Chapter 7 Business Strategy and Competitive Advantage Copyright © 1999 by Harcourt Brace & Company All rights reserved. Requests for permission to make

Chapter 7Chapter 7

Business Strategy and Business Strategy and Competitive AdvantageCompetitive Advantage

Chapter 7Chapter 7

Business Strategy and Business Strategy and Competitive AdvantageCompetitive Advantage

Copyright © 1999 by Harcourt Brace & Company

All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Bourgeois, Duhaime,

& Stimpert

Copyright © 1999 by Harcourt Brace & CompanyAll rights reserved

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

Introduce the concept of generic business strategies: Cost leadership. Differentiation. Focus.

Describe the organizational resources and capabilities associated with these strategies. Suggest how managers can identify opportunities

for reducing costs and differentiating their businesses.


Chapter ObjectivesChapter Objectives (cont.)(cont.)Chapter ObjectivesChapter Objectives (cont.)(cont.)

Identify and discuss the implication of generic business strategies. Special challenges of commodity markets (tendency

to compete on price alone). Factors which limit effectiveness of differentiation

strategies.• Private-label competition.

• Discounting.

• Commoditization or tendency for differentiated products to lose their distinctiveness.


IntroductionIntroductionIntroductionIntroduction

How managers formulate business strategies aimed at developing and sustaining competitive advantage. Managerial thinking and decisions about business

definition are interrelated. Firms tend to pursue one of four different types of

business strategies: Prospectors: pursuing entrepreneurial exploration of

their competitive environments with the aim of developing new product and market opportunities.


Exhibit 7.1:Exhibit 7.1: Model of Model of Strategic ManagementStrategic ManagementExhibit 7.1:Exhibit 7.1: Model of Model of Strategic ManagementStrategic Management

Feedbackreinforces or

suggests changes

in managers'

mental models

Managers' Mental Models

+ Industry environments

+ How to compete + Appropriate size/diversity,

how businesses are related,

how diversification should

be managed

+ How to organize

Decisions about

Business Definition

Decisions about

Organizational

Structure

Decisions about

Business Strategy

Decisions about

Corporate Strategy

and Diversification

Market Position,Resources, and

Capabilities

Performanceand

CompetitiveAdvantage


Introduction Introduction (cont.)(cont.)Introduction Introduction (cont.)(cont.)

Defenders: seeking stability by maintaining current market positions and defending against encroachment by other firms.

Analyzers: balance the opportunity nature of prospectors against risk aversion of defenders; tend to draw most revenue from stable portfolio of products.

Reactors: characterized by inconsistencies and a reactionary response to environmental change.

• Not considered viable in long-run.


Introduction Introduction (cont.)(cont.)Introduction Introduction (cont.)(cont.)

Porter’s generic business strategies Cost leadership Differentiation Focus


Exhibit 7.2:Exhibit 7.2: Porter’s Porter’s Generic Business Generic Business StrategiesStrategies

Exhibit 7.2:Exhibit 7.2: Porter’s Porter’s Generic Business Generic Business StrategiesStrategies

Focus:Differentiation

Differentiation

Focus:Cost Leadership

Cost Leadership

Uniqueness Low Cost

Broad

Narrow

Strategic Advantage

Targ

et

Mark

et


Porter’s Generic Porter’s Generic Business StrategiesBusiness Strategies (cont.)(cont.)


Cost Leadership Firms with lower costs than their competitors are

likely to enjoy competitive advantage if they can maintain this cost advantage over time.

Firms pursuing this strategy will seek to exploit economies of scale and experience by maximizing sales volume.




Cost Leadership (cont.) Probably most effective in those industries or

markets price is most important factor (over service, technology, or product characteristics).

Successful cost leaders develop competitive advantage by offering of comparable quality at lower prices than most industry competitors.

• Not the same as selling cheap merchandise or products perceived as inferior.




Cost Leadership (cont.) Successful cost leader does not always have to offer

lowest prices.• Customer perception is most important factor.

Firms following this strategy will seek to maximize market share.




Cost leadership strategies are characterized by: Capital-intensive manufacturing or production

processes that reduce labor costs; Process engineering skills that are aimed at lowering

production costs; and Products designed to be manufactured easily and

products which share many common components.• Leaders have developed sophisticated materials

procurement and inventory management systems.

• Leaders usually have low-cost distribution systems.




Firms which want to pursue cost leadership strategies should emphasize: Close supervision of labor; Tight cost controls; and Incentives based on cost and quantitative targets.

Value chain concept is useful tool for managers using this strategy.

