Transcript Class Note for Chapters 5 and 6

Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 5 – Business-Level Strategy
Business-Level Strategy
 Key Terms
Strategy – integrated
and coordinated set of commitments
–
and actions the firm uses to gain a
competitive advantage by exploiting
core competencies in specific product
markets
 Business-Level
Types of Business-Level Strategy
Features of the Five Business-Level Strategies
 Generic, can be used across industries
 Two distinct types of competitive
advantage:
Low Cost
 Differentiation

 Choice of scope:
 Broad
 Narrow (niche)
Cost Leadership Strategy
 Key Terms
Leadership Strategy – integrated
set of actions designed to produce or
deliver goods or services with
features that are acceptable to
customers at the lowest cost, relative
to competitors
 Cost
Cost Leadership Strategy –
Implementation
 No-frill, standardized goods
 Continuously reduce costs of
value chain activities
Value-Creating Activities Associated
with Cost Leadership Strategy
Cost Leadership Strategy and the Five
Forces of Competition
 Low-cost position is a valuable defense against rivals
 Powerful customers can demand reduced prices
 Costs leaders are in a position to absorb supplier
price increases and relationship demands, and to
force suppliers to hold down their prices
 Continuously improving levels of efficiency and cost
reduction can be difficult to replicate and serve as
significant entry barriers to potential competitors
 Cost leaders hold an attractive position in terms of
product substitutes, with the flexibility to lower prices
to retain customers
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.
Strategy and Organizational Structure
 Specialization
 Centralization
 Formalization
Cost Leadership Strategy and Structure
Simple reporting relationships
 Few decision-making and authority layers
 Centralized corporate staff
 Strong operational focus on process
improvements
 Low-cost culture
 Centralized staff decision-making authority
 Jobs specialization
 Highly formalized rules and procedures

Risks of Cost Leadership Strategy
 Processes
can become obsolete
 Focus
on cost reductions can come at
the expense of understanding
customer perceptions and needs
 Strategy
could be imitated, requiring
the firm to increase the value offered
to retain customers
Differentiation Strategy
 Key Terms
Strategy – integrated
set of actions designed by a firm to
produce or deliver goods or services
at an acceptable cost that customers
perceive as being different in ways
that are important to them
 Differentiation
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
differentiation
PERCEIVED VALUE
versus
INCREMENTAL COSTS
Differentiation Strategy –
Implementation
 Target customers – perceived
product value
 Customized products –
differentiating on as many
features as possible
Differentiation Strategy –
Implementation (cont.)
 Unusual features
 Responsive
customer service
 Rapid product
innovations
 Technological
leadership
 Perceived prestige
and status
 Different tastes
 Engineering design
 Performance
Differentiation (cont.)
 What firms pursue differentiation?
 How or on what basis do they achieve differentiation?
Value-Creating Activities Associated
with the Differentiation Strategy
Differentiation (cont.)
 Signalling important when:
 nature of differentiation difficult to quantify
 first-time purchase –
 re-purchase infrequent
 buyers unsophisticated
Differentiation Strategy and Structure
 Complex and flexible reporting
relationships
 Cross-functional product development
teams
 Strong focus on marketing and product
R&D
 Development-oriented culture
 Decentralized decision making
 Broad job descriptions
 Informal rules and procedures
Risks of Differentiation Strategy







quick imitation
no value in uniqueness
over differentiation
 cell phones
premium price or costs are costs too high
poorly understood/changing customer needs
 Minivan, FAO Schwartz
costs/price become more important than
uniqueness
unwillingness to offer true differentiation
Differentiation Strategy and the Five
Forces of Competition
 Customer loyalty provides the most valuable
defense against rivals
 Uniqueness products reduce customer
sensitivity to raised prices
 High margins (for differentiated products)
insulate from supplier influence
 Customer loyalty and product uniqueness serve
as significant entry barriers
 Firms with customers loyal to their products are
positioned effectively against product substitutes
How can Differentiation protect against…?
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.
Problems with P&G’s Differentiation Strategy
How has P&G responded?
Introduction of new, higher margined products
like battery powered toothbrush and white
strips
Introduction of “Rejuvenating Effects,” a
toothpaste for women marketed as a beauty
product
Using Emeril Lagasse to hawk their citrus,
cinnamon, and herbal mint toothpastes
Focus Strategy
 Key Terms
Strategy – integrated set of
actions designed to produce or
deliver goods or services to a narrow
target consumer based on specific
differences in the market
 Focus
Focus Strategy – Market Segments
 Buyer group
 Product line segment
 Geographic market
Focus Strategy – Reasons
 Large firms may overlook small niches
 Firms may lack resources to compete in
the broader market
 Firms may be able to serve a narrow
market segment more effectively than
larger, industry-wide competitors
 Firms may direct resources to certain
value chain activities to build competitive
advantage
Focus Strategy – Types
 Focused cost leadership strategy
 Focused differentiation strategy
Risks of Differentiation Strategy
 A competitor may be able to focus on a more
narrowly defined competitive segment and
"outfocus” the focuser
 A company competing on an industry-wide
basis may decide that the market segment
served by the focus strategy firm is attractive
and worthy of competitive pursuit
 The needs of customers within a narrow
competitive segment may become more
similar to those of industry-wide customers as
a whole
Integrated Cost
Leadership/Differentiation Strategy
 Key Terms
 Integrated
Cost Leadership/
Differentiation Strategy – integrated
set of actions designed by a firm to
produce or deliver goods or services
at an acceptable cost that customers
perceive as being different in ways
that are important to them
Integrated Strategy – Advantages
 Improved speed of adapting to
environmental changes
 Improved speed of learning new skills
and technologies
 Improved leverage of core
competencies while competing against
rivals
Integrated Strategy – Implementation
Benefits
 Evidence suggests a relationship between
use of an integrated strategy and achieving
above-average returns
 Businesses that combine multiple forms of
competitive advantage in low-profit-potential
industries are shown to outperform
businesses that compete with a single form
Value-Creating Activities Associated
with the Integrated Strategy
 Integrating cost leadership and
differentiation strategies (which
emphasize different primary and
support activities) requires a balance
when selecting the activities to perform
 A flexible organizational structure is
required
Integrated Strategy and the Flexible
Structure
 Commitment to strategic flexibility
 Flexible decision-making patterns, with partial
centralization
 Less specialized jobs than in a traditional
functional structure—workers are more
sensitive to balancing cost and differentiation
 Modular structures to produce modular goods
create differentiation and simultaneously hold
down costs
Risks of Integrated Strategy
 Failure to establish a leadership position
can result in a firm being "stuck in the
middle," unable to create value, and
unable to earn above-average returns
Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 6 – Competitive Rivalry and
Competitive Dynamics
Model of Competitive Rivalry
 Over time firms take competitive actions/reactions
 Pattern shows firms are mutually interdependent
 Firm level rivalry is usually dynamic and complex
 Strategic and tactical action does not occur within
a vacuum

Strategic actions/responses: market-based moves that
signify a significant commitment of resources


Difficult to implement and reverse
Tactical actions/responses: market-based moves that
involve fewer resources to fine-tune a strategy that is
already in place

Easy to implement and reverse
38
Prisoner’s Dilemma
Silent
S = 6 months
S = 6 months
S = 10 years
T = 0 years
Testify
S = 10 years
T = 0 years
T = 5 years
T = 5 years
Silent
Testify
39
Competitive Rivalry
 Key Terms
Competitors – firms operating in the same
market, offering similar products and targeting
similar customers
 Competitive Rivalry – ongoing set of competitive
actions and competitive responses occurring
between competitors as they contend with each
other for an advantageous market position
 Competitive Behavior – set of competitive
actions and competitive responses the firm
takes to build or defend its competitive
advantages and to improve its market position

Competitive Rivalry
 Key Terms
 Competitive Dynamics – total set of actions and
responses of all firms competing within a market
 Multimarket Competition – firms competing
against one another in several product or
geographic markets
From Competitors to Competitive Dynamics
Model of
Competitive
Rivalry
Intensity of Rivalry
 The total number of competitors
 Market characteristics
 Quality of individual firms' strategies
 Drivers of competitive behavior
Competitor Determinants
 Market Commonality
 Resource Similarity
Market Commonality
 Key Terms
Commonality – number of
markets with which the firm and a
competitor are jointly involved, and
degree of importance of the individual
markets to each firm
 Market
Resource Similarity
 Key Terms

Resource Similarity – extent to which the
firm's tangible and intangible resources
are comparable to competitors' resources
in terms of both type and amount
Framework of Competitive Analysis
Drivers of Competitive Actions and Responses
 Awareness
 Motivation
 Ability
 Resource Similarity
Likelihood of Attack
 First mover incentives
 Organizational size
 Quality
Timing of Competitive Behavior
 Key Terms



First Mover – firm that takes an initial competitive
action to build or to defend its competitive
advantages or to improve its market position
Second Mover – firm that responds to first mover's
competitive action, typically through imitation
Late Mover – firm that responds to competitive
action, but only after time has elapsed since first
mover's action and second mover's response
Timing of Competitive Behavior
 Key Terms

Slack – buffer or cushion provided by
actual or obtainable resources not
currently used by an organization,
resources in excess of the minimum
those needed to produce a given
level of output
First Mover – Characteristics
 Often builds upon a strategic foundation of
superior research and development skills
 Tends to be aggressive and willing to
experiment with innovation
 Tends to take higher, yet reasonable, risks
 Needs to have liquid resources (slack) that
can be quickly allocated to support actions
First Mover – Benefits
 Above-average returns
 Customer loyalty
 An early hold on market share
First Mover – Risks
 Difficulty in accurately estimating
potential returns
 Substantial costs of product innovation,
which reduce slack available for other
opportunities
 Lower likelihood of introducing (or
converting to) the product that becomes
the industry standard as the market
evolves
Second Mover – Characteristics




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Responds to first mover, typically through imitation
Is more cautious than first movers
Tends to study customer reactions to product
innovations
Tends to learn from the mistakes of first movers,
reducing its risks
Takes advantage of time to develop processes and
technologies that are more efficient than first
movers, reducing its costs
Will not benefit from first mover advantages,
lowering potential returns
Late Mover – Characteristics
 Responds to market opportunities only
after considerable time has elapsed
since first and second movers have
taken action
 Has substantially reduced risks and
returns
Organizational Size
 Small firms

Act as nimble and flexible competitors

Rely on speed and surprise to defend
their competitive advantage

Have greater variety of competitive
behavior options available
Organizational Size
 Large firms

Often have greater slack

Have greater likelihood to initiate
competitive and strategic actions over
time

Tend to rely on a limited variety of
competitive actions, which can
ultimately reduce their competitive
success
Quality
 Key Terms

Quality – customer perception that
the firm's goods or services perform
in ways that are important to
customers, meeting or exceeding
their expectations
Quality
Likelihood of Response
 Types and effectiveness of the
competitive action
 Reputation of the firm that takes
competitive actions
 Dependence on the market
 If the action significantly
strengthens or weakens the firm's
competitive position
Actor’s Reputation
 Key Terms

Actor – firm taking an action or response
(in the context of competitive rivalry)

Reputation – positive or negative
attribute ascribed by one rival to another
based on past competitive behavior
Dependence on the Market
 Key Terms
Dependence – extent to
which a firm's revenues or profits
are derived from a particular
market
 Market
Competitive Dynamics
– Three Market Types
 Slow-cycle markets
 Fast-cycle markets
 Standard-cycle markets
Slow-Cycle Markets
 Key Terms
Markets – markets in
which the firm's competitive
advantages are shielded from
imitation for long periods of time,
and in which imitation is costly
 Slow-Cycle
Slow-Cycle Markets
 Build a one-of-a-kind competitive
advantage that is proprietary and difficult
for competitors to understand (creating
sustainability)
 Once a proprietary advantage is
developed, competitive behavior should
be oriented to protecting, maintaining, and
extending that advantage
 Organizational structure should be used
to effectively support strategic efforts
Slow-Cycle Markets
Fast-Cycle Markets
 Key Terms
Markets – markets in
which the firm's capabilities that
contribute to competitive advantages
are not shielded from imitation and
where imitation is often rapid and
inexpensive
 Fast-Cycle
Fast-Cycle Markets
 Focus on learning how to rapidly and
continuously develop new competitive
advantages that are superior to those
they replace (creating innovation)
 Avoid loyalty to any of their products,
possibly cannibalizing their own current
products to launch new ones before
competitors learn how to do so through
successful imitation
 Continually try to move on to another
temporary competitive advantage before
competitors can respond to the first one
Fast-Cycle Markets
Standard-Cycle Markets
 Key Terms
Markets – markets
in which the firm's competitive
advantages are moderately
shielded from imitation and where
imitation is moderately costly
 Standard-Cycle
Standard-Cycle Markets
 Have competitive advantages that can be
partially sustained when their quality is
continuously upgraded
 Seek to serve many customers and gain
a large market share
 Gain brand loyalty through brand names
 Carefully control operations to manage a
consistent experience for the customer