Lecture 4 Strategy and Competitive Advantage

1. BA 951 Policy Formulation and Administration Lecture 4Strategy and Competitive Advantage © Ram Mudambi, Temple University, 2007.

2. Learning outcomes • A framework for strategy design at the individual business level • Drawing on the essence of each of the firm’s business functions to highlight strategic aspects • Relating business functions to generic strategy choices © Ram Mudambi, Temple University, 2007.

3. Lecture outline • Business strategies for competitive advantage • Cost vs. Differentiation • Leadership vs. focus • The industry life cycle • Functional strategies for competitive advantage • Production • Operations • Marketing • R&D • Human resources © Ram Mudambi, Temple University, 2007.

4. Mostly mission and vision development Business-level strategy What Is Business-Level Strategy? • Business-level strategy • A plan of action to use the firm’s resources and distinctive competencies to gain competitive advantage. • Abell’s “Business Definition” process • Customer groups – market segmentation (who?) • Customer needs – value proposition (what?) • Distinctive competencies – competitive actions (how?) © Ram Mudambi, Temple University, 2007.

5. Offers low priced products Offers unique or distinctive products Serves the entire market Serves a specific niche Recall – Porter’s generic strategies © Ram Mudambi, Temple University, 2007.

6. A low-cost strategy works best when: • Price competition is vigorous • Product is standardized or readily available from many suppliers • There are few ways to achieve differentiation that have value • Most buyers use product in same ways • Buyers incur low switching costs • Buyers are large and have significant bargaining power © Ram Mudambi, Temple University, 2007.

7. D2 P0 P1 D1 Price cuts and sales volume P Loss Gain 0 Q SALES © Ram Mudambi, Temple University, 2007.

8. Pitfalls of low-cost strategies • Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume--profits go down,not up) • Low cost methods are easily imitated by rivals • Becoming too fixated on reducing costsand ignoring • Buyer interest in additional features • Declining buyer sensitivity to price • Changes in how the product is used • Technological breakthroughs open up cost reductions for rivals © Ram Mudambi, Temple University, 2007.

9. Which hat is unique? The appeal of differentiation strategies • A powerful competitive approach when uniquenesscan be achieved in ways that • Buyers perceive asvaluable • Rivals find hard to match or copy • Can be incorporated at a cost well below theprice premium that buyers will pay © Ram Mudambi, Temple University, 2007.

10. Achieving Superior Quality • Quality as reliability • They do the jobs they were designed for and do them well • Quality as excellence • Perceived by customers to have superior attributes Quality can be thought of in terms of two dimensions: GENERIC STRATEGY? COST GENERIC STRATEGY? DIFFERENTIATION © Ram Mudambi, Temple University, 2007.

11. D2 P1 P0 Gain D1 Loss Successful differentiation – price premia P Q 0 © Ram Mudambi, Temple University, 2007.

12. Choosing an investment strategy at the Business Level • Investment strategy • The resources (human, functional, and financial) required to gain sustainable competitive advantage. • Competitive position • Market share is an indicator of competitive strength. • Distinctive competencies are competitive tools. • Life Cycle Effects • An industry’s life cycle stage affects its attractiveness to investment prospects. © Ram Mudambi, Temple University, 2007.

13. The industry life cycle & competitive advantage OFFENSE DEFENSE Buildup Period Benefit Period Erosion Period Shakeout Growth Maturity Size of Competitive Advantage Embryonic Decline Strategic Moves Produce Competitive Advantage Moves by Rivals Reduce Competitive Advantage Time © Ram Mudambi, Temple University, 2007.

14. Choosing an Investment Strategy at the Business Level © Ram Mudambi, Temple University, 2007.

15. Business assessment – the BCG Matrix © Ram Mudambi, Temple University, 2007.

16. Production Operations Marketing R & D H R M Functional analysis Customer groups BUSINESS Cost vs. differentiation © Ram Mudambi, Temple University, 2007.

17. The Production function GENERIC STRATEGY? COST • Economies of scale • Lower unit costs due to higher CURRENT production volumes. • The experience curve • Systematic unit-cost reductions that are the result of ACCUMULATED production volumes. • Much of the experience curve emanates from learning effects • Cost reductions due to learning by doing. © Ram Mudambi, Temple University, 2007.

18. Economies of scale – related to Q Typical long run unit cost curve Unit costs Initial decline is very rapid Subsequent declines are smaller Minimum efficient scale 0 Volume of output / unit time © Ram Mudambi, Temple University, 2007.

19. The experience curve – related to Q • A typical experience curve © Ram Mudambi, Temple University, 2007.

20. Learning effects • Economies of scaleand learning effects: © Ram Mudambi, Temple University, 2007.

21. Increased • Quantity • Diversity • Quality The Operations function • Flexible manufacturing technology (lean production) • Reduced setup times • Increased machine utilization • Improved quality control • Lower inventory levels • Mass customization • Low cost and product customization • Flexible manufacturing cells • Increased variety of operations • Ability to achieve higher levels of quality © Ram Mudambi, Temple University, 2007.

