Competing For Advantage Part III – Creating Competitive Advantage Chapter 5 – Business-Level Strategy

Business-Level Strategy Key Terms Business-Level Strategy – integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets –

Types of Business-Level Strategy

Features of the Five Business-Level Strategies Generic, can be used across industries Two distinct types of competitive advantage: Low Cost Differentiation Choice of scope: Broad Narrow (niche)

Cost Leadership Strategy Key Terms Cost Leadership Strategy – integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

Cost Leadership Strategy – Implementation No-frill, standardized goods Continuously reduce costs of value chain activities

Value-Creating Activities Associated with Cost Leadership Strategy

Cost Leadership Strategy and the Five Forces of Competition Low-cost position is a valuable defense against rivals Powerful customers can demand reduced prices Costs leaders are in a position to absorb supplier price increases and relationship demands, and to force suppliers to hold down their prices Continuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitors Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers

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.

Strategy and Organizational Structure Specialization Centralization Formalization

Cost Leadership Strategy and Structure Simple reporting relationships Few decision-making and authority layers Centralized corporate staff Strong operational focus on process improvements Low-cost culture Centralized staff decision-making authority Jobs specialization Highly formalized rules and procedures

Risks of Cost Leadership Strategy Processes can become obsolete Focus on cost reductions can come at the expense of understanding customer perceptions and needs Strategy could be imitated, requiring the firm to increase the value offered to retain customers

Differentiation Strategy Key Terms Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

Differentiation Offer attributes that customers want, and are willing to pay for. Leads to premium price, higher volume, loyalty Marginal revenue must exceed the costs of differentiation PERCEIVED VALUE versus INCREMENTAL COSTS

Differentiation Strategy – Implementation (cont.) Unusual features Responsive customer service Rapid product innovations Technological leadership Perceived prestige and status Different tastes Engineering design Performance

Differentiation (cont.) What firms pursue differentiation? How or on what basis do they achieve differentiation?

Starbuck’s Differentiation 4 Tablespoons of $10 bag = 40 cents Three cups Double-Tall Latte = $3.22 Double Shot Espresso = $1.85 $ $1.85 = $1.37 for steamed milk 20 seconds to steam milk $1.37 * 3 * 60 = $246 a hour to steam milk Customers “allow” Starbucks to draw interest in their smart- cards. Millions of dollars annually on the float “You are one of us” “Collectible” Pretax profit margins of 10.5%

Value-Creating Activities Associated with the Differentiation Strategy

Differentiation Strategy and Structure Complex and flexible reporting relationships Cross-functional product development teams Strong focus on marketing and product R&D Development-oriented culture Decentralized decision making Broad job descriptions Informal rules and procedures

Risks of Differentiation Strategy quick imitation no value in uniqueness over differentiation cell phones premium price or costs are costs too high poorly understood/changing customer needs Minivan, FAO Schwartz costs/price become more important than uniqueness unwillingness to offer true differentiation

To introduce his beer, Coors often gave free sample to gold miners.

..because you can’t sell beer to minors.

Differentiation Strategy and the Five Forces of Competition Customer loyalty provides the most valuable defense against rivals Uniqueness products reduce customer sensitivity to raised prices High margins (for differentiated products) insulate from supplier influence Customer loyalty and product uniqueness serve as significant entry barriers Firms with customers loyal to their products are positioned effectively against product substitutes

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.

Can you differentiate……?

Can you differentiate…..? Salt?

Can you differentiate…..? Deodorant

Strong enough for a man, …. But made for a woman

Ph balanced too?????

Can you differentiate…..? Water

Evian spelled backwards - naïve Coincidence? I think not…..

Now, I am going to do a card trick.

I am going to read your mind.

You are going to see a series of cards.

You are going to choose one card.

Once you select your card, clear your mind, and think only of that card.

Are you ready to pick a card?

Pick a card.

Did you pick a card?

Think of it now.

I hear you.

And now, I will remove your card.

Your card is gone….yes?

Focus Strategy Key Terms Focus Strategy – integrated set of actions designed to produce or deliver goods or services to a narrow target consumer based on specific differences in the market

Focus Strategy – Market Segments Buyer group Product line segment Geographic market

Focus Strategy – Reasons Large firms may overlook small niches Firms may lack resources to compete in the broader market Firms may be able to serve a narrow market segment more effectively than larger, industry-wide competitors Firms may direct resources to certain value chain activities to build competitive advantage

Focus Strategy – Types Focused cost leadership strategy Focused differentiation strategy

Risks of Differentiation Strategy A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit The needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

Integrated Cost Leadership/Differentiation Strategy Key Terms Integrated Cost Leadership/ Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

Risks of Integrated Strategy Failure to establish a leadership position can result in a firm being "stuck in the middle," unable to create value, and unable to earn above-average returns