Business Strategy & Policy PSU MGMT #562

1. Business Strategy & Policy PSU MGMT #562 Dave Garten daveoutside@alum.mit.edu Week # 4 –Biz Strategies

2. Inside Outside 3-5 years out Building a collective view of the future… Yet… What new core competencies do we need to build? What new product concepts should we pioneer? What alliances do we need to form? What l/t regulatory initiatives do we need to form? Source: Derived from Competing for the Future by Gary Hamel and C.K. Prahalad Dave Garten - Business Strategy

3. Differentiation “increase in perceived value relative to the perceived value of other firms” - Barney “If you can’t differentiate yourself in this world, you get commoditized instantaneously. So we are constantly driving for more innovation, more differentiation and more technology.” - Jeffrey R. Immelt, Chairman and CEO, GE Dave Garten - Business Strategy

4. Differentiation • Why differentiate? • Ways to differentiate X Dave Garten - Business Strategy

5. Differential (Segmentation) • Segmentation is basis for differentiation • Determines the value proposition Segment via benefits, demographics and psychographics Dave Garten - Business Strategy

6. The Basis for Segmentation *Size *Technical sophistication *OEM/replacement Industrial buyers Characteristics of the Buyers *Demographics *Lifestyle *Purchase occasion Household buyers *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list Distribution channel Opportunities for Differentiation Geographical location *Physical size *Price level *Product features *Technology design *Inputs used (e.g. raw materials) *Performance characteristics *Pre-sales & post-sales services Characteristics of the Product Source: Jim Goes

7. Differentiation - observations • 5 forces: differentiation lowers threat of rivalry & substitutes (barriers to entry) • VRIO tests differentiation: rare & imitable? • Differentiation narrows with life cycle • Brand can limit differentiation • Patents can enhance differentiation • Organization is a source of differentiation • Creativity, risk-taking, complexity, cross group (link to core competency) Dave Garten - Business Strategy

8. Segmentation - U.S. Bicycle Industry SEGMENT KEY SUCCESS FACTORS Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); * Low-costs through global sourcing of components & low-wage assembly. * Supply contract with major retailer. Leading competitors: Taiwanese & Chinese assemblers, some U.S manufacturers, e.g. Murray Ohio, Huffy Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; *Cost efficiency through large scale operation and either low wages or automated manufacturing. *Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers. * International marketing & distribution. Leading competitors: Raleigh, Giant, Peugeot, Fuji (Japan). High-priced bicycles for enthusiasts. *Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance). *Reputation (e.g. through success in racing, through effective brand management). *Strong dealer relations. Leading competitors: K2, Specialized, Trek Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Similar to low-price bicycle segment. Source: Jim Goes

9. Cost Leadership • Manufacturing businesses • Conventional: High MSS -> High accumulated volume  low unit cost -> high profitability • Experience curve (learning), know-how, IP, specialization, improvements • Service businesses • Know-how; experience curve applies • Diseconomies sometimes • Cost structure • Labor, capital, land, raw materials, geography, use of technology, government policy Source: Derived from Barney, Gaining & Sustaining Competitive Advantage Dave Garten - Business Strategy

10. Drivers of Cost Advantage • Indivisibilities • Specialization and division of labor ECONOMIES OF SCALE • Increased dexterity • Improved coordination/ organization ECONOMIES OF LEARNING • Mechanization and automation • Efficient utilization of materials • Increased precision PRODUCTION TECHNIQUES • Design for automation • Designs to economize on materials PRODUCT DESIGN • Location advantages • Ownership of low-cost inputs • Bargaining power • Supplier cooperation INPUT COSTS CAPACITY UTILIZATION • Ratio of fixed to variable costs • Costs of installing and closing capacity MANAGERIAL/ ORGANIZATIONAL EFFICIENCY • Organizational slack

11. Cost Leadership Observations • 5 Forces: • Entrants often try differentiation to attack • Threat of substitution check & balance • Scale -> more power relative to suppliers/customers • VRIO test rarity & imitability • Social complexity (learning curve), access to low cost factors, “software” • Price-cost decoupling • TTM, penetration and defensive strategies • Pure play cost leadership • Generally not…“Lean and mean” Dave Garten - Business Strategy

12. Airline Cost/Differentiation Dave Garten - Business Strategy

13. Low Cost Entry Source: Strategies to Fight Low Cost Rivals, by Nurmalya Kumar, HBR, 2006 (#R0126F) Dave Garten - Business Strategy

14. R&D Manufacturing Sales & marketing Distribution Service Vertical Integration • Degree of control over the value chain • Forward -> toward customer • Backward -> toward R&D • Driven by relationship, threat of opportunism, specificity, uncertainty Dave Garten - Business Strategy

15. Control (opportunism) Flexibility (uncertainty) Vertical Integration • Plus of vertical integration • Minus of vertical integration Vertical Integration Market Governance Alliances X Dave Garten - Business Strategy

16. Time to Market • Learning curve advantages • First use stickiness • Brand, differentiation, reputation • Creation of “standard,” expectations • Networking effect • Interoperability, Value = f(n**2) • “Arrows in the back” • Incumbent, imitation, mistake • Windows • Always learn and adjust Dave Garten - Business Strategy

17. Mondavi Case • Objective: Evaluation of business strategies used in the wine industry • Learnings: • Industries exhibit different structures across geographies. • Use of different strategies is used within an industry to gain competitive advantage. • Consolidation as a strategy is most often driven by economies of scope/scale, but other considerations become factors. Dave Garten - Business Strategy