22. Materials Management and JIT • Materials management • Getting materials into and through the production process and out through the distribution system to the end user. • Just-In-Time (JIT) • Reduce inventory holding costs by having materials arrive JIT to enter the production process. • JIT risk: There are no buffer stocks for non-delivery or unanticipated increases in demand. © Ram Mudambi, Temple University, 2007.

23. Comparison of Lean and Mass Production © Ram Mudambi, Temple University, 2007.

24. The impact of flexible manufacturing • The tradeoff betweencosts and product variety © Ram Mudambi, Temple University, 2007.

25. Achieving Superior Quality • Total Quality Management (TQM): • All company operations focused on continuouslyimproving product and service quality. • Deming’s Five-Step “Chain Reaction”: • Improved quality reduces costs. • Improved productivity. • Higher market share. • Increased profitability. • More jobs created. © Ram Mudambi, Temple University, 2007.

26. 1. Constancy of purpose 2. Adopt the philosophy 3. Don’t rely on mass inspection 4. Don’t award business on price 5. Constant improvement 6. Training 7. Leadership Deming’s 14 points 8. Drive out fear 9. Break down barriers 10. Eliminate slogan and exhortations 11. Eliminate quotas 12. Pride of workmanship 13. Education & retraining 14. Plan of action © Ram Mudambi, Temple University, 2007.

27. 1. Committed leadership 2. Adoption & communication of TQM 3. Closer customer relationships 4. Closer supplier relationships 5. Benchmarking Implementing TQM Aspects common to most TQM and continuous improvement programs 6. Increased training 7.Open organization 8. Employee empowerment 9. Zero-defects mentality 10. Flexible manufacturing 11. Process improvement 12. Measurement © Ram Mudambi, Temple University, 2007.

28. COST DIFFERENTIATION The Operations function GENERIC STRATEGY? • Flexible manufacturing technology (lean production) • Mass customization • Flexible manufacturing cells • Ability to achieve higher levels of quality Increased • Quantity • Diversity • Quality © Ram Mudambi, Temple University, 2007.

29. Increased customer responsiveness The Marketing function • Marketing strategy • Product design • Advertising • Promotion • Pricing • Distribution • Principal objectives • Customer acquisition • Customer retention • Defection increases unit costs • Per-customer profit increases with relationship longevity © Ram Mudambi, Temple University, 2007.

30. Relationship between Customer Loyalty and Profit per Customer The longer a company holds on to a customer the greater the volume of customer-generated unit sales that offset fixed marketing costs and lowers the average cost of each sale. © Ram Mudambi, Temple University, 2007.

31. Achieving Superior Customer Responsiveness GENERIC STRATEGY? • Developing a customer focus: • Top leadership commitment to customers. • Employee attitudes toward customers. • Bringing customers into the company. • Satisfying customer needs: • Customization of the features of products and services to meet the unique need of groups and individual customers. • Reducing customer response times: • Marketing that communicates with production. • Flexible production and materials management. • Information systems that support the process. DIFFERENTIATION © Ram Mudambi, Temple University, 2007.

32. The R&D function • Design easy-to-manufacture products • Reduce numbers of parts per unit. • Reduce assembly time. • Closely coordinate R&D and production activities. • Pioneer process innovations • Create competitive advantage through gains in process efficiencies. • Pioneer product innovations • Create competitive advantage by anticipating customer needs. © Ram Mudambi, Temple University, 2007.

33. Causes of the high failure rate of innovation • Uncertainty • Quantum innovation • Incremental innovation • Poor commercialization • Poor positioning strategy • Technological myopia • Slowness in marketing © Ram Mudambi, Temple University, 2007.

34. Achieving Superior Innovation • Building competencies in innovation: • Building skills in basic and applied research • Project selection • Project management • Cross-functional integration • Product development teams • Partly parallel development process • Leveraging knowledge networks © Ram Mudambi, Temple University, 2007.

35. MNCs: The innovation-integration dilemma High Isolated freedom Connected freedom Semi-connected freedom Degree of local autonomy Isolated control Connected control Low Low High Information connectivity © Ram Mudambi, Temple University, 2007.

36. The Development Funnel Gate 1 Gate 2 © Ram Mudambi, Temple University, 2007.

37. Sequential and Partly Parallel Development Processes Reduced development time & time-to-market © Ram Mudambi, Temple University, 2007.

38. The Human Resource function • Ways to increase employee productivity and lower unit costs: • Provide training that upgrades employee skills. • Establish self-managing teams to gain a more flexible work forceand increased productivity. • Use pay-for-performance incentives for teams to encourage meeting productivity and quality goals. © Ram Mudambi, Temple University, 2007.

39. Functional strategies - summary © Ram Mudambi, Temple University, 2007.

40. Customer groups Value proposition Summary • Business level strategy is mainly concerned with answering the “how?” question • Two generic business strategies – cost and differentiation • Functional strategies must support the chosen business strategy © Ram Mudambi, Temple University, 2007.