Competing For Advantage

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

13. 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

14. 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

15. Differentiation • Offer attributes that customers want, and are willing to pay for. Leads to premium price, higher volume, loyalty • Marginal revenue must exceed the costs of differentiation PERCEIVED VALUE versus INCREMENTAL COSTS

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?

19. Starbuck’s Differentiation • 4 Tablespoons of $10 bag = 40 cents • Three cups • Double-Tall Latte = $3.22 • Double Shot Espresso = $1.85 • $3.22 - $1.85 = $1.37 for steamed milk • 20 seconds to steam milk • $1.37 * 3 * 60 = $246 a hour to steam milk • Customers “allow” Starbucks to draw interest in their smart-cards. • Millions of dollars annually on the float • “You are one of us” • “Collectible” • Pretax profit margins of 10.5%

20. Value-Creating Activities Associated with the Differentiation Strategy

21. 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

22. 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

23. To introduce his beer, Coors often gave free sample to gold miners.

24. ..because you can’t sell beer to minors.

25. 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

26. 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.

27. Can you differentiate……?

28. Can you differentiate…..? • Salt?

33. Can you differentiate…..? • Deodorant

34. Strong enough for a man, …. But made for a woman

35. Ph balanced too?????

36. Can you differentiate…..? • Water

38. Evian spelled backwards - naïve • Coincidence? I think not…..

39. Now, I am going to do a card trick.

40. I am going to read your mind.

41. You are going to see a series of cards.

42. You are going to choose one card.

43. Once you select your card, clear your mind, and think only of that card.

44. Are you ready to pick a card?

45. Pick a card.

46. Did you pick a card?

47. Think of it now.

48. I hear you.

49. And now, I will remove your card.