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Competing For Advantage Part III – Creating Competitive Advantage Chapter 5 – Business-Level Strategy.

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Presentation on theme: "Competing For Advantage Part III – Creating Competitive Advantage Chapter 5 – Business-Level Strategy."— Presentation transcript:

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2 Competing For Advantage Part III – Creating Competitive Advantage Chapter 5 – Business-Level Strategy

3 Business-Level Strategy Key Terms Business-Level Strategy – integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets –

4 Types of Business-Level Strategy

5 Features of the Five Business-Level Strategies Generic, can be used across industries Two distinct types of competitive advantage: Low Cost Differentiation Choice of scope: Broad Narrow (niche)

6 Cost Leadership Strategy Key Terms Cost Leadership Strategy – integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

7 Cost Leadership Strategy – Implementation No-frill, standardized goods Continuously reduce costs of value chain activities

8 Value-Creating Activities Associated with Cost Leadership Strategy

9 Cost Leadership Strategy and the Five Forces of Competition Low-cost position is a valuable defense against rivals Powerful customers can demand reduced prices Costs leaders are in a position to absorb supplier price increases and relationship demands, and to force suppliers to hold down their prices Continuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitors Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers

10 How can Low Costs protect against…? Low cost leadership does not eliminate any of these forces, it just allows the low costs firm to more easily deal with these forces, or offset the power of these forces, and potentially, remain profitable.

11 Strategy and Organizational Structure Specialization Centralization Formalization

12 Cost Leadership Strategy and Structure Simple reporting relationships Few decision-making and authority layers Centralized corporate staff Strong operational focus on process improvements Low-cost culture Centralized staff decision-making authority Jobs specialization Highly formalized rules and procedures

13 Risks of Cost Leadership Strategy Processes can become obsolete Focus on cost reductions can come at the expense of understanding customer perceptions and needs Strategy could be imitated, requiring the firm to increase the value offered to retain customers

14 Differentiation Strategy Key Terms Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

15 Differentiation Offer attributes that customers want, and are willing to pay for. Leads to premium price, higher volume, loyalty Maintaining uniqueness can be a challenge Kodak, Wrigley’s, Campbell’s, Coca-Cola, Gillette, Del Monte, and Nabisco all leaders since 1923 Marginal revenue must exceed the costs of differentiation PERCEIVED VALUE versus INCREMENTAL COSTS

16 Differentiation Strategy – Implementation Target customers – perceived product value Customized products – differentiating on as many features as possible

17 Differentiation Strategy – Implementation (cont.) Unusual features Responsive customer service Rapid product innovations Technological leadership Perceived prestige and status Different tastes Engineering design Performance

18 Differentiation (cont.) What firms pursue differentiation? How or on what basis do they achieve differentiation?

19 Value-Creating Activities Associated with the Differentiation Strategy

20 Differentiation (cont.) Signalling important when: nature of differentiation difficult to quantify first-time purchase – re-purchase infrequent buyers unsophisticated

21 Differentiation Strategy and Structure Complex and flexible reporting relationships Cross-functional product development teams Strong focus on marketing and product R&D Development-oriented culture Decentralized decision making Broad job descriptions Informal rules and procedures

22 Risks of Differentiation Strategy quick imitation no value in uniqueness over differentiation cell phones premium price or costs are costs too high poorly understood/changing customer needs Minivan, FAO Schwartz costs/price become more important than uniqueness unwillingness to offer true differentiation

23 Differentiation Strategy and the Five Forces of Competition Customer loyalty provides the most valuable defense against rivals Uniqueness products reduce customer sensitivity to raised prices High margins (for differentiated products) insulate from supplier influence Customer loyalty and product uniqueness serve as significant entry barriers Firms with customers loyal to their products are positioned effectively against product substitutes

24 How can Differentiation protect against…? Differentiation does not eliminate any of these forces, it just allows the differentiated firm to more easily deal with these forces, or offset the power of these forces, and potentially, remain profitable.

