Download - Copyright Guy Harley 2004 Technology & Organisational Change Business Level Strategy Week 4
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Outline
Customers, Who, What and How? Types of business level strategy
Cost leadership Differentiation Focused cost leadership Focused Differentiation Cost leadership\differentiation
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Strategic Competitiveness
To achieve strategic competitiveness, firms must: Identify who their customers are Determine customer needs/preferences Focus on satisfying the needs of some group of
customers Select a strategy that enables them to satisfy
customer needs
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Internet Competitive Advantage
In the Internet age, firms can maintain competitive
advantage by: Thinking continuously about accessing &
connecting with customers (reach) Maintaining info with depth & detail for and from
customers (richness) Determining how to build relationships with
customers (relationship)
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Determining which customers to serve
Need to identify customers on basis of needs or preferences
Firm must determine whether differences in needs/preferences are significant
If not, can offer a standardised product.
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Basis for Customer Segmentation
Customer Markets Demographic factors Socio-economic factors Geographic factors Psychological factors Consumption patterns Perceptual factors
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Basis for Customer Segmentation (cont.)
Industrial Markets End-use segments Product segments Geographic segments Common buying factor segments Customer Size segments
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Standardised Product
When would a firm offer a standardised product? When it can’t easily be customised or
differentiated Or when firm’s core competencies are best
suited to producing standardised products. Typically offer them at lowest competitive price
as they follow a cost leadership strategy.
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Increasing segmentation of markets
Availability of sophisticated info processing technologies allows firms to identify unique bundles of customer characteristics and needs
Competitors are becoming adept at identifying small but strategically relevant differences in customer needs
Trend towards smaller and smaller segments
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Determining what needs to satisfy
Customers want needs satisfied and they want value
Need to identify key customer groups, needs and preferences.
Thus customer knowledge must be a priority for top level managers since they determine policy, technology etc
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Customer knowledge
Becomes more important as firms attempt to perpetuate or sustain competitive advantage. By listening to customers, firms can correctly anticipate their future needs and create product innovations ahead of competitors- first mover advantage
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Core Competencies
Determining core Competencies to satisfy
customer needs Need to decide how to bundle resources & core
competencies to satisfy customer needs to by implementing value creating strategies
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Core Competencies
This means that: Firms must improve their ability to convert
innovation and new technologies into commercial products
New products should be based on core competencies or technology
New products must meet present or future needs
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Generic Strategies Now look at 4 generic strategies, and how they
relate to the 5 competitive forces, the applicability of the value chain, risks associated with each
A firms position in an industry relative to competitors and to the 5 forces of competition Rivalry with existing competitors Bargaining power of suppliers Bargaining power of buyers Potential entrants Product substitutes
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Breadth of Competitive Scope
Source of Competitive Advantage
BroadTargetMarket
NarrowTargetMarket
Cost
Focused Differen-
tiation
Focused Differen-
tiation
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Focused Low CostFocused
Low Cost
Generic Business-Generic Business-Level StrategiesLevel Strategies
Generic Business-Generic Business-Level StrategiesLevel Strategies Uniqueness
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Generic strategy: Cost-leadership
Offers relatively standardised product – minimum differentiation at lowest competitive price
Reducing price is not necessarily a cost leadership strategy- need to give consumer value- includes quality
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Cost reduction strategies
Building efficient scale facilities Tight control of production & overhead costs Minimising costs of sales, R&D and service State of the art manufacturing technologies
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Critical focus
Efficiency Cost reduction Still can’t ignore sources of differentiation that
customers value- e.g. styling, minimal levels of service, quality
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Strategy 1:Cost Leadership
Even when competitive forces are strong, a firm that has cost leadership can still earn above average profits.
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Rivalry with existing competitors
Achieving the lowest cost position means that competitors will hesitate to compete on basis of price because in a price war, the low cost firm will continue to earn profits after competitors have competed away their profits
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Bargaining power of buyers
Achieving low cost position provides some protection against powerful customers who attempt to drive down prices
If customers drive prices below the cost of the next most efficient firm, the firm might choose to exit the market, leaving the low cost firm in a monopoly position
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Bargaining power of suppliers
Cost leadership strategy enables a firm to absorb greater amount of cost increases fro powerful suppliers before it must raise prices
If has dominant market share, might be able to force suppliers to lower prices
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Potential Entrants
Firms generally must produce & sell in large volumes to have cost leadership- this acts as a barrier to entry why?
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Product substitutes
To retain customers the low cost leader can more easily reduce prices to maintain the price-value relationship and maintain customers
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Cost Leadership
Competitive risks of the cost leadership strategy: Tech innovations by competitors could eliminate
advantage Over focus on efficiency might cause lack of
focus on consumer preferences Competitors might imitate low cost leaders value
chain configuration
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Strategy 2: Differentiation
Value is provided through the unique features of the product
Can charge premium price Price charged must exceed the cost of the
differentiation Focus on product innovation and product
features
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Means of differentiation Superior quality Unusual or unique features More responsive customer service Rapid product innovation Advanced technological features Engineering design Additional features Image of prestige
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Rivalry with existing competitors
Brand loyalty means that customers will be less sensitive to price increases. As long as the firm satisfies the differential needs of customers it may be insulated from price base competition
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Bargaining power of buyers
Product considered unique Reduces customer sensitivity to price
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Bargaining power of suppliers
Differentiator can absorb a greater level of cost increase from powerful suppliers through its higher margins
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Differentiation Strategy
Competitive risks of differentiation strategy: Customers may decide the cost of uniqueness is
too high Firms means of differentiation no longer of value
to customers Customer learning may influence customer
perception of value counterfeiting
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Strategy 3: focus
Firms focus on small segments or niches Why follow a focus strategy?
Able to serve niche more effectively Needs are so special that industry wide
competitors choose not to meet them Can be based on cost leadership or
differentiation
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Focused cost leadership strategy
Generally targets the smallest buyers in the industry
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Focused differentiation strategy
Customised products for small segments Successful when quantities involved are too
small for industry wide competitors, or when the degree of customisation requested is beyond capabilities of the industry wide differentiator
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Competitive risks of focus strategies
Competitors may successfully focus on an even smaller segment of the market
Industry-wide competitor may recognise the attractiveness of the segment
Preferences of the narrow segment may become similar to those of the wider market
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Integrated cost-leadership/differentiation
Integrating generic strategies may enable them to: Adapt quickly to environmental change Learn new skills and technology More effectively leverage core competencies
across business units and product lines Produce differentiated products at a relatively
low cost
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Integrated cost leadership/differentiation
Benefits Differentiation enables firm to charge premium
price Cost leadership allows firm to charge lowest
price
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Integrated cost leadership/differentiation
Products from integrated cost
leadership/differentiation strategy are: Less differentiated than if firm pursued just a
differentiation strategy and Costs not as low as if pursued cost leadership
strategy
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Integrated cost leadership/differentiation
To overcome Competitive Risks must be able to: Focus consistently on reducing costs Add differentiated features that customers value
and for which they are willing to pay a higher price
Avoid becoming ‘stuck in the middle’ by failing to consistently pay attention to the competitive requirements of either or both generic strategies.
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Outline
Increased rivalry Model of competitive dynamics & rivalry Likelihood of attack Likelihood of response Firms abilities to take action and respond Outcomes of inter-firm rivalry
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New ways of competing
Bring new products to the market more quickly Use of new technology Diversifying product line Shifting product emphasis Consolidation of industries Combining on-line selling with traditional
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Changing Competitive Environment
Reasons for changing competitive environment Attention on global market Advances in ICTs- more info, faster decision
making Innovation Cooperation between former competitors in
development of new technology or formation of strategic alliances
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Model of competitive dynamics & rivalry
Competitive rivalry exists when firms jockey with one another in pursuit of advantageous market position
Exists because of competitive asymmetry- i.e. firms differ in terms of resources, capabilities, core competencies & the opportunities and threats in their environments
Competition results in mutual interdependence
Actions and responses shape the
competitive positions of each firm’s business-level
strategy
Actions and responses shape the
competitive positions of each firm’s business-level
strategy
Actions taken by one firm elicit responses from competitors
Actions taken by one firm elicit responses from competitors
A firm’s strategic conduct
is dynamic in nature
A firm’s strategic conduct
is dynamic in nature
Competitive responses lead
to additional actions from the
firm that acted originally
Competitive responses lead
to additional actions from the
firm that acted originally
Competitive Dynamics
Competitive Dynamics
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Model of Inter-firm Rivalry
Awareness- whether the attacking/responding firm is aware of a potential attacker or respondent.
