1. © Ram Mudambi, Temple University, 2007. Lecture 4 Strategy and Competitive Advantage BA 951 Policy Formulation and Administration

2. © Ram Mudambi, Temple University, 2007. 4-2 Learning outcomes  A framework for strategy design at the individual business level  Drawing on the essence of each of the firm’s business functions to highlight strategic aspects  Relating business functions to generic strategy choices

3. © Ram Mudambi, Temple University, 2007. 4-3 Lecture outline  Business strategies for competitive advantage  Cost vs. Differentiation  Leadership vs. focus  The industry life cycle  Functional strategies for competitive advantage  Production  Operations  Marketing  R&D  Human resources

4. © Ram Mudambi, Temple University, 2007. 4-4 What Is Business-Level Strategy? Business-level strategy  A plan of action to use the firm’s resources and distinctive competencies to gain competitive advantage. Abell’s “Business Definition” process  Customer groups – market segmentation (who?)  Customer needs – value proposition (what?)  Distinctive competencies – competitive actions (how?) Mostly mission and vision development Business-level strategy

5. © Ram Mudambi, Temple University, 2007. 4-5 Recall – Porter’s generic strategies Offers low priced products Offers unique or distinctive products Serves the entire market Serves a specific niche

6. © Ram Mudambi, Temple University, 2007. 4-6 A low-cost strategy works best when :  Price competition is vigorous  Product is standardized or readily available from many suppliers  There are few ways to achieve differentiation that have value  Most buyers use product in same ways  Buyers incur low switching costs  Buyers are large and have significant bargaining power

7. © Ram Mudambi, Temple University, 2007. 4-7 Price cuts and sales volume P Q 0 D1 P0 P1 D2 Loss Gain SALES

8. © Ram Mudambi, Temple University, 2007. 4-8 Pitfalls of low-cost strategies  Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume--profits go down,not up)  Low cost methods are easily imitated by rivals  Becoming too fixated on reducing costs and ignoring  Buyer interest in additional features  Declining buyer sensitivity to price  Changes in how the product is used  Technological breakthroughs open up cost reductions for rivals

9. © Ram Mudambi, Temple University, 2007. 4-9 The appeal of differentiation strategies A powerful competitive approach when uniqueness can be achieved in ways that  Buyers perceive as valuable  Rivals find hard to match or copy  Can be incorporated at a cost well below the price premium that buyers will pay Which hat is unique?

10. © Ram Mudambi, Temple University, 2007. 4-10 Achieving Superior Quality Quality as reliability They do the jobs they were designed for and do them well They do the jobs they were designed for and do them well Quality as excellence Perceived by customers to have superior attributes Perceived by customers to have superior attributes Quality can be thought of in terms of two dimensions: GENERIC STRATEGY? COST DIFFERENTIATION

11. © Ram Mudambi, Temple University, 2007. 4-11 Successful differentiation – price premia P Q 0 D1 P0 D2 P1 Loss Gain

12. © Ram Mudambi, Temple University, 2007. 4-12 Choosing an investment strategy at the Business Level Investment strategy  The resources (human, functional, and financial) required to gain sustainable competitive advantage. Competitive position  Market share is an indicator of competitive strength.  Distinctive competencies are competitive tools. Life Cycle Effects  An industry’s life cycle stage affects its attractiveness to investment prospects.

13. © Ram Mudambi, Temple University, 2007. 4-13 The industry life cycle & competitive advantage The industry life cycle & competitive advantage Size of Competitive Advantage Time Benefit PeriodErosion PeriodBuildup Period Strategic Moves Produce Competitiv e Advantage Moves by Rivals Reduce Competitive Advantage OFFENSEDEFENSE Embryonic Growth Maturity Shakeout Decline

14. © Ram Mudambi, Temple University, 2007. 4-14 Choosing an Investment Strategy at the Business Level Stage of the Industry Life Cycle Strong Competitive Position Weak Competitive Position Embryonic Share building GrowthGrowth Market concentration Shakeout Share increasing Market concentration or harvest/liquidation Maturity Hold-and-maintain or profit Harvest or liquidation/divestiture Decline Market concentration or harvest (asset reduction) Turnaround, liquidation, or divestiture

