Chapter 4 Business Level Strategy Pages 96 - 125.

Chapter 4

Business Level StrategyPages 96 - 125

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

Porter’s Generic Strategies

Two fundamental issues Competitive advantage - low cost vs.

uniqueness Competitive Scope- broad based vs.

narrow

Pursuit of the generic strategies provides protection from each of the five forces


Low Cost

Uniqueness

Broad Narrow

CompetitiveAdvantage

Competitive Scope

Overall Low-Cost

Focused DifferentiationBroad Differentiation

Focused Low-Cost


Low Cost

Uniqueness

Broad Narrow

WalMartDomino’s

Big LotsLittle Caesar’s

TargetPapa John’s

NordstromPapa Murphy’s

CompetitiveAdvantage

Competitive Scope

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

differentiationPERCEIVED VALUE

versusINCREMENTAL COSTS

Differentiation (cont.)

Signalling important when: nature of differentiation difficult to quantify first-time purchase – re-purchase infrequent buyers unsophisticated

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

How can Differentiation protect against…?

Starbuck’s$1.80

Costs

Profit

Price

New Entrants


Joe’s Coffee

Starbuck’s$1.80

AssumeEqualCosts

New Entrants


New Entrants

Joe’s Coffee99 cents

Starbuck’s$1.80


New Entrants


Starbuck’s$1.80

Extra Profits


Rivals Starbuck’s$1.80



Starbuck’s$1.80


Advertising& Promotionsdrive costs UP


Starbuck’s$1.80 $1.70

Joe’s Coffee99 89 cents

Discountsand sales drive prices DOWN


SubstitutesStarbuck’s

$1.80


Starbuck’s$1.80

There is nosubstitute for the

truly differentiatedproduct


Power of Buyers - How do powerful buyer’s leverage their power?

Lower Prices, Higher Quality


Starbuck’s$1.80 $1.70

Joe’s Coffee99 89 cents

RaiseQuality

LowerPrices


Power of Suppliers - How do powerful suppliers leverage their power?

Drive up costs


Starbuck’s$1.70


RaiseCosts


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.

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

Low Cost Leadership (cont.)

Attractive when price is dominant consideration commodity low switching costs powerful buyers

Low Cost Leadership (cont.)

What firms pursue a low cost strategy?

How do they drive their costs downRisky when:

technology breakthroughs frequent easy to imitate costs advantages erode more

quickly than differentiation causes near-sightedness on a few

activities/sunk costs

How can Low Costs provide protection from….

New Entrants

Wal-Mart Joe’s

RubbermaidTub

$1.99


Wal-Mart Joe’s

RubbermaidTub

$1.99

Higher costs


Rivalry

Wal-Mart Joe’s

RubbermaidTub

$1.99


Wal-Mart Joe’s

RubbermaidTub

$1.89

…can pushprices down….


Wal-Mart Joe’s

RubbermaidTub

$1.99

… or push costs up


Wal-Mart Joes

RubbermaidTub

$1.99

Substitutes


Wal-Mart Joe’s

RubbermaidTub

$1.89



Wal-Mart Joe’s

RubbermaidTub

$1.99

… or push costs up


Wal-Mart Joe’s

RubbermaidTub

$1.99

Power of Buyers


Wal-Mart Joe’s

RubbermaidTub

$1.89



Wal-Mart Joe’s

RubbermaidTub

$1.99

Power of Suppliers


Wal-Mart Joe’s

RubbermaidTub

$1.99

… can push costs up

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.

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

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

Focus (cont.)

Market Segmentation – clustering of people with similar needs into identifiable groups E.g. consumer vs. industrial,

demographic, sociocultural, geographic, psychological (lifestyle), consumption patterns (frequency of use)

Integrated Low Cost-Differentiation

Combines both generic strategiesDifficult to implement

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

Chapter 4 Business Level Strategy Pages 96 - 125.

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Transcript of Chapter 4 Business Level Strategy Pages 96 - 125.