Strat - Chapter 5

Improving Competitive Position vis-à-vis the Five Forces

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Improving Competitive Position vis-à-vis the Five Forces

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Improving Competitive Position vis-à-vis the Five Forces

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Cost Leadership requires:

- Learning to lower costs through the experience curve - This strategy requires competitive parity (being 'on par' with competitors with respect to low cost). This permits cost leaders to translate cost advantages into higher profits

A focus strategy requires:

- Narrow product lines, buyer segments, or targeted geographic markets - Advantages obtained either through differentiation or cost leadership

Criticisms of Porter's Competitive Strategy model:

- Too generic (therefore not very useful for managers) - What about organizations that do not pursue one of the strategies but are still successful? (outliers) - But, Porter found that companies that did not consciously adopt any of the strategies did not do as well as companies who adopted a competitive strategy - Lacks dynamism, emphasizes stability - Theory does not tell us how

Differentiation requires:

- a level of cost parity relative to competitors - Integration of multiple points along the value chain - Differentiation along several different dimensions at once

Blue ocean

Cirque du Soleil, E-Bay, Coffee bars (they were new when they started) ▪More examples on p. 79

Business-Level Strategy

Designed for a firm or division of the firm that competes within a single business. Generic strategies are based on the breadth of target market & type of competitive advantage

3) Differentiation Focus

Implies: ▪ Products and/or services that are unique & valued ▪ Emphasis on non-price attributes for which customers will gladly pay a premium (e.g. Apple)

Pitfalls of Combination Strategies

Firms that fail to attain both overall low-cost & differentiation strategies may end up with neither and become "stuck in the middle" ▪ Firms can also underestimate the challenges & expenses associated with coordinating value creating activities in the extended value chain ▪ Firms can also miscalculate sources of revenue and profit pools in the firm's industry

1) Overall 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 costs (e.g. Walmart)

Broad differentiation means:

that you are trying to sell to everyone (and not just to a niche market)

A focus strategy is based:

- on the choice of a narrow competitive scope within an industry ▪A firm selects a segment or group of segments (or niche) and tailors its strategy to serve them ▪ A firm achieves competitive advantages by dedicating itself to these segments exclusively

Insights from Research: Creating Customer Loyalty

-People have a need for genuine self-expression and authentic functioning -Requiring employees to obey rules may cause them to become "numb" to their real feelings - Business leaders should model a positive disposition toward customers

A focus strategy has two variants:

1) Cost focus 2) Differentiation focus

Pitfalls of Cost Leadership

1.Too much focus on one or a few value chain activities 2.Increase in the cost of the inputs on which the advantage is based 3.The strategy is imitated too easily 4.A lack of parity on differentiation 5.Obsolescence of the basis of a cost advantage 6.Reduced flexibility (due to investments in large scale operations/systems)

Four Generic Strategies (2 are similar)

Three generic stages but 4 specific stages 1) Overall Low-Cost Leadership 2) Broad Differentiation 3) Focus 4) Differentiation focus

Combination Strategies

▪ Combining overall low-cost and differentiation strategies can take several forms: ▪ Automated & flexible manufacturing systems allow for mass customization ▪ Data analytics allows firms to customize product & services while using resources efficiently ▪ Exploitation of the profit pool concept creates a competitive advantage ▪ Using information technology, firms can integrate activities throughout the extended value chain

Cost focus

▪ Creates a cost advantage in its target segment ▪ Exploits differences in cost behaviour ▪ E.g. Staple Business Depot (targets small business and home office clients)

Differentiation focus

▪ Differentiates itself in its target market ▪ Exploits the special needs of buyers ▪ E.g. Hermes (exclusive clientele)

Pitfall of focus

▪ Erosion of cost advantages within the narrow segment (processes can be copied eventually) ▪ Highly focused products and services are still subject to competition from new entrants & from imitation (e.g. organic products) ▪ Focusers can become too focused to satisfy buyer needs (larger stores start offering similar products)

Combination Strategies: Integrating Low-Cost & Differentiation

▪ Integration of low-cost and differentiation strategies makes it difficult for competitors to duplicate or imitate strategy ▪ The goal of a combination strategy is to provide unique value in an efficient manner

The many forms of Differentiation Strategy

▪ Prestige or brand image (e.g. Roots, BMW) ▪ Quality (e.g. Lexus) ▪ Technology (e.g. Martin guitars) ▪ Innovation (e.g. 3M, Cirque du Soleil) ▪ Features (e.g. Honda Goldwing motorcycles) ▪ Customer service (e.g. Nordstrom) ▪ Dealer network (e.g. Caterpillar) ▪ Ethical posture (e.g. Whole Foods)

Pitfalls of Differentiation

▪ Uniqueness that is not valuable ▪ Too much differentiation ▪ Too high a price premium (e.g. "The Homer") ▪ Differentiation that is easily imitated (e.g. Crocs) ▪ Dilution of brand identification through product line extensions (e.g. Gucci's lower priced line) ▪ Perceptions of differentiation may vary between buyers and sellers

Red ocean

▪Existing market spaces with many competitors (e.g. Detergents)

Evaluating Business Strategy

▪See p. 180-185 ▪Evaluating strategy is not the same as evaluating firm performance! ▪Firm performance is after the fact ("ex poste") ▪See Atlas Door example