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1. Chapter Five Crafting Business Strategy
2. OBJECTIVES 1 Define generic strategies and show how they relate to a firm’s strategic position 2 Describe the drivers of low-cost, differentiation, and focus strategic positions 3 Identify and explain the risks associated with each generic strategy position 4 Show how different positions fit with various stages of the industry life cycle 5 Evaluate the quality of the firm’s strategy
3. THE RACE TO THE FUTURE IS ON Companies can be classified as: Drivers Passengers Road Kill Which will get to the future first?
4. STRATEGIC POSITIONING SHOULD IMPROVE PROFITABILITY Definition Where managers of a company situate that company relative to it’s rivals along important competitive dimensions Purpose To reduce the effects of rivalry and thereby improve profitability
5. A FIRM CAN GAIN ADVANTAGE OVER RIVALS IN TWO WAYS Description No advantage overrivals Advantage over rivals Produce a differentiated product and charge suffici-ently higher prices to more than off-set the added costs of differentiation Differentiation Produce an essentially equivalent product at a lower cost Low-cost
6. THE STRATEGIC POSITIONING MODEL Broad(i.e., industry wide) Broad low-costleadership Broaddifferentiation Strategictarget Narrow(i.e., particular segment only) Focused costleadership Focuseddifferentiation Low-cost Differentiation Strategic advantage Adapted from Porter, M.1980. Competitive strategy, 1980.
7. Low-cost leadership Differentiation Capture market share by offering lower-price or Earn higher by maintaining price parity Capture market share by offering higher quality at same price or Earn higher margins by raising prices over competitors Benefits Pacific Cycle Gallo Wines Wal-Mart Southwest Airlines Home Depot Trek Bicycles Coca-Cola and Pepsi Mercedez Benz Honda, Yamaha, and Suzuki motorcycles Stouffers (frozen foods) Examples LOW-COST LEADERSHIP AND DIFFERENTIATION OFFER GREATER MARKET SHARE AND/OR PROFITS
8. STRATEGIC POSITIONING EXAMPLES Wal-Mart Gallo Wines Trek Bicycles Coca-cola Broad Strategictarget Montague Mercedes Benz (in US) Narrow Jet Blue Low-cost Differentiation Strategic advantage
9. KEY DRIVERS OF COST ADVANTAGE Economies of scale Learning Product technology Product design Location advantages for sourcing inputs
10. ECONOMIES OF SCALE Economiesof scale Economies of scale exist during a period of time if the average total cost for a unit of production is lower at higher levels of output You must review cost to assess whether economies of scale exist: Fixed costs remain the same for different levels of production Variable costs are the costs of variable inputs (such as raw materials and labor) and vary directly with output Marginal cost is the cost of the last unit of production Total cost is the sum of all production costs and always increases as output goes up Average cost is the mean cost of total production during a given period (say, a year) Learning Economiesof scope Productiontechnology Productdesign Location
11. Some sourcesof economies Some sourcesof diseconomies R&D spend Advertising spend Specialization of specific production processes Superior inventory management Purchasing power Bureaucracy High labor costs Inefficient operations DISECONOMIES OF SCALE – SIZE DOES NOT ENSURE ECONOMIES OF SCALE Economiesof scale Learning Economiesof scope Productiontechnology Productdesign Location
12. Costs decrease … Economiesof scale as the scale of operation increases during any given period of time Learning curve with the cumulative level of production since the production of the first unit LEARNING CURVE AS A SOURCE OF COST ADVANTAGE Economiesof scale How Learning Differs from Scale Learning Economiesof scope Productiontechnology Productdesign Location
13. ECONOMIES OF SCOPE AS A SOURCE OF COST ADVANTAGE Economiesof scale If a firm produces two or more products and can share resources among two or more of these (e.g., share manufacturing machines) – thereby lowering the costs of each product – it benefits from economies of scope Learning Economiesof scope Productiontechnology Productdesign Location
14. PRODUCTION TECHNOLOGY AS A SOURCE OF COST ADVANTAGE Economiesof scale Often, a new entrant who wants to compete against industry incumbents with significant scale and experience advantages, tries to match or beat incumbents’ costs by introducing a production technology that is subject to different economics (e.g., Jet Blue, Nucor Steel) Learning Economiesof scope Productiontechnology Productdesign Location
15. PRODUCTION DESIGN AS A SOURCE OF COST ADVANTAGE Economiesof scale Learning Product design can sometimes be altered to lower a firm’s production costs (e.g., Canon vs. Xerox) Economiesof scope Productiontechnology Productdesign Location
16. LOCATION AS A SOURCE OF COST ADVANTAGE Economiesof scale Sometimes firms try to attain lower production costs by locating their operations in cheaper labor markets (e.g., Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek who manufactures in the US) Learning Economiesof scope Productiontechnology Productdesign Location
17. To drive up customer’s willingness to pay and generate demand sufficient to Premium brand image Customization Unique styling Speed More convenient access Unusually high-quality Recoup added costs and Generate enough profits to make strategy worthwhile KEY DRIVERS OF DIFFERENTIATION ADVANTAGES Key Drivers Purpose
18. Drivers Threats Economies of scale Learning Economies of scope Superior technology Product design Location New technology Too low-quality Social, political, and economic risks of outsourcing Low-cost Premium brand image Customization Unique styling Speed Convenient access Unusually high-quality Failure to increase buyer’s willingness to pay higher prices Under estimating cost of differentiation Over fulfillment of buyer’s needs Lower cost imitation Differentiation DRIVERS AND THREATS TO DIFFERENTIATION AND LOW-COST ADVANTAGE
19. COUNTERFEITING AS A THREAT TO DIFFERENTIATION $250 billion annually lost to American businesses 750,000 jobs lost annually $600 billion in counterfeited goods
20. STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE Phases of in-dustry life cycle Embryonic Growth Mature Decline
21. TESTING THE QUALITY OF A STRATEGY