Business Management

whiterose2015

CH5SLIDES8edMGMT4650Spring2018.pdf

Home >Business & Finance homework help >Operations Management homework help >Business Management

Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Business-Level Strategy:

Creating and Sustaining

Competitive Advantages

chapter 5

Sustaining a Competitive Advantage

Consider . . . The viability of a firm’s success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the environment.

They also have a strategy…

5-2

5-3

Sustaining a Competitive Advantage

▪ Business-level strategies require a choice: ▪ How to overcome the five forces and achieve

competitive advantage?

▪ Suggestion – use Porter’s three generic strategies: ▪ Overall cost leadership ▪ Differentiation ▪ Focus

5-4

Three Generic Strategies

Exhibit 5.1 Three Generic Strategies Source: Adapted and reprinted with the permission of The Free Press, a division of Simon & Schuster Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved.

5-5

Three Generic Strategies

▪ Overall cost leadership is based on: ▪ Creating a low-cost position relative to a

firm’s peers ▪ Managing relationships throughout the entire

value chain to lower costs ▪ Differentