What are the principal elements of the strategic-management process?
The Association for Strategic Planning’s motto of “think—plan—act” also forms the foundation of
this book. Are these three basic elements enough? 2. What are the principal elements of the strategic-management process? How are they
interrelated? 3. How does strategic planning differ from strategic management? 4. What part of doing strategic planning appears, in your opinion, to be the most difficult to do?
Which part, if not done well, would be most likely to lead to poor strategic decisions?
CHAPTER 1Section 1.2 About Competition
Thus, it is more accurate to talk about industries—not markets—being regulated (or not). The exception is the term market share, which means a firm’s annual sales as a percentage of the annual sales of the entire industry. Given this definition, “industry share” is more accurate than “market share,” because that is how it is calculated. However, using the term market share to mean this is so ingrained in the business lexicon that we will go along with the norm and call it market share in this book (even though we mean industry share). At least you will know what it really means when you read about companies and their market shares.
How Firms Compete in an Industry In any industry regardless of the degree of regulation, firms compete with each other to sell more products or services to customers; their purpose being to “capture more of the customer’s dollar.” Firms are free at any time to offer whatever products they think people need at any price they believe people would be willing to pay. If they succeed, customers will buy their product; if not, they won’t. That’s the nature of competition. Ultimately, consumers, whether individuals or businesses, communicate through their buying behavior exactly what goods and services they need. Companies that fail to deliver products that satisfy customers’ needs will soon go out of business.
In one extreme situation in which a particular firm is the only company in an industry, then it has a monopoly. It can charge any price it likes since customers cannot get the product from any other source. At the other end of the scale, when many firms in an industry all produce essentially the same product (such as paper clips or fertilizer), they compete on the basis of price. In such a mar- ket, customers’ perceptions that products are all the same will base purchase decisions on price alone. This is called price or “perfect” competition. Another example of this is that people who believe that supermarkets are all the same will buy from any one, especially the one that reduces their overall grocery bill the most.
Figure 1.2: Industries vs. markets
Transactions
Market (“demand”)
Consists of buyers, which could be companies in
another industry (B2B) or individual consumers (B2C);
usually segmented into smaller customer groups
Industry (“supply”)
Consists of competitors providing similar products or services to the same
market; often segmented to cater to different market
segments
CHAPTER 1Section 1.2 About Competition
Differentiation Companies can also compete by being differentiated, that is, have a strong and distinctive brand, along with unique or different products. In that instance they can charge more for their prod- ucts because in the consumer’s mind, they are offering something that no one else is offering. Examples of this are a designer perfume or a Porsche automobile. Differentiation can, depending on the product, be achieved by offering customers superior quality, product features, technology, convenience, selection, style, performance, safety, comfort, reliability, cost savings, warranties, return policy, customer service, and so on. The key is to differentiate based on the customers’ needs not what the firm thinks they need. When consumers perceive that your product alone best meets their need, they will buy it and be willing to pay more for it.
Companies can compete based on many other factors beyond attributes of the product or service. They may offer customers on-time delivery or shipment without spoilage or damage for products such as fresh produce. Efficient distribution such as Netflix provides, automated warehouse oper- ations, and excellent management of the supply chain all may provide a competitive advantage that a company can use to attract customers. The list is endless. As with product differentiation, the point is to address the needs of the customer.
Cooperation Companies are increasingly cooperating with other firms in an industry rather than competing, or doing both. They do this through partnerships, agreements, and joint ventures. Is
Case Study Case of Mistaken Differentiation
A watch manufacturer once made a very average watch that sold just well enough to keep the com- pany going as it did not offer customers any distinct advantages over competing products. The com- pany was forced to compete on price, thus returning thin margins. The CEO lamented that the com- pany’s watch was never the “best” in any dimension, so he couldn’t charge more for it. This changed when his chief engineer observed that he could make the watch accurate to within a fraction of a sec- ond per year for only a $10 increase in price. The CEO concluded that with the most accurate watch in the world he could raise the price by more than $10. He gave the go-ahead.
The marketing department created a new ad campaign touting the watch’s accuracy and doubled the advertising budget. Soon, the watches were distributed to retailers, and the campaign blitzed the media.
To the dismay of the CEO, sales never picked up. He instructed his VP of marketing to find out what was going on. The report was troubling. Potential watch buyers weren’t interested in accuracy. In fact, los- ing or gaining minutes a year was not a concern for them. What they really wanted was for the watch to be more of a fashion accessory with interchangeable snap-on covers in different designs and colors.
The CEO realized too late that, while the company’s watch could actually be differentiated from the competition, it had to be perceived by customers to be differentiated along some dimension that they valued. Differentiation strategies must be preceded by market research to determine what cus- tomer need is not being met and then move quickly to meet it. Only then will customers be willing to pay more for the product and the company command higher margins.