Average 74 80% or higher – 19 70% - 79 – 22 60 – 69 - 11 Other - 4.

Average 74 80% or higher – 19 70% - 79 – 22 60 – 69 - 11 Other - 4

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

How do these Firms Compete?




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


Low Cost

Differentiation

CompetitiveAdvantage


Broad Segment/Focus

Strategic Target


Low Cost

Differentiation

Broad Segment/Focus


Strategic Target


Low Cost

Differentiation

Broad Segment/Focus

WalMartDomino’sCompetitive

Advantage

Strategic Target


Low Cost

Differentiation

Broad Segment/Focus

Big LotsLittle Caesar’s

WalMartDomino’sCompetitive

Advantage

Strategic Target


Low Cost

Differentiation

Broad Segment/Focus

WalMartDominos’s

Big LotsLil Caesar’s

TargetPapa John’s


Strategic Target


Low Cost

Differentiation

Broad Segment/Focus

WalMartDomino’s

Big LotsLittle Caesar’s

TargetPapa John’s

NordstromPapa Murphy’s


Strategic Target

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 (cont.)

What firms pursue differentiation? How or on what basis do they achieve differentiation?

Starbuck’s Differentiation 4 Tablespoons of $10 bag = 40 cents

Three cups Double-Tall Latte = $3.22

Double Shot Espresso = $1.85 $3.22 - $1.85 = $1.37 for steamed milk

20 seconds to steam milk $1.37 * 3 * 60 = $246 a hour to steam milk

Customers “allow” Starbucks to draw interest in their smart-cards. Millions of dollars annually on the float “You are one of us” “Collectible”

Pretax profit margins of 10.5%


Signalling important when: nature of differentiation difficult to quantify first-time purchase - re-purchase infrequent buyers unsophisticated

To introduce his beer, Coors often

gave free sample to gold miners.


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

Can you differentiate……?

Can you differentiate…..?

Salt?


Deodorant

Strong enough for a man, ….

But made for a woman

Ph balanced too?????


Water

Evian spelled backwards - naïve

Coincidence? I think not…..

Now, I am going to do a card trick.

I am going to read your mind.

You are going to see a series of cards.

You are going to choose one card.

Once you select your card, clear your mind, and think only of that card.

Are you ready to pick a card?

Pick a card.

Did you pick a card?

Think of it now.

I hear you.

And now, I will remove your card.

Your card is gone….yes?

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

How can Differentiation protect against…?

Starbuck’s$1.80

Costs

Profit

Price

New Entrants


Joe’s Coffee

Starbuck’s$1.80

AssumeEqualCosts

New Entrants


New Entrants

Joe’s Coffee99 cents

Starbuck’s$1.80


New Entrants


Starbuck’s$1.80

Extra Profits


Rivals Starbuck’s$1.80



Starbuck’s$1.80


Advertising& Promotionsdrive costs UP


Starbuck’s$1.80 $1.70

Joe’s Coffee99 89 cents

Discountsand sales drive prices DOWN


SubstitutesStarbuck’s

$1.80


Starbuck’s$1.80

There is nosubstitute for the

truly differentiatedproduct


Power of Buyers - How do powerful buyer’s leverage their power?

Lower Prices, Higher Quality


Starbuck’s$1.80 $1.70

Joe’s Coffee99 89 cents

RaiseQuality

LowerPrices


Power of Suppliers - How do powerful suppliers leverage their power?

Drive up costs


Starbuck’s$1.70


RaiseCosts


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.

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

0

100

200

300

400

500

600

700

800

900

Personnel SGA

Sonic - 1100 unitsChurch's - 1400 units

Low Cost Leadership (cont.)

Attractive when price is dominant consideration commodity low switching costs powerful buyers

Low Cost Leadership (cont.)

What firms pursue a low cost strategy?

How do they drive their costs downRisky when:

technology breakthroughs frequent easy to imitate costs advantages erode more

quickly than differentiation causes near-sightedness on a few

activities/sunk costs

Less than 24 hours after rival HP reported its PC division had lost money one quarter last year, Dell lowered prices by up to 22%

Analysts believe Dell has a 5% cost advantage

HP forced to choose between market share and profitability

How can Low Costs provide protection from….

New Entrants

Wal-Mart Joe’s

RubbermaidTub$1.99


Wal-Mart Joe’s

RubbermaidTub$1.99

Higher costs


Rivalry

Wal-Mart Joe’s

RubbermaidTub$1.99


Wal-Mart Joe’s

RubbermaidTub$1.89

…can pushprices down….


Wal-Mart Joe’s

RubbermaidTub$1.99

… or push costs up


Wal-Mart Joes

RubbermaidTub$1.99

Substitutes


Wal-Mart Joe’s

RubbermaidTub$1.89



Wal-Mart Joe’s

RubbermaidTub$1.99

… or push costs up


Wal-Mart Joe’s

RubbermaidTub$1.99

Power of Buyers


Wal-Mart Joe’s

RubbermaidTub$1.89



Wal-Mart Joe’s

RubbermaidTub$1.99

Power of Suppliers


Wal-Mart Joe’s

RubbermaidTub$1.99

… can push costs up

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.

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

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

Integrated Low Cost-Differentiation

Combines both generic strategies Difficult to implement

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

Average 74 80% or higher – 19 70% - 79 – 22 60 – 69 - 11 Other - 4.

Documents