MGMT 490 Discuss question
MGMT 490
Week 4
Global Strategic Management
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Studying this chapter should provide you with
the strategic management knowledge needed to:
Learning Objectives
Define business-level strategy.
Discuss the relationship between customers and business-level strategies in terms of who, what, and how.
Explain the differences among business-level strategies.
Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy.
Define the sustainable competitive advantage
Understand how a business may achieve sustainable competitive advantage – the three order fit model
Use the three-order-fit model to explain how above-average returns can be earned.
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Business-Level Strategy (Defined)
- An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Customers: Their Relationship
with Business-Level Strategies
Professor Ranfeng Qiu
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Key Issues
in
Business-level
Strategy
Who will be
served?
What needs will
be satisfied?
How will those
needs be satisfied?
Professor Ranfeng Qiu
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Who: Determining the Customers
to Serve
- Market segmentation
A process used to cluster people with similar needs into individual and identifiable groups.
Professor Ranfeng Qiu
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All Customers
Industrial/business
Markets
Consumer
Markets
Professor Ranfeng Qiu
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- Consumer Markets
Demographic factors
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
- Industrial Markets
End-use segments
Product segments
Geographic segments
Common buying factor segments
Customer size segments
Market Segmentation
Professor Ranfeng Qiu
2–*
Professor Ranfeng Qiu
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What: Determining Which
Customer Needs to Satisfy
- Customer needs are related to a product’s benefits and features.
- Customer needs are neither right nor wrong, good nor bad.
- Customer needs represent desires in terms of features and performance capabilities.
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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How: The Purpose of a
Business-Level Strategy
- Business-Level Strategies
Are intended to create differences between the firm’s competitive position and those of its competitors.
- To position itself, the firm must decide whether it intends to:
Perform activities differently or
Perform different activities as compared to its rivals.
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Business-level strategy
- Competitive parity
Professor Ranfeng Qiu
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- No firm brings anything (unique) to the game
- No firm has added value. How do firms compete?
Intense price-based rivalry drives profits down to 0
Professor Ranfeng Qiu
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Business-level Strategy
Professor Ranfeng Qiu
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Increase WtP:
Differentiation Strategy
Lower O.C:
Low Cost Strategy
Both:
DualStrategy
1. Differentiation
2. Low costs
3. Dual advantage
- Competitive advantage
a wider wedge = Max (WtP – Cost)
Professor Ranfeng Qiu
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Types of Business-Level Strategies
Professor Ranfeng Qiu
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Lowest Cost
Distinctiveness
Basis for Customer Value
**In the textbook, there are also focused low cost and focused differentiation strategies. To me, there is no need to differentiate between the focused or general strategies.
Differentiation
Cost Leadership
Integrated Cost Leadership/ Differentiation
Professor Ranfeng Qiu
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Low Cost Strategy
Professor Ranfeng Qiu
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- A “quality-effective” way to economize on resources
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Value Chain Analysis
Professor Ranfeng Qiu
Professor Ranfeng Qiu
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- Cost-effective MIS
- Few management layers
- Simplified planning
- Consistent policies
- Effecting training
- Easy-to-use manufacturing technologies
- Investments in technologies
- Finding low-cost raw materials
- Monitor suppliers’ performances
- Link suppliers’ products to production processes
- Economies of scale
- Efficient-scale facilities
- Effective delivery schedules
- Low-cost transportation
- Highly trained sales force
- Proper pricing
Value-Creating Activities
for Cost Leadership
Professor Ranfeng Qiu
2–*
Professor Ranfeng Qiu
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**Value Chain Analysis on Automobile Industry
Professor Ranfeng Qiu
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Stage 1. Identify the principle activities and allocate the total cost
Purchasing
Parts
Inventory
R&D
Design
Comp prod
Assembly
Testing
Qlty
Control
Prod.
Invt
Sales
Mrkt
Distribution
Dealer
After-
sales
The above value chain chart illustrates the value chain activities of an auto industry. Please use this and the next slide as references for your “Discussion forum 4”.
Professor Ranfeng Qiu
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**Value Chain Analysis on Automobile Industry
Professor Ranfeng Qiu
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Stage 2. Identify cost driver for each activity
The above value chain chart illustrates the value chain activities of an auto industry. Please use this and the next slide as references for your “Discussion forum 4”.
| Purchasing | Parts inventory | R&D Design | Components prod. | Assembly | Testing Qlty control | Products inventory | Sales & mrkt | Distribution | Dealer & after sales |
Professor Ranfeng Qiu
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Low cost strategy
- Trade-offs
Professor Ranfeng Qiu
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a loss of competitive advantage to newer technologies
Neglect changes in customers’ needs
Competitors imitate the cost leader’s competitive advantage
Professor Ranfeng Qiu
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Low Cost Strategy
- Low cost = low price???
- Low cost = low WtP???
Professor Ranfeng Qiu
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Challenger has no advantage, but charges a lower price.
Can it survive?
Challenger is lower costs – and lower WtP.
Can it survive?
Professor Ranfeng Qiu
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Low cost strategy
Professor Ranfeng Qiu
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| Low Cost | Differentiation | Dual |
| Strategic focus | O.C | |
| Product | Standardized | |
| Customers | Typical | |
| Driving factors | Scale Efficiency | |
| Value chain activities | Operation, production and logistic technologies |
Professor Ranfeng Qiu
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Low Cost Strategy and FF
Professor Ranfeng Qiu
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| Low Cost | Differentiation | |
| Supplier | Absorb cost increase or force suppliers hold down their prices | Pass cost increase to customers |
| Customer | Retain customers with low prices | Maintain high price with high WtP |
| New Entrants | Significant barriers | Barriers to entry with high switching costs |
| Substitutes | Defend against substitutes with low price | Provide high price/quality tradeoffs |
| Rivals | Defend again rivals | Stay away from price war |
Professor Ranfeng Qiu
Differentiation Strategy
- Differentiate Strategy
Professor Ranfeng Qiu
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- Better meet customers’ needs.
- Raise customer WtP Sold at a premium price
Professor Ranfeng Qiu
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Customers: who?
Professor Ranfeng Qiu
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For consumer markets:
Demographic factors
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
For industrial markets:
End-use segments
Product segments
Geographic segments
Common buying factor segments
Customer size segments
Professor Ranfeng Qiu
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Differentiation Strategy
Professor Ranfeng Qiu
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- Quantify WtP?
“Middle-market consumers - 20%-200% premiums for
well-designed
well engineered
and well-crafted (traditional luxury goods)
not before found in the mass middle market”.
- Is there WtP calculator?
intangible factors and perceptions (nonlinear)
Professor Ranfeng Qiu
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Differentiation Strategy
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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- Highly developed MIS
- Emphasis on quality
- Worker compensation for creativity/productivity
- Use of subjective performance measures
- Basic research capability
- Technology
- High quality raw materials
- Delivery of products
- High quality replacement parts
- Superior handling of incoming raw materials
- Attractive products
- Rapid response to customer specifications
- Order-processing procedures
- Customer credit
- Personal relationships
Value-Creating Activities
and Differentiation
Professor Ranfeng Qiu
2–*
Professor Ranfeng Qiu
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Differentiation strategy
Professor Ranfeng Qiu
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| Low Cost | Differentiation | Dual |
| Strategic focus | O.C | WtP |
| Product | Standardized | Differentiated |
| Customers | Typical | Specific (Niche) |
| Driving factors | Scale Efficiency | Quality Features Service Innovation, design Prestige image |
| Value chain activities | Operation, production and logistic technologies | R&D (design and innovation) Marketing |
Professor Ranfeng Qiu
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Differentiation Strategy and FF
Professor Ranfeng Qiu
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| Low Cost | Differentiation | |
| Supplier | Absorb cost increase or force suppliers hold down their prices | Pass cost increase to customers |
| Customer | Retain customers with low prices | Maintain high price with high WtP |
| New Entrants | Significant barriers | Barriers to entry with high switching costs |
| Substitutes | Defend against substitutes with low price | Provide high price/quality tradeoffs |
| Rivals | Defend again rivals | Stay away from price war |
Professor Ranfeng Qiu
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Differentiation Strategy
- Difficulties
Professor Ranfeng Qiu
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a higher price
not sufficiently differentiate
Competitors offer similar products at a lower cost
Counterfeiters offer a differentiated good or service.
Professor Ranfeng Qiu
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Dual Strategy
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
Dual Strategy
- Dual advantage
Relatively low cost products with valued differentiated features.
Use primary and support activities to produce differentiated products at relatively low costs.
Professor Ranfeng Qiu
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- Risks
Lack sufficient low cost
Lack differentiation.
Professor Ranfeng Qiu
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Competitive advantages
- The tension between O.C and WtP
- Widening the wedge is difficult
What to compare?
Professor Ranfeng Qiu
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Small premium
coffee shops
Mom & Pop shops
Gas station coffee
McDonald’s
Professor Ranfeng Qiu
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Dual Strategy
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
Dual Strategy
- Dual advantage (strategy)
Relatively low cost products with valued differentiated features.
Use primary and support activities to produce differentiated products at relatively low costs.
Professor Ranfeng Qiu
*
- Risks
Lack sufficient low cost
Lack differentiation.
Professor Ranfeng Qiu
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Competitive advantages
- The tension between O.C and WtP
- Widening the wedge is difficult
What to compare?
