Explosive technological change is rapidly creating countless new market opportunities. The author provides a proven market-driven approach to formulating and implementing competitive strategy at the business unit level - "in the trenches". Day introduces the five critical strategic choices that managers must make - in selecting channels, in product differentiation, in pricing - that will yield a competitive advantage.
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George S. Day is executive director of the Marketing Science Institute in Cambridge, Massachusetts, visiting professor of marketing at the Harvard Business School, and professor of marketing at the University of Toronto. He is the author of nine books.Excerpt. © Reprinted by permission. All rights reserved.:
Chapter 1: Managing in Turbulent Markets
There is no resting place for an enterprise in a competitive society.
Alfred Sloan, Jr.
Unless we change our direction we are likely to end up where we are headed.
Ancient Chinese Wisdom
Benetton and Sears, Roebuck both compete for a piece of the retail apparel market. Otherwise there are few similarities. The differences between these two firms are more interesting for they illustrate the richness and complexity of competitive strategies, as well as the adverse consequences for performance when a strategy drifts out of touch with the market. Their stories are also apt metaphors for some of the forces that will be sweeping the markets of the 1990s.
Sears is a classic example of what happens when a firm becomes complacent in its market. Until 1986 Sears was the dominant retailer in the United States, before being challenged by K-Mart and Wal-Mart. By 1989 it was struggling to reverse a decade-long decline in its share of general merchandise sales from 18 percent to 13 percent, overcome bloated selling and administrative costs of 30 percent of sales, and raise pretax margins from 3.7 percent to a level closer to the 7 percent of their competitors.
The problems with apparel were symptomatic of Sears's difficulties. The traditional key success factors in this department were quality of presentation and assortment. Both were major problems to manage because of the number of stores and diversity of product lines in each store. Many suppliers of branded apparel didn't like Sears's sloppy presentation or considered a mass market outlet inappropriate. Changes to overcome these problems proved difficult to make. One proposal was to create "neighborhood stores" that would sell only apparel and home furnishings. However, the executives representing "hard goods" such as appliances, electronics, and automotive products argued they shouldn't be left out of the stores, and killed the proposal.
Despite Sears's problems, its standing with consumers remained strong. Consistently it was picked as a company associated with high quality, and 75 percent of Americans visited a Sears store at least once a year. Unfortunately, this reservoir of goodwill was being dissipated by a ponderous and noncompetitive culture, antiquated systems, and excessive in-fighting. Customers were being siphoned off by trendier specialty retailers, such as The Gap or The Limited, or superdiscounters such as Circuit City or Toys R Us who dominated specific merchandise types.
Benetton was anything but complacent. In just 10 years this Italian-based fashion retailer opened 5,000 shops in 79 countries. Each shop offered brightly colored sportswear with a distinctive flair, presented in basic color and design configurations, with lots of excitement and ever-changing variety.
The contrasts with Sears were telling; Benetton was focused, global. It competed with a distinct strategy that provided a stable platform for managing in a turbulent fashion market where life cycles were often less than a season. Not surprisingly, their net profit margins were also three times those of Sears.
The most noticeable difference was their "customer draw" system that electronically tied the 5,000 stores directly to their factories -- so closely that turnaround from order to delivery was only two to six weeks. Store managers didn't have to guess in advance what to order, they could monitor what was selling and reorder the "hot" items. The highly automated factories produced only to order. If a new style or fabric emerged unexpectedly, a sophisticated computer-aided design (CAD) system could compress the time from design to production of a full range of sizes and colors. Not only had they broken the traditional constraints of time with this system, they were also able to avoid being penalized by costs that typically rise with increasing variety. This gave them a distinct competitive advantage.
While it is tempting to dismiss Sears as a dinosaur, ill-equipped to match fleet-footed competitors in fast-changing global markets, and celebrate Benetton as a prototype of innovative winners in the future, that would be terribly misleading. Their respective positions reflect past strategic choices and intentions, but their future performance hinges on how well they adapt to the future environment. If Sears management can shake loose from their bad habits, they have enormous strengths to exploit. Conversely Benetton must keep innovating or be surpassed by eager emulators. Their futures are very much in their hands, depending on the wisdom and commitment their management brings to the critical choices any business must make to successfully manage its markets. This chapter introduces the strategic choices that collectively determine whether the rules of their competitive game are defined to their advantage and not preempted by their rivals. The rest of the book is about how to make these choices.
CHOICES AND CHALLENGES IN TURBULENT MARKETS
A competitive strategy specifies how a business intends to compete in the markets it chooses to serve. This strategy provides a conceptual glue that gives shared meaning to all the separate functional activities and programs. Effective strategies are straightforward in their intent and direction. Too much subtlety and complexity, and the essential ingredients won't be consistently understood or acted upon by the organization. This is damaging to performance in the market because it sends erratic and confusing signals to customers.
Strategies are directional statements, rather than detailed step-by-step plans of action. The direction is set by four choices:
Arena: the markets to serve and customer segments to target
Advantage: the positioning theme that differentiates the business from competitors
Access: the communication and distribution channels used to reach the market
Activities: the appropriate scale and scope of activities to be performed
These choices are highly interdependent -- change one and all the other elements of the strategy have to be changed. The result of these choices is an integrated pattern that collectively specifies the strategy in Figure 1-2.
A fifth and final set of choices deals with the adaptation of the strategy to impending threats and emerging opportunities. Winning strategies don't change every year or at the whim of new management, because if they did the customers and the organization would soon become confused. This doesn't mean a sound strategy can be static, for that would stifle innovation and lead to stagnation. Successful adaptation requires a clear sense of the growth direction to pursue that will best capitalize on the competencies of the business.
The choice of the best direction depends on making sense of a myriad of events, trends, and cross-currents, and placing bets on how the environment will unfold. If the bets are wrong, and the business can't change course quickly, the penalty is below par performance and foreclosure from future opportunities. Each of the critical strategic choices will be more difficult in the future because of the challenges posed by an accelerating rate of change and competition of unprecedented intensity.
ARENA: CHOOSING MARKETS AND TARGET SEGMENTS
As soon as the market arena is chosen management loses many of their degrees of freedom. This single choice largely dictates the customers to be served, the rivals to surpass, and the key success factors (KSFs) they must master. These KSFs are the functions and activities that must be managed well for the business to outperform the rivals. Conversely if these are done badly then failure is almost assured. Each market has a distinctive profile of KSFs, shaped by the attributes of the market. In mature indu
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