Chapter 5 BusinessLevel Strategy: Creating and Sustaining ...
Chapter 5 BusinessLevel Strategy: Creating and Sustaining Competitive Advantages Case Study Cott • • • •
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How can we outrun our competitors? How can we achieve objectives? Competitive strategy about creating value for consumers and have consumers reward the firm for the superior value they receive Soft drink market is cut throat Coca Cola and Pepsi dominate But Cott secured contract to provide soda for PC soft drinks o Soon these sales surpasses the combined sales of Coke and Pepsi products in Loblaws stores o Then got in all stores (shoppers so on) o Eliminated marketing costs b/c adopted retailers brand and used retailers distribution and warehousing capacity and price product lower o Deal with RC cola only alternative cola syrup o 1993 stock trading at $43 overnight sensation Brought in new CEO o Started moving into branding, pet foods, snacks, beer o Moved offices to Toronto o Partnered with independent bottlers all over world o Shares hit $48 But found itself in number of controversies o Aggressive accounting o Operational problems in facilities o Stock fell to just above $3 o Net loss of 30 million Brought in new manager to clean up o Focus back on soft drinks in Canada and US and UK o Stock went back up to mid 40s o Healthy demand again o Broader products b/c of demand But this led to operational problems b/c too high capacity Brought in new manager again o Launched red rain and sport drinks o Stock went down again due to operational problems o Replaced this CEO too What went wrong? o Early success due to breaking up industry’s value chain and reducing costs of inbound logistics and operations, slashing marketing and sales and delivering a private label to big box companies o Shows that a single minded commitment to the source of competitive advantage is necessary for success Strategy formulation, the second main aspect of SM is about thought processes and decisions managers make to address o 1) What business should we be in o 2) How to compete in those businesses (latter is biz strategy) Business level strategy is about the ways a firm competes in its chosen business o Compete to provide superior value to consumers o Superiority manifested in the market’s response to its products and services and how to sustain it over long time
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o Has to stay relevant and withstand attacks (imitations) Different design schools of strategic management emphasize different perspectives of strategy and highlight formal and informal processes all with different principles o The design school and the planning school articulate formal processes of the external and internal analyses followed by systematic conclusions and recommendations o Other schools see managers as protagonists or as members of teams Two most dominant schools are the positioning school and resource based school o Former views biz strategy and the corresponding role of managers as identifying and striving to occupy the most attractive competitive positions Outside in perspective emphasizes the importance of external analysis and alignment of the firm’s activities to pursue a desirable position o Latter starts with the resources within the firm and the uniqueness of those resources Exploitation of those resources as the strategy Insideout perspective o Both can be complimentary and reveal facets of business strategies o Also suggest alternative basis for competitive advantage Textbook uses outside in approach with a twist o Start by locating attractive competitive positions but also emphasize how internal resource bundles and activities used to achieve sustainable CA o Outside in readings mostly come from Porter o Target market and type of competitive advantage Want narrow target Second about low cost versus uniqueness and differentiation These choices created 3 generic strategies • Overall low cost • Differentiation • Focus Like chart we looked at in class from broad to narrow and from low cost to differentiation
Types of Competitive Advantage and Sustainability • • • • •
Each has potential to allow firm to out perform its rivals Cost leadership o Creating low cost position relative to peers o Manage relationships with entire value chain and be committed to lowering costs Differentiation o Unique products and services that are valued in eyes on consumers o Primary emphasis is on the “nonprice” attributes for which customers will pay a premium When a firm decides to pursue one type of competitive advantage (low cost) it must attain parity on the basis of other competitive advantages (differentiation) o Need to be able to stay on par with competitors even if pursuing one kind Parity on the basis of differentiation permits a cost leader to translate cost advantages into higher profits than competitors and earn above average returns o No Frills, FreshCo Although overall cost leadership, still needs to pay attention to updating and enlarging stores, extended operating hours, improving shoppers convenience and experimenting with new ideas
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Firm following a focus strategy must direct attention toward narrow product lines, buyer segments, or targeted areas o Must still attain advantages either through differentiation or through cost leadership o But targeted at a narrow market as opposed to industry wide
Overall Cost Leadership •
