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Chapter 4. Business Level Strategy Pages 96 - 125. 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 4

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Chapter 4 l.jpg

Chapter 4

Business Level Strategy

Pages 96 - 125


Business level strategy l.jpg

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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Porter’s Generic Strategies

  • Two fundamental issues

    • Competitive advantage - low cost vs. uniqueness

    • Competitive Scope- broad based vs. narrow

  • Pursuit of the generic strategies provides protection from each of the five forces


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Porter’s Generic Strategies

Focused Low-Cost

Overall Low-Cost

Low Cost

Competitive

Advantage

Broad Differentiation

Focused Differentiation

Uniqueness

Narrow

Broad

Competitive Scope


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Porter’s Generic Strategies

WalMart

Domino’s

Big Lots

Little Caesar’s

Low Cost

Competitive

Advantage

Target

Papa John’s

Nordstrom

Papa Murphy’s

Uniqueness

Narrow

Broad

Competitive Scope


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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


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Differentiation (cont.)

  • Signalling important when:

    • nature of differentiation difficult to quantify

    • first-time purchase –

    • re-purchase infrequent

    • buyers unsophisticated


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Differentiation (cont.)

  • Risky when:

    • quick imitation

    • no value in uniqueness

    • over differentiation

      • cell phones

    • premium price

    • costs too high

    • poorly understood/changing customer needs

      • Minivan, FAO Schwartz

    • costs/price become more important than uniqueness

    • unwillingness to offer true differentiation


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How can Differentiation protect against…?

Starbuck’s

$1.80

New Entrants

Price

Profit

Costs


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How can Differentiation protect against…?

Starbuck’s

$1.80

New Entrants

Joe’s Coffee

Assume

Equal

Costs


How can differentiation protect against11 l.jpg

Starbuck’s

$1.80

Joe’s Coffee

99 cents

How can Differentiation protect against…?

New Entrants


How can differentiation protect against12 l.jpg

How can Differentiation protect against…?

Starbuck’s

$1.80

New Entrants

Joe’s Coffee

99 cents

Extra Profits


How can differentiation protect against13 l.jpg

Starbuck’s

$1.80

Joe’s Coffee

99 cents

How can Differentiation protect against…?

Rivals


How can differentiation protect against14 l.jpg

How can Differentiation protect against…?

Starbuck’s

$1.80

Joe’s Coffee

99 cents

Advertising

& Promotions

drive costs UP


How can differentiation protect against15 l.jpg

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 against16 l.jpg

How can Differentiation protect against…?

Starbuck’s

$1.80

Substitutes


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How can Differentiation protect against…?

Starbuck’s

$1.80

There is no

substitute for the

truly differentiated

product


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How can Differentiation protect against…?

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

Lower Prices, Higher Quality


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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 against20 l.jpg

How can Differentiation protect against…?

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

Drive up costs


How can differentiation protect against21 l.jpg

Starbuck’s

$1.70

Joe’s Coffee

89 cents

How can Differentiation protect against…?

Raise

Costs


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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.


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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


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Low Cost Leadership (cont.)

Attractive when price is dominant consideration

  • commodity

  • low switching costs

  • powerful buyers


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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 l.jpg

How can Low Costs provide protection from….

New Entrants

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from27 l.jpg

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.99

Higher

costs

Wal-Mart

Joe’s


How can low costs provide protection from28 l.jpg

How can Low Costs provide protection from….

Rivalry

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from29 l.jpg

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 from30 l.jpg

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 from31 l.jpg

How can Low Costs provide protection from….

Rubbermaid

Tub

$1.99

Substitutes

Wal-Mart

Joes


How can low costs provide protection from32 l.jpg

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 from33 l.jpg

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 from34 l.jpg

How can Low Costs provide protection from….

Power of Buyers

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from35 l.jpg

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 from36 l.jpg

How can Low Costs provide protection from….

Power of Suppliers

Rubbermaid

Tub

$1.99

Wal-Mart

Joe’s


How can low costs provide protection from37 l.jpg

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 l.jpg

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.


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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


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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


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Focus (cont.)

  • Market Segmentation – clustering of people with similar needs into identifiable groups

    • E.g. consumer vs. industrial, demographic, sociocultural, geographic, psychological (lifestyle), consumption patterns (frequency of use)


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Integrated Low Cost-Differentiation

  • Combines both generic strategies

  • Difficult to implement


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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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