See

Exhibit 7.3




Differentiation strategy These firms aim to serve broad segment of market

by offering products/services that are perceived as unique.

• Likely to work best with products/services that lend themselves well to differentiation.

– Even commodities can be differentiated: Morton’s salt.




Differentiation strategy (cont.) It is the perception of differences that is most

important -- not the actual characteristics of competing products.

• Customer perceptions can be fragile and short-lived. Firms must develop strong marketing capabilities

and a reputation for quality or uniqueness.




Firms pursuing differentiation must also enhance their: Creativity and research capabilities; Coordination among R&D, marketing, and

manufacturing; and Ability to attract highly skilled labor, scientists, or

creative people. Value-chain analysis is helpful. See

Exhibit 7.4




Focus strategy Targeted at narrow industry niche. These firms seek overall cost leadership or perceived

uniqueness, but they “focus” that advantage on a particular market segment.

• Thus, there are two possible focus strategies: focus differentiation (Rolls-Royce in ultra-luxury car market) and focus cost leadership.

Changes in customer demographics, competing products, and new technologies can wipe-out a narrow target market.




“Stuck in the Middle” Porter argued that some firms do not pursue any

viable business strategy -- thus, they are stuck in the middle.

This happens for two reasons:• They fail to pursue successfully any of the generic

business strategies.

• Firms might attempt to pursue more than one generic strategy.


Illustrations of Generic Illustrations of Generic Business StrategiesBusiness StrategiesIllustrations of Generic Illustrations of Generic Business StrategiesBusiness Strategies

Exhibit 7-5 Cost leader

• While the successful cost leader’s product is priced just below industry average, its unit costs are much lower than industry average.

Successful differentiator• Offers product that is perceived as unique.

– Can charge prices higher than industry average.

– May have costs higher than industry average.

SeeExhibit 7.5


Illustrations of Generic Illustrations of Generic Business Strategies Business Strategies (cont.)(cont.)

Illustrations of Generic Illustrations of Generic Business Strategies Business Strategies (cont.)(cont.)

Exhibit 7.6 Wal-Mart

• Prototypical example of successful cost leader.– SGA expenses represent only 16% of revenues.

May Department Stores• Successful differentiator

– Higher SGA (19%), but higher ROS (6%)

Sears• Stuck in the middle

– Higher SGA and lower ROS

SeeExhibit 7.6


Exhibit 7.7:Exhibit 7.7: Generic Generic Strategies of Companies in Strategies of Companies in Various IndustriesVarious Industries

Exhibit 7.7:Exhibit 7.7: Generic Generic Strategies of Companies in Strategies of Companies in Various IndustriesVarious Industries

Industry CostLeadership

Differentiation Focus

Airline Southwest American Kiwi

Automobile Kia GM Rolls-Royce

Retailing Wal-Mart May Stores Starbucks

Watches Timex Seiko Rolex


Efficiency/Effectiveness Efficiency/Effectiveness of Generic Strategiesof Generic StrategiesEfficiency/Effectiveness Efficiency/Effectiveness of Generic Strategiesof Generic Strategies

None of Porter’s generic strategies is optimal for all companies. Appropriate generic strategy for any firm will

depend on its industry context, its business definition, and its capabilities.

Both cost leadership and differentiation strategies can be efficient (ratio of outputs to inputs) and effective (firm performance relative to average industry performance).


Unattractive Unattractive Characteristics of Characteristics of Commodity MarketsCommodity Markets

Unattractive Unattractive Characteristics of Characteristics of Commodity MarketsCommodity Markets

Even though they may be profitable, these markets tend to be less attractive and more challenging. Competition in commodity markets is almost

always vigorous.• Primarily based on price.

Firms must become successful cost leaders or be able to differentiate their commodities.

Profits heavily impacted by business cycles. Markets characterized by lack of customer loyalty.


Observations on Price Observations on Price CompetitionCompetitionObservations on Price Observations on Price CompetitionCompetition

Not uncommon for price competition to deteriorate into all-out price wars. Airlines in early 1990s. GE and Westinghouse in 1950s. Price wars are never a good idea!

Potential for escalation and “fixes that fail.”

SeeExhibit 7.8


Exhibit 7.9:Exhibit 7.9: Escalation EscalationExhibit 7.9:Exhibit 7.9: Escalation Escalation

Results of A

Relative to B

A's Results

Activity

by A

B's Results

Activity

by B


Exhibit 7.10:Exhibit 7.10: Fixes that Fixes that FailFailExhibit 7.10:Exhibit 7.10: Fixes that Fixes that FailFail

Problem Fix

UnintendedConsequences

Delay


Observations on Price Observations on Price Competition Competition (cont.)(cont.)

