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Competing For Advantage

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  1. Competing For Advantage Part III – Creating Competitive Advantage Chapter 5 – Business-Level Strategy

  2. Business-Level Strategy • Key Terms • Business-Level Strategy – integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets –

  3. Types of Business-Level Strategy

  4. Features of the Five Business-Level Strategies • Generic, can be used across industries • Two distinct types of competitive advantage: • Low Cost • Differentiation • Choice of scope: • Broad • Narrow (niche)

  5. Cost Leadership Strategy • Key Terms • Cost Leadership Strategy – integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

  6. Cost Leadership Strategy – Implementation • No-frill, standardized goods • Continuously reduce costs of value chain activities

  7. Value-Creating Activities Associated with Cost Leadership Strategy

  8. Cost Leadership Strategy and the Five Forces of Competition • Low-cost position is a valuable defense against rivals • Powerful customers can demand reduced prices • Costs leaders are in a position to absorb supplier price increases and relationship demands, and to force suppliers to hold down their prices • Continuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitors • Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers

  9. 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.

  10. Strategy and Organizational Structure • Specialization • Centralization • Formalization

  11. Cost Leadership Strategy and Structure • Simple reporting relationships • Few decision-making and authority layers • Centralized corporate staff • Strong operational focus on process improvements • Low-cost culture • Centralized staff decision-making authority • Jobs specialization • Highly formalized rules and procedures

  12. Risks of Cost Leadership Strategy • Processes can become obsolete • Focus on cost reductions can come at the expense of understanding customer perceptions and needs • Strategy could be imitated, requiring the firm to increase the value offered to retain customers

  13. Differentiation Strategy • Key Terms • Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

  14. 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

  15. Differentiation Strategy – Implementation • Target customers – perceived product value • Customized products – differentiating on as many features as possible

  16. Unusual features Responsive customer service Rapid product innovations Technological leadership Perceived prestige and status Different tastes Engineering design Performance Differentiation Strategy – Implementation (cont.)

  17. Differentiation (cont.) • What firms pursue differentiation? • How or on what basis do they achieve differentiation?

  18. Value-Creating Activities Associated with the Differentiation Strategy

  19. Differentiation (cont.) • Signalling important when: • nature of differentiation difficult to quantify • first-time purchase – • re-purchase infrequent • buyers unsophisticated

  20. Differentiation Strategy and Structure • Complex and flexible reporting relationships • Cross-functional product development teams • Strong focus on marketing and product R&D • Development-oriented culture • Decentralized decision making • Broad job descriptions • Informal rules and procedures

  21. Risks of Differentiation Strategy • quick imitation • no value in uniqueness • over differentiation • cell phones • premium price or costs are costs too high • poorly understood/changing customer needs • Minivan, FAO Schwartz • costs/price become more important than uniqueness • unwillingness to offer true differentiation

  22. Differentiation Strategy and the Five Forces of Competition • Customer loyalty provides the most valuable defense against rivals • Uniqueness products reduce customer sensitivity to raised prices • High margins (for differentiated products) insulate from supplier influence • Customer loyalty and product uniqueness serve as significant entry barriers • Firms with customers loyal to their products are positioned effectively against product substitutes

  23. 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.

  24. Problems with P&G’s Differentiation Strategy

  25. 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

  26. Focus Strategy • Key Terms • Focus Strategy – integrated set of actions designed to produce or deliver goods or services to a narrow target consumer based on specific differences in the market

  27. Focus Strategy – Market Segments • Buyer group • Product line segment • Geographic market

  28. Focus Strategy – Reasons • Large firms may overlook small niches • Firms may lack resources to compete in the broader market • Firms may be able to serve a narrow market segment more effectively than larger, industry-wide competitors • Firms may direct resources to certain value chain activities to build competitive advantage

  29. Focus Strategy – Types • Focused cost leadership strategy • Focused differentiation strategy

  30. Risks of Differentiation Strategy • A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser • A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit • The needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

  31. Integrated Cost Leadership/Differentiation Strategy • Key Terms • Integrated Cost Leadership/ Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

  32. Integrated Strategy – Advantages • Improved speed of adapting to environmental changes • Improved speed of learning new skills and technologies • Improved leverage of core competencies while competing against rivals

  33. Integrated Strategy – Implementation Benefits • Evidence suggests a relationship between use of an integrated strategy and achieving above-average returns • Businesses that combine multiple forms of competitive advantage in low-profit-potential industries are shown to outperform businesses that compete with a single form

  34. Value-Creating Activities Associated with the Integrated Strategy • Integrating cost leadership and differentiation strategies (which emphasize different primary and support activities) requires a balance when selecting the activities to perform • A flexible organizational structure is required

  35. Integrated Strategy and the Flexible Structure • Commitment to strategic flexibility • Flexible decision-making patterns, with partial centralization • Less specialized jobs than in a traditional functional structure—workers are more sensitive to balancing cost and differentiation • Modular structures to produce modular goods create differentiation and simultaneously hold down costs

  36. Risks of Integrated Strategy • Failure to establish a leadership position can result in a firm being "stuck in the middle," unable to create value, and unable to earn above-average returns

  37. Competing For Advantage Part III – Creating Competitive Advantage Chapter 6 – Competitive Rivalry and Competitive Dynamics

  38. Model of Competitive Rivalry • Over time firms take competitive actions/reactions • Pattern shows firms are mutually interdependent • Firm level rivalry is usually dynamic and complex • Strategic and tactical action does not occur within a vacuum • Strategic actions/responses: market-based moves that signify a significant commitment of resources • Difficult to implement and reverse • Tactical actions/responses: market-based moves that involve fewer resources to fine-tune a strategy that is already in place • Easy to implement and reverse

  39. Prisoner’s Dilemma

  40. Competitive Rivalry • Key Terms • Competitors – firms operating in the same market, offering similar products and targeting similar customers • Competitive Rivalry– ongoing set of competitive actions and competitive responses occurring between competitors as they contend with each other for an advantageous market position • Competitive Behavior– set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position

  41. Competitive Rivalry • Key Terms • Competitive Dynamics– total set of actions and responses of all firms competing within a market • Multimarket Competition– firms competing against one another in several product or geographic markets

  42. From Competitors to Competitive Dynamics

  43. Model of Competitive Rivalry

  44. Intensity of Rivalry • The total number of competitors • Market characteristics • Quality of individual firms' strategies • Drivers of competitive behavior

  45. Competitor Determinants • Market Commonality • Resource Similarity

  46. Market Commonality • Key Terms • Market Commonality – number of markets with which the firm and a competitor are jointly involved, and degree of importance of the individual markets to each firm

  47. Resource Similarity • Key Terms • Resource Similarity– extent to which the firm's tangible and intangible resources are comparable to competitors' resources in terms of both type and amount

  48. Framework of Competitive Analysis

  49. Drivers of Competitive Actions and Responses • Awareness • Motivation • Ability • Resource Similarity

  50. Likelihood of Attack • First mover incentives • Organizational size • Quality