MGT401 Quiz 3

Differentiation requires

- A level of cost parity relative to competitors (iPhone X sales) - Integration of multiple points along the value chain - Differentiation along several different dimensions at once

The maturity stage is

- Aggregate industry demand slows - Market becomes saturated, few new adopters - Direct competition becomes predominant - Marginal competitors begin to exit

Cost leadership involves

- Aggressive construction of efficient scale facilities > A store within 10 miles of 90% of US population - Tight cost and overhead control - Cost minimization in all activities in the firm's value chain such as R&D (entering online shopping), service, sales force & advertising (Waffle House ads only on billboards) - How much Walmart invests in technology? - How much spend on overhead costs?

Companies pursuing a differentiation strategy

- Apple - Whole Foods

Competitive advantage/markets served matrix

- Broad Target Market and Low Cost Position = broad cost leadership - Broad Target Market and Superior Value Perceived by Customers = broad differentiation - Narrow Target Market and Low Cost Position = focus cost leadership - Narrow Target Market and Superior Value Perceived by Customers = focus differentiation

Differentiation strategy vis-a-vis the Five Forces: Bargaining power of suppliers

- Can accommodate because of high margins

Low-cost position vis-a-vis the Five Forces: Bargaining power of suppliers

- Can accommodate powerful suppliers

The growth stage is

- Characterized by strong increases in sales - Attractive to potential competitors - When firms can build brand recognition

Cost leadership requires

- Competitive parity: being "on par" with competitors with respect to low-cost differentiation, or other strategic product characteristics Ex: Yugo car, sold for $3,990

Cost leadership is different than price leadership

- Cost leadership is based on how much they make - Price leadership is based on how much they charge (Walmart is a leader in this)

Growth stage strategies

- Create branded differentiated products - Stimulate selective demand: Tesla freed patent use by competitors (because they know where they stand and that they can take the risk because of their huge customer base) - Provide financial resources to support value-chain activities

Maturity stage strategies

- Create efficient manufacturing operations - Lower costs as customers become price-sensitive - Adopt reverse or breakaway positioning - Ads and price battles, attacks & counterattacks

Cost focus

- Creates a cost advantage in its target segment - Exploits differences in cost behavior - Ex: Aldi - don't offer a large variety, very niche, messy shelves, not great customer service

Cost leadership is based on

- Creating a low-cost position relative to a firm's peers - Managing relationships throughout the entire value chain to lower cost

Introduction stage strategies

- Develop a product and get users to try - First-mover advantages > Brand (iPhone) > Path dependency (Google) - First mover disadvantages? Public image might reject it (ex: Tesla) - Generate exposure so the produce becomes "standards" > Smart Speakers > iPhone in 2007

Differentiation focus

- Differentiates itself in its target market - Exploits the special needs of buyers - Ex: supercars

Low-cost position vis-a-vis the Five Forces: Threat of new entrants

- Economies of scale and cost advantages

Low-cost position vis-a-vis the Five Forces: Bargaining power of buyers

- Fewer or no efficient suppliers

Industry life cycle can be seen from several levels

- From the entire industry to the a single variation or model of a specific product or service - Examples: personal computers, cell phones, or long-distance telephone services

Why bother studying life cycles?

- Generic strategies, functional areas, value-creating activities, and overall objectives all vary over the course of an industry life cycle > R&D is important is early stages > Latter stages face greater emphasis on operational excellence (Look at chart on slide 25)

Why are there trade-offs?

- Inconsistencies in image or reputation (clinical soaps vs. Ivory) - Value-chain activities > Systems (Ikea) > Machinery (Bentley) > People (Walmart) - Limits of internal coordination > Continental imitating Southwest - Just know that combo doesn't make sense; can't be everything at once

The decline stage is when

- Industry sales and profits begin to fall - Price competition increases - Industry consolidation occurs

Low-cost position vis-a-vis the Five Forces: Rivalry from competitiors

- Intensity of competition inside industry - Ex: price wars (Kmart) - It is a good thing to have lower prices

The industry life cycle

- Introduction (Many ideas die in this phase) - Growth (If it gains enough attention) - Maturity - Decline

Decline stage strategies

- Maintaining the product position: keep going but not investing in (marketing, technology, development,...) - Harvesting profits and reducing costs: getting as much as possible out of it before it's gone WHILE cutting costs as much as possible - Exiting the market: dropping it (Windows phone) - Consolidating or acquiring surviving firms: Bigger firms acquiring others (defense industry after the cold war) Ex: rental, hard disks, desktops computers? - not really declining, still have their own market (look at slide 30)

Companies pursuing an overall cost leadership strategy

- MocDonalds - Walmart

Focus requires

- Narrow product lines, buyer segments, or targeted geographic market - Advantages obtained either through differentiation or cost leadership Focus is not sufficient for a firm to create value. Need either differentiation or cost leadership.

Differentiation strategy vis-a-vis the Five Forces: Bargaining power of buyers

- No other "unique" value-proposition

A differentiation strategy can take many forms

- Prestige or brand image (Mercedes, Nike) - Quality (Apple) - Technology (Tesla - a lot of delays, but fans don't care) - Innovation (3M's) - Features - Customer service (Nordstrom) - Dealer network (Tesla) (Look at chart on slide 13)

Differentiation implies

- Product and/or services that are unique and valued - Emphasis on nonproduct attributes for which customers will gladly pay a premium

The introduction stage is when

- Products are unfamiliar to consumers - Market segments are not well-defined - Product features are not clearly specified - Competition tends to be limited

Low-cost position vis-a-vis the Five Forces: Threat of substitutes

- Puts the firm in a favorable position with respect to substitute products - Price/performance ratio

Companies pursuing a focus strategy

- Redbox - Checkers Drive In (Also look at slide 7 chart)

Differentiation strategy vis-a-vis the Five Forces: Rivalry among competitors

- Reduced because of the differentiation

Differentiation strategy vis-a-vis the Five Forces: Substitutes

- Reduced by customer loyalty

Differentiation strategy vis-a-vis the Five Forces: Threat of new entrants

- Reduced by customer loyalty

The Five Forces

- Rivalry from competitors - Bargaining power of buyers - Bargaining power of suppliers - Threat of new entrants - Threat of substitutes

Differentiation examples

- Rolls Royce ($400,000): leathers example - Concept_One ($980,000) - Supercars

Differentiation questions

- Scripted responses to customer complaints? - Do you have any stories about a company where customer service employees went above and beyond for you? - How did this make you feel? - Were you more likely to be loyal to this company as a result of how you were treated - Is this then truly a differentiated competitive advantage?

Integration of multiple points along the value chain

- Superior material handling operations - Low defect rates to improve quality - Accurate and responsive order processing - Personal relationships with key customers - Rapid response to customer service requests

Pitfalls of cost leadership

- Too much focus on one or a few value chain activities > Not only operations - Increase in the cost of the critical inputs > China's demographic - The strategy is imitated too easily (as is the case with any strategy) > Selling food waste to bioenergy buyers - A lack of parity on differentiation - Reduced flexibility > Huge investments > Walmart online business - Obsolescence of the basis of a cost advantage > Toyota's lean manufacturing - Loss of desirable features

Pitfalls of differentiation

- Uniqueness that is not valuable - Too much differentiation - Too high a price premium (Energizer - $2.99, Duracell - $4.59) - Differentiation that is easily imitated (as is the case with any strategy) -Dilution of brand identification through product line extensions: Gucci leveraging brand name, heavy presence with multiple products - Perceptions of differentiation may vary between buyers and sellers

An overall focus strategy

- Value ultimately comes from either DIFFERENTIATION or COST-LEADERSHIP - Reduces buyer power because the firm provides specialized products or services - Focused niches are less vulnerable to substitutes

Generic strategies: uniqueness

- You cannot be EVERYTHING to EVERYONE - There are tradeoffs

Business strategy suggestions (use Porter's generic strategies)

1. Cost leadership 2. Differentiation 3. Focus

How much does Walmart invest in technology?

A LOT; online technology, trying to catch up with Amazon with online initiatives like 2-day delivery and groceries

Business-level strategies are about what

How to achieve competitive advantage and overcome the five forces

Turnoaround strategy

Involves reversing performance decline & reinvigorating growth toward profitability through - Asset and cost surgery - Selected market and product pruning - Piecemeal productivity improvements Example: Ford Motor Company and Jamba Juice

How much do they spend on overhead costs?

Wages, business trip amenities, cut costs on things like this