Competing For Advantage

Part III – Creating Competitive AdvantageChapter 5 – Business-Level Strategy

Business-Level Strategy

Key TermsBusiness-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

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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 TermsCost 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 goodsContinuously 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 CentralizationFormalization

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

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Personnel SGA

Sonic - 1100 unitsChurch's - 1400 units

Risks of Cost Leadership Strategy

Processes can become obsoleteFocus 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 TermsDifferentiation 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 $3.22 - $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 TermsFocus 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 groupProduct line segmentGeographic 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 strategyFocused 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