Business Strategy

04/08/2023 Kellogg on business strategy 1

RECALL;We have studied the following cases:

*Microsoft & surface*Apple & Motorola* HBS notes on business strategy *Macdonald*Core or more*Kongo Gumi *Uninor*Coca-Cola* ABC analysis. *Chaos in the skies.*Amazon.com* Post office in rural markets


Value creation tactics: the tactics firms use to create value and

reduce costs vary by industry. But they tend to fall into a small

number of generic categories.


OPTIONS TO REDUCE C EXAMPLES OF ACTION COMMENTS

Drive cost reductions through product market activities

‘Buy’ share in existing markets through low prices to increase scale.

Easy for competitors to imitate, but may create positional or early-mover advantage; being first is often key.

‘buy’ share in existing markets to accumulate experience.

Introduce new products to better utilize shared facilities.

Enter new geographies to improve capacity utilization or increase scale.



Control cost drivers within the firms activities

Reallocation of production within existing facilities

Not very difficult for competitors to imitate.

Reallocation of facilities to low input-cost regions.

Input substitution (labor)

Use lower-cost components.

Special terms or ‘trades’ with key suppliers.

Enhance worker productivity through incentive systems.

Outsource major cost centers.

Reduction in work force



Control cost drivers within the firms activities

Use of nonmonetary compensation

More difficult for competitors to imitate.

Improve material yields.

Reduce complexity of production operations

Alterations in product design to improve manufacturability

Push improvements in asset management

Enhance worker productivity through changes in organizational structure.

Dramatically reconfigure firm’s value chain.

Major re-engineering initiatives.

Available to all but hard to do well.


OPTIONS TO IMPROVE B EXAMPLES OF ACTION COMMENTS

Enhance physical characteristics of the product.

*add features*improve aesthetics.*enhance performance.*enhance durability.*reduce defect rates.

Simple product changes are easy to imitate. Enduring improvements are easy to aim for but often hard to reach.

Bundle complementary products or services.

*warranties/service contracts.*spare parts.*quality presale technical advice/training.*Postsale consulting services.

Opportunities to exploit competencies in complementary markets. Raises question of whether firm should focus in the complementary market, however.


OPTIONS TO IMPROVE B EXAMPLES OF ACTION COMMENTS

Enhance sale or delivery of good/reduce buyer purchase costs.

*firm location.* product-line extension for ‘one-stop’ shopping.* Availability /generosity of trade credit.*easy order – placing.*speed/timeliness of delivery.

Location is a unique asset.One-stop shopping requires scale and scope.Firms can develop competencies in order fulfillment.

Improve product image. * Compelling packaging/labeling.*compelling advertising messages.

Neither is predictable and neither is predictably unique.

Create uniqueness in drastically different ways.

*paradigm-breaking new product concepts.

Competency in R & D can lead to a lasting advantage.


Competitor Identification: a step-by-step process for competitor

identification for the output markets served by a firm or

industry. The key of this process is the ability of the analyst to define

competition differently in each unique product and geographic

market.


STEP 1. Initial market selection: define the product markets of interest – presumably a list of markets in which the firm competes. This is essentially a list of broad product markets. Each of these markets will be narrowed by following steps 2 to 5.

STEP 2. One product market or several? Assess whether the competitors are likely to be the same for all the products you have selected. If you are not sure, then do not assume they are. If you believe the set of competitors is likely to be the same, then choose one product to study. Otherwise, be sure to repeat steps 3 to 5 for each product.

STEP 3. One geographic market or several? Identify the different geographic regions in which the product is sold. If you believe the set of competitors is likely to be the same in each region, then pick one region to study. Otherwise, repeat steps 4 to 5 for each region. (note: if competition varies by product and by region, the number of distinct markets to study can rapidly proliferate. This is not an excuse for pretending that competition is the same in each product/region, however. )


STEP 4. Identify the key product performance characteristics. What does the product do for consumers? Here you should specify the features that drive customer choice:*do customers prefer a ‘one stop shop’ or do they prefer to deal with multiple vendors?•How might the product be segmented by attributes like look and feel, ease of use, warranties, durability, availability of complementary goods as well as other relevant factors consumers are likely to consider in choosing among industry offerings. •What types of service contracts are firms offering?•What different channels is the product distributed through?•Does brand matter and why.•How intimate are relationships between firms and customers? What are the switching costs?•How much price dispersion is there in the market? What drives this price dispersion?