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Requires tight set of interrelated efforts that include: o Aggressive construction of efficient –scale facilities o Vigorous pursuit of cost reductions from experience o Tight cost and overhead control o Avoidance of marginal customer accounts o Cost minimization in all activities in the firm’s value chain R&D, service, sales, advertising Can use value to chain to see how firm can attain cost leadership See relative costs of competitors so you can see where you can get an advantage Two important concepts o Economies of scale decline in per unit costs that usually come with larger production runs, bigger facilities and allocating fixed costs across more units produced o Experience curve how a business learns to lower costs as it gains experience wit production processes With experience, unit costs of production decline as output increases o Like IKEA does low costs No frills product to broad target market using standardization to derive greatest benefits from economies of scale and experience o But must attain parity on important dimensions of differentiation at same time Quick response to consumer requests
Strategy Spotlight The Experience Curve (more human learning, less machines) • • • • • • • • •
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Names by Boston Consulting Group Way of looking at efficiencies developed through a firm’s cumulative experience In basic forms experience curve relates production costs to production output As cumulative output doubles, costs decline by 1030% o If cost $10 per unit to produce first 100 units, it would be 9 and 7 in production for the next 100 Due to people learning how to be more efficient Each time output doubles, firm can expect perunit costs to decline But as output increases, becomes harder to double it so need new product modifications and changes in manufacturing High tech products best gains in production efficiencies o Value engineering which drives down cost of production A product’s sensitivity to price strongly affects a firm’s ability to exploit the experience curve o Cutting price of product with high demand elasticity (where demand increase a lot with modest price drop) creates many new customer purchases of product o So can increase demand and increases firm’s experience Toyota and Nissan used lessons of experience curve in early entry into NA o Aggressively priced cars with eye on cost structures Questions to ask page 127
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Need to know what specifically causes the decline in costs o If cost drops from economies of scale or efficient production, the experience curve is not useful o Can help managers analyze costs when efficient learning, rather than efficient machinery is the source of the cost savings
Overall Cost Leadership: Improving Competitive Position visavia the Five Forces • Overall low cost allows firm to achieve above average returns despite strong competition o Protects firms against rivalry from competitors b/c still earns returns even if competitors eroding profits o Also protects them from powerful buyers Buyers can only force down prices to the level of the next most efficient producer o Provides more flexibility to cope wit demands from powerful suppliers for input cost increases o Provide entry barriers from economies of scale and cost advantages o Puts the firm in a favourable position with respect to substitute products o IKEA’s close attention to costs helps protect the firm against powerful buyers and rivalry from competitors o So can drive down unit costs and enjoy strong power over suppliers RONA paired with ITM (one of world’s largest distributors) to give it more purchasing power Potential Pitfalls of Overall Cost Leadership Strategies •
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Too much focus on one or a few valuechain activities o Need to pay attention to all activities in the supply chain and to manage overall costs o Explore all value chain activities – and relationships among them as possibilities to cost reduction Don’t just want to cut one area and leave other untouched Vulnerability to raw material costs o Vulnerable to price increases in the factors of production o Less able to pass on price increase b/c the customers they target are price sensitive Discount Airline files for bankruptcy b/c of increasing fuel costs A strategy that is imitated too easily o A firms strategy may consist of value creating activities that are easy to imitate Like online brokers – over 100 firms copied this and most had to shut down after incurring substantial loses A lack of parity on differentiation o Need some level o Need instruction that is comparable with traditional providers o Can be achieved on reputation, quality, signaling mechanisms such as recognition Erosion of cost advantages when the pricing info available to customers increases o Internet challenging competitors to lower prices to remain competitive o 10% increase in consumer use of the internet, corresponding reduction in life insurance prices to consumers of 35%
Strategy Spotlight IKEA • •
Began as one person mail order company in small farming village Everything they do to do with cutting costs, reducing waste, and achieving cost leadership strategy
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Chose to come to Canada before US lower costs (5 years then US – honed skills) Have parity on differentiation o Selfservice model o Designs own low cost, modular, ready to assemble furniture No third party manufacturer Good quality and low price Prices 3050% lower than competition but not cheap Capitalize on experience curve effects
Strategy Spotlight ING Direct • • • • • •
Fast food chain of the financial services industry is perfect example of low cost strategy Attracts people who want higher interest rates on savings and need little hand holding Can offer higher rates b/c 75% of its transactions occur online so avoids other costs Typically fires about 0.2% of its clients each year = saves 1 million o If customers want too much attention cut them Costs lower than 1/3rd of industry average Business not based on relationships o Keeps expenses down b/c high volume, low margin
Differentiation • •
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Consists of creating differences in the firm’s products or service by creating something that is perceived industry wide as unique and values by customers Can take many forms: o Prestige or brand image (BMA, Roots, Holt Renfrew) o Quality (Lexus, PC) o Technology o Innovation (3M, Cirque du Soleil) o Features o Customer service o Dealer network (Canadian Tire) Exhibit 5.4 page 131 value chain activities to differentiate More than being different o Can come from anywhere in value chain o Can differentiate themselves along several different dimensions at once Achieve and sustain differentiation when their price premiums exceed extra costs incurred for being unique o BMW charges higher prices for reputation o Use differences to justify price o But need level of cost parity relative to competitors o Reduce costs in all areas that don’t affect differentiation
Strategy Spotlight Lexus • •
Division of Toyota Famous for extra care given to customers that differentiated them not the cars themselves
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o Perceptions of product quality can be strongly influenced by downstream activities in the value chain (service) Lexus known strong relationships among value activities reinforce and strengthen the customer’s total perception of vale Keeps close ties with dealers and provides them with resources Have great marketing, services and high quality cars
Spotlight VoodooPC: Canadian Differentiation strategy • • • • • • •
High end of the market High performance and stylish personal computer entertainment systems Each one custom made for consumer Call customers and confirm what they want 40005000 dollars Higher profit margin than other companies And focus on high quality service too
Differentiation: Improving Competitive Position vis a vis the 5 forces • • • • • •
Protects again competition o Consumers more loyal and less sensitive to price and raises consumer switching costs Avoids having to have low cost production Reduces buyers power o Lack comparable alternatives Higher entry barriers o Customer loyalty and uniqueness Higher margins that enable firm to deal with supplier power o No prestige with being supplier to a producer of amazing product o And they want to be associated with these brands so wont drive prices up Higher customer loyalty, less threat of imitators
Potential Pitfalls of Differentiation Strategies • • • • •
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Uniqueness that is not valuable o Customers need to value highly Too much differentiation o Can’t get too crazy and aim too high (car with way too many features) o Leaves them vulnerable to competitors who provide an acceptable level of quality at lower price Too high a price premium o Batteries suffered b/c of this Differentiation that is easily imitated o Like frequent flyer program o China copying products Dilution of brand identification through productline extensions o Erode quality of brand image by adding products or services with lower prices and quality o Can increase short term revenue but hurt long term o Gucci overstretched itself and tarnished prestigious image Perceptions of differentiation that vary b/w buyers and sellers
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o Company may see products as differentiated but consumers may see them as commodities o Stay in touch with reality Differentiation becoming harder now as more industries get saturated
Strategy Spotlight Crocs • Stock so high in beginning • Then knock offs from China came for a fraction of price • Now stock at $1 couldn’t trademark design (Clogs have always been around) Focus • • • • •
Based on the choice of a narrow competitive scope within an industry Selects segment or group of segments and tailors its strategy to serve them Achieve CA by dedicating itself to these segments exclusively Alone not enough for above average performance Two variants: Cost focus and Differentiation focus
Cost Focus • •
Strive to create cost advantage in its target market and serve with a lower price than rivals who either target whole industry or are unable to match low costs Takes advantages of lower costs from not going after whole market segment o Like Staples targeting Small businesses and homeoffice clients by increasing private label items it carries (jumbo sized packs and cuts prices)
Differentiation Focus • •
Differentiate in narrow segment Aims to provide better service, prestige, image or quality to a well defined narrow market o Keg stayed simple with same menu and young families and business people
Focus Improving Competitive Position vis a vis the Five Forces • • • •
Requires firm to have a low cost position with strategic target, a high differentiation or both Want niches least vulnerable to substitutes or where competition is weakest o Keg aims at less price sensitive people Image and quality make stronger barriers to entry And protection against substitutes good reputation
Potential Pitfalls of Focus Strategies • •
Erosion of cost advantages within the narrow segment o Competitors may erode cost advantages Dell Possible competition from new entrants and from imitation o Rivals may invade their niche o Entry barriers are low, little buyer loyalty and competition becomes intense o Revenues fall, profit margins squeezed and only strongest survive
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Too much focus on satisfying needs o May have product or service that is too narrow Specialty stores falling as large, national stores stock their products
Combination Strategies: Integrating overall Low Cost and Differentiation • • •
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Can be strategic benefits to combining generic strategies Study found those combining strategies (low cost and differentiation) were outperforming business using only one o Lowest were those who didn’t identify even one strategy “stuck in middle” Harder for competitors to duplicate or imitate o Provides two types of value to consumers Differentiated attributes and lower prices o Some can do this simultaneously o Better quality can lead to lower costs b/c need for less rework Three approaches to this:
Automated and Flexible Manufacturing Systems •
Advances in manufacturing and IT companies can manufacture unique products in relatively small quantities at lower costs – “Mass Customization” o Anderson Windows demand grew too much (errors is system) o Developed computerized version, error free o Time cut by 75% o So lowered costs, enhanced quality and variety
Exploiting the Profit Pool Concept for Competitive Advantage • •
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Profit pool – total profits in an industry at all points along the industry’s value chain Structure of it can be complex o Pool will be deeper in some segments o Profitability may vary by customer group, product category, geographic market or distribution channel o Profit concentration could be different to revenue generation Automobile industry o Little relationship b/w generation of revenues and capturing profits o Manufacturing generates most profit but this activity is far smaller, profit wise than other activities such as financing o Much profit in the downstream activities o Can’t focus solely on manufacturing
Coordinating the “Extended” Value Chain by Way of IT • •
Integrate activities through extended value chain and using IT to link their own value chain with the value chain of customers and suppliers Helps firm add value through its own value creating activities and the pass this value on to customer and suppliers o Often necessitates redefining the industry’s value chain o WalMart did this to change the competitive challenge
Looked to save money in logistics and communications rather than merchandising and promotions
Strategy Spotlight WalMart • • • •
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Combined competitive advantages Broadened product line Most of success due to strategic focus, emphasis on key valuechain activities and combo of competitive advantages Differentiated itself from competition o Optical shops and photo finishing services, fast food o Uses crossdocking (logistics technique) Don’t place goods in inventory – moves from one dock to another in 48h o Use sophisticated software to max speed and to manage inventory and distribution o This reduces costs by 20% These lower costs turn into lower prices for customers Stable prices = predictable sales o Reduces stock out and excess inventory Can take on more staff Cross docking not easily copied by competitors o Helps Walmarts flexibility and shortens procurement times Integrates interdependent activities o Makes imitator products a less viable threat
Integrated Overall Low cost and differentiation strategies: Improving CA through 5 Forces • • • • •
Integrating both creates envious position o Through integrating info systems lower costs and provide vast product selection This creates high entry barriers Creates bargaining power over suppliers Reduces power of buyers b/c relatively few competitors can offer same low prices So reduces headtohead rivalry
Pitfalls of Integrates Cost Leadership and Differentiation •
Failing to attain both strategies and ending up “stuck in middle” o Try to achieve cost control and differentiation in a competitive market can be bad o Eaton’s old department store, couldn’t fend off WalMart and people
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Underestimating the challenges and expenses associated with coordinating valuecreating activities in the extended value chain o Integrating activities across firm’s value chain of suppliers and customers involves significant investment in finance and HR o IT investment is super expensive o Must be confident they can generate a sufficient scale of operations and revenues to justify all the expenses
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Miscalculating sources of revenue and profit pools in the firm’s industry
o Bias of manager can lead to overestimating/under revenues in certain areas o Allocating fixed costs, transfer pricing mechanisms or even politics may yield an inaccurate picture of costs and revenues o Again cant focus too much on one area in the value chain and ignore another less important one Criticisms of Generic Strategies Model • • •
Focuses too much on economic analysis and not enough of social, political and cognitive aspect Strategic choices are short list – discourages unique list Model lacks dynamism o Emphasizes stability – doesn’t analyze how one gets to attractive position, just how to hold it
Evaluating Business Strategy • •
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Use various analytical tools described in last 3 chapters to see which strategy is right for you or if its working Evaluating strategy not same as evaluating firm’s performance o Latter is expost assessment, outcome of following actions o Composite measure to see if strategy was effective and if it was executed well and to see if industry did well Evaluating strategy ought to be an exant prerequisite before strategy put into action, resources are allocated and commitments are made o Compare strategy and determine best option given firm’s resources o But hard to see which one is best Examination is mostly qualitative – 4 things Consistency o Whether the strategy is in alignment with the company’s goals and objectives o Whether it introduces contradictions among goals o Will it be pulling company into competing dimensions o Need components to be well aligned with company vision and mission o Everyone knows direction and desirable outcomes o Happens when all components mutually underpin and do not determine each other Consonance o Fit b/w strategy and external environment o Trends, stakeholder’s wants o Responding to and incorporating outside o Address threats/ opportunities Advantage o CA of the strategy and if they are enduring and hard to copy o Elements of superiority to competitors o Serve markets better o Want to erect entry barriers o Innovative Feasibility o Capacity of the firm to achieve what it is embarking on o Is it realistic?
