Strategic reference point theory two basic strategic alternatives

Chapter 5

Organizational Strategy

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What Would You Do?

Walt Disney Company (Burbank, California)

Should Disney grow, stabilize, or retrench? If Disney should grow, where? If stabile, how do you improve quality to keep doing what Disney has been doing, but even better? Finally, retrenchment would mean shrinking Disney’s size and scope. If you were to do this, what divisions would you shrink or sell?

Is Disney a content business, creating characters and stories? Or is it a technology/distribution business that simply needs to find ways to buy content wherever it can?

From a strategic perspective, how should Disney’s different entertainment areas be managed? Should there be one grand strategy (i.e., growth, stability, retrenchment) that every division follows, or should each division have a focused strategy for its own market and customers?

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Walt Disney Company Headquarters, Burbank, California

Over two decades, your predecessor and boss at the Walt Disney Company, CEO Michael Eisner, accomplished much, starting the Disney Channel, the Disney Stores, and Disneyland Paris, and acquiring ABC television, Starwave Web services (from Microsoft cofounder Paul Allan), and Infoseek (an early Web search engine). But his strong personality and critical management style created conflict with shareholders, creative partners, and board members, including Roy Disney, nephew of founder Walt Disney.

One of your first moves as Disney’s new CEO was repairing relationships with Pixar Studios and its then CEO Steve Jobs. Pixar produced computer-animated movies for Disney to distribute and market. Disney also had the right to produce sequels to Pixar Films, such as Toy Story, without Pixar’s involvement. Jobs argued, however, that Pixar should have total financial and creative control over its films. When Disney CEO Michael Eisner disagreed, relations broke down, with Pixar seeking other partners. On becoming CEO, you approached Jobs about Disney buying Pixar for $7 billion. More important than the price, however, was promising Jobs and Pixar’s leadership, President Ed Catmull and creative guru John Lasseter, total creative control of Pixar’s films and Disney’s storied but struggling animation unit. Said Jobs, “I wasn’t sure I could get Ed and John to come to Disney unless they had that control.”

Although Pixar and Disney animation thrived under the new arrangement, Disney still had a number of critical strategic problems to address. Disney was “too old” and suffering from brand fatigue as its classic but aging characters, Mickey Mouse (created in 1928) and Winnie-the-Pooh (licensed by Disney in 1961), accounted for 80 percent of consumer sales. On the other hand, Disney was also “too young” and suffering from “age compression,” meaning it appealed only to young children and not preteens, who gravitated to Nickelodeon, and certainly not to teens at all. Finally, despite its legendary animated films, over time Disney products had developed a reputation for low-quality production, poor acting, and weak scripts. Movies “High School Musical 3: Senior Year,” “Beverly Hills Chihuahua,” “Bolt,” “Confessions of a Shopaholic,” “Race to Witch Mountain,” and “Bedtime Stories” disappointed audiences and failed to meet financial goals. As you told your board of directors, “It’s not the marketplace, it’s our slate [of TV shows and movies].”

With many of Disney’s brands and products clearly suffering, you face a basic decision: Should Disney grow, stabilize, or retrench? Disney is an entertainment conglomerate with Walt Disney Studios (films), parks and resorts (including Disney Cruise lines and vacations), consumer products (i.e., toys, clothing, books, magazines, and merchandise), and media networks such as TV (ABC, ESPN, Disney Channels, ABC Family), radio, and the Disney Interactive Media Group (online, mobile, and video games and products). If Disney should grow, where? Like Pixar, is another strategic acquisition necessary? If so, what company should it acquire? If stability, how do you improve quality to keep doing what Disney has been doing, but even better? Finally, retrenchment would mean shrinking Disney’s size and scope. If you were to do this, what divisions would you shrink or sell?

Next, given the number of different entertainment areas that Disney has, what business is it really in? Is Disney a content business, creating characters and stories? Or is it a technology/distribution business that simply needs to find ways to buy content wherever it can, for example, by buying Pixar and then delivering that content in ways that customers want (i.e., DVDs, cable channels, iTunes, Netflix, social media, Internet TV, etc.)?

