Differentiation Strategy Organization’s resources and attention are directed toward making its products appear different from those of the competition (ex: Coke, Pepsi) Market scope = Broad Source of competitive advantage = Unique product
GENERIC STRATEGIES Cost Leadership Organization’s resources and attention are directed toward minimizing costs to operate more efficiently than the competition (ex: Wal-Mart) Market scope = Broad Source of competitive advantage = Low price
GENERIC STRATEGIES Focused Differentiation Concentrates on a particular market segment and tries to offer the most unique product in that segment Market scope = Narrow Source for competitive advantage = Unique product Focused Cost Leadership Concentrates on a particular market segment and tries to be the provider with the lowest costs in that segment Market scope = Narrow Source for competitive advantage = Low price
GENERIC STRATEGIES Differentiation Strategy (in depth) Seeks advantage though uniqueness Done by: Certain look (ex: Polo Ralph Lauren, American Apparel, Roots) Lifestyle advertising (ex: Coca Cola, Pepsi, Much Music) ____________________________________________________________ Goal is to attract consumers who will be loyal and ignore the competitions’ products This strategy requires organizational strengths in marketing, research and development, and creativity. Differentiation’s success is dependent upon the consumers’ continuing perceptions of quality and uniqueness.
GENERIC STRATEGIES Cost Leadership Strategy (in depth) Your goal is to have the lowest prices available to receive the largest profit Done by: Continually improving operating efficiencies of production, distribution, and other organizational systems. _________________________________________________ Requires tight cost and managerial controls as well as products that are easy to manufacture and distribute Perfect example is Wal-Mart
GENERIC STRATEGIES Focus Strategies (in depth) Concentrate on a special market segment with the objective to serve it better than anyone else Focus organizational resources and attention on a particular customer, geographical region, or product/service line Seek the competitive advantage in that singular segment through product differentiation or cost leadership Example = WestJet
Number of competitors Quality differences Other (product) differences Switching costs Customer loyalty Costs of leaving the market Fixed costs/value added Brand identity Diversity of rivals Industry growth Corporate stakes Can other companies offer equally attractive products? Who holds the power? Can other companies do what you do? Will your customers stay or go? COMPETITIVE RIVALRY
Rivalry drives profits to zero Varies across industries Industry concentration Companies can choose from various rival strategies to win a competitive advantage There are many characteristics to determine the intensity of rivalry COMPETITIVE RIVALRY
Buyer Power depends on the following: Number of customers Size of each order Differences between competitors Price sensitivity Ability to substitute Cost of changing Monopsony: multiple suppliers and one buyer BUYER POWER
How easy it is for suppliers to drive up prices Less suppliers = more power for the suppliers SUPPLIER POWER
THREAT OF NEW ENTRY Time and cost of entry Investment cost Technology protection Barriers to entry Specialized Assets Experience is needed Training is available Economies of scale Brand identity Access to distribution Profitable markets that yield high returns will attract new firms New companies= decrease profits Types:
HIGH VS. LOW INDUSTRY PROFITS High industry profits associated with: Weak suppliers High entry barriers Few substitutes Little rivalry Low industry profits associated with: Strong suppliers Low entry barriers Many substitutes Intense rivalry
BARRIERS TO ENTRY Examples of Barriers to Entry: -Patents -Copy Rights Most attractive market segment is one in which entry barriers are high and exit barriers are low Governments creates barriers too –permits, grants, restrictions..etc.
ENTERING AND EXITING A MARKET Easy to enter if: Access to distribution channels Little Brand Identity Common technology Difficult to Enter if there is: Patents Difficulty in brand switching Restricted distribution channels Easy to Exit if there are: Low exit cost Independent businesses Assets are easy to sell Difficult to Exit if there are: Hard to sell assets High exit costs Interrelated Businesses
BRAND IDENTITY Consumers will believe that a product with a well-known name is better than products with a less well-known name New firms won’t join if there is a big name brand
ECONOMICS OF SCALE This has to do with the MES which is the Minimum Efficient Scale Unit cost for production are at a minimum ex. the most cost efficient level of production If MES for firms in an industry is known, then we can determine the amount of market share necessary for low cost entry Creates a barrier: The greater the difference between industry MES and entry unit cost, the greater the barrier to entry.
SPECIALIZED ASSETS Extent to which the firms assets can be utilized to produce a different product Expensive assets/ equipment Provides a barrier for two reason: 1.when a firm already holds specialized assets, new companies don’t bother in joining the market segment because it would be intense rivalry (not a lot of profit) 2.Potential entrants do not want to make huge investments in highly specialized assets -hard to sell if venture fails
OTHERS…. Time and cost of entry: -is it expensive to enter the market? Does it require a lot of time to enter? ______________________________________________________________________________ Access to distribution: -is there a company that already has the distribution rights? -A lack of access will make it difficult for newcomers to enter the market ______________________________________________________________________________ Training is available: -do your employees need to be specially trained? Can they get the training somewhere? Ex- CPR training
OTHERS… Experience is needed: -do you already have to have experience in the field to join the market? --------------------------------------------------------------------------------------------------------------------------- Investment Cost: -High cost will deter entry -High capital requirements might mean that only large businesses can compete
THREAT OF SUBSTITUTES Refers to products in other industries Substitution is easy=weakens your power Ex: Instead of
THREAT OF SUBSTITUTES Threat of Substitute exists when a products demand is affected by the price change of substitute products Price elasticity: as more substitutes become available, demand becomes more elastic since buyers have more options A close substitute product constrains the ability of firms in an industry to raise prices Substitute performance: price and performance of the substitute can match the industry’s product Cost of Change: if it is low cost to switch then you is in serious trouble