Copyright © Houghton Mifflin Company. All rights reserved. STRATEGIC MANAGEMENT Lecture 5 Dr. John Kraft Copyright © Houghton Mifflin Company. All rights reserved.

Abell’s Framework for Defining the Business Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Opening Case Sony’s Failure in Competitive Positioning Copyright © Houghton Mifflin Company. All rights reserved.

Business-Level Strategy Developing a firm-specific business model that will allow a company to gain competitive advantage over its rivals in a market or industry Customers’ needs Customer groups Distinctive competencies (how customers’ need will be satisfied) Source: Publisher’s PowerPoint, Ch5-Slide 2 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Ryan Air takes control over the sky in Europe. Copyright © Houghton Mifflin Company. All rights reserved.

The Dynamics of Business-Level Strategy Make a consistent and compatible set of choices concerning: How to differentiate and price the product When and how much to segment the market to maximize demand Where and how to invest capital in order to create value while keeping cost structures viable (for competitive pricing) Source: Publisher’s PowerPoint, Ch5-Slide 7 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Film Ryan Air Click for Video – Ryan Air Copyright © Houghton Mifflin Company. All rights reserved.

The Dynamics of Business-Level Strategy Source: Copyright © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Level Strategy,” (unpublished manuscript, 2002). Copyright © Houghton Mifflin Company. All rights reserved. Source: Publisher’s PowerPoint, Ch5-Slide 8

The Four Principal Generic Business-Level Strategies Cost Leadership Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability Focused Cost Leadership Cost leadership in selected market niches where it has a local or unique cost advantage Differentiation Features important to customers & distinct from competitors that allow premium pricing Focused Differentiation Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators Copyright © Houghton Mifflin Company. All rights reserved.

Choosing a Generic Business-Level Strategy Generic strategies All businesses can pursue them regardless of whether they are manufacturing, service, or nonprofit Can be pursued in different kinds of industry environments Results from a company’s consistent choices on product, market, and distinctive competencies Source: Publisher’s PowerPoint, Ch5-Slide 9 Copyright © Houghton Mifflin Company. All rights reserved.

Generic Business Models The Value-Creation Frontier Figure 5.6 The Four Principal Generic Strategies Cost Leadership Focused Cost Leadership Differentiation Focused Differentiation Copyright © Houghton Mifflin Company. All rights reserved.

Cost Leadership Generic Business-Level Strategies Cost leaders establish a cost structure that allows them to provide goods and services at lower unit costs than competitors. Strategic Choices The cost leader does not try to be the industry innovator. The cost leader positions its products to appeal to the “average” or typical customer. The overriding goal of the cost leader is to increase efficiency and lower its costs relative to industry rivals. Copyright © Houghton Mifflin Company. All rights reserved.

Focus Generic Business-Level Strategies The focuser strives to serve the need of a targeted niche market segment where it has either a low-cost or differentiated competitive advantage. Strategic Choices The focuser selects a specific market niche that may be based on: Geography Type of customer Segment of product line Focused company positions itself as either: Low-Cost or Differentiator Copyright © Houghton Mifflin Company. All rights reserved.

Differentiation: Generic Business-Level Strategies Companies with a differentiation strategy create a product that is different or distinct from its competitors in an important way. Strategic Choices A differentiator strives to differentiate itself on as many dimensions as possible. Differentiator focuses on quality, innovation, and responsiveness to customer needs. May segment the market in many niches. A differentiated company concentrates on the organizational functions that provide a source of distinct advantages. Copyright © Houghton Mifflin Company. All rights reserved.

The Dynamics of Competitive Positioning Figure 5.8 Retail Industry Dynamics Many successful companies lose their position on the frontier at some point in their history. To turn around their declining performance, they need to change their business models. Companies that can continually outperform their rivals are rare. Copyright © Houghton Mifflin Company. All rights reserved.

Broad Differentiation: Cost Leadership and Differentiation A broad differentiation business model may result when a successful differentiator has pursued its strategy in a way that has also allowed it to lower its cost structure: Using robots and flexible manufacturing cells reduces costs while producing different products. Standardizing component parts used in different end products can achieve economies of scale. Limiting customer options reduces production and marketing costs. JIT inventory can reduce costs and improve quality and reliability. Using the Internet and e-commerce can provide information to customers and reduce costs. Low-cost and differentiated products are often both produced in countries with low labor costs. Copyright © Houghton Mifflin Company. All rights reserved.

The Broad Differentiation Business Model Figure 5.9 The Broad Differentiators The middle of the value-creation frontier is occupied by broad differentiators, which have pursued their differentiation strategy in a way that has allowed them to lower their cost structure at the same time. They may pose serious threats to both the cost leaders and differentiators over time. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies Source: Publisher’s PowerPoint, Ch5-Slide 10 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action LL Bean’s New Business Model Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Running Case Wal-Mart’s Business Model Copyright © Houghton Mifflin Company. All rights reserved.

Why Focus Strategies Are Different Source: Publisher’s PowerPoint, Ch5-Slide 22 Copyright © Houghton Mifflin Company. All rights reserved.

Competitive Positioning: Strategic Groups Strategic Groups are groups of companies that follow a business model similar to other companies within their strategic group, but are different from that of other companies in other strategic groups. Implications of Strategic Groups for Competitive Positioning: Strategic managers must map their competitors: Map according to their choice of business model Use this knowledge to position themselves closer to customers Differentiate themselves from their competitors Use the map to better understand changes in the industry Affecting its relative position vis-à-vis differentiation & cost structure To identify opportunities and threats Identify emerging threats from companies outside the strategic group Determine which strategies are successful Why certain business models are working or not Fine tune or radically alter business models and strategies to improve competitive position Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Zara uses IT to Change World of Fashion Copyright © Houghton Mifflin Company. All rights reserved.

Failures in Competitive Positioning Successful competitive positioning requires that a company achieve a fit between its strategies and its business model. Many companies, through neglect, ignorance or error: Do not work continually to improve their business model Do not perform strategic group analysis Often fail to identify and respond to changing opportunities and threats in the industry environment Companies lose their position on the value frontier – They have lost their source of competitive advantage Their rivals have found ways to push out the value-creation frontier and leave them behind There is no more important task than ensuring that the company is optimally positioned against its rivals to compete for customers. Copyright © Houghton Mifflin Company. All rights reserved.

Business-Level Strategy: Stuck in the Middle Companies that do not do the planning necessary for success in their chosen strategy Product and market choices that have not been able to obtain or sustain competitive advantage Successful generic competitive strategy: Product, market, and distinctive competency decisions must result in a business-level strategy that leads to competitive advantage and superior profitability The environment and competition must be monitored constantly in order to stay in tune with changes Copyright © Houghton Mifflin Company. All rights reserved.

Using a Business Model to Push Out the Value-Creation Frontier Figure 5.10 The Dynamic & Changing Value-Creation Frontier Broad differentiators constantly improve their strategy to formulate and implement their broad differentiation business models and push out the value-creation frontier. Industry differentiators and cost leaders may find over time that they have lost their distinctive competencies that previously led to their superior performance. Copyright © Houghton Mifflin Company. All rights reserved.

Choosing an Investment Strategy at the Business Level Source: Publisher’s PowerPoint, Ch5-Slide 29 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Course Pack Item Gucci Loses its Grip Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Course Pack Item Iridium Falls to Earth Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Holiday Inn on Six Continents Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Toyota’s Goal? A High-Value Vehicle to Match Every Customer Need Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. End of Lecture 5 Copyright © Houghton Mifflin Company. All rights reserved.