Chapter 5: Business-Level Strategy Creating and Sustaining ...
Chapter 5: Business-Level Strategy Creating and Sustaining Competitive Advantage Case Study - A firm’s competitive strategy is about creating value for its customers and having these customers reward the firm for the superior value they receive - Soft drink and beverages business is global and cut-throat, each single market share point translates to billions of dollar sales - Cott supplying President’s Choice pop surpassed combined sales of Pepsi and Coke products at Loblaws What went wrong at Cott? - Its ups and downs reflect the company’s strategic choices to align with its commitment to a simple line of core products and efficient operations or its decisions to move toward an ambitious strategy of expansion, product differentiation and consulting to mass merchants around the word - Strategy formulation, the second main aspect of strategic management, is about the thought processes and the decisions managers make to address 1. What business they should be in 2. How to compete in the business - Business-Level strategy is about the particular ways a firm competes in its chosen business - 2 dominant schools of strategic management 1. Positioning School o Views business strategy and the corresponding role of managers as identifying and striving to occupy the most attractive competitive positions in the marketplace (outside-in approach) o Emphasizes importance of external analysis and alignment of firm’s activities to purse position against external forces 2. Resource-based school o tarts with resources within the firm and the uniqueness of those resources (inside-out approach Types of Competitive Advantage and Sustainability 1. Overall Cost Leadership o Creating a low-cost position relative to a firm’s peers o Firm must manage the relationships in the entire value chain and be devoted to lowering costs throughout the chain o Efforts of cost leadership Aggressive construction of efficient-scale facilities Vigorous pursuit of cost reductions from experience Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firm’s value chain such as r&d, services, sales force and advertising o Two important concepts 1. Economies of scale - Decline in per unit costs that usually come with larger production runs, facilities and allocating fixed costs across more units products 2. Experience curve o How a business learns to lower costs as it gains experience with production processes -
Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces o Low cost position enables a firm to achieve above average returns despite strong competition o Protects firm against rivalry from competitors because lower costs allow a firm to earn returns even if its competitors are eroding profits through intense rivalry o Low cost also protects firms against powerful buyers o Low cost provides more flexibility to cope with demands from powerful suppliers for input cost increases
Low cost position puts the firm in a favourable position with respect to substitute products introduced by new and existing competitors Potential Pitfalls of Overall Cost Leadership Strategies o Too much focus on one or a few value-chain activities Need to pay attention to all activities o Vulnerability to raw material costs They are less able to pass on price increases because the customers they target are more price sensitive and constantly looking for lower prices o A strategy that is imitated too easily o A lack of parity on differentiation o Erosion of cost advantages when the pricing information available to customers increases Internet increased the amount of information available to consumers about price and cost structures, challenging competitors to lower prices to remain competitive 2. Differentiation o Requires a firm to create products and services that are unique and valued as such in the eyes of its customers o Primary emphasis is on “non-price” attributed for which customers will gladly pay a premium o Can take forms of Prestige or brand image Quality Technology Innovation Features Customer service Dealer network o Firms achieve and sustain differentiation advantages and attain above average performances when their price premiums exceed the extra costs incurred in being unique o Differentiation: improving Competitive Position vis-à-vis the Five Forces Provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs Higher barriers to entry because of customer loyalty and uniqueness Higher margins that enable a firm to deal with supplier power o Potential Pitfalls of Differentiation Strategies Uniqueness that is not valuable • Must provide unique bundles of products Too much differentiation • Firms may strive for quality or service that is higher than what their customers want Too high price premiums Differentiation that is easily imitated Dilution of brand identification through product-line extension • Firms can erode quality by adding products or services with lower prices and quality (TIFFANYS) Perceptions of differentiation that vary between buyers and sellers • Beauty is in the eye of the beholder • Just because company perceives it as differentiated doesn’t mean customers will o
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3. Focus o Direct attention toward narrow product lines, buyer segments, or targeted geographic markets o Cost Focus Serve customers in target segment with price lower than competitors
Exploits differences in cost behaviour in a particular segment and takes advantage of potentially lower costs that arise from purposefully limiting the firm’s customer base to a well-defined segment Differentiation Focus Aim: to provide better service, prestige, image or quality EX. The Keg Focus Improving Competitive Position vis-à-vis Five Forces Low-cost position with its strategies target, a high differentiation, or both Focus niche markets that are least vulnerable to substitutes Potential Pitfalls of Focus Strategy Erosion of cost advantages within the narrow segment Possible competition from new entrants and firm imitation Too much focus on satisfying buyer needs
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Combination Strategies: Integrating Overall Low Cost and Differentiation - Allows firms to provide differentiated attributed and lower prices - Automated and Flexible Manufacturing Systems o Firms have been able to manufacture unique products in relatively small quantities at lower costs (aka mass consumption) - Exploiting the Profit Pool Concept for Competitive Advantage o Profit pool: total profits in an industry at all points along the industry’s value chain o Structure can be complex o Pool of profits can be deeper in some segments of the value chain than others - Coordinating the “Extended” Value Chain by Way of Information Technology o Enables a firm to add value through its own value creating activities and to pass this value to its customers and suppliers - Integrated Overall Low Cost and Differentiation Strategies: Improving Competitive Position vis-à-vis the Five Forces o Firms that successfully integrate both differentiation and cost advantages create an desirable position relative to industry forces - Pitfalls of Integrated Overall Cost Leadership and Differentiation Strategies o Failing to attain both strategies and ending up stuck in the middle o Underestimating the challenges and expenses associated with coordinating value creating activities in the extended value chain o Miscalculating resources of revenue and profit pools in the firm’s industry - Model criticized for focusing too narrowly on economic analysis and not enough on social, political and cognitive aspects - Strategic choices are restricted to a very short life of options, discouraging the creation of truly unique strategies - Model itself lacks dynamism - Emphasizes stability = identifying and staying in an attractive position rather than analyzing how one gets there Evaluating Business Strategy - Consistency o Whether the strategy is in alignment with the organization’s goals and objectives, whether it introduces contradictions among different goals and whether it will be pulling the organization into competing dimensions - Consonance o The fit between the strategy and the external environment - Advantage o Whether it is creating and exploiting competitive advantages that are both enduring and difficult to duplicate o Can they perform activities and serve markets BETTER than competitors - Feasibility
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The capacity of the firm to achieve what it is embarking on Is it realistic?
Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces o Low cost position enables a firm to achieve above average returns despite strong competition o Protects firm against rivalry from competitors because lower costs allow a firm to earn returns even if its competitors are eroding profits through intense rivalry o Low cost also protects firms against powerful buyers o Low cost provides more flexibility to cope with demands from powerful suppliers for input cost increases
Low cost position puts the firm in a favourable position with respect to substitute products introduced by new and existing competitors Potential Pitfalls of Overall Cost Leadership Strategies o Too much focus on one or a few value-chain activities Need to pay attention to all activities o Vulnerability to raw material costs They are less able to pass on price increases because the customers they target are more price sensitive and constantly looking for lower prices o A strategy that is imitated too easily o A lack of parity on differentiation o Erosion of cost advantages when the pricing information available to customers increases Internet increased the amount of information available to consumers about price and cost structures, challenging competitors to lower prices to remain competitive 2. Differentiation o Requires a firm to create products and services that are unique and valued as such in the eyes of its customers o Primary emphasis is on “non-price” attributed for which customers will gladly pay a premium o Can take forms of Prestige or brand image Quality Technology Innovation Features Customer service Dealer network o Firms achieve and sustain differentiation advantages and attain above average performances when their price premiums exceed the extra costs incurred in being unique o Differentiation: improving Competitive Position vis-à-vis the Five Forces Provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs Higher barriers to entry because of customer loyalty and uniqueness Higher margins that enable a firm to deal with supplier power o Potential Pitfalls of Differentiation Strategies Uniqueness that is not valuable • Must provide unique bundles of products Too much differentiation • Firms may strive for quality or service that is higher than what their customers want Too high price premiums Differentiation that is easily imitated Dilution of brand identification through product-line extension • Firms can erode quality by adding products or services with lower prices and quality (TIFFANYS) Perceptions of differentiation that vary between buyers and sellers • Beauty is in the eye of the beholder • Just because company perceives it as differentiated doesn’t mean customers will o
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3. Focus o Direct attention toward narrow product lines, buyer segments, or targeted geographic markets o Cost Focus Serve customers in target segment with price lower than competitors
Exploits differences in cost behaviour in a particular segment and takes advantage of potentially lower costs that arise from purposefully limiting the firm’s customer base to a well-defined segment Differentiation Focus Aim: to provide better service, prestige, image or quality EX. The Keg Focus Improving Competitive Position vis-à-vis Five Forces Low-cost position with its strategies target, a high differentiation, or both Focus niche markets that are least vulnerable to substitutes Potential Pitfalls of Focus Strategy Erosion of cost advantages within the narrow segment Possible competition from new entrants and firm imitation Too much focus on satisfying buyer needs
o
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o
Combination Strategies: Integrating Overall Low Cost and Differentiation - Allows firms to provide differentiated attributed and lower prices - Automated and Flexible Manufacturing Systems o Firms have been able to manufacture unique products in relatively small quantities at lower costs (aka mass consumption) - Exploiting the Profit Pool Concept for Competitive Advantage o Profit pool: total profits in an industry at all points along the industry’s value chain o Structure can be complex o Pool of profits can be deeper in some segments of the value chain than others - Coordinating the “Extended” Value Chain by Way of Information Technology o Enables a firm to add value through its own value creating activities and to pass this value to its customers and suppliers - Integrated Overall Low Cost and Differentiation Strategies: Improving Competitive Position vis-à-vis the Five Forces o Firms that successfully integrate both differentiation and cost advantages create an desirable position relative to industry forces - Pitfalls of Integrated Overall Cost Leadership and Differentiation Strategies o Failing to attain both strategies and ending up stuck in the middle o Underestimating the challenges and expenses associated with coordinating value creating activities in the extended value chain o Miscalculating resources of revenue and profit pools in the firm’s industry - Model criticized for focusing too narrowly on economic analysis and not enough on social, political and cognitive aspects - Strategic choices are restricted to a very short life of options, discouraging the creation of truly unique strategies - Model itself lacks dynamism - Emphasizes stability = identifying and staying in an attractive position rather than analyzing how one gets there Evaluating Business Strategy - Consistency o Whether the strategy is in alignment with the organization’s goals and objectives, whether it introduces contradictions among different goals and whether it will be pulling the organization into competing dimensions - Consonance o The fit between the strategy and the external environment - Advantage o Whether it is creating and exploiting competitive advantages that are both enduring and difficult to duplicate o Can they perform activities and serve markets BETTER than competitors - Feasibility
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The capacity of the firm to achieve what it is embarking on Is it realistic?
