Transcript chapter_06. ppt - harbert.auburn.edu

McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 6
Business-Level Strategy
Learning Objectives
After reading this chapter, you should have a good
understanding of:





The central role of competitive advantage in the study of
strategic management.
The three generic strategies: overall cost leadership,
differentiation, and focus.
How the successful attainment of generic strategies can
improve a firm’s relative power vis-à-vis the five forces that
determine an industry’s average profitability.
The pitfalls managers must avoid in striving to attain
generic strategies.
How firms can effectively combine the generic strategies of
overall cost leadership and differentiation.
6-3
Question
Which of the following is not one of the three
generic strategies, according to Michael Porter,
to overcome the five forces and achieve
competitive advantage?
a)
b)
c)
d)
Overall cost leadership
Differentiation
Focus
Integration
6-4
Types of Competitive Advantage
and Sustainability

Three generic strategies
1. Overall cost leadership
 Low-cost-position relative to a firm’s peers
 Manage relationships throughout the entire value chain
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Types of Competitive Advantage
and Sustainability
2. Differentiation
 Create products and/or services that are unique and valued
 Non-price attributes for which customers will pay a
premium
3. Focus strategy
 Narrow product lines, buyer segments, or targeted
geographic markets
 Attain advantages either through differentiation or cost
leadership
6-6
Three Generic Strategies
6-7
Example
1.
Companies pursuing an overall cost
leadership strategy
 McDonalds
 Wal-Mart
2.
Companies pursuing a differentiation strategy
 Harley Davison
 Apple
3.
Companies pursuing a focus strategy
 Rolex
 Lamborghini
6-8
Overall Cost Leadership
 Integrated tactics
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, service, sales force,
and advertising
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Overall Cost Leadership
 Experience Curve
How business “learns” to lower costs as it
gains experience with production
processes
With experience, unit costs of production
decline as output increases in most
industries
6-10
Experience Curve Effects
Exhibit 5.4 Comparing Experience Curve Effects
6-11
Learning Organizations
Defined:
An organization skilled at creating,
acquiring, and transferring
knowledge and at modifying its
behavior to reflect new knowledge
and insights.
6-12
Overall Cost Leadership
 A firm following an overall cost leadership
position:
Must attain competitive parity on the basis of
differentiation relative to competitors
Competitive parity on the basis of differentiation
Permits a cost leader to translate cost advantages directly
into higher profits than competitors
Allows firm to earn above-average profits
6-13
Overall Cost Leadership: Improving
Competitive Position vis-à-vis the Five Forces
 An overall low-cost position
Protects a firm against rivalry from competitors
Protects a firm against powerful buyers
Provides more flexibility to cope with demands from
powerful suppliers for input cost increases
Provides substantial entry barriers from economies of
scale and cost advantages
Puts the firm in a favorable position with respect to
substitute products
6-14
Pitfalls of Overall Cost
Leadership Strategies
 Too much focus on one or a few value-chain
activities
Too often managers make big cuts in operating
expenses, but don’t question year-to-year spending on
capital projects
Should explore all value-chain activities as candidates
for cost reductions
 All rivals share a common input or raw material
Vulnerable to price increases
6-15
Pitfalls of Overall Cost
Leadership Strategies
 Strategy is imitated too easily
 A lack of parity on differentiation
To attain advantage, must obtain level of
differentiation
Can be achieved by reputation, quality,
through signaling mechanisms
 Erosion of cost advantages when the
pricing information available to customers
increases
6-16
Question
Explain how Wal-Mart and McDonald’s follow the
overall cost leadership strategy.
6-17
Differentiation
 Differentiation can take many forms
Prestige or brand image
Technology
Innovation
Features
Customer service
Dealer network
6-18
Differentiation
 Firms may differentiate along several dimensions
at once
 Firms achieve and sustain differentiation and
above-average profits when price premiums
exceed extra costs of being unique
 Requires integration with all parts of a firm’s
value chain
 Important aspect is speed or quick response
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Differentiation: Improving Competitive
Position vis-à-vis the Five Forces
 Differentiation
Avoids need for low-cost position by increasing a
firm’s margins
Creates higher entry barriers due to customer loyalty
and uniqueness in its products or services
Provides higher margins that enable the firm to deal
with supplier power
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Differentiation: Improving Competitive
Position vis-à-vis the Five Forces
 Differentiation
Reduces buyer power because buyers lack suitable
alternative
Reduces supplier power due to prestige associated
with supplying to highly differentiated products
Establishes customer loyalty and hence less threat
from substitutes
6-21
Question
There are potential pitfalls of all strategies. Which
of the following is not a potential pitfall of a
differentiation strategy?
a)
b)
c)
d)
Too high a price premium
Differentiation that is easily irritated
Too little differentiation
Dilution of brand identification through product-line
extensions
6-22
Potential Pitfalls of
Differentiation Strategies
 Uniqueness that is not valuable
Must be unique and possess high customer value
 Too much differentiation
Firms may strive for too much quality
 Too high a price premium
Customers may desire product, but repelled by price
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Potential Pitfalls of
Differentiation Strategies
 Differentiation that is easily imitated
 Dilution of brand identification through productline extensions
Increase short-term revenues, detrimental in long run
 Perceptions of differentiation may vary between
buyers and sellers
“Beauty is in the eye of the beholder”
6-24
Example: Differentiate Or Die
 In one-year period, 1,600 headlines that used the
word "differentiate" or "differentiation."
 In the construction world: "Tile Roofs Add Value,
Differentiate Builders“, "Differentiate to Stand Out
from your Competition"
 In automobiles: "Dodge Nitro SUV: Company
Figures Out How to Differentiate Its Model in a
Crowded Field“
 In Internet businesses: "Differentiation Can Be
Brutal in the Web Search Business"
www.forbes.com/opinions/2007/06/28/trout-marketing-differentiate-oped-cx_jt_0629trout.html
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Focus
 Focus is based on the choice of a
narrow competitive scope within an
industry
Firm selects a segment or group of
segments (niche) and tailors its strategy
to serve them
Firm achieves competitive advantages
by dedicating itself to these segments
exclusively
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Focus
 Two variants
Cost focus
Strives to create a cost advantage in its target segment
Differentiation focus
Seeks differentiate in target market
Both rely on providing better service than broad-based
competitors who are trying to serve the focuser’s target
segment
6-27
Focus: Improving Competitive Position
vis-à-vis the Five Forces
 Focus
Creates barriers of either cost leadership or
differentiation, or both
Used to select niches that are least
vulnerable to substitutes or where
competitors are weakest
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Pitfalls of Focus Strategies
 Erosion of cost advantages within the narrow
segment
 Focused products and services still subject to
competition from new entrants and from
imitation
 Focusers can become too focused to satisfy
buyer needs
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Example: Expensive Golf Gear
 "For as long as golf has been played, golfers
have been trying to buy a better game," says
Steve Pike
 Designer business with highest-end equipment
from manufacturers such as Callaway,
TaylorMade, and Titleist
 Showing up with top-notch gear is like bringing a
platinum-covered bazooka to a knife fight
 Consumers think the higher the price, the better
the equipment
www.forbes.com/sport/2005/08/23/callaway-luxurygolf-lifestyle-cx_ns_0823feat_ls.html
6-30
Question
The goal of a combination strategy is to:
a)
b)
c)
d)
Provide unique value
Duplicate competitors products
Lower costs by using a substitute
Develop a new product line
6-31
Combination Strategies: Integrating
Overall Low Cost and Differentiation
 Primary benefit of successful integration of lowcost and differentiation strategies is difficulty it
poses for competitors to duplicate or imitate
strategy
 Goal of combination strategy is to provide
unique value in an efficient manner
6-32
Combination Strategies: Integrating
Overall Low Cost and Differentiation
 Two types of value to customers
Differentiated attributes
High quality
Brand identification
Reputation
Lower prices
6-33
Three Combination Approaches
 Automated and flexible manufacturing
systems
Firms are able to manufacture unique products,
in small quantities, with lower prices
 Known as “Mass Customization”
 Technology advances in CAD/CAM
6-34
Three Combination Approaches
 Exploiting the profit pool concept for
competitive advantage
Profit pool is the total profits in an industry at all
points along the industry’s value-chain
Structure can be complex
Pattern of profit is different from pattern of revenue
generation
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The U.S. Automobile Industry’s
Profit Pool
6-36
Three Combination Approaches
 Coordinating the “extended” value chain by
way of information technology
Integrate activities throughout the “extended value
chain”
Enables a firm to add value for its own valuecreating activities and its customers and suppliers
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Combination Strategies: Improving
Competitive Position vis-à-vis the Five Forces
 Obtain advantages of competition from both
approaches
High entry barriers
Bargaining power over suppliers
Reduces power of buyers (fewer competitors)
Value position reduces threat from substitute products
Reduces the possibility of head-to-head rivalry
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Pitfalls of Combination Strategies
 Firms that fail to attain both strategies may end
up with neither and become “stuck in the middle”
 Underestimating the challenges and expenses
associated with coordinating value-creating
activities in the extended value chain
 Miscalculating sources of revenue and profit
pools in the firm’s industry
6-39