University of Cagliari, Faculty of Economics, a.a Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 6 credits Lecturer: Dr Alberto Asquer Phone:

Business Strategy and Policy Lecture 2 Strategic positioning and the generic competitive strategies

Plan of this lecture 1. The “Bain paradigm” 2. The analysis of the industry: the 5 forces framework 3. The analysis of the position of the competitors: strategic grouping 4. Strategic positioning and the generic strategies 5. Hybrid strategies Summary

1. The “Bain paradigm” The “Bain paradigm” refers to the theoretical approach for which: Industry structure Industrial behaviour Firms' performance affects

2. The analysis of the industry: the 5 forces framework Michael Porter's (1980) theoretical framework for industry analysis Internal rivalry Threat of substitutive products Threat of new entrants Bargaining power of suppliers Bargaining power of clients

2. The analysis of the industry: the 5 forces framework Michael Porter's (1980) theoretical framework for industry analysis Assessment of the attractiveness of an industry Internal rivalry Threat of substitutive products Threat of new entrants Bargaining power of suppliers Bargaining power of clients

2. The analysis of the industry: the 5 forces framework What are the effects of... High demand growth? Ease of market entry? High switching costs? High economies of scale? High brand preference and customer loyalty? Low regulatory restrictions? There are just a few large buyers?High learning or experience curves? Internal rivalry Threat of substitutive products Threat of new entrants Bargaining power of suppliers Bargaining power of clients

2. The analysis of the industry: the 5 forces framework For example, what is the attractiveness of the car industry? Demand growth? Ease of market entry? Switching costs? Economies of scale? Brand preference and customer loyalty? Regulatory restrictions? Are there just a few large buyers?Learning or experience curves? Internal rivalry Threat of substitutive products Threat of new entrants Bargaining power of suppliers Bargaining power of clients

3. The analysis of the position of the competitors Competitors tend to form groups whose members share similar competitive approaches and behaviour in the market. The analysis of the position of the competitors results in a map of strategic groups. Groups can be formed along any out of several dimensions, like: pricing behaviour, quality of products, geographic coverage, degree of vertical integration, product-line breath, distribution channels, type of service, etc. Strategic groups can be represented into graphs!

3. The analysis of the position of the competitors Example: strategic group map of the automotive industry Variety of models Price, performance, reputation General Motors, Ford Nissan, Chrysler, Mazda Toyota Hundai, Suzuki BMW, Mercedes Wolkswagen, Honda

3. The analysis of the position of the competitors Example: strategic group map of the automotive industry Variety of models Price, performance, reputation General Motors, Ford Nissan, Chrysler, Mazda Toyota Wolkswagen, Honda Hundai, Suzuki BMW, Mercedes More distance = less rivalry

3. The analysis of the position of the competitors Example: strategic group map of the automotive industry Variety of models Price, performance, reputation General Motors, Ford Nissan, Chrysler, Mazda Toyota Hundai, Suzuki BMW, Mercedes Different position = different competitive pressures, different strategies, different profit potential Wolkswagen, Honda

Low-Cost Strategy Differentiation Strategy Focus Strategy Hybrid Strategies 4. Strategic positioning and the generic strategies Low-cost Differentiation

4. Generic strategies: overall LOW COST The basis for sustained competitive advantage is lower costs than competitors One way is to perform value chain activities more cost-effectively than competitors Another way is to reconfigure the value system in such a way as to bypass or eliminate non-essential activities altogether

4. Generic strategies: overall LOW COST Typical actions to improve cost-efficiency of the value chain: Exploit economies of scaleUse low-cost materials Climb up the experience/learning curveUse online and other IT systems Operate at full capacityUse labour-saving methods Boost sales volumesLeverage on your bargaining power Improve supply chain efficiencyOutsourcing and vertical integration

4. Generic strategies: overall LOW COST Typical actions to reconfigure the value system: Bypassing intermediates and directly sell to customers Replace activities with faster and cheaper ones Streamline operations by eliminating activities that are not needed or deliver little value Relocate facilities to save shipping (and sometimes labour costs) Simplify the product (no-frills) Narrow the product line

4. Generic strategies: overall DIFFERENTIATION The basis for sustained competitive advantage is “being different” - possibly, in a way that is difficult to imitate Sources of differentiation are found in: - Supply chain activities - R&D activities - Production and technology activities - Distribution activities - Marketing activities And differentiation works by making the product 1) cheaper to use; 2) better performing; 3) better satisfy the consumer; 4) faster to reach consumer.

4. Generic strategies: FOCUS The basis for sustained competitive advantage is the specialisation to serve the particular needs (solve the specific problems) of selected targets within the consumers market There are two variants: 1) Focused low-cost strategy

4. Generic strategies: FOCUS The basis for sustained competitive advantage is the specialisation to serve the particular needs (solve the specific problems) of selected targets within the consumers group There are two variants: 2) Focused differentiation strategy

4. Strategic positioning in “Hybrid Strategies” The basis for sustained competitive advantage is the ability to incorporate attractive or upscale attributes at a lower cost than rivals, i.e., “Best Cost” strategy It's a 'middle ground', or 'hybrid', strategic approach that broadly seeks to combine low cost and differentiation There may be the risk to be “stuck in the middle” (Porter, 1980)

5. Summary Main points The 5-forces framework assists in analysing industry structure for the sake of assessment of the attractiveness of the industry. Competitors tend to form strategic groups that can be mapped. The generic strategies provide broad guidelines for formulating the direction for the strategic management of firms. Low-cost, differentiation, and focus are the main generic strategies. Firms may also try to follow “hybrid” strategies.