15. © Ram Mudambi, Temple University, 2007. 4-15 Business assessment – the BCG Matrix

16. © Ram Mudambi, Temple University, 2007. 4-16 Functional analysis BUSINESS Custome r groups Production Operations Marketing R & D H R M Cost vs. differentiation

17. © Ram Mudambi, Temple University, 2007. 4-17 The Production function Economies of scale  Lower unit costs due to higher CURRENT production volumes. The experience curve  Systematic unit-cost reductions that are the result of ACCUMULATED production volumes. Much of the experience curve emanates from learning effects Much of the experience curve emanates from learning effects  Cost reductions due to learning by doing. GENERIC STRATEGY? COST

18. © Ram Mudambi, Temple University, 2007. 4-18 Economies of scale – related to Q Minimum efficient scale Unit costs 0 Volume of output / unit time Typical long run unit cost curve Initial decline is very rapid Subsequent declines are smaller

19. © Ram Mudambi, Temple University, 2007. 4-19 The experience curve – related to  Q A typical experience curve

20. © Ram Mudambi, Temple University, 2007. 4-20 Learning effects Economies of scale and learning effects:

21. © Ram Mudambi, Temple University, 2007. 4-21 The Operations function  Flexible manufacturing technology (lean production)  Reduced setup times  Increased machine utilization  Improved quality control  Lower inventory levels  Mass customization  Low cost and product customization  Flexible manufacturing cells  Increased variety of operations  Ability to achieve higher levels of quality Increased Quantity Quality Diversity

22. © Ram Mudambi, Temple University, 2007. 4-22 Materials Management and JIT Materials management  Getting materials into and through the production process and out through the distribution system to the end user. Just-In-Time (JIT)  Reduce inventory holding costs by having materials arrive JIT to enter the production process.  JIT risk: There are no buffer stocks for non-delivery or unanticipated increases in demand.

23. © Ram Mudambi, Temple University, 2007. 4-23 Comparison of Lean and Mass Production Function Lean Production Mass Production Product Development Dedicated team Functional dept Leadership Project leader w/ full authority Coordinator w/ limited authority Innovation, R&D Focused innovation Variations on established technology Manufacturing Ops JIT - Resource utilization Resource stockpiling Product Supply Chain Limited suppliers w/ concurrent participation Many suppliers w/ limited participation Cost Reduction Value engineering driven Volume / price driven Supplier Relationships Work with suppliers to improve performance Penalize suppliers for bad performance Mgmt Style TeamHierarchical

24. © Ram Mudambi, Temple University, 2007. 4-24 The impact of flexible manufacturing The tradeoff between costs and product variety

25. © Ram Mudambi, Temple University, 2007. 4-25 Achieving Superior Quality Total Quality Management (TQM):  All company operations focused on continuously improving product and service quality. Deming’s Five-Step “Chain Reaction”: 1. Improved quality reduces costs. 2. Improved productivity. 3. Higher market share. 4. Increased profitability. 5. More jobs created.

26. © Ram Mudambi, Temple University, 2007. 4-26 Deming’s 14 points 1. Constancy of purpose 2. Adopt the philosophy 3. Don’t rely on mass inspection 4. Don’t award business on price 5. Constant improvement 6. Training 7. Leadership 8. Drive out fear 9. Break down barriers 9. Break down barriers 10. Eliminate slogan and exhortations 11. Eliminate quotas 12. Pride of workmanship 13. Education & retraining 14. Plan of action

27. © Ram Mudambi, Temple University, 2007. 4-27 Aspects common to most TQM and continuous improvement programs 1. Committed leadership 2. Adoption & communication of TQM 3. Closer customer relationships 4. Closer supplier relationships 5. Benchmarking 6. Increased training 7.Open organization 7. Open organization 8. Employee empowerment 9. Zero-defects mentality 10. Flexible manufacturing 11. Process improvement 12. Measurement Implementing TQM

