2. Chapter 3

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. How do these Firms Compete?

5. 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

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

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

8. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus Competitive Advantage Strategic Target Overall Low-Cost Focused Differentiation Broad Differentiation Focused Low-Cost

9. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus Competitive Advantage Strategic Target Best-Cost Provider NOT one of Porter’s Generic Strategies

10. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus WalMart Domino’s Big Lots Little Caesar’s Target Papa John’s Nordstrom Papa Murphy’s Competitive Advantage Strategic Target

11. 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

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

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

14. 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

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

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

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

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

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

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

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

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

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

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

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

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

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

28. 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.

29. 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

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

31. 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

32. How can Low Costs provide protection from…. New Entrants Wal-Mart Joe’s Bottle of Tide $1.99

33. How can Low Costs provide protection from…. Wal-Mart Joe’s Bottle of Tide $1.99 Higher costs

34. How can Low Costs provide protection from…. Rivalry Wal-Mart Joe’s Bottle of Tide $1.99

35. How can Low Costs provide protection from…. Wal-Mart Joe’s Bottle of Tide $1.89 …can push prices down….

36. How can Low Costs provide protection from…. Wal-Mart Joe’s Bottle of Tide $1.99 … or push costs up

37. How can Low Costs provide protection from…. Wal-Mart Joes Bottle of Tide $1.99 Substitutes

38. How can Low Costs provide protection from…. Wal-Mart Joe’s Bottle of Tide $1.89 …can push prices down….

39. How can Low Costs provide protection from…. Wal-Mart Joe’s Bottle of Tide $1.99 … or push costs up

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

41. How can Low Costs provide protection from…. Wal-Mart Joe’s Bottle of Tide $1.89 …can push prices down….

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

43. How can Low Costs provide protection from…. Wal-Mart Joe’s Bottle of Tide $1.99 … can push costs up

44. 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.

45. 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

46. 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

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

48. 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