2. Chapter 5 Building Competitive Advantage Through Business-Level Strategy

3. 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

4. Porter’s Generic Strategies  Two fundamental issues Competitive advantage - low cost vs. differentiation Strategic Target - broad based vs. segment  Pursuit of the generic strategies provides protection from each of the five forces

5. Porter’s Generic Strategies Low Cost Differentiation Competitive Advantage

6. Porter’s Generic Strategies BroadSegment/Focus Strategic Target

7. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus Competitive Advantage Strategic Target

8. 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

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

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

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

12. Problems with P&G’s Differentiation Strategy

13. How has P&G responded? Introduction of new, higher margined products like battery powered toothbrush and white strips Introduction of “Rejuvenating Effects,” a toothpaste for women marketed as a beauty product Using Emeril Lagasse to hawk their citrus, cinnamon, and herbal mint toothpastes

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

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

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

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

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

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

20. How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents Discounts and sales drive prices DOWN

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

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

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

24. How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents Raise Quality Lower Prices

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

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

27. 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.

28. 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

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

30. 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

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

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

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

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

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

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

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

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

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

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

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

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

43. 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.

44. 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

45. 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

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

47. 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