Creating Value Successful business strategies Second edition Shiv S Mathur and Alfred Kenyon OXFORD AUCKLAND BOSTON JOHANNESBURG MELBOURNE NEW DELHI Butterworth-Heinemann Linacre House, Jordan Hill, Oxford OX2 8DP 225 Wildwood Avenue, Woburn, MA 01801-2041 A division of Reed Educational and Professional Publishing Ltd A member of the Reed Elsevier plc group First published as Creating Value: Shaping tomorrow’s business 1997 Reprinted 1997 Paperback edition 1998 Second edition 2001 © Shiv S Mathur and Alfred Kenyon 1997, 1998, 2001 All rights reserved No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1P 0LP Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publishers British Library Cataloguing in Publication Data Mathur, Shiv Creating value: successful business strategies – 2nd ed Strategic planning Competition I Title II Kenyon, Alfred 658.4'012 ISBN 7506 5363 For information on all Butterworth-Heinemann publications visit our website at www.bh.com Composition by Genesis Typesetting, Laser Quay, Rochester, Kent Printed and bound in Great Britain Contents Preface to the first edition Preface to the second edition Outline: The framework in a nutshell Purpose, scope and basics Introduction: The purpose of this book The objective: financial results from customer markets Organization- v customer-centred, supply v demand perspective Non-profit-making enterprises Development of business strategy as a discipline The role of this book Care with words Views of ˛business strategy Mintzbergs ˛emerging business strategies Strategy and ˛plan Business strategy: a working definition The macroeconomic environment Addressing the manager Top management and its skills taken as given, not as a variable Should managers be thinkers? What decisions are strategic? Business strategy, culture, mission statements Outline of the book 5 7 10 10 12 13 13 14 15 15 16 17 18 How to read the book Notes 19 19 Part 1: FUNDAMENTALS: THE FRAMEWORK AND ITS MAIN BUILDING BLOCKS Objectives: what is business strategy for? Corporate success and the financial and commercial markets The fundamental goal is financial: to earn more than the cost of capital The cost of capital Threats to independent survival Expected returns are the yardstick of value Financial value and shareholder, owner or investor value The source of financial returns is commercial success Pure dealing Short termism and the importance of time- frames Is a business an ethical agent? Ethical dilemmas and short and long time- frames Ethical conflicts of managers Collective and individual ethical values The owner-manager Summary of ethical issues Conclusion Notes 24 24 25 25 26 27 28 29 30 32 33 35 36 36 37 37 Competitive and corporate strategy - why centred on offerings? Introduction The individual offering The importance of success in customer markets Identifying the single offering Inputs and outputs The company Tasks of competitive and corporate strategy Offerings are not management units The case for a CC-strategy for each offering 41 41 42 43 43 44 45 Decisions are often for more than one offering The offering as firmlet The ˛firm How business strategy is structured Redefining ˛business strategy Summary Introduction Exclusion 1: Tax-based changes in the operating profile of a group of companies Exclusion 2: Diversification or restructuring to improve financial leverage ( gearing) Exclusion 3: Diversification to enhance financial clout Summary Notes 49 49 51 51 52 53 57 58 59 60 62 62 Part 2: UNDERSTANDING COMPETITIVE POSITIONING AND STRATEGY Differentiation creates private, not public markets Introduction Differentiation: the key concept Defining differentiation The distancing of an offering from substitutes Competition for customers takes place in markets The key assumption Industry analysis Industries as markets The public market Illustrations of public markets An illustration from the tourist trade Public and private markets The private market The galaxy Which model best fits the real world? Implications for the ˛industry and ˛industry analysis Using the model of the private market Segmentation Where the industry and public market models remain useful Summary and conclusion 68 69 70 71 71 72 73 73 74 75 77 78 79 81 82 83 83 84 Customer and market segments Limitations of market segments as an analytical tool Using customer segments Segmentation Summary Notes 85 86 86 87 88 88 Differentiation and its dimensions: classification of competitive strategies Introduction Classifying competitive strategies High and low differentiation and price sensitivity The four generic forms of differentiation Subdimensions of differentiation Types of support differentiation Types of merchandise differentiation Fuller classification of differentiation The 16 permutations The odder the better? Advertising and differentiation Strategists need to think in terms of customers and output Fallacies prompted by an input language