o Does company have necessary resources? o Don’t want to spread company too thin
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How can we outrun our competitors? How can we achieve objectives? Competitive strategy about creating value for consumers and have consumers reward the firm for the superior value they receive Soft drink market is cut throat Coca Cola and Pepsi dominate But Cott secured contract to provide soda for PC soft drinks o Soon these sales surpasses the combined sales of Coke and Pepsi products in Loblaws stores o Then got in all stores (shoppers so on) o Eliminated marketing costs b/c adopted retailers brand and used retailers distribution and warehousing capacity and price product lower o Deal with RC cola only alternative cola syrup o 1993 stock trading at $43 overnight sensation Brought in new CEO o Started moving into branding, pet foods, snacks, beer o Moved offices to Toronto o Partnered with independent bottlers all over world o Shares hit $48 But found itself in number of controversies o Aggressive accounting o Operational problems in facilities o Stock fell to just above $3 o Net loss of 30 million Brought in new manager to clean up o Focus back on soft drinks in Canada and US and UK o Stock went back up to mid 40s o Healthy demand again o Broader products b/c of demand But this led to operational problems b/c too high capacity Brought in new manager again o Launched red rain and sport drinks o Stock went down again due to operational problems o Replaced this CEO too What went wrong? o Early success due to breaking up industry’s value chain and reducing costs of inbound logistics and operations, slashing marketing and sales and delivering a private label to big box companies o Shows that a single minded commitment to the source of competitive advantage is necessary for success Strategy formulation, the second main aspect of SM is about thought processes and decisions managers make to address o 1) What business should we be in o 2) How to compete in those businesses (latter is biz strategy) Business level strategy is about the ways a firm competes in its chosen business o Compete to provide superior value to consumers o Superiority manifested in the market’s response to its products and services and how to sustain it over long time
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o Has to stay relevant and withstand attacks (imitations) Different design schools of strategic management emphasize different perspectives of strategy and highlight formal and informal processes all with different principles o The design school and the planning school articulate formal processes of the external and internal analyses followed by systematic conclusions and recommendations o Other schools see managers as protagonists or as members of teams Two most dominant schools are the positioning school and resource based school o Former views biz strategy and the corresponding role of managers as identifying and striving to occupy the most attractive competitive positions Outside in perspective emphasizes the importance of external analysis and alignment of the firm’s activities to pursue a desirable position o Latter starts with the resources within the firm and the uniqueness of those resources Exploitation of those resources as the strategy Insideout perspective o Both can be complimentary and reveal facets of business strategies o Also suggest alternative basis for competitive advantage Textbook uses outside in approach with a twist o Start by locating attractive competitive positions but also emphasize how internal resource bundles and activities used to achieve sustainable CA o Outside in readings mostly come from Porter o Target market and type of competitive advantage Want narrow target Second about low cost versus uniqueness and differentiation These choices created 3 generic strategies • Overall low cost • Differentiation • Focus Like chart we looked at in class from broad to narrow and from low cost to differentiation
Types of Competitive Advantage and Sustainability • • • • •
Each has potential to allow firm to out perform its rivals Cost leadership o Creating low cost position relative to peers o Manage relationships with entire value chain and be committed to lowering costs Differentiation o Unique products and services that are valued in eyes on consumers o Primary emphasis is on the “nonprice” attributes for which customers will pay a premium When a firm decides to pursue one type of competitive advantage (low cost) it must attain parity on the basis of other competitive advantages (differentiation) o Need to be able to stay on par with competitors even if pursuing one kind Parity on the basis of differentiation permits a cost leader to translate cost advantages into higher profits than competitors and earn above average returns o No Frills, FreshCo Although overall cost leadership, still needs to pay attention to updating and enlarging stores, extended operating hours, improving shoppers convenience and experimenting with new ideas
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Firm following a focus strategy must direct attention toward narrow product lines, buyer segments, or targeted areas o Must still attain advantages either through differentiation or through cost leadership o But targeted at a narrow market as opposed to industry wide
Overall Cost Leadership •