Motivation- incentives that firm has to attack/respond when attacked
Market commonality- extent to which firms compete in same market
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Multipoint competition
When firms overlap in several markets (geographic or product)
High levels of commonality reduce the likelihood of competitive interaction- see Strategic Focus- airlines p163
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Resource similarity
Intensity of competition often based on potential for response- attackers are generally not motivated to target a rival that is likely to retaliate
Firms with dissimilar resources are more likely to attack
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Likelihood of attack The model tells us that the firm’s motivation and
awareness are developed from competitor analysis of market commonality and resource dissimilarity.
First mover Take an initial competitive action Have the resources, capabilities & core competencies
that to Gain competitive advantage through innovative and entrepreneurial actions
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First Mover
First mover hopes to: Gain sustainable competitive advantage Earn above average returns until competitors
respond effectively Gain customer loyalty
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First Mover
Disadvantage of first mover Inability to predict success of the action Second movers through imitation can avoid high
development costs
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Second Movers
Firms that respond to first movers competitive action
Quick response may allow second mover to: Capture some of the initial customers and
gain a degree of brand loyalty Avoid some of the risks of the first mover Learn from mistakes and successes Avoid market development costs
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Late movers
Respond to competitive action after considerable time
Performance generally suffers
Relative SizeSpeed
InnovationQuality
Ability for Ability for Action and Action and ResponseResponse
OutcomesOutcomesDrivers of Drivers of
Competitive Competitive BehaviourBehaviourAwarenessMotivationCapability
Competitor Competitor AnalysisAnalysisMarket
Commonality
ResourceSimilarity
Interfirm Rivalry:Interfirm Rivalry:Attack & ResponseAttack & Response
Likelihood of AttackLikelihood of AttackFirst Mover Incentives
Likelihood of ResponseLikelihood of ResponseType of Competitive
Action
Dependence on theMarket
Resource Availability
Actor’s Reputation
CompetitiveCompetitive
Slow, Standardor Fast Cycle
Market TypesMarket Types
CompetitiveCompetitive
SustainedOutcomesOutcomes
CompetitiveAdvantageTemporaryAdvantageEvolutionaryEvolutionaryOutcomesOutcomes
Entrepreneurial
or Market-PowerGrowth-Oriented
Actions
FeedbackFeedback
Model of Interfirm Rivalry:Model of Interfirm Rivalry:Likelihood of Attack and ResponseLikelihood of Attack and Response
Model of Interfirm Rivalry:Model of Interfirm Rivalry:Likelihood of Attack and ResponseLikelihood of Attack and Response
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Likelihood of response
Depends on Type of action Reputation of competitor taking the action Competitors resource availability
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Firm’s ability to take action and respond
Relative size of the firm within market Speed of competitive actions and responses Extent of innovation by firms in the industry Quality of firms products
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Outcomes of inter-firm rivalry
Slow cycle markets-strongly shielded resource positions (monopoly)
Standard cycle- more closely associated with Porter-oligopoly
Fast cycle- largely impossible to achieve sustained competitive advantage
Competitive dynamics and industry evolution outcomes
ExploitingOpen Niches
(Blind Spots) & Competitive Uncertainty
Exploiting Factors of Production
Firm
Resou
rce & M
arket S
trength
TimeTime
Key Task Key Task
EntrepreneurialActions
Growth-orientedActions
Emerging Stage Growth Stage
Exploiting Market Position
Key Task
Market-powerActions
Mature Stage
RenewalMaintenance
Decline
Key Task
RenewalActions
Elaboration Stage