Chapter 5 Business-Level Strategy: Creating and Sustaining Competitive Advantages

Perspective: Analysis (1-4) Formation (5-8) Chapter 5 Porter’s Generic Business Strategies Industry Life Cycles

Business versus Corporate How do we compete in this business? How do we sustain competitive advantage in this business? Corporate What businesses should we be in? How can our businesses work together?

I. Generic Strategies Definition Overall cost leadership Pros/Cons Value-chain activities Target Customer(s) Businesses: (McDonald’s? Wal-Mart? Xerox? Rolex? Google? Apple? Target?) Overall cost leadership Differentiation Focus Combination

Three Generic Strategies 5-5

Three Generic Strategies Overall cost leadership Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium 5-6

Three Generic Strategies Focus strategy Narrow product lines, buyer segments, or targeted geographic markets Attain advantages either through differentiation or cost leadership 5-7

Examples Companies pursuing an overall cost leadership strategy McDonalds Wal-Mart Companies pursuing a differentiation strategy Harley Davison Apple Companies pursuing a focus strategy Rolex Lamborghini Family Dollar 5-8 8

Competitive Advantage and Business Performance 5-9

Overall Cost Leadership Tight set of interrelated tactics that includes: Aggressive construction of efficient-scale facilities Vigorous pursuit of cost reductions from experience Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firm’s value chain 5-10

Overall Cost Leadership Experience curve refers to how business “learns” to lower costs as it gains experience with production processes with experience, unit costs of production declines as output increases in most industries 5-11

Overall Cost Leadership (Cont.) Parity on the basis of differentiation Permits a cost leader to translate cost advantages directly into higher profits than competitors Allows firm to earn above-average profits 5-12

Improving Competitive Position vis-à-vis the Five Forces An overall low-cost position Protects a firm against rivalry from competitors Protects a firm against powerful buyers Provides more flexibility to cope with demands from powerful suppliers for input cost increases Provides substantial entry barriers from economies of scale and cost advantages Puts the firm in a favorable position with respect to substitute products 5-13

Pitfalls of Overall Cost Leadership Strategies Too much focus on one or a few value-chain activities All rivals share a common input or raw material The strategy is imitated too easily A lack of parity on differentiation Erosion of cost advantages when the pricing information available to customers increases 5-14

Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership Primary Activities Inbound Logistics Marketing and Sales Effective layout of receiving dock operations Purchase of media in large blocks. Sales force utilization is maximized by territory management. Operations Service Effective use of quality control inspectors to minimize rework. Thorough service repair guidelines to minimize repeat maintenance calls. Use of single type of vehicle to minimize repair costs. Outbound Logistics Effective utilization of delivery fleets

Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership Support Activities Firm Infrastructure/ Gen Admin Technology Development Few management layers to reduce overhead costs. Standardized accounting practices to minimize personnel required. Effective use of automated technology to reduce scrappage rates. Expertise in process engineering to reduce manufacturing costs. Human Resource Management Procurement Minimize costs associated with employee turnover through effective policies. Effective orientation and training programs to maximize employee productivity. Effective policy guidelines to ensure low-cost raw materials (with acceptable quality levels). Shared purchasing operations with other business units.

Differentiation Creating something unique and valuable, perceived industrywide Prestige or brand image Technology Innovation Features Customer service Dealer network 5-17

Differentiation Firms may differentiate along several dimensions at once Successful differentiation requires integration with all parts of a firm’s value chain An important aspect of differentiation is speed or quick response Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique 5-18

Differentiation: Improving Competitive Position Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power Reduces buyer power because buyers lack suitable alternative Reduces supplier power due to prestige associated with supplying to highly differentiated products Establishes customer loyalty and hence less threat from substitutes 5-19

Potential Pitfalls of Differentiation Strategies Uniqueness that is not valuable Too much differentiation Too high a price premium Differentiation that is easily imitated Dilution of brand identification through product-line extensions Perceptions of differentiation may vary between buyers and sellers 5-20

Ex 5.5 Value-Chain Activities: Examples of Differentiation Primary Activities Inbound Logistics Outbound Logistics Superior material handling operations to minimize damage. Quick transfer of inputs to manufacturing process. Accurate and responsive order processing. Effective product replenishment to reduce customer inventory. Operations Marketing and Sales Flexibility and speed in responding to changes in manufacturing specifications. Low defect rates to improve quality. Creative and innovative advertising programs. Fostering of personal relationship with key customers. Service Rapid response to customer service requests. Complete inventory of replacement parts and supplies.

Ex 5.5 Value-Chain Activities: Examples of Differentiation Support Activities Firm Infrastructure/ Gen Admin Superior MIS: To integrate value-creating activities to improve quality. Facilities that promote firm image. Widely respected CEO enhances firm reputation. Human Resource Management Programs to attract talented engineers and scientists. Provide training and incentives to ensure a strong customer service orientation. Technology Development Superior material handling and sorting technology. Excellent applications engineering support. Procurement Purchase of high-quality components to enhance product image. Use of most prestigious outlets.

