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Strategic Options
Add value either through
•Operating activities (marketing or production).
•Aggressive financial activities.
•Either way might contribute to an organization’s
improved performance.
•Both have risks that may place the company at a
competitive disadvantage or make it vulnerable to
takeovers.
•Extremes in either strategy may dominate management
decisions.
•Operating strategies
•Research and development (R & D) is a third
activity for achieving competitive advantage, but
it is included with marketing or production,
depending on its focus.
•Management seeks to achieve competitive
advantage through reliance on marketing or
production or some balance between these two
functions.
Defining A Leading Strategy
Resource allocation between operating & financial activities
•Capital and operating expenditures
•Changes in historical patterns that define
management’s priorities.
•A company concentrates its resources in one functional
area or the other to build value.
•Staffing patterns
•View of primary stakeholders
•Management’s focus in managing the value chain
Staffing in top management
– Operating strategy: In traditional
manufacturing organizations, employees
move up through engineering or production.
– In high-technology organizations, they
progress through the R&D group.
– In a financial emphasis, they progress
through the legal, accounting, or finance side
of operations
•Those viewed as primary stakeholders partially define
the leading strategy
•Many groups have interests in and are affected by
the company’s decisions.
•Typically, interests of one group of stakeholders can
be satisfied only at the expense of another’s.
•E.g. Employees seek higher wages & benefits, which
drive higher prices to consumers & lower returns to
investors.
•External agents (stockholders & creditors), internal
agents (management & employees), those in the value
chain (customers & suppliers), or external groups
(community) may be defined as primary stakeholders
Marketing strategy
Standardization Partial Differentiation
Strategic Leadership in Operating
MapDifferentiation Strategies
Low Fixed Costs 11-- Reactive 12 13 Market Leader
(High AC with cost Strategy - Low High investment in
flexibility during investment R & D product
downturns ) strategy; innovation, e.g.,
capitalize on entrepreneurial
increase focus.
demand; cut
back on
declining
demand.
Moderate cost 21 Follower Strategy 23
control with - partial
implementation
moderate AC
of fixed cost
. control & low AC
costs with some
differentiation.
Low Cost 31 Production 31 33 Value Leader
Leadership. (Low Leader Strategy Strategy
AC but low - high investment Market
flexibility to adjust in infrastructure differentiation and
costs with dropping & production cost leadership, high
demand) personnel investment
Strategic Leadership Map of Operating Strategies
Marketing
Strategy
Standardization Mixed Differentiation
Production case
Strategy
Cost Control Niche strategy Market leader
(high average Low investment strategy
cost with cost strategy; High investment in
flexibility unfocused R&D product
during strategy in terms innovation,
downturns) of achieving advertising &
competitive promotion (e.g.,
advantage (e.g., custom designers
U.S. Steel) such as fashion
leaders in clothing;
Low-Cost (Standarization) (Differentiation)
Leadership Production Value leader
•High investment leader strategy strategy
strategy--Low AC at Price leader •Image and/or
capacity, but low (e.g. functional product
flexibility to adjust Southwestern differentiation &
costs with dropping Airlines, price leader, (e.g.,
demand) Lincoln Intel, Toyota)
•Low investment Electric, mini- •Value leader—
strategy—retain core steel mills, differentiation by
& contract out the Korean mass
rest; low AC & high integrated steel customization &
flexibility plants) price leader (e.g.
Dell, Amazon
Dot.com)
Differences in Perspective--production
•Production emphasis. If management believes
that low costs will enable the firm to dominate the
market, it protects the production core from multiple
demands.
•Standardizes the product or service.
•Limits responsiveness to special demands.
Production as Leading Strategy
•Low-cost leadership usually requires that production
assume dominant strategy in operating activities.
•High investment strategy: Lower its costs through
the experience curve and optimum plant size which
require large market share.
•Low investment strategy: Lower costs through
contracting out all but core functions.
•Marketing is subordinated to the requirements of the
production system.
•Insulate production’s technological core since this is
where efficiency improvements most often occur.
Production Strategy
A firm may seek advantage through production
leadership.
•E.g. Korean integrated steel mills, Goodyear,
Lincoln Electric, & Southwest Airlines.
•Sustain improvements in production economies by
standardizing products or services & investing in
modern plants and equipment.
•Low average costs enable their products and
services to be sold aggressively.
•Drive out less efficient companies from the industry
•Discourage new entrants.
Differences in Perspective--marketing
– Marketing emphasis. Differentiating products
or services is the best way to achieve
competitive advantage.
• Marketing drives the decisions and activities to
achieve product image or functional differentiation
such as product variety, product innovation,
product complements & quality standards,.
Marketing as the Leading Strategy
•A company emphasizes adding value through
marketing activities.
•Marketing assumes priority claim over total
resources and management’s time.
•Emphasis is on the skilled selling and efficient
distribution of product or service.
•Differentiate functionally &/or image the product
or service
•E.g.. Achieve rapid and reliable delivery.
•E.g. Provide superior quality & value.
•E.g. Research is market-oriented.
Value as leading strategy
• Combine production (cost leadership) &
marketing (differentiation) to create high
value leadership:
– Differentiate standard products by quality
– Add complements that provide high value
but low costs.