28. © Ram Mudambi, Temple University, 2007. 4-28 The Operations function  Flexible manufacturing technology (lean production)  Mass customization  Flexible manufacturing cells  Ability to achieve higher levels of quality Increased Quantity Quality Diversity GENERIC STRATEGY? COST DIFFERENTIATION

29. © Ram Mudambi, Temple University, 2007. 4-29 The Marketing function Marketing strategy  Product design  Advertising  Promotion  Pricing  Distribution Principal objectives  Customer acquisition  Customer retention  Defection increases unit costs  Per-customer profit increases with relationship longevity Increased customer responsiveness

30. © Ram Mudambi, Temple University, 2007. 4-30 Relationship between Customer Loyalty and Profit per Customer The longer a company holds on to a customer the greater the volume of customer-generated unit sales that offset fixed marketing costs and lowers the average cost of each sale.

31. © Ram Mudambi, Temple University, 2007. 4-31 Achieving Superior Customer Responsiveness Developing a customer focus:  Top leadership commitment to customers.  Employee attitudes toward customers.  Bringing customers into the company. Satisfying customer needs:  Customization of the features of products and services to meet the unique need of groups and individual customers.  Reducing customer response times:  Marketing that communicates with production.  Flexible production and materials management.  Information systems that support the process. GENERIC STRATEGY? DIFFERENTIATION

32. © Ram Mudambi, Temple University, 2007. 4-32 The R&D function Design easy-to-manufacture products  Reduce numbers of parts per unit.  Reduce assembly time.  Closely coordinate R&D and production activities. Pioneer process innovations  Create competitive advantage through gains in process efficiencies. Pioneer product innovations  Create competitive advantage by anticipating customer needs.

33. © Ram Mudambi, Temple University, 2007. 4-33 Causes of the high failure rate of innovation  Uncertainty  Quantum innovation  Incremental innovation  Poor commercialization  Poor positioning strategy  Technological myopia  Slowness in marketing

34. © Ram Mudambi, Temple University, 2007. 4-34 Achieving Superior Innovation Building competencies in innovation:  Building skills in basic and applied research  Project selection  Project management  Cross-functional integration  Product development teams  Partly parallel development process  Leveraging knowledge networks

35. © Ram Mudambi, Temple University, 2007. 4-35 MNCs: The innovation-integration dilemma Degree of local autonomy Low High LowHigh Information connectivity Isolated control Isolated freedom Connected control Connected freedom Semi-connected freedom

36. © Ram Mudambi, Temple University, 2007. 4-36 The Development Funnel Gate 1Gate 2

37. © Ram Mudambi, Temple University, 2007. 4-37 Sequential and Partly Parallel Development Processes Reduced development time & time-to-market Reduced development time & time-to-market

38. © Ram Mudambi, Temple University, 2007. 4-38 The Human Resource function Ways to increase employee productivity and lower unit costs:  Provide training that upgrades employee skills.  Establish self-managing teams to gain a more flexible work force and increased productivity.  Use pay-for-performance incentives for teams to encourage meeting productivity and quality goals.

39. © Ram Mudambi, Temple University, 2007. 4-39 Functional strategies - summary FunctionActions Production 1. Pursue economies of scale and learning economies. 2. Map scale efficiency gains against output quality 3. Implement flexible manufacturing systems / JIT. Manufacturing 1. Achieve customization and pro-activeness 2. Rationalize suppliers / help them implement TQM 3. Trace defects to suppliers Marketing 1. Adopt aggressive customer acquisition to ride down the experience curve. 2. Limit customer defection rates by building brand loyalty 3. Provide customer feedback on quality R&D 1. Design products for ease of manufacture. 2. Seek product and process innovations 3. Bring customers into product development Human Resources 1. Institute training programs to build quality and customer skills 2. Implement self-managing teams. 3. Implement pay for performance.

40. © Ram Mudambi, Temple University, 2007. 4-40 Summary  Business level strategy is mainly concerned with answering the “how?” question Value proposition Customer groups  Two generic business strategies – cost and differentiation  Functional strategies must support the chosen business strategy