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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. - PowerPoint PPT Presentation
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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
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
Porter’s Generic Strategies
Low Cost
Differentiation
CompetitiveAdvantage
Porter’s Generic Strategies
Broad Segment/Focus
Strategic Target
Porter’s Generic Strategies
Low Cost
Differentiation
Broad Segment/Focus
CompetitiveAdvantage
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
Differentiation (cont.)
What firms pursue differentiation? How or on what basis do they achieve differentiation?
Differentiation (cont.)
Signalling important when: nature of differentiation difficult to quantify first-time purchase - re-purchase infrequent buyers unsophisticated
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
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
How can Differentiation protect against…?
Joe’s Coffee
Starbuck’s$1.80
AssumeEqualCosts
New Entrants
How can Differentiation protect against…?
New Entrants
Joe’s Coffee99 cents
Starbuck’s$1.80
How can Differentiation protect against…?
New Entrants
Joe’s Coffee99 cents
Starbuck’s$1.80
Extra Profits
How can Differentiation protect against…?
Rivals Starbuck’s$1.80
Joe’s Coffee99 cents
How can Differentiation protect against…?
Starbuck’s$1.80
Joe’s Coffee99 cents
Advertising& Promotionsdrive costs UP
How can Differentiation protect against…?
Starbuck’s$1.80 $1.70
Joe’s Coffee99 89 cents
Discountsand sales drive prices DOWN
How can Differentiation protect against…?
SubstitutesStarbuck’s
$1.80
How can Differentiation protect against…?
Starbuck’s$1.80
There is nosubstitute for the
truly differentiatedproduct
How can Differentiation protect against…?
Power of Buyers - How do powerful buyer’s leverage their power?
Lower Prices, Higher Quality
How can Differentiation protect against…?
Starbuck’s$1.80 $1.70
Joe’s Coffee99 89 cents
RaiseQuality
LowerPrices
How can Differentiation protect against…?
Power of Suppliers - How do powerful suppliers leverage their power?
Drive up costs
How can Differentiation protect against…?
Starbuck’s$1.70
Joe’s Coffee89 cents
RaiseCosts
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.
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
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
How can Low Costs provide protection from….
New Entrants
Wal-Mart Joe’s
RubbermaidTub$1.99
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.99
Higher costs
How can Low Costs provide protection from….
Rivalry
Wal-Mart Joe’s
RubbermaidTub$1.99
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.89
…can pushprices down….
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.99
… or push costs up
How can Low Costs provide protection from….
Wal-Mart Joes
RubbermaidTub$1.99
Substitutes
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.89
…can pushprices down….
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.99
… or push costs up
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.99
Power of Buyers
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.89
…can pushprices down….
How can Low Costs provide protection from….
Wal-Mart Joe’s
RubbermaidTub$1.99
Power of Suppliers
How can Low Costs provide protection from….
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 strategiesDifficult 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
