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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.

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Chapter 5

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Chapter 5

Chapter 5

Building Competitive Advantage Through Business-Level Strategy


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

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 strategies1

Porter’s Generic Strategies

Low Cost

Competitive

Advantage

Differentiation


Porter s generic strategies2

Porter’s Generic Strategies

Broad

Segment/Focus

Strategic Target


Porter s generic strategies3

Porter’s Generic Strategies

Low Cost

Competitive

Advantage

Differentiation

Broad

Segment/Focus

Strategic Target


Differentiation

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

Differentiation (cont.)

  • What firms pursue differentiation?

  • How or on what basis do they achieve differentiation?


Differentiation cont1

Differentiation (cont.)

  • Signalling important when:

    • nature of differentiation difficult to quantify

    • first-time purchase - re-purchase infrequent

    • buyers unsophisticated


Differentiation cont2

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


Chapter 5

Problems with P&G’s Differentiation Strategy


How has p g responded

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

How can Differentiation protect against…?

Starbuck’s

$1.80

New Entrants

Price

Profit

Costs


How can differentiation protect against1

How can Differentiation protect against…?

Starbuck’s

$1.80

New Entrants

Joe’s Coffee

Assume

Equal

Costs


How can differentiation protect against2

Starbuck’s

$1.80

Joe’s Coffee

99 cents

How can Differentiation protect against…?

New Entrants


How can differentiation protect against3

How can Differentiation protect against…?

Starbuck’s

$1.80

New Entrants

Joe’s Coffee

99 cents

Extra Profits


How can differentiation protect against4

Starbuck’s

$1.80

Joe’s Coffee

99 cents

How can Differentiation protect against…?

Rivals


How can differentiation protect against5

How can Differentiation protect against…?

Starbuck’s

$1.80

Joe’s Coffee

99 cents

Advertising

& Promotions

drive costs UP


How can differentiation protect against6

How can Differentiation protect against…?

Starbuck’s

$1.80 $1.70

Joe’s Coffee

99 89 cents

Discounts

and sales drive

prices DOWN


How can differentiation protect against7

How can Differentiation protect against…?

Starbuck’s

$1.80

Substitutes


How can differentiation protect against8

How can Differentiation protect against…?

Starbuck’s

$1.80

There is no

substitute for the

truly differentiated

product


How can differentiation protect against9

How can Differentiation protect against…?

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

Lower Prices, Higher Quality


How can differentiation protect against10

Starbuck’s

$1.80 $1.70

Joe’s Coffee

99 89 cents

How can Differentiation protect against…?

Lower

Prices

Raise

Quality


How can differentiation protect against11

How can Differentiation protect against…?

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

Drive up costs


How can differentiation protect against12

Starbuck’s

$1.70

Joe’s Coffee

89 cents

How can Differentiation protect against…?

Raise

Costs


How can differentiation protect against13

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

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

Low Cost Leadership (cont.)

Attractive when price is dominant consideration

  • commodity

  • low switching costs

  • powerful buyers


Low cost leadership cont1

Low Cost Leadership (cont.)

What firms pursue a low cost strategy?

How do they drive their costs down

Risky 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

How can Low Costs provide protection from….

New Entrants

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from1

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.99

Higher

costs

Wal-Mart

Joe’s


How can low costs provide protection from2

How can Low Costs provide protection from….

Rivalry

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from3

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.89

…can push

prices down….

Wal-Mart

Joe’s


How can low costs provide protection from4

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.99

… or push

costs up

Wal-Mart

Joe’s


How can low costs provide protection from5

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.99

Substitutes

Wal-Mart

Joes


How can low costs provide protection from6

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.89

…can push

prices down….

Wal-Mart

Joe’s


How can low costs provide protection from7

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.99

… or push

costs up

Wal-Mart

Joe’s


How can low costs provide protection from8

How can Low Costs provide protection from….

Power of Buyers

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from9

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.89

…can push

prices down….

Wal-Mart

Joe’s


How can low costs provide protection from10

How can Low Costs provide protection from….

Power of Suppliers

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from11

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.99

… can push

costs up

Wal-Mart

Joe’s


How can low costs protect against

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

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

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

Integrated Low Cost-Differentiation

  • Combines both generic strategies

  • Difficult to implement


Stuck in the middle

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


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