Professor Ranfeng Qiu
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Small premium
coffee shops
Mom & Pop shops
Gas station coffee
Starbucks Coffee
McDonald’s
Professor Ranfeng Qiu
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What is strategy?
- Strategy: the creation of a unique and valuable position, involving a different set of activities (Porter, 1996).
Position
- Sustainability - “Fit” of activities
“Fit” – internally consistent activities
What not to be, and what not to be
tradeoffs
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
A strategy that creates value in one position may create less value in a different position
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Positioning (strategy)
- Short-lived advantages: “operational effectiveness is not strategy”
Professor Ranfeng Qiu
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- When firms move away from each other in product/technology/taste space.
Professor Ranfeng Qiu
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Positioning
- The U.S PC industry (1976-1988)
The IBM-clone PC model.
Differentiation index decline (>37%).
Margins fell (56%, $2.95billion).
“Brand” effect was eroded.
(Mckinsey Quartly, 2000, 2)
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Strategic herding
Positioning
Professor Ranfeng Qiu
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Position (different)
New market
Same market, new activities
few needs of many customers
broad needs of few customers
broad needs of many customers in a narrow market (ex. specific location)
Cola drinks and soda
Professor Ranfeng Qiu
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Segmented markets – more profitable position
Undifferentiated market – price-based competition
The attractiveness of the market
The crowdedness of the market?
Or the size of the market?
Sustainable Strategy – “Fit”
- Strategic “fit”
choosing a position,
commitment to position
Market-based (external)
Organizational resources (internal).
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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acties tailored towards a particular position
Without continuity, difficult to develop unique skills and assets and build reputations
A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse.
Consistency – first order “fit”
- First order fit:
Activity (function) - the overall strategy.
- (Value adding) activities
Directly affecting WtP and O.C
Firms make choice
A source of sustainable advantage
Activities are interlocked
Can be difficult to copy - sustainable
Professor Ranfeng Qiu
*
Professor Ranfeng Qiu
*
acties tailored towards a particular position
Without continuity, difficult to develop unique skills and assets and build reputations
A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse.
Professor Ranfeng Qiu
*
acties tailored towards a particular position
Without continuity, difficult to develop unique skills and assets and build reputations
A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse.
Consistency – first order “fit”
Professor Ranfeng Qiu
*
- Ikea
Position:
young furniture buyers, stylish at low cost.
Activities:
Limited sale associates;
Packaging
Modulized designs, long-term suppliers
Labeling, European designers
Ready to transport and assemble
Displays in room-like setting
On-site inventory
Professor Ranfeng Qiu
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acties tailored towards a particular position
Without continuity, difficult to develop unique skills and assets and build reputations
A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse.
Complementarity of activities – second order “fit”
- Second order fit:
Activities are reinforcing each other.
Activity – activity – activity
Higher level “fit”, more sustainable
Ikea
- Activity system
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Customers self-serve, no sale associates, ready to assembly, own pick-up and delivery,
Professor Ranfeng Qiu
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Ikea’s Activity System
Limited
Customer
Service
Modular
Designs
Low Mfg
Cost
Self-service
Selection
Self-transport
Limited
sales staff
Customer loyalty
Self -assembly
Suburban Location
Most items in stock
Design focused on low cost
Explanatory labeling
Easy transport
Flat packing kits
Wide variety
Long-term suppliers
Year-round stocking
On-site inventory
Impulse buying
High-traffic store layout
Easy to make
Professor Ranfeng Qiu
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Complexity and History – third order “fit”
- Complexity, and tacit knowledge
the system - too complex to fully appreciate and copy.
not codified but embedded in unstated routines, implicit.
- History:
Typically result from a long process of trail-and-error experimentation.
Professor Ranfeng Qiu
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- 1960s, Swedish adopted a program to build 1 million new apartments in 10 years.
- Mail-order, catalogue since 1951
Professor Ranfeng Qiu
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Complexity and History – third order “fit”
- The importance of small decisions
“success does not depend on doing a few big things, but on doing lots of little things right.”
“Imitators will not have to imitate just a few internal attributes; they will have to imitate thousands, or even hundreds of thousands of such attributes – a daunting task indeed.”
(Barney)
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Starbucks’ value-adding activities
- What is Starbucks’ business-level strategy?
Professor Ranfeng Qiu
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Professor Ranfeng Qiu
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Starbucks
Professor Ranfeng Qiu
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Few rivals/substitutes create high WtP
Standard supplies and formats lower costs
Good quality and efficiency lead to high satisfaction
High demand and loyalty
experience effects and economies of scale
Expand
Scope and geographic
Costs fall
First mover advantage to negate competition and imitation from rivals and substitutes
Professor Ranfeng Qiu