Focus Focus is based on the choice of a narrow competitive scope within an industry Firm selects a segment or group of segments (niche) and tailors its strategy to serve them Firm achieves competitive advantages by dedicating itself to these segments exclusively 5-23

Focus Cost Focus Differentiation Focus firm strives to create a cost advantage in its target segment Differentiation Focus firm seeks to differentiate in its target market 5-24

Focus: Improving Competitive Position Creates barriers of either cost leadership or differentiation, or both Used to select niches that are least vulnerable to substitutes or where competitors are weakest 5-25

Pitfalls of Focus Strategies Erosion of cost advantages within the narrow segment Focused products and services still subject to competition from new entrants and from imitation Focusers can become too focused to satisfy buyer needs 5-26

2.11 World Auto Industry: Strategic Groups Ferrari Lamborghini Porsche High Mercedes BMW Toyota Ford General Motors Chrysler Honda Nissan Price Hyundai Kia Chery Geely Tata Motors Low Low Breadth of Product Line High

3 Combination Approaches 1. Automated and flexible manufacturing systems Mass customization Andersen Windows, Dell MC: a firm’s ability to manufacture unique products in small quantities at low cost. 5-28 28

3 Combination Approaches 2. Exploiting the profit pool concept for competitive advantage Value-chain, supply-chain Automobile Industry (cross-over with corporate-level) 5-29 29

U.S. Automobile Industry’s Profit Pool 5-30

3 Combination Approaches 3. Coordinating the “extended” value chain by way of information technology Value-chain, supply-chain Walmart 5-31 31

Combination Approaches: TTKIM Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy Goal of combination strategy is to provide unique value in an efficient manner

Combination Strategies: Improving Competitive Position High entry barriers Bargaining power over suppliers Reduces power of buyers (fewer competitors) Value position reduces threat from substitute products Reduces the possibility of head-to-head rivalry 5-33

Pitfalls of Combination Strategies Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” Miscalculating sources of revenue and profit pools in the firm’s industry Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain 5-34

Internet-Enabled Strategies Low-Cost Leaders Differentiation Focus 5-35

Internet-Enabled Low Cost Leader Strategies Online bidding and order processing: eliminating the need for sales calls and minimizing sales force expenses Online purchase orders are making many transactions paperless, thus reducing the costs of procurement and paper. Direct access to progress reports and the ability for customers to periodically check work in progress is minimizing rework. 5-36

Internet-Enabled Low Cost Leader Strategies (continued) Collaborative design efforts using Internet technologies that link designers, materials suppliers, and manufacturers are reducing the costs and speeding the process of new product development. Imitation Overemphasis on one business activity 5-37

Internet-Enabled Differentiation Strategies Internet-based knowledge management systems that link all parts of the organization are: shortening response times accelerating organization learning Quick online responses to service requests and rapid feedback to customer surveys and product promotions are enhancing marketing efforts. 5-38

Internet-Enabled Differentiation Strategies (continued) Personalized online access provides customers with their own “site within a site” in which their prior orders, status of current orders, and requests for future orders are processed directly on the supplier’s website. Online access to real-time sales and service information is being used to empower the sales force and continually update R&D and technology development efforts. Ability to compare easily Un-valued uniqueness 5-39

Internet-Enabled Focus Strategies Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices. Niche portals that target specific groups are providing advertisers with access to viewers with specialized interests. Virtual organizing and online “officing” are being used to minimize firm infrastructure requirements. 5-40

Internet-Enabled Focus Strategies (continued) Procurement technologies that use Internet software to match buyers and sellers are highlighting specialized buyers and drawing attention to smaller suppliers. Correctly assessing the size 5-41

Strategic Implications Industry Life Cycle Strategic Implications

II. Industry Life-Cycle Stages: Strategic Implications refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry Emphasis on: strategies, functional areas, value-creating activities, and overall objectives -- varies over the course of an industry life cycle 5-43 43

Stages of the Industry Life Cycle 5-44

Industry Life-Cycle Strategies In the Introduction Stage: Products are unfamiliar to consumers Market segments not well defined Product features not clearly specified Competition tends to be limited Examples Electric vehicles, Solar Panels HDTV (?) 5-45

Industry Life-Cycle Strategies For the Introduction Stage: Develop product and get users to try it Generate exposure so product becomes “standard” 5-46

Industry Life-Cycle Strategies The Growth Stage is: Characterized by strong increases in sales Attractive to potential competitors Examples HDTV (?), PDAs(?) E-readers, Tablets 5-47

Industry Life-Cycle Strategies For the Growth Stage: Brand recognition Differentiated products Financial resources to support value-chain activities 5-48

Industry Life-Cycle Strategies In the Maturity stage: Aggregate industry demand slows Market becomes saturated, few new adopters Direct competition becomes predominant Marginal competitors begin to exit Examples Beer, Automobiles, Televisions Proctor & Gamble, Unilever 5-49

Industry Life-Cycle Strategies For the Maturity Stage: Efficient manufacturing operations and process engineering Low costs (customers become price sensitive) Options: Reverse, Breakaway 5-50

Industry Life-Cycle Strategies In the Decline Stage: Industry sales and profits begin to fall Strategic options become dependent on the actions of rivals Examples Typewriters Cassette tapes (video & audio) 5-51

Strategies in the Decline Stage For the Decline Stage Maintaining Exiting the market Harvesting Consolidation 5-52

Turnaround Strategies in the Life Cycle Turnaround strategy a strategy that reverses a firm’s decline in performance and returns it to growth and profitability. Asset and cost surgery Selective product and market pruning Piecemeal productivity improvements Example FORD 5-53 53