Observations on Price Observations on Price Competition Competition (cont.)(cont.)

When confronted by aggressive price competition, managers need to be proactive. Work with key customers to negotiate long-term

contracts. Signal to competitors that they are prepared to

weather a protracted price war. Work to differentiate your products.

• Customers will perceive your products as qualitatively better.


Limits of Limits of DifferentiationDifferentiationLimits of Limits of DifferentiationDifferentiation

Success of this strategy depends on two factors: Consumers must value the product/service

characteristics on which managers have based their differentiation strategies.

Key to success of any differentiation strategy is the ability of firms to maintain the perception of uniqueness in their products/services.


Exhibit 7.11:Exhibit 7.11: Companies that Companies that Have Maintained Market Have Maintained Market Share Leadership Since the Share Leadership Since the 1920s1920s

Exhibit 7.11:Exhibit 7.11: Companies that Companies that Have Maintained Market Have Maintained Market Share Leadership Since the Share Leadership Since the 1920s1920s

Kodak

Colgate

Campbell

Nabisco

ColgateIvory

Gillette

Wrigley's

DelMonte


Exhibit 7.12:Exhibit 7.12: Product Product Categories that Have Been Categories that Have Been Immune to Private Label Immune to Private Label InvasionInvasion

Exhibit 7.12:Exhibit 7.12: Product Product Categories that Have Been Categories that Have Been Immune to Private Label Immune to Private Label InvasionInvasion

CategoryBaby food

Beer

Shaving cream

Bar soap

Deodorant

Toothpaste

Private Label Share0.0%

0.1%

0.6%

0.8%

1.3%

2.0%


Limits of Limits of Differentiation Differentiation (cont.)(cont.)

Limits of Limits of Differentiation Differentiation (cont.)(cont.)

Differentiation strategies can be threatened by a number of factors: Private-label and store brand competition are

serious threats. Discounting. Gradual commoditization.

• Companies fail to invest in maintaining brand image.

• Companies have “crowded-out” their own products by introducing new products.

SeeExhibit 7.13


Pursuit of Differentiation Pursuit of Differentiation and Cost Leadership and Cost Leadership StrategiesStrategies


Porter argues that firms pursuing both strategies will be “stuck in the middle.” There are, however, some exceptions. Anheuser-Busch

• Enjoys significant cost advantage over its competitors.

• Has also been very successful differentiating its products.

Morton International• Successful at both with its table salt.




Japanese companies• Canon and its photocopiers

• Toyota and its cars While most managers today emphasize one of the

generic strategies, there is always competition on both cost and differentiation.


ConclusionsConclusionsConclusionsConclusions

Content versus process as sources of competitive advantage. Ability of any strategy to provide competitive

advantage comes not from content of strategy, but from the way the firm chooses to formulate and implement the strategy and the unique capabilities the firms develop.

Role of general managers See Exhibit 7.14.


Exhibit 7.14Exhibit 7.14:: A “Mental A “Mental Model” of Competitive Model” of Competitive AdvantageAdvantage

Exhibit 7.14Exhibit 7.14:: A “Mental A “Mental Model” of Competitive Model” of Competitive AdvantageAdvantage

Defining the business

Select competitive strategy

Resource & capability requirements

Time, success, interconnectedness, & investment

Rare, valuable. non-substitutable, & difficult to imitate resources & capabilities


Key Points Introduced Key Points Introduced in in Chapter 7Chapter 7Key Points Introduced Key Points Introduced in in Chapter 7Chapter 7

Cost leadership, differentiation, and focus represent three alternative generic business strategies. Each generic strategy has its own set of

organizational resources and capabilities. Commodity markets, in which products or services of

competing companies are perceived to have few differences, have several unattractive characteristics. Most significant is that firms tend to compete on

basis of price.


Key Points Introduced Key Points Introduced in in Chapter 7Chapter 7 (cont.)(cont.)


Successful differentiation strategies require that: Consumers value the product or service characteristics

on which managers have based their differentiation strategies.

Firms can maintain perception of uniqueness that is vital to success of any differentiation strategy.

Factors that limit ability of firms to differentiate: Competition from private-label and store brand

products.




Discounting, which tends to erode customers’ perception of product or service uniqueness and value.

Commoditization, or tendency for once-differentiated products to become commodity-like over time.

Competitive advantage is best derived by developing and possessing unique and difficult to imitate resources and capabilities.

Documents

Chapter 7 Business Strategy and Competitive Advantage Copyright © 1999 by Harcourt Brace & Company All rights reserved. Requests for permission to make