Chapter 4 Business Level Strategy Pages

Business Level Strategy How are we going to compete in our industry/segment? Improving the firm’s competitive position Competitive advantages are the single most dependable contributor to above-average profitability

Porter’s Generic Strategies  Two fundamental issues Competitive advantage - low cost vs. uniqueness Competitive Scope- broad based vs. narrow  Pursuit of the generic strategies provides protection from each of the five forces

Porter’s Generic Strategies Low Cost Uniqueness Broad Narrow Competitive Advantage Competitive Scope Overall Low-Cost Focused Differentiation Broad Differentiation Focused Low-Cost

Porter’s Generic Strategies Low Cost Uniqueness Broad Narrow WalMart Domino’s Big Lots Little Caesar’s Target Papa John’s Nordstrom Papa Murphy’s Competitive Advantage Competitive Scope

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

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

Differentiation (cont.)  Risky when: quick imitation no value in uniqueness over differentiation  cell phones premium price costs too high poorly understood/changing customer needs  Minivan, FAO Schwartz costs/price become more important than uniqueness unwillingness to offer true differentiation

How can Differentiation protect against…? Starbuck’s $1.80 Costs Profit Price New Entrants

How can Differentiation protect against…? Joe’s Coffee Starbuck’s $1.80 Assume Equal Costs New Entrants

How can Differentiation protect against…? New Entrants Joe’s Coffee 99 cents Starbuck’s $1.80

How can Differentiation protect against…? New Entrants Joe’s Coffee 99 cents Starbuck’s $1.80 Extra Profits

How can Differentiation protect against…? Rivals Starbuck’s $1.80 Joe’s Coffee 99 cents

How can Differentiation protect against…? Starbuck’s $1.80 Joe’s Coffee 99 cents Advertising & Promotions drive costs UP

How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee cents Discounts and sales drive prices DOWN

How can Differentiation protect against…? Substitutes Starbuck’s $1.80

How can Differentiation protect against…? Starbuck’s $1.80 There is no substitute for the truly differentiated product

How can Differentiation protect against…? Power of Buyers - How do powerful buyer’s leverage their power? Lower Prices, Higher Quality

How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee cents Raise Quality Lower Prices

How can Differentiation protect against…? Power of Suppliers - How do powerful suppliers leverage their power? Drive up costs

How can Differentiation protect against…? Starbuck’s $1.70 Joe’s Coffee 89 cents Raise Costs

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.

Low Cost Leadership Design, produce, and market a comparable product at a lower cost Effective utilization of value-chain capital intensive mfg processes - efficient scale process, not product engineering - cost reductions products designed for simple assembly and sharing common components procurement and materials handling low cost distribution Requires organizational culture to support close supervision, cost controls

Low Cost Leadership (cont.) Attractive when price is dominant consideration commodity low switching costs powerful buyers

Low Cost Leadership (cont.) What firms pursue a low cost strategy? How do they drive their costs down Risky when: technology breakthroughs frequent easy to imitate costs advantages erode more quickly than differentiation causes near-sightedness on a few activities/sunk costs

How can Low Costs provide protection from…. New Entrants Wal-Mart Joe’s Rubbermaid Tub $1.99

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 Higher costs

How can Low Costs provide protection from…. Rivalry Wal-Mart Joe’s Rubbermaid Tub $1.99

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.89 …can push prices down….

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 … or push costs up

How can Low Costs provide protection from…. Wal-Mart Joes Rubbermaid Tub $1.99 Substitutes

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.89 …can push prices down….

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 … or push costs up

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 Power of Buyers

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.89 …can push prices down….

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 Power of Suppliers

How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 … can push costs up

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.

Focus  Emphasizing a market niche where customers have unique preferences or requirements. Either focus-low cost or focus-differentiation  Profitable when niche is large, growing niche is not crucial to broad-based competitors firm is able to defend position

Focus (cont.)  What firms pursue a focus strategy?  What is their niche?  Risky when: competitor “outfocuses the focuser” broad based competitors have deep pockets homogenization of customer needs economies of scope becomes a dominant KSF

Focus (cont.)  Market Segmentation – clustering of people with similar needs into identifiable groups E.g. consumer vs. industrial, demographic, sociocultural, geographic, psychological (lifestyle), consumption patterns (frequency of use)

Integrated Low Cost-Differentiation  Combines both generic strategies  Difficult to implement

Stuck in the Middle  Firm’s offering are too costly to compete with low costs provider’s product, and too undifferentiated to command the price premium gained by the differentiated firm