Copy-Cat? Unit 4 discussion, management homework help

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Should the Hampton Inn use the same competitive strategy that Motel 6 uses? Explain. Use concepts from the course to make your case. Note that the question is not whether Motel 6 should use the strategies that Hampton Inn uses.

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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 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 7 150 Chapter 7 A Business Unit An organizational entity with its own unique mission, set of competitors, and industry. Generic Strategies Broad competitive Strategies that can be adopted by business units to guide their organizations. Strategic Group A select group of direct competitors who have similar strategic profiles. fter a firm’s top managers have settled on a corporate-level strategy, their focus then shifts to how the firm’s business or businesses should compete. Whereas the corporate strategy concerns the basic thrust of the firm—where top managers would like to lead the firm—the business or competitive strategy addresses the competitive aspect—who the business should serve, what needs should be satisfied, and how a business should develop core competencies and be positioned to satisfy customers’ needs. Another way of addressing the task of formulating a business strategy is to consider whether a business should concentrate its efforts on exploiting current opportunities, exploring new ones, or attempting to balance the two. Exploitation generates returns in the short term; exploration can create forms of sustainable competitive advantage for the long term. The business strategy developed for an organization seeks, among other things, to resolve this challenge.1 A business unit is 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 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 151 152 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. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 153 A cost leader may be more likely than other businesses to outsource a number of its production activities if costs are reduced as a result, even if modest amounts of control over quality are lost in the process. In addition, the most efficient means of distribution is sought, even if it is not the fastest or easiest to manage. It is worth noting that successful low-cost businesses do not emphasize cost minimization to the degree that quality and service decline excessively. In other words, cost leadership taken to an extreme can result in the production of “cheap” goods and services that nobody is willing to purchase. Low-cost leaders depend on unique capabilities not available to others in the industry such as access to scarce raw materials, large market share, or a high degree of capitalization.8 Manufacturers that employ a low-cost strategy, however, are vulnerable to intense price competition that drives down profit margins and limits their ability to improve outputs, to augment their products with superior services, or to spend 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. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 154 Chapter 7 Aldi is a clear example of a business that pursues a focus–low-cost strategy. Aldi is an international retailer that offers a limited assortment of groceries and related items at the lowest possible prices. Functional operations are tightly coordinated around a single strategic objective: low costs. Efforts are targeted to consumers with low to moderate incomes. Aldi minimizes costs a number of ways. Most products are private label, allowing Aldi to negotiate rock-bottom prices from its suppliers. Stores are modest in size, much smaller than that of a typical chain grocer. Aldi only stocks common food and related products, maximizing inventory turnover. The retailer does not accept credit cards, eliminating the 2 to 4 percent fee typically charged by banks to process the transaction. Customers bag their own groceries and must either bring their own bags or purchase them from Aldi for a nominal charge. Aldi also takes an innovative approach to the use of its shopping carts. 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 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 155 Like low-cost businesses that do not adopt a focus approach, focus–low-cost businesses are particularly vulnerable to technological obsolescence. Businesses that value technological stability and do not respond to new product and market opportunities may eventually find that their products have become obsolete and are no longer desired by customers. 7-1c Differentiation Strategy (No Focus) Businesses that utilize the differentiation strategy produce and market to the entire industry products or services that can be readily distinguished from those of their competitors. Because they attempt to satisfy most or all of the market, these businesses tend to be large and established. Differentiated businesses often attempt to create new product and market opportunities and have access to the latest scientific breakthroughs because technology and flexibility are key factors 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. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 156 Chapter 7 S T R A T E G Y A T W O R K 7 - 2 The Differentiation Strategy in Residential Real Estate Implementing a differentiation strategy can be difficult in a highly regulated industry in which competitors are forced to follow rules and even work together. Residential real estate is an example of such an industry. In most cases, a real estate agent who lists a home for a seller must work with agents from other firms who represent prospective buyers. Buyers and sellers are interested in working only with agents who can negotiate successfully with other agents to complete 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. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 157 Firms can focus their efforts in several ways. Popular retailer Cabela’s has even successfully targeted its efforts to men who hate to shop! The Cabela’s in Michigan draws an estimated 6 million visitors to its retail store each year, mixing its outdoorsman-oriented merchandise with an aquarium, indoor waterfall stocked with trout, and realistic nature scenes. As a result, Cabela’s has secured a customer base largely ignored by other retailers.23 In general, high prices are acceptable to certain customers who need product performance, prestige, safety, or security, especially when only one or a few businesses cater to their needs. As such, focus differentiation is most appropriate when market demand is inelastic, because high-cost products are often required to support the specialized efforts to serve a limited market niche. As a result, cost reduction efforts, while always desirable, are not emphasized.24 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. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 158 Chapter 7 By 2003, however, sales had declined to about 131,000 units, a year in which about 100,000 units were repossessed from previous customers. Manufacturers such as Clayton Homes responded by targeting customers with moderate incomes, offering homes with upscale features, such as Mohn faucets, porcelain sinks, a woodburning fireplace, and even a high-definition television set.29 Revenue declines within an industry may cause some of its differentiated businesses to cut costs to remain competitive. In the years following the events of 9/11, for example, British Air embarked on an aggressive cost-cutting campaign, ordering replacement jets devoid of the customary special features, trimming the total number of jets in its fleet, cutting fees to travel agents, eliminating 13,000 jobs, and even limiting menu choices for customers. Ticket prices were also reduced so that the airline could become more competitive with low-fare carriers. As a result, British Air has integrated an emphasis on low costs into its 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 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 163 164 Chapter 7 Case Analysis 7-2 Step 11: What Business-Level Strategies Are Presently Being Employed by Competitors? To analyze all the competitive options available to a business, one needs to understand the strategic approach of competitors. Because obtaining detailed information about all competitors is often difficult, a focus on the primary competitors utilizing at least one of the business strategy typologies is appropriate. The key here is to understand how different competitors in the industry utilize various strategic means to serve customers and pursue profitability. It is helpful to identify how the companies are similar and different in their strategic approaches. This insight can help strategic managers predict how competitors might respond to a change in strategy. 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 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 165 166 Chapter 7 Japanese manufacturer to operate a facility in the United States, has been most aggressive in this regard. In 2000, Mitsubishi was aggressively redesigning the Montero Sport to make it a “global vehicle” that could sell effectively in world markets. In 2001, however, the car maker dropped its one-size-fits-all approach and began to emphasize design factors unique to the critical U.S. market.52 Given the intense competition in most markets in the developed world, strategic managers must remain abreast of opportunities that may exist in emerging economies. India, for example, has enjoyed considerable growth in recent years. Some firms have outsourced jobs in technical areas to India where trained workers are available at considerably lower wages. Economic liberalization in the country has invited additional foreign investment into the country. India’s Tata Motors helped overcome the country’s reputation for poor production quality by exporting an estimated twenty thousand CityRovers to the United Kingdom in 2004.53 India, however, has 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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Copy-Cat? Unit 4 Discussion
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COMPETITIVE STRATEGY

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Copy-Cat? Unit 4 Discussion

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