practice Quiz
0
Notes
5Reading 8-1
1
B
U
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
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
consider factors such as the need for additional personnel and the organization’s
W
I
L Differentiation
Low-Cost
Emphasize low-cost distri- S Emphasize differentiated
bution and low-cost adverand advertising
O distribution
tising and promotion.
and promotion on a large
N scale.
Lower financial costs by , Emphasize obtaining re-
I nte gra ting Bus iness a nd Fu nctio na l S tr a teg ies
Strategy
Marketing
Finance
Production
Purchasing
Research and
Development (R&D)
Human Resource
Management
Information Systems
borrowing when credit
costs are low and issuing
stock when the market is J
strong.
Emphasize operation ef- A
ficiencies through learning,
M
economies of scale, and
capital-labor substitution I
possibilities.
E
Purchase at low costs
through quantity discounts.
Operate storage and warehouse facilities and control5
inventory efficiently.
sources 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.
Emphasize timely and pertinent information on costs
of operations.
Emphasize timely and pertinent information on the
ongoing processes that yield
unique products/services.
0
Emphasize process R&D 5
aimed at lowering costs of
operation and distribution.1
Emphasize reward systems that encourage costB
reductions.
U
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.
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,
production, purchasing, human resources, and information systems. Although
the relationships among functional strategies are not always clear, Table 8-1 summarizes the way functional strategies typically integrate with the business strategy using as an example the modified version
W of Porter’s typology discussed in
Chapter 7.
I In practice, however, many of the
This chapter is...
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