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Requires tight set of interrelated efforts that include: o Aggressive construction of efficient –scale facilities o Vigorous pursuit of cost reductions from experience o Tight cost and overhead control o Avoidance of marginal customer accounts o Cost minimization in all activities in the firm’s value chain R&D, service, sales, advertising Can use value to chain to see how firm can attain cost leadership See relative costs of competitors so you can see where you can get an advantage Two important concepts o Economies of scale decline in per unit costs that usually come with larger production runs, bigger facilities and allocating fixed costs across more units produced o Experience curve how a business learns to lower costs as it gains experience wit production processes With experience, unit costs of production decline as output increases o Like IKEA does low costs No frills product to broad target market using standardization to derive greatest benefits from economies of scale and experience o But must attain parity on important dimensions of differentiation at same time Quick response to consumer requests
Strategy Spotlight The Experience Curve (more human learning, less machines) • • • • • • • • •
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Names by Boston Consulting Group Way of looking at efficiencies developed through a firm’s cumulative experience In basic forms experience curve relates production costs to production output As cumulative output doubles, costs decline by 1030% o If cost $10 per unit to produce first 100 units, it would be 9 and 7 in production for the next 100 Due to people learning how to be more efficient Each time output doubles, firm can expect perunit costs to decline But as output increases, becomes harder to double it so need new product modifications and changes in manufacturing High tech products best gains in production efficiencies o Value engineering which drives down cost of production A product’s sensitivity to price strongly affects a firm’s ability to exploit the experience curve o Cutting price of product with high demand elasticity (where demand increase a lot with modest price drop) creates many new customer purchases of product o So can increase demand and increases firm’s experience Toyota and Nissan used lessons of experience curve in early entry into NA o Aggressively priced cars with eye on cost structures Questions to ask page 127
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Need to know what specifically causes the decline in costs o If cost drops from economies of scale or efficient production, the experience curve is not useful o Can help managers analyze costs when efficient learning, rather than efficient machinery is the source of the cost savings
Overall Cost Leadership: Improving Competitive Position visavia the Five Forces • Overall low cost allows firm to achieve above average returns despite strong competition o Protects firms against rivalry from competitors b/c still earns returns even if competitors eroding profits o Also protects them from powerful buyers Buyers can only force down prices to the level of the next most efficient producer o Provides more flexibility to cope wit demands from powerful suppliers for input cost increases o Provide entry barriers from economies of scale and cost advantages o Puts the firm in a favourable position with respect to substitute products o IKEA’s close attention to costs helps protect the firm against powerful buyers and rivalry from competitors o So can drive down unit costs and enjoy strong power over suppliers RONA paired with ITM (one of world’s largest distributors) to give it more purchasing power Potential Pitfalls of Overall Cost Leadership Strategies •
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Too much focus on one or a few valuechain activities o Need to pay attention to all activities in the supply chain and to manage overall costs o Explore all value chain activities – and relationships among them as possibilities to cost reduction Don’t just want to cut one area and leave other untouched Vulnerability to raw material costs o Vulnerable to price increases in the factors of production o Less able to pass on price increase b/c the customers they target are price sensitive Discount Airline files for bankruptcy b/c of increasing fuel costs A strategy that is imitated too easily o A firms strategy may consist of value creating activities that are easy to imitate Like online brokers – over 100 firms copied this and most had to shut down after incurring substantial loses A lack of parity on differentiation o Need some level o Need instruction that is comparable with traditional providers o Can be achieved on reputation, quality, signaling mechanisms such as recognition Erosion of cost advantages when the pricing info available to customers increases o Internet challenging competitors to lower prices to remain competitive o 10% increase in consumer use of the internet, corresponding reduction in life insurance prices to consumers of 35%
Strategy Spotlight IKEA • •
Began as one person mail order company in small farming village Everything they do to do with cutting costs, reducing waste, and achieving cost leadership strategy
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Chose to come to Canada before US lower costs (5 years then US – honed skills) Have parity on differentiation o Selfservice model o Designs own low cost, modular, ready to assemble furniture No third party manufacturer Good quality and low price Prices 3050% lower than competition but not cheap Capitalize on experience curve effects
Strategy Spotlight ING Direct • • • • • •
Fast food chain of the financial services industry is perfect example of low cost strategy Attracts people who want higher interest rates on savings and need little hand holding Can offer higher rates b/c 75% of its transactions occur online so avoids other costs Typically fires about 0.2% of its clients each year = saves 1 million o If customers want too much attention cut them Costs lower than 1/3rd of industry average Business not based on relationships o Keeps expenses down b/c high volume, low margin
Differentiation • •