25 Problems with P&G’s Differentiation Strategy

26 How has P&G responded? Introduction of new, higher margined products like battery powered toothbrush and white strips Introduction of “Rejuvenating Effects,” a toothpaste for women marketed as a beauty product Using Emeril Lagasse to hawk their citrus, cinnamon, and herbal mint toothpastes

27 Focus Strategy Key Terms Focus Strategy – integrated set of actions designed to produce or deliver goods or services to a narrow target consumer based on specific differences in the market

28 Focus Strategy – Market Segments Buyer group Product line segment Geographic market

29 Focus Strategy – Reasons Large firms may overlook small niches Firms may lack resources to compete in the broader market Firms may be able to serve a narrow market segment more effectively than larger, industry-wide competitors Firms may direct resources to certain value chain activities to build competitive advantage

30 Focus Strategy – Types Focused cost leadership strategy Focused differentiation strategy

31 Risks of Differentiation Strategy A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit The needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

32 Integrated Cost Leadership/Differentiation Strategy Key Terms Integrated Cost Leadership/ Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

33 Integrated Strategy – Advantages Improved speed of adapting to environmental changes Improved speed of learning new skills and technologies Improved leverage of core competencies while competing against rivals

34 Integrated Strategy – Implementation Benefits Evidence suggests a relationship between use of an integrated strategy and achieving above-average returns Businesses that combine multiple forms of competitive advantage in low-profit-potential industries are shown to outperform businesses that compete with a single form

35 Value-Creating Activities Associated with the Integrated Strategy Integrating cost leadership and differentiation strategies (which emphasize different primary and support activities) requires a balance when selecting the activities to perform A flexible organizational structure is required

36 Integrated Strategy and the Flexible Structure Commitment to strategic flexibility Flexible decision-making patterns, with partial centralization Less specialized jobs than in a traditional functional structure—workers are more sensitive to balancing cost and differentiation Modular structures to produce modular goods create differentiation and simultaneously hold down costs

37 Risks of Integrated Strategy Failure to establish a leadership position can result in a firm being "stuck in the middle," unable to create value, and unable to earn above-average returns

38 Competing For Advantage Part III – Creating Competitive Advantage Chapter 6 – Competitive Rivalry and Competitive Dynamics

39 38 Model of Competitive Rivalry  Over time firms take competitive actions/reactions  Pattern shows firms are mutually interdependent  Firm level rivalry is usually dynamic and complex  Strategic and tactical action does not occur within a vacuum Strategic actions/responses: market-based moves that signify a significant commitment of resources Difficult to implement and reverse Tactical actions/responses: market-based moves that involve fewer resources to fine-tune a strategy that is already in place Easy to implement and reverse

40 Prisoner’s Dilemma SilentS = 6 months S = 10 years T = 0 years TestifyS = 10 years T = 0 years T = 5 years SilentTestify 39

41 Competitive Rivalry Key Terms Competitors – firms operating in the same market, offering similar products and targeting similar customers Competitive Rivalry – ongoing set of competitive actions and competitive responses occurring between competitors as they contend with each other for an advantageous market position Competitive Behavior – set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position

42 Competitive Rivalry Key Terms Competitive Dynamics – total set of actions and responses of all firms competing within a market Multimarket Competition – firms competing against one another in several product or geographic markets

43 From Competitors to Competitive Dynamics

44 Model of Competitive Rivalry

45 Intensity of Rivalry The total number of competitors Market characteristics Quality of individual firms' strategies Drivers of competitive behavior

46 Competitor Determinants Market Commonality Resource Similarity

47 Market Commonality Key Terms Market Commonality – number of markets with which the firm and a competitor are jointly involved, and degree of importance of the individual markets to each firm

48 Resource Similarity Key Terms Resource Similarity – extent to which the firm's tangible and intangible resources are comparable to competitors' resources in terms of both type and amount