STEP 5. Competitor identification: identify the set of firms whose products deliver comparable specifications on the key product performance characteristics. These firms constitute the market.


Tactics for Softening Price Competition: steps or process, but

would vary from product to product.


MARKET CONDITIONS TACTICS

If the product is to be used repeatedly, with frequent upgrades:

Design the product or service so that consumers derive more benefits with use, or so that you can offer more benefits to consumers as you gain experience with them.

If good/service is an experience good and it is difficult for consumers to comparison shop for quality :

Establish a strong brand identity.

If the good / service is not an experience good, and customers are very price sensitive:

Establish a customer loyalty program, especially if marginal costs are low.

All goods and services: Offer complementary goods to form a coordinated product line.


Softening Price Competition: a summary.


THEME COMMENTS

An ounce of prevention is worth a pound of cure

*target narrow segments to limit the number of competitors.•Imprint a strong brand reputation on experience goods, especially when there is no independent shopping guide.• create switching costs by developing customer specific knowledge, having the customer develop product specific knowledge; or assembling a collection of interrelated products.

Be thy brother’s keeper. •Never openly discuss prices with competitors, or via intermediaries.• allow one firm to take the lead in announcing annual price changes; competitors can follow suit, thereby minimizing the risk of price wars. •Granting most favored customer status may placate large purchasers, but it also softens price competitions. •Practice tit-for-tat pricing to restore a sense of trust among competitors.•Consult with an attorney before taking any strategic decisions designed to raise industry prices.


THEME COMMENTS

Do not throw stones. *’an industry is only as smart as its stupidest competitors’. Take stock of who that is, and be prepared to act. • be aware of the conditions that foster misread and misjudgments, and be forgiving when those conditions are present.

He who laughs last laughs best.

•Avoid wars of attrition unless you are confident of a decisive victory. • if your firm is losing more each day the price war endures, you should raise prices or reduce output first. If your rival is losing more each day, hold on tight and pray it comes to its senses. •If you can, make credible commitments to stay in. this should encourage your rival to bow out.


Entry deterrence checklist: all strategic plans must contemplate entry. If entry

is not blockaded or accommodated, firms must figure out the best way to deter it. Summary of variety of entry

barriers.


ENTRY BARRIER MOST EFFECTIVE WHEN COMMENT

Sunk costs Incumbent has incurred them and entrant has not.

Costs must truly be sunk. If incumbent can sell its fixed assets, then so, too could an entrant. This implies failure is not very costly and entry is harder to deter.

Production barriers Economies of scale or scope, superior access to critical inputs or superior location, process or product patents, or government subsidies.

Must be asymmetric. Technological innovation can lift barriers. Patents are not all equally defensible, and the cost of defending a patent can be prohibitive.

Reputation Incumbents have longstanding relationships with suppliers and customers

Reputation reflects hard ot measure factors, such as quality or reliability, that entrants may not be able to promise.


ENTRY BARRIER MOST EFFECTIVE WHEN COMMENT

Switching costs There are few supply side barriers to entry

Can the firm prevent imitation? Do consumers really perceive entrants as different from incumbents?

Tie up access Channels are few and hard to replicate

Must share spoils with channel. May arouse antitrust scrutiny.

Limit pricing Entrants are unsure about demand and/or costs.

May require permanent reduction in profit margins to sustain entry deterrence.

Predatory pricing Firm has reputation fro toughness or competes in multiple markets.

Incumbent firm may lost more than entrant; deep pockets and conviction that there are many potential entrants are a must. May arouse antitrust scrutiny.

Holding excess capacity

Marginal costs are low and flooding the market causes price reductions.

Capacity investments must be sunk. Demand must not be growing.

Documents

Business Strategy