The input - output distinction: conclusion Summary Notes 92 93 93 94 96 99 101 101 103 104 105 107 108 108 Competitive positioning: differentiation and price Introduction Differentiation: why and how? Distance and price sensitivity Single-scale and multidimensional differentiation Differentiation is indirect and uncertain Differentiation seen as occurring along a quality scale Very successful new offerings The cheaper and better offering The strategic role of price Summary Notes 111 111 113 115 116 118 120 121 123 124 Competitive positioning in imperfect markets with dominant sellers Introduction Market ’entry’ or ’encroachment’? Markets and profit margins: differentiation and circularity Monopoly Few dominant sellers: the circular or oligopoly case Circularity and the strategist Oligopoly and strategy implementation The interrelation between circularity, differentiation and price Summary: differentiation, circularity and price Notes 127 129 129 132 134 134 135 136 Part 3: COMPETITIVE STRATEGIES FOR PROFIT Competitive strategy: what makes it profitable? Introduction: strategies are selected for their financial value Accounting profits versus financial value Differences between the accounting and financial frameworks The impact of competitive strategy on profitability: targeting profitable customers Competitive positioning is for tomorrow The time-frame The forgotten truism: the source of profits Competitive strategy and the determinants of profit Effect of competitive strategy: differentiation and circularity The effect of differentiation on volume Durability of margins and threats to durability Competitive threats Autonomous, non-competitive threats Responses to competitive threats When is a commodity-buy strategy profitable? Volume and scale economies Market share and its benefits 142 143 144 145 146 146 147 148 148 148 149 149 149 150 150 How a strategy aimed at raising market share can generate financial value How valid is market share as an intermediate goal? Summary Notes 152 153 154 157 Competitive strategy: dynamics of positioning Introduction The generic offering The transaction life cycle The model of the rearranger Differentiation and the rearranger Price competition and the rearranger The model of the transformer Summary Notes 160 163 164 164 165 167 167 Part 4: RESOURCES AND BUSINESS STRATEGY 10 The theory of winning resources (the resource-based view) Introduction Different perspectives of ˛sustained The resource-based view and its success criterion Success-aping pressures Where does sustained value-building occur in the offering or in the company? Sustained value-building in customer markets: the resource- based view Resources, their types and classification: winning resources Peterafs four cornerstones Heterogeneous (distinctive) Ex ante limits to competition (bargain) Ex post limits to competition (matchless) Imperfect mobility (inseparable) How the framework fits together Sustained value creation: for how long? Using the resource-based framework Why no customer market failure? 172 173 173 174 174 175 176 177 178 179 180 183 183 184 184 Sustained value-building by companies, through corporate strategy Does the company encounter a success-aping process? The evidence and the logic Higher-level resources Pure management resources The resource-based framework and corporate strategy Summary and conclusion Notes 185 186 188 188 189 190 191 192 11 Winning resources for the manager Introduction The cost of capital as the benchmark Satisfying the benchmark Earning the cost of capital is a benchmark, not a cutoff point Practical benefits of the resource-based view Must they always be winning resources? The role of the cornerstones: me-tooism is not enough Illustration: the jersey knitters Protective armour The serial innovation case The rapid payback case External impediments to encroachment Resources suitable to protect duration Corporate competences Discriminating among winning resources Limitations of the resource-based approach Value-building through corporate strategy A special case: the capital of a financial institution Summary Notes 197 198 199 199 199 201 201 203 204 204 205 206 207 209 212 213 214 215 216 12 The ’scissors’ process for choosing a competitive strategy Introduction The big asymmetry The two options The choice process 219 220 221 ... to independent survival Expected returns are the yardstick of value Financial value and shareholder, owner or investor value The source of financial returns is commercial success... and Professional Publishing Ltd A member of the Reed Elsevier plc group First published as Creating Value: Shaping tomorrow’s business 1997 Reprinted 1997 Paperback edition 1998 Second edition... be addressed to the publishers British Library Cataloguing in Publication Data Mathur, Shiv Creating value: successful business strategies – 2nd ed Strategic planning Competition I Title II Kenyon,