Finally, from a strategic perspective, how should Disney’s different entertainment areas be managed? Should there be one grand strategy (i.e., growth, stability, retrenchment) that every division follows, or should each division have a focused strategy for its own market and customers? Likewise, how much discretion should division managers have to set and execute their strategies, or should that be controlled and approved centrally by the strategic planning department at Disney headquarters?

If you were CEO at Disney, what would you do?

Sustainable Competitive Advantage

Competitive advantage

Providing greater value for customers than competitors can.

Sustainable competitive advantage

A competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate.

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An organization’s resources are the assets, capabilities, processes, employee time, information, and knowledge that the organization controls. Firms use their resources to improve organizational effectiveness and efficiency. Resources are critical to organizational strategy, because they can help companies create and sustain an advantage over competitors.

Organizations can achieve a competitive advantage by using their resources to provide greater value for customers than competitors can. A competitive advantage becomes a sustainable competitive advantage when other companies cannot duplicate the value a firm is providing to customers. Importantly, sustainable competitive advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if that advantage still exists after competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it.

Exhibit 5.1 Four Requirements for Sustainable Competitive Advantage

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Four conditions must be met if a firm’s resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable, and nonsubstitutable.

Valuable resources allow companies to improve their efficiency and effectiveness. Unfortunately, changes in customer demand and preferences, competitors’ actions, and technology can make once-valuable resources much less valuable. For sustained competitive advantage, valuable resources must also be rare resources. Think about it. How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities? Consequently, rare resources, resources that are not controlled or possessed by many competing firms, are necessary to sustain a competitive advantage. However, for sustained competitive advantage, other firms must be unable to imitate or find substitutes for those valuable, rare resources. Imperfectly imitable resources are impossible or extremely costly or difficult to duplicate. Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also nonsubstitutable resources, meaning that no other resources can replace them and produce similar value or competitive advantage.

Exhibit 5.2 Three Steps of the Strategy-Making Process

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Exhibit 5.2 displays the three steps of the strategy-making process.

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Assessing Need for Change

Top-level managers are often slow to recognize need for change because of competitive inertia.

Managers should look for strategic dissonance to improve speed and accuracy of determining need for changes.

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It might seem that determining the need for strategic change would be easy to do, but in reality, it’s not. There’s a great deal of uncertainty in strategic business environments. Furthermore, top-level managers are often slow to recognize the need for strategic change, especially at successful companies that have created and sustained competitive advantages. Because they are acutely aware of the strategies that made their companies successful, they continue to rely on them, even as the competition changes. In other words, success often leads to competitive inertia—a reluctance to change strategies or competitive practices that have been successful in the past.

So, besides being aware of the dangers of competitive inertia, what can managers do to improve the speed and accuracy with which they determine the need for strategic change? One method is to actively look for signs of strategic dissonance. Strategic dissonance is a discrepancy between upper management’s intended strategy and the strategy actually implemented by the lower levels of management. Upper management sets overall company strategy, but middle and lower-level managers must carry out the strategy. Middle and lower-level managers are held directly responsible for meeting customers’ needs and responding to competitors’ actions. While strategic dissonance can indicate that these managers are not doing what they should to carry out company strategy, it can also mean that the intended strategy is out of date and needs to be changed.

SWOT Analysis

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A situational analysis can also help managers determine the need for strategic change. A situational analysis, also called a SWOT analysis for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment.

Internal Environment

A company’s strengths and weaknesses begin with an assessment of distinctive competencies and core capabilities.

A distinctive competence is something a company can do better than its competitors.

Core capabilities are less visible factors that determine how efficiently inputs can be turned into outputs.

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Consequently, an analysis of an organization’s internal environment, that is, a company’s strengths and weaknesses, begins with an assessment of distinctive competencies and core capabilities. A distinctive competence is something that a company can make, do, or perform better than its competitors. While distinctive competencies are tangible—for example, a product or service is faster, cheaper, or better—the core capabilities that produce distinctive competencies are not. Core capabilities are the less visible, internal decision-making routines, problem-solving processes, and organization cultures that determine how efficiently inputs can be turned into outputs.

External Environment

Managers must identify specific opportunities and threats that affect a company’s ability to sustain competitive advantage.

Strategic group

A group of companies within an industry against which top managers compare, evaluate, and benchmark their company’s strategic threats and opportunities.

Core firms

The central companies in a strategic group.

Secondary firms

Firms that use strategies related to but somewhat different from those of core firms.

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When scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries into several kinds of strategic groups: core, secondary, and transient firms.

The first kind of strategic group consists of core firms, that is, central companies in a strategic group. Secondary firms are firms that use related but somewhat different strategies than core firms. Managers are aware of the potential threats and opportunities posed by secondary firms. However, they spend more time assessing the threats and opportunities associated with core firms.

what really works Strategy Making for Firms, Big and Small

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Measure Probability of Success
Strategic Planning & Profits for Big Companies 72%
Strategic Planning & Growth for Big Companies 75%
Strategic Planning & Growth for Small Companies 61%
Strategic Planning & Return on Investment for Small Companies 62%
Strategic Planning & External Growth through Acquisitions 45%
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There is a 72 percent chance that big companies that engage in the strategy-making process will be more profitable than big companies that don’t. Not only does strategy making improve profits but it also helps companies grow. Specifically, there is a 75 percent chance that big companies that engage in the strategymaking process will have greater sales and earnings growth than big companies that don’t. Thus, in practical terms, the strategy-making process can make a significant difference in a big company’s profits and growth.

Choosing Strategic Alternatives

Risk-avoiding

Aims to protect an existing competitive advantage.

Risk-taking

Aims to extend or create a sustainable competitive advantage.

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According to Strategic Reference Point Theory, managers choose between two basic alternative strategies. They can choose a conservative, risk-avoiding strategy that aims to protect an existing competitive advantage. Or, they can choose an aggressive, risk-seeking strategy that aims to extend or create a sustainable competitive advantage. The choice to be risk-seeking or risk-avoiding typically depends on whether top management views the company as falling above or below strategic reference points.

Exhibit 5.3 Strategic Reference Points

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Strategic reference points are the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage. However, Strategic Reference Point Theory is not deterministic. Managers are not predestined to choose risk-averse or risk-seeking strategies for their companies. Indeed, one of the most important points in Strategic Reference Point Theory is that managers can influence the strategies chosen at their companies by actively changing and adjusting the strategic reference points they use to judge strategic performance. To illustrate, if a company has become complacent after consistently surpassing its strategic reference points, then top management can change the company’s strategic risk orientation from risk-averse to risk-taking by raising the standards of performance (i.e., strategic reference points).

As shown in Exhibit 5.3, when a company is performing above or better than its strategic reference points, top management will typically be satisfied with the company’s strategy. This satisfaction tends to make top management conservative and risk-averse. But, when a company is performing below or worse than its strategic reference points, top management will typically be dissatisfied with the strategy. In this instance, managers are more likely to choose a risk-taking strategy.

Corporate-Level Strategies

“What business or businesses are

we in or should we be in?”

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Companies must answer three basic questions:

What business are we in or should we be in?

How should we compete in this industry?

Who are our competitors and how should we respond to them?

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Exhibit 5.4 Corporate-Level Strategies

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Corporate-level strategy is the overall organizational strategy that addresses the question “What business or businesses are we in or should we be in?”

One of the standard strategies for stock market investors is diversification: buy stocks in a variety of companies in different industries. The purpose of this strategy is to reduce risk in the overall stock portfolio (i.e. the entire collection of stocks). The basic idea is simple: If you invest in 10 companies in 10 different industries, you won’t lose your entire investment if one company performs poorly. Furthermore, because they’re in different industries, one company’s losses are likely to be offset by another company’s gains. Portfolio strategy is based on these same ideas.

Portfolio strategy is a strategy that minimizes risk by diversifying investment among various businesses or product lines. Managers who use portfolio strategy are often on the lookout for acquisitions—other companies to buy.

Portfolio strategy can reduce risk even more through unrelated diversification—creating or acquiring companies in unrelated businesses. The BCG Matrix is the best-known portfolio strategy that managers use to categorize their corporation’s businesses.

Grand strategies include growth, stability, and retrenchment/recovery.

Portfolio Strategy

A corporate-level strategy that minimizes risk by diversifying investments among various businesses or product lines.

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Standard strategies:

Diversification

Acquisition

Unrelated diversification

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Portfolio Strategy

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One of the standard strategies for stock market investors is diversification, or owning stocks in a variety of companies in different industries.

An acquisition is the purchase of a company by another company.

Unrelated diversification is creating or acquiring companies in completely unrelated businesses

BCG Matrix

A portfolio strategy that managers use to categorize their corporation’s businesses by growth rate and relative market share, helping them decide how to invest corporate funds

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The BCG matrix is a portfolio strategy that managers use to categorize their corporation’s businesses by growth rate and relative market share, helping them decide how to invest corporate funds. The matrix, shown in Exhibit 5.5, separates businesses into four categories, based on how fast the market is growing (high-growth or low-growth) and the size of the business’s share of that market (high or low).

Stars are companies that have a large share of a fast-growing market. To take advantage of a star’s fast-growing market and its strength in that market (large share), the corporation must invest substantially in it. However, the investment is usually worthwhile, because many stars produce sizable future profits. Question marks are companies that have a small share of a fast-growing market. If the corporation invests in these companies, they may eventually become stars, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in stars. Cash cows are companies that have a large share of a slow-growing market. Companies in this situation are often highly profitable, hence the name “cash cow.” Finally, dogs are companies that have a small share of a slow-growing market. As the name “dogs” suggests, having a small share of a slow-growth market is often not profitable.

Exhibit 5.5 Boston Consulting Group Matrix

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Exhibit 5.5

Arrow 1: While the substantial cash flows from cash cows last, they should be reinvested in stars.

Arrow 2: Over time, as their market growth slows, some stars may turn into cash cows.

Arrow 3: Cash flows should also be directed to some question marks because of greater potential in a fast-growing market.

Arrow 4: Some question marks will become stars over time, as their small markets become larger ones.

Arrow 5: Because dogs lose money, they should “find a new owner” or be “taken to the pound” (sold or closed down and liquidated for their assets).

Related Diversification

Different business units share similar products, manufacturing, marketing, technology, or cultures.

The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio.

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Exhibit 5.6 U-Shaped Relationship between Diversification and Risk

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Source: M. Lubatkin & P.J. Lane, “Psst…The Merger Mavens Still Have It Wrong!” Academy of Management Executive 10 (1996): 21-39.

While the BCG matrix and other forms of portfolio strategy are relatively popular among managers, portfolio strategy has some drawbacks. The most significant is that the evidence does not support the usefulness of acquiring unrelated businesses. As shown in Exhibit 5.6, there is a U-shaped relationship between diversification and risk. The left side of the curve shows that single businesses with no diversification are extremely risky (if the single business fails, the entire business fails). So, in part, the portfolio strategy of diversifying is correct—competing in a variety of different businesses can lower risk. However, portfolio strategy is partly wrong, too--the right side of the curve shows that conglomerates composed of completely unrelated businesses are even riskier than single, undiversified businesses.

Grand Strategies

There are three kinds of grand strategies:

Growth

Stability

Retrenchment

Recovery

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A grand strategy is a broad strategic plan used to help an organization achieve its strategic goals. Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use. There are three kinds of grand strategies: growth, stability, and retrenchment/recovery.

The purpose of a growth strategy is to increase profits, revenues, market share, or the number of places (store, offices, locations) in which the company does business. Companies can grow in several ways. They can grow externally by merging with or acquiring other companies. The purpose of a stability strategy is to continue doing what the company has been doing, but just do it better. Consequently, companies following a stability strategy try to improve the way in which they sell the same products or services to the same customers.

The purpose of a retrenchment strategy is to turn around very poor company performance by shrinking the size or scope of the business. The first step of a typical retrenchment strategy might include significant cost reductions, layoffs of employees, closing of poorly performing stores, offices, or manufacturing plants, or closing or selling entire lines of products or services. After cutting costs and reducing a business’s size or scope, the second step in a retrenchment strategy is recovery. Recovery consists of the strategic actions that a company takes to return to a growth strategy. This two-step process of cutting and recovery is analogous to pruning roses.

Industry-level Strategies

Industry-level strategies address the question:

“How should we compete in this industry?”

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Exhibit 5.7 Five Industry Forces

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According to Harvard professor Michael Porter, five industry forces determine an industry’s overall attractiveness and potential for long-term profitability. These include the character of the rivalry, the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, and the bargaining power of buyers. The stronger these forces, the less attractive the industry becomes to corporate investors because it is more difficult for companies to be profitable.

Character of the rivalry is a measure of the intensity of competitive behavior among companies in an industry. Is the competition among firms aggressive and cutthroat, or

do competitors focus more on serving customers than on attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat. The threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. If new companies can easily enter the industry, then competition will increase and prices and profits will fall. On the other hand, if there are sufficient barriers to entry, such as large capital requirements to buy expensive equipment or plant facilities or the need for specialized knowledge, then competition will be weaker and prices and profits will generally be higher. The threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry’s products or services. If customers can easily find substitute products or services, the competition will be greater and profits will be lower. If there are few or no substitutes, competition will be weaker and profits will be higher. Generic medicines are some of the best-known examples of substitute products. Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. When companies can buy parts, materials, and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low. On the other hand, if there are few suppliers, or if a company is dependent on a supplier with specialized skills and knowledge, then the suppliers will have the bargaining power to dictate price levels. Bargaining power of buyers is a measure of the influence that customers have on a firm’s prices. If a company sells a popular product or service to multiple buyers, then the company has more power to set prices. By contrast, if a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices.

Positioning Strategies

After analyzing industry forces, the next step in industry-level strategy is to protect your company from the negative effects of industry-wide competition and to create a sustainable competitive advantage.

Cost leadership

Differentiation

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Cost leadership is producing a product or service of acceptable quality at consistently lower production costs than competitors so that the firm can offer the product or service at the lowest price in the industry.

Differentiation is making your product or service sufficiently different from competitors’ offerings so that customers are willing to pay a premium price for the extra value or performance that it provides.

Focus Strategy

A company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specifically targeted group in a particular region or market.

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Adaptive Strategies

Adaptive strategies are another set of industry-level strategies.

Defenders

Prospectors

Analyzers

Reactors

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Adaptive strategies are another set of industry-level strategies. Whereas the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment. There are four kinds of adaptive strategies: defenders, prospectors, analyzers, and reactors. Defenders seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers. In other words, defenders aggressively “defend” their current strategic position by doing the best job they can to hold on to customers in a particular market segment. Prospectors seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market. Adaptive strategies are another set of industry-level strategies. Whereas the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment. There are four kinds of adaptive strategies: defenders, prospectors, analyzers, and reactors. Analyzers are a blend of the defender and prospector strategies. Analyzers seek moderate, steady growth and limited opportunities for fast growth. Analyzers are rarely first to market with new products or services. Instead, they try to simultaneously minimize risk and maximize profits by following or imitating the proven successes of prospectors. Finally, unlike defenders, prospectors, or analyzers, reactors do not follow a consistent strategy. Furthermore, rather than anticipating and preparing for external opportunities and threats, reactors tend to “react” to changes in their external environment after they occur. Not surprisingly, reactors tend to be poorer performers than defenders, prospectors, or analyzers.

Firm-level Strategy

“How should we compete

against a particular firm?”

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Firm-level strategies

address the question:

“How should we compete against a particular firm?”

Direct Competition

The rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive actions as they act and react to each other’s strategic actions.

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Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions. Two factors determine the extent to which firms will be in direct competition with each other: market commonality and resource similarity.

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Direct Competition

Two factors determine the extent to which firms will be in direct competition with each other:

Market commonality

Resource similarity

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Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions. Two factors determine the extent to which firms will be in direct competition with each other: market commonality and resource similarity. Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies. Resource similarity is the extent to which a competitor has similar amounts and kinds of resources, that is, similar assets, capabilities, processes, information, and knowledge used to create and sustain an advantage over competitors. From a competitive standpoint, resource similarity means that the strategic actions that your company takes can probably be matched by your direct competitors.

Exhibit 5.8 A Framework of Direct Competition

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Exhibit 5.8 shows how market commonality and resource similarity interact to determine when and where companies are in direct competition. The overlapping

area in each quadrant (between the triangle and the rectangle, or between the differently colored rectangles) depicts market commonality; the larger the overlap, the greater the market commonality. Shapes depict resource similarity, with rectangles representing one set of competitive resources and triangles representing another. Quadrant I shows two companies in direct competition because they have similar resources at their disposal and a high degree of market commonality. These companies try to sell similar products and services to similar customers. McDonald’s and Burger King would clearly fit here as direct competitors. In Quadrant II, the overlapping parts of the triangle and rectangle show two companies going after similar customers with some similar products or services but with different competitive resources. McDonald’s and Wendy’s restaurants would fit here. Wendy’s is after the same lunchtime and dinner crowds that McDonald’s is. Nevertheless, with its more expensive hamburgers, fries,

shakes, and salads, Wendy’s is less of a direct competitor to McDonald’s than is Burger King. Wendy’s Garden Sensation salads (using fancy lettuce varieties, grape tomatoes, and mandarin oranges) bring in customers who would have eaten at more expensive casual dining restaurants like Applebee’s. In Quadrant III, the very small overlap shows two companies with different competitive resources and little market commonality. McDonald’s and Luby’s cafeterias fit here. Although both are in the fast-food business, there’s almost no overlap in terms of products and customers. Luby’s sells baked chicken, turkey, roasts, meat loaf, and vegetables, none of which are available at McDonald’s. Furthermore, Luby’s customers aren’t likely to eat at McDonald’s. In fact, Luby’s is not really competing with other fast-food restaurants at all, but with eating at home. Finally, in Quadrant IV, the small overlap between the two rectangles shows that McDonald’s and Subway compete with similar resources but with little market commonality. In terms of resources, sales at McDonald’s are much larger, but Subway has grown substantially in the last decade and now has 33,048 stores worldwide, compared to 32,000 worldwide at McDonald’s (just 13,000 in the United States). Though Subway and McDonald’s compete, they aren’t direct competitors in terms of market commonality in the way that McDonald’s and Burger King are because Subway, unlike McDonald’s, sells itself as a provider of healthy fast food.

Strategic Moves of Direct Competition

Firms in direct competition can make two basic strategic moves:

Attack

Response

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While corporate-level strategies help managers decide what business to be in and business-level strategies help them determine how to compete within an industry, firm-level strategies help managers determine when, where, and what strategic actions should be taken against a direct competitor. Firms in direct competition can make two basic strategic moves: attacks and responses.

An attack is a competitive move designed to reduce a rival’s market share or profits.

A response is a countermove, prompted by a rival’s attack, designed to defend or improve a company’s market share or profit.

Attacks and responses can include smaller, more tactical moves, like price cuts, specially advertised sales or promotions, or improvements in service. However, they can also include resource-intensive strategic moves, such as expanding service and production facilities, introducing new products or services within the firm’s existing business, or entering a completely new line of business for the first time. Of these, market entries and exits are probably the most important kinds of attacks and responses. Entering a new market is a clear offensive signal to an attacking or responding firm that your company is committed to gaining or defending market share and profits at their expense. By contrast, exiting a market is an equally clear defensive signal that your company is retreating.

Strategic Moves of Direct Competition

When market commonality is strong, there is less motivation to attack and more motivation to respond to an attack.

When resource similarity is strong, the responding firm will generally be able to match the strategic moves of the attacking firm.

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When resource similarity is low, a competitive attack is more likely to produce sustained competitive advantage.

In general, the more moves a company initiates against direct competitors, and the greater a company’s tendency to respond when attacked, the better its performance.

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Strategic Moves of Direct Competition

Evaluate Theo’s new strategy in light of the company’s strengths, weaknesses, opportunities, and threats.

Using the BCG matrix, explain Theo’s decision to offer a classic line of chocolate bars after having limited success with Fantasy Flavor chocolates.

3. Which of the three competitive strategies—differentiation, cost leadership, or focus—do you think is right for Theo Chocolate? Explain.

Management Workplace - Theo Chocolate

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Theo Chocolate: Strategy Formulation and Execution

When Theo Chocolate first started its production, the company offered an exotic line of dark chocolate and milk chocolate bars and truffles. These early treats had unusual names such as the 3400 Phinney Bar, and they were wrapped in artistic watercolor packaging with whimsical cover designs. Though the chocolate was well received by critics and organic food enthusiasts, it was not popular with mainstream consumers. Founder Joe Whinney began working on a new strategy, creating classic milk chocolate bars as a gateway product that would attract consumers more easily. The end result is that Theo now offers two distinct product lines for two different market segments - a Classic line of milk chocolate bars for mainstream customers, and Fantasy Flavors for more adventurous eaters.