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Consists of creating differences in the firm’s products or service by creating something that is perceived industry wide as unique and values by customers Can take many forms: o Prestige or brand image (BMA, Roots, Holt Renfrew) o Quality (Lexus, PC) o Technology o Innovation (3M, Cirque du Soleil) o Features o Customer service o Dealer network (Canadian Tire) Exhibit 5.4 page 131 value chain activities to differentiate More than being different o Can come from anywhere in value chain o Can differentiate themselves along several different dimensions at once Achieve and sustain differentiation when their price premiums exceed extra costs incurred for being unique o BMW charges higher prices for reputation o Use differences to justify price o But need level of cost parity relative to competitors o Reduce costs in all areas that don’t affect differentiation
Strategy Spotlight Lexus • •
Division of Toyota Famous for extra care given to customers that differentiated them not the cars themselves
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o Perceptions of product quality can be strongly influenced by downstream activities in the value chain (service) Lexus known strong relationships among value activities reinforce and strengthen the customer’s total perception of vale Keeps close ties with dealers and provides them with resources Have great marketing, services and high quality cars
Spotlight VoodooPC: Canadian Differentiation strategy • • • • • • •
High end of the market High performance and stylish personal computer entertainment systems Each one custom made for consumer Call customers and confirm what they want 40005000 dollars Higher profit margin than other companies And focus on high quality service too
Differentiation: Improving Competitive Position vis a vis the 5 forces • • • • • •
Protects again competition o Consumers more loyal and less sensitive to price and raises consumer switching costs Avoids having to have low cost production Reduces buyers power o Lack comparable alternatives Higher entry barriers o Customer loyalty and uniqueness Higher margins that enable firm to deal with supplier power o No prestige with being supplier to a producer of amazing product o And they want to be associated with these brands so wont drive prices up Higher customer loyalty, less threat of imitators
Potential Pitfalls of Differentiation Strategies • • • • •
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Uniqueness that is not valuable o Customers need to value highly Too much differentiation o Can’t get too crazy and aim too high (car with way too many features) o Leaves them vulnerable to competitors who provide an acceptable level of quality at lower price Too high a price premium o Batteries suffered b/c of this Differentiation that is easily imitated o Like frequent flyer program o China copying products Dilution of brand identification through productline extensions o Erode quality of brand image by adding products or services with lower prices and quality o Can increase short term revenue but hurt long term o Gucci overstretched itself and tarnished prestigious image Perceptions of differentiation that vary b/w buyers and sellers
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o Company may see products as differentiated but consumers may see them as commodities o Stay in touch with reality Differentiation becoming harder now as more industries get saturated
Strategy Spotlight Crocs • Stock so high in beginning • Then knock offs from China came for a fraction of price • Now stock at $1 couldn’t trademark design (Clogs have always been around) Focus • • • • •
Based on the choice of a narrow competitive scope within an industry Selects segment or group of segments and tailors its strategy to serve them Achieve CA by dedicating itself to these segments exclusively Alone not enough for above average performance Two variants: Cost focus and Differentiation focus
Cost Focus • •
Strive to create cost advantage in its target market and serve with a lower price than rivals who either target whole industry or are unable to match low costs Takes advantages of lower costs from not going after whole market segment o Like Staples targeting Small businesses and homeoffice clients by increasing private label items it carries (jumbo sized packs and cuts prices)
Differentiation Focus • •
Differentiate in narrow segment Aims to provide better service, prestige, image or quality to a well defined narrow market o Keg stayed simple with same menu and young families and business people
Focus Improving Competitive Position vis a vis the Five Forces • • • •
Requires firm to have a low cost position with strategic target, a high differentiation or both Want niches least vulnerable to substitutes or where competition is weakest o Keg aims at less price sensitive people Image and quality make stronger barriers to entry And protection against substitutes good reputation
Potential Pitfalls of Focus Strategies • •
Erosion of cost advantages within the narrow segment o Competitors may erode cost advantages Dell Possible competition from new entrants and from imitation o Rivals may invade their niche o Entry barriers are low, little buyer loyalty and competition becomes intense o Revenues fall, profit margins squeezed and only strongest survive
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Too much focus on satisfying needs o May have product or service that is too narrow Specialty stores falling as large, national stores stock their products
Combination Strategies: Integrating overall Low Cost and Differentiation • • •
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Can be strategic benefits to combining generic strategies Study found those combining strategies (low cost and differentiation) were outperforming business using only one o Lowest were those who didn’t identify even one strategy “stuck in middle” Harder for competitors to duplicate or imitate o Provides two types of value to consumers Differentiated attributes and lower prices o Some can do this simultaneously o Better quality can lead to lower costs b/c need for less rework Three approaches to this:
Automated and Flexible Manufacturing Systems •
