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Chapter 5

Chapter 5. Building Competitive Advantage Through Business-Level Strategy. Business Level Strategy. How are we going to compete in our industry/segment? Improving the firm’s competitive position Competitive advantages are the single most dependable contributor to above-average profitability.

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Chapter 5

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  1. Chapter 5 Building Competitive Advantage Through Business-Level Strategy

  2. Business Level Strategy How are we going to compete in our industry/segment? Improving the firm’s competitive position Competitive advantages are the single most dependable contributor to above-average profitability

  3. Porter’s Generic Strategies • Two fundamental issues • Competitive advantage - low cost vs. differentiation • Strategic Target - broad based vs. segment • Pursuit of the generic strategies provides protection from each of the five forces

  4. Porter’s Generic Strategies Low Cost Competitive Advantage Differentiation

  5. Porter’s Generic Strategies Broad Segment/Focus Strategic Target

  6. Porter’s Generic Strategies Low Cost Competitive Advantage Differentiation Broad Segment/Focus Strategic Target

  7. 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

  8. Differentiation (cont.) • What firms pursue differentiation? • How or on what basis do they achieve differentiation?

  9. Differentiation (cont.) • Signalling important when: • nature of differentiation difficult to quantify • first-time purchase - re-purchase infrequent • buyers unsophisticated

  10. Differentiation (cont.) • Risky when: • no value in uniqueness - over differentiation • cell phones • premium price too high • quick imitation • poorly understood/changing customer needs • Minivan, FAO Schwartz • Costs/price become more important than uniqueness

  11. Problems with P&G’s Differentiation Strategy

  12. 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

  13. How can Differentiation protect against…? Starbuck’s $1.80 New Entrants Price Profit Costs

  14. How can Differentiation protect against…? Starbuck’s $1.80 New Entrants Joe’s Coffee Assume Equal Costs

  15. Starbuck’s $1.80 Joe’s Coffee 99 cents How can Differentiation protect against…? New Entrants

  16. How can Differentiation protect against…? Starbuck’s $1.80 New Entrants Joe’s Coffee 99 cents Extra Profits

  17. Starbuck’s $1.80 Joe’s Coffee 99 cents How can Differentiation protect against…? Rivals

  18. How can Differentiation protect against…? Starbuck’s $1.80 Joe’s Coffee 99 cents Advertising & Promotions drive costs UP

  19. How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents Discounts and sales drive prices DOWN

  20. How can Differentiation protect against…? Starbuck’s $1.80 Substitutes

  21. How can Differentiation protect against…? Starbuck’s $1.80 There is no substitute for the truly differentiated product

  22. How can Differentiation protect against…? Power of Buyers - How do powerful buyer’s leverage their power? Lower Prices, Higher Quality

  23. Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents How can Differentiation protect against…? Lower Prices Raise Quality

  24. How can Differentiation protect against…? Power of Suppliers - How do powerful suppliers leverage their power? Drive up costs

  25. Starbuck’s $1.70 Joe’s Coffee 89 cents How can Differentiation protect against…? Raise Costs

  26. 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.

  27. Low Cost Leadership Design, produce, and market a comparable product at a lower cost Effective utilization of value-chain • capital intensive mfg processes - efficient scale • process, not product engineering - cost reductions • products designed for simple assembly and sharing common components • procurement and materials handling • low cost distribution Requires organizational culture to support • close supervision, cost controls

  28. Low Cost Leadership (cont.) Attractive when price is dominant consideration • commodity • low switching costs • powerful buyers

  29. Low Cost Leadership (cont.) What firms pursue a low cost strategy? How do they drive their costs down Risky when: • technology breakthroughs frequent • easy to imitate • costs advantages erode more quickly than differentiation • causes near-sightedness on a few activities/sunk costs

  30. How can Low Costs provide protection from…. New Entrants Rubbermaid Tub $1.99 Wal-Mart Joe’s

  31. How can Low Costs provide protection from…. Rubbermaid Tub $1.99 Higher costs Wal-Mart Joe’s

  32. How can Low Costs provide protection from…. Rivalry Rubbermaid Tub $1.99 Wal-Mart Joe’s

  33. How can Low Costs provide protection from…. Rubbermaid Tub $1.89 …can push prices down…. Wal-Mart Joe’s

  34. How can Low Costs provide protection from…. Rubbermaid Tub $1.99 … or push costs up Wal-Mart Joe’s

  35. How can Low Costs provide protection from…. Rubbermaid Tub $1.99 Substitutes Wal-Mart Joes

  36. How can Low Costs provide protection from…. Rubbermaid Tub $1.89 …can push prices down…. Wal-Mart Joe’s

  37. How can Low Costs provide protection from…. Rubbermaid Tub $1.99 … or push costs up Wal-Mart Joe’s

  38. How can Low Costs provide protection from…. Power of Buyers Rubbermaid Tub $1.99 Wal-Mart Joe’s

  39. How can Low Costs provide protection from…. Rubbermaid Tub $1.89 …can push prices down…. Wal-Mart Joe’s

  40. How can Low Costs provide protection from…. Power of Suppliers Rubbermaid Tub $1.99 Wal-Mart Joe’s

  41. How can Low Costs provide protection from…. Rubbermaid Tub $1.99 … can push costs up Wal-Mart Joe’s

  42. 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.

  43. Focus • Emphasizing a market niche where customers have unique preferences or requirements. Either focus-low cost or focus-differentiation • Profitable when • niche is large, growing • niche is not crucial to broad-based competitors • firm is able to defend position

  44. Focus (cont.) • What firms pursue a focus strategy? • What is their niche? • Risky when: • competitor “outfocuses the focuser” • broad based competitors have deep pockets • homogenization of customer needs • economies of scope becomes a dominant KSF

  45. Integrated Low Cost-Differentiation • Combines both generic strategies • Difficult to implement

  46. Stuck in the Middle • Firm’s offering are too costly to compete with low costs provider’s product, and too undifferentiated to command the price premium gained by the differentiated firm

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