Managing Industry Competition: Part 2 Competitive Strategies Dr. Ellen A. Drost.

Managing Industry Competition:Managing Industry Competition:Part 2Part 2

Competitive StrategiesCompetitive Strategies

Dr. Ellen A. DrostDr. Ellen A. Drost

Ellen A. Drost, Winter 2007Ellen A. Drost, Winter 2007

Lecture ObjectivesLecture Objectives- To extent the industrial organizational To extent the industrial organizational

model, and to introduce the model, and to introduce the positioning schoolpositioning school

To identify three generic strategies To identify three generic strategies relative to the Porter Five Forces relative to the Porter Five Forces ModelModel


Five Forces Model and Competitive Five Forces Model and Competitive StrategyStrategy

Lessons learned from the Five Forces ModelLessons learned from the Five Forces Model Not all industries are equal in terms of their profit Not all industries are equal in terms of their profit

potentialpotential

To assess the opportunities and threats underlying To assess the opportunities and threats underlying each competitive force affecting an industry, and each competitive force affecting an industry, and then estimate the profit potential of the industrythen estimate the profit potential of the industry

The key is to stake out a position in the industry that The key is to stake out a position in the industry that is less vulnerable to competitive threats from is less vulnerable to competitive threats from competitors competitors

Industry positioning schoolIndustry positioning school


Three Generic Competitive StrategiesThree Generic Competitive Strategies

- Cost LeadershipCost Leadership

- DifferentiationDifferentiation

- FocusFocus


Cost LeadershipCost LeadershipHigh volume, low marginHigh volume, low margin

When a Cost Leadership Strategy Works BestWhen a Cost Leadership Strategy Works Best

1.1. When price competition among rival sellers is a When price competition among rival sellers is a dominant competitive forcedominant competitive force

2.2. When the industry’s product is a standard, When the industry’s product is a standard, commodity-type item readily available from a variety commodity-type item readily available from a variety of sellersof sellers

3.3. When there are not many ways to achieve product When there are not many ways to achieve product differentiation that have value to the buyerdifferentiation that have value to the buyer

4.4. When most buyers use the product in the same ways When most buyers use the product in the same ways and have much the same needs/requirementsand have much the same needs/requirements

5.5. When buyers incur low switching costs in changing When buyers incur low switching costs in changing from one seller to another and are prone to shop for from one seller to another and are prone to shop for the best pricethe best price


Cost LeadershipCost LeadershipCommonly Required Skills and ResourcesCommonly Required Skills and Resources

1.1. Sustained capital investment and access to capitalSustained capital investment and access to capital

2.2. Process engineering skillsProcess engineering skills

3.3. Intense supervision of laborIntense supervision of labor

4.4. Products designed for ease in manufactureProducts designed for ease in manufacture

5.5. Low-cost distribution systemLow-cost distribution system

Common Organizational RequirementsCommon Organizational Requirements

1.1. Tight cost controlTight cost control

2.2. Frequent, detailed control reportsFrequent, detailed control reports

3.3. Structured organization and responsibilitiesStructured organization and responsibilities


Risks of OverallRisks of OverallCost LeadershipCost Leadership

1.1.Imitation by newcomers or followers in the Imitation by newcomers or followers in the industryindustry– lost-cost learninglost-cost learning

– state-of-the-art facilitiesstate-of-the-art facilities

2.2.Inability to see required product or market Inability to see required product or market change because of the attention to costchange because of the attention to cost– buyer desires increased quality or servicebuyer desires increased quality or service

– declining buyer sensitivity to pricedeclining buyer sensitivity to price


DifferentiationDifferentiationWhen a Differentiation Strategy Works Best1. When there are many ways to differentiate

the product/service and these differences are perceived by buyers to have value

2. When buyer needs and uses of the item are diverse

3. When not many rivals are following a similar type of differentiation approach

Differentiation strategies are most powerful when buyer needs and preferences are too diverse to be satisfied by a standardized product.