Advances in manufacturing and IT companies can manufacture unique products in relatively small quantities at lower costs – “Mass Customization” o Anderson Windows demand grew too much (errors is system) o Developed computerized version, error free o Time cut by 75% o So lowered costs, enhanced quality and variety
Exploiting the Profit Pool Concept for Competitive Advantage • •
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Profit pool – total profits in an industry at all points along the industry’s value chain Structure of it can be complex o Pool will be deeper in some segments o Profitability may vary by customer group, product category, geographic market or distribution channel o Profit concentration could be different to revenue generation Automobile industry o Little relationship b/w generation of revenues and capturing profits o Manufacturing generates most profit but this activity is far smaller, profit wise than other activities such as financing o Much profit in the downstream activities o Can’t focus solely on manufacturing
Coordinating the “Extended” Value Chain by Way of IT • •
Integrate activities through extended value chain and using IT to link their own value chain with the value chain of customers and suppliers Helps firm add value through its own value creating activities and the pass this value on to customer and suppliers o Often necessitates redefining the industry’s value chain o WalMart did this to change the competitive challenge
Looked to save money in logistics and communications rather than merchandising and promotions
Strategy Spotlight WalMart • • • •
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Combined competitive advantages Broadened product line Most of success due to strategic focus, emphasis on key valuechain activities and combo of competitive advantages Differentiated itself from competition o Optical shops and photo finishing services, fast food o Uses crossdocking (logistics technique) Don’t place goods in inventory – moves from one dock to another in 48h o Use sophisticated software to max speed and to manage inventory and distribution o This reduces costs by 20% These lower costs turn into lower prices for customers Stable prices = predictable sales o Reduces stock out and excess inventory Can take on more staff Cross docking not easily copied by competitors o Helps Walmarts flexibility and shortens procurement times Integrates interdependent activities o Makes imitator products a less viable threat
Integrated Overall Low cost and differentiation strategies: Improving CA through 5 Forces • • • • •
Integrating both creates envious position o Through integrating info systems lower costs and provide vast product selection This creates high entry barriers Creates bargaining power over suppliers Reduces power of buyers b/c relatively few competitors can offer same low prices So reduces headtohead rivalry
Pitfalls of Integrates Cost Leadership and Differentiation •
Failing to attain both strategies and ending up “stuck in middle” o Try to achieve cost control and differentiation in a competitive market can be bad o Eaton’s old department store, couldn’t fend off WalMart and people
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Underestimating the challenges and expenses associated with coordinating valuecreating activities in the extended value chain o Integrating activities across firm’s value chain of suppliers and customers involves significant investment in finance and HR o IT investment is super expensive o Must be confident they can generate a sufficient scale of operations and revenues to justify all the expenses
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Miscalculating sources of revenue and profit pools in the firm’s industry
o Bias of manager can lead to overestimating/under revenues in certain areas o Allocating fixed costs, transfer pricing mechanisms or even politics may yield an inaccurate picture of costs and revenues o Again cant focus too much on one area in the value chain and ignore another less important one Criticisms of Generic Strategies Model • • •
Focuses too much on economic analysis and not enough of social, political and cognitive aspect Strategic choices are short list – discourages unique list Model lacks dynamism o Emphasizes stability – doesn’t analyze how one gets to attractive position, just how to hold it
Evaluating Business Strategy • •
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Use various analytical tools described in last 3 chapters to see which strategy is right for you or if its working Evaluating strategy not same as evaluating firm’s performance o Latter is expost assessment, outcome of following actions o Composite measure to see if strategy was effective and if it was executed well and to see if industry did well Evaluating strategy ought to be an exant prerequisite before strategy put into action, resources are allocated and commitments are made o Compare strategy and determine best option given firm’s resources o But hard to see which one is best Examination is mostly qualitative – 4 things Consistency o Whether the strategy is in alignment with the company’s goals and objectives o Whether it introduces contradictions among goals o Will it be pulling company into competing dimensions o Need components to be well aligned with company vision and mission o Everyone knows direction and desirable outcomes o Happens when all components mutually underpin and do not determine each other Consonance o Fit b/w strategy and external environment o Trends, stakeholder’s wants o Responding to and incorporating outside o Address threats/ opportunities Advantage o CA of the strategy and if they are enduring and hard to copy o Elements of superiority to competitors o Serve markets better o Want to erect entry barriers o Innovative Feasibility o Capacity of the firm to achieve what it is embarking on o Is it realistic?
o Does company have necessary resources? o Don’t want to spread company too thin