49 Framework of Competitive Analysis

50 Drivers of Competitive Actions and Responses Awareness Motivation Ability Resource Similarity

51 Likelihood of Attack First mover incentives Organizational size Quality

52 Timing of Competitive Behavior Key Terms First Mover – firm that takes an initial competitive action to build or to defend its competitive advantages or to improve its market position Second Mover – firm that responds to first mover's competitive action, typically through imitation Late Mover – firm that responds to competitive action, but only after time has elapsed since first mover's action and second mover's response

53 Timing of Competitive Behavior Key Terms Slack – buffer or cushion provided by actual or obtainable resources not currently used by an organization, resources in excess of the minimum those needed to produce a given level of output

54 First Mover – Characteristics Often builds upon a strategic foundation of superior research and development skills Tends to be aggressive and willing to experiment with innovation Tends to take higher, yet reasonable, risks Needs to have liquid resources (slack) that can be quickly allocated to support actions

55 First Mover – Benefits Above-average returns Customer loyalty An early hold on market share

56 First Mover – Risks Difficulty in accurately estimating potential returns Substantial costs of product innovation, which reduce slack available for other opportunities Lower likelihood of introducing (or converting to) the product that becomes the industry standard as the market evolves

57 Second Mover – Characteristics Responds to first mover, typically through imitation Is more cautious than first movers Tends to study customer reactions to product innovations Tends to learn from the mistakes of first movers, reducing its risks Takes advantage of time to develop processes and technologies that are more efficient than first movers, reducing its costs Will not benefit from first mover advantages, lowering potential returns

58 Late Mover – Characteristics Responds to market opportunities only after considerable time has elapsed since first and second movers have taken action Has substantially reduced risks and returns

59 Organizational Size Small firms Act as nimble and flexible competitors Rely on speed and surprise to defend their competitive advantage Have greater variety of competitive behavior options available

60 Organizational Size Large firms Often have greater slack Have greater likelihood to initiate competitive and strategic actions over time Tend to rely on a limited variety of competitive actions, which can ultimately reduce their competitive success

61 Quality Key Terms Quality – customer perception that the firm's goods or services perform in ways that are important to customers, meeting or exceeding their expectations

62 Quality

63 Likelihood of Response Types and effectiveness of the competitive action Reputation of the firm that takes competitive actions Dependence on the market If the action significantly strengthens or weakens the firm's competitive position

64 Actor’s Reputation Key Terms Actor – firm taking an action or response (in the context of competitive rivalry) Reputation – positive or negative attribute ascribed by one rival to another based on past competitive behavior

65 Dependence on the Market Key Terms Market Dependence – extent to which a firm's revenues or profits are derived from a particular market

66 Competitive Dynamics – Three Market Types Slow-cycle markets Fast-cycle markets Standard-cycle markets

67 Slow-Cycle Markets Key Terms Slow-Cycle Markets – markets in which the firm's competitive advantages are shielded from imitation for long periods of time, and in which imitation is costly

68 Slow-Cycle Markets Build a one-of-a-kind competitive advantage that is proprietary and difficult for competitors to understand (creating sustainability) Once a proprietary advantage is developed, competitive behavior should be oriented to protecting, maintaining, and extending that advantage Organizational structure should be used to effectively support strategic efforts

69 Slow-Cycle Markets

70 Fast-Cycle Markets Key Terms Fast-Cycle Markets – markets in which the firm's capabilities that contribute to competitive advantages are not shielded from imitation and where imitation is often rapid and inexpensive

71 Fast-Cycle Markets Focus on learning how to rapidly and continuously develop new competitive advantages that are superior to those they replace (creating innovation) Avoid loyalty to any of their products, possibly cannibalizing their own current products to launch new ones before competitors learn how to do so through successful imitation Continually try to move on to another temporary competitive advantage before competitors can respond to the first one

72 Fast-Cycle Markets

73 Standard-Cycle Markets Key Terms Standard-Cycle Markets – markets in which the firm's competitive advantages are moderately shielded from imitation and where imitation is moderately costly

74 Standard-Cycle Markets Have competitive advantages that can be partially sustained when their quality is continuously upgraded Seek to serve many customers and gain a large market share Gain brand loyalty through brand names Carefully control operations to manage a consistent experience for the customer


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