DifferentiationDifferentiation

- What Kind of Differentiation to PursueWhat Kind of Differentiation to Pursue- The ones least subject to imitationThe ones least subject to imitation- Based on long-lasting competitiveBased on long-lasting competitive

advantage (core competence)advantage (core competence)-- Technological innovation (3M, Technological innovation (3M,

Philips)Philips)-- Quality (Mercedes Benz, Lexus)Quality (Mercedes Benz, Lexus)-- Service (Dell, Nordstrom)Service (Dell, Nordstrom)-- Manufacturing (components)Manufacturing (components)-- Image (fashion)Image (fashion)


Signals of ValueSignals of ValueBuyers Judge Value on the Basis of SignalsBuyers Judge Value on the Basis of Signals1.1. How attractively the product is packagedHow attractively the product is packaged2.2. How “well-know” the brand is said to beHow “well-know” the brand is said to be3.3. Whether the seller has “prestige” customersWhether the seller has “prestige” customers4.4. How long the firm has been in businessHow long the firm has been in business5.5. Whether the item is “more expensive”Whether the item is “more expensive”6.6. Professionalism of seller’s employeesProfessionalism of seller’s employees7.7. Whether the seller has “prestige” facilitiesWhether the seller has “prestige” facilitiesSignals of Value versus Actual ValueSignals of Value versus Actual Value1.1. Differences among competing brands Differences among competing brands are subjective or hard to quantifyare subjective or hard to quantify2.2. Buyers are making their first-time purchasesBuyers are making their first-time purchases3.3. Repurchase is infrequentRepurchase is infrequent4.4. Buyers are unsophisticatedBuyers are unsophisticated



Commonly Required Skills and ResourcesCommonly Required Skills and Resources1.1.Strong marketing abilitiesStrong marketing abilities2.2.Product engineeringProduct engineering3.3.Creative flairCreative flair4.4.Strong capability in basic researchStrong capability in basic research5.5.Corporate reputation for quality or technological Corporate reputation for quality or technological

leadershipleadership6.6.Long tradition in the industry or unique combination of Long tradition in the industry or unique combination of

skills drawn from other businessesskills drawn from other businesses7.7.Strong cooperation from channels (suppliers)Strong cooperation from channels (suppliers)



Common Organizational RequirementsCommon Organizational Requirements1.1.Strong coordination among functions in R&D, Strong coordination among functions in R&D,

product development, and marketingproduct development, and marketing2.2.Subjective measurement and incentives Subjective measurement and incentives

instead of quantitative measuresinstead of quantitative measures3.3.Amenities to attract highly skilled labor, Amenities to attract highly skilled labor,

scientists, or creative peoplescientists, or creative people


Risks of DifferentiationRisks of Differentiation11.. Imitation narrows perceived differentiationImitation narrows perceived differentiation

– Common as industries matureCommon as industries mature

2.2. Cost differential between low-cost competitor and the Cost differential between low-cost competitor and the differentiated firm becomes too greatdifferentiated firm becomes too great– Buyers forego differentiated feature for large cost Buyers forego differentiated feature for large cost

savingssavings– Ignoring the need to signal valueIgnoring the need to signal value

3.3. Buyers need for differentiation falls. This occurs Buyers need for differentiation falls. This occurs when buyers become more sophisticated.when buyers become more sophisticated.– Example: Kawasaki and other Japanese Example: Kawasaki and other Japanese

motorcycle producers have been able to motorcycle producers have been able to successfully attach differentiated producers such successfully attach differentiated producers such as Harley-Davidson and Triumph in large as Harley-Davidson and Triumph in large motorcycles by offering major cost savings to motorcycles by offering major cost savings to buyers.buyers.


Focus Strategy Focus Strategy

Serving needs of particular segment of Serving needs of particular segment of industryindustry– Geographical market or type of customerGeographical market or type of customer

DifferentiatorsDifferentiators Cost leadersCost leaders

Focusing may be successful when a firm Focusing may be successful when a firm possesses intimate knowledge about a possesses intimate knowledge about a particular segmentparticular segment


Three Generic StrategiesThree Generic StrategiesLessons learnedLessons learned

The essence of strategic choicesThe essence of strategic choices– Whether to perform activities differently or to Whether to perform activities differently or to

perform different activities relative to customersperform different activities relative to customers

Two fundamental strategic dimensions: cost Two fundamental strategic dimensions: cost or differentiationor differentiation– Stuck in the middle firms are driftingStuck in the middle firms are drifting


Debates and ExtensionsDebates and Extensions

Clear versus blurred boundaries of an Clear versus blurred boundaries of an industryindustry

Industry rivalry versus strategic groupsIndustry rivalry versus strategic groups Integrating versus outsourcingIntegrating versus outsourcing Being stuck in the middle or being an all-Being stuck in the middle or being an all-

rounderrounder


Industry Competition and generic Industry Competition and generic strategiesstrategies

What are your observations regarding What are your observations regarding generic strategies?generic strategies?– Do they make sense?Do they make sense?

Managing Industry Competition: Part 2 Competitive Strategies Dr. Ellen A. Drost.

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