– Mass customization of products or service
– Improve responsiveness—speed, . . .
Value Leader Strategy
•Combination of differentiation in marketing and cost leadership in
production. Potential for dominant competitive advantage.
•Achieve differentiation & cost leadership by standardizing
products & services in functional terms but differentiating by an
image of superiority.
•E.g. IBM typically lags in product innovation in its markets but
emphasizes image of excellence & economies of production,
distribution.
•IBM differentiates standard products with its emphasis on high
quality & reliability of its products & with service follow-up.
•The Japanese have been able to pursue value leader strategy by
low cost of standard products, but superior quality to achieve a
value leader strategy.
Trade-Offs in Operating Strategy
Leading Operating Production Marketing Leadership
Strategies Leadership
High investment strategy
•Marketing strategies Standardization Differentiation
•Production strategies Low cost leadership Support marketing w/
(low AC, high FC, low production flexibility &
MC @ capacity) quality (accept high AC)
Value leadership Value leadership
Low investment strategy
Mass customization Mass customization
•Marketing strategies
Low cost leadership via Low cost leadership via
•Production strategies
contracting out contracting out
Financial Activities
•Conducted defensively, aggressively, or in some
combination of the two styles.
•The trade-offs in financial strategy are:
•Defensive: Low leverage & limited speculation
•Aggressive or high leverage and speculative
activities
•Financial Strategy (usually discussed under
corporate diversification or vertical integration
strategies)
•Management seeks to achieve superior
performance through financial leveraging &
speculative activities.
• Aggressive operating & aggressive financial
strategies tend to move a firm in divergent
directions & generally involve trade-offs.
•Finance as a leading strategy concentrates its resources
on financial activities to add value to the firm
•Takes actions to increase the value placed on the
existing assets and earnings stream by investors.
•Financial activities designed to increase a company’s
value include:
Purchase of assets (e.g., inventory, land, buildings,
securities) that are expected to rise in value
Purchase of companies judged as undervalued.
Leverage of return on assets by debt.
Speculation in futures markets
•Increase the value of its existing assets and earnings
stream by actions to influence the price of its stock.
•Increasing percentage of dividend payout.
•Buying back stock.
•Adopting accounting procedures that stabilizes
reported earnings or value of assets
•Accounting charges & revenues timed to sustain or
increase earnings per share over time.
•Initiate or sustain speculative & leveraging activities
•Use debt to finance dividends or stock buybacks.
Diversification Decisions
•Purchases of plant, equipment, & goodwill of a related
or unrelated business are often driven by aggressive
financial strategies.
•Speculation is that existing earnings stream will be
capitalized at a higher value because of greater investor
confidence in the new management.
•Speculation is that the new management will be more
competent than existing management (rather than
worse)
•Speculation is that an increase in the earnings stream
will be realized through synergies.
Strategic Leadership Map of Operating & Financial
Strategies
Passive or niche Follow-the-leader Value leadership
Operating response (moderate (high investment in
Strategy (low investment) investment) marketing &
Financial production to
Strategy achieve low AC &
differentiation)
Defensive (low “Minimax” strategy Competitive
leverage, low (e.g., Montgomery dominance
speculation) Ward, 1946-1956; ) (e.g. John Deere)
Financial straddle Incrementalist
(some leverage and strategy
speculation)
Aggressive (high Liquidation Grand-slam
leverage, extensive strategy (e.g., strategy (e.g., Dot
speculation) Firestone, raiders com firms in 90’s;
such as Carl Icahn Enron, GE)
and T. Boone
Pickens)
Minimax Strategy
•The most conservative and is least likely to be
competitive.
•A standard product or service at high average cost.
•High flexibility to respond to customer demand
may provide a market niche in permissive settings.
•The ability to cut costs enables survival on
temporary downturns.
Functional Emphasis: Leading Strategy
Organizational Marketing Production Financial
Activities Activities Activities Activities
Dominant areas Marketing- Production- Financial-
(where value is advertising, purchasing, speculation in
added to the firm) distribution (e.g., manufacturing, futures markets,
aspirins, vitamins, assemble, or assets; leverage
cosmetics, beer, shipping, (e.g., through use of
soft drinks) automobile firms, debt, acquisitions
steel companies)
Processing (for Financial
service firms, activities such as
such as hospitals, accounting
universities, policies, liberal
consulting dividend policies,
operations, stock buybacks
accounting firms)
Competitive Differentiation Cost leadership Aggressive
focus financial
activities
R&D focus Incremental Innovation & Collection of
improvements incremental data on future
& innovation in improvements interest rates,
products & in production commodity
services process to prices, value of
increase currencies,
efficiency inflationary
trends
Trade-off Emphasis on Emphasis on Emphasis on
stakeholders’ customers’ production stockholders’
interests interests as personnel, & creditors’
first priority unions, and interests over
suppliers those of other
over other groups
groups
Investment Distribution Production Commodities,
priorities in & market facilities: stock
capital facilities buildings & buybacks,
expenditures equipment purchase of
other firms
Operating R&D for R&D in mfg. Dividend &
expenditures products & process; interest
and research services; preventive payouts
allocations advertising, maintenance,
promotion, recruitment,
recruitment, upgrading of
training, & production
upgrading of personnel &
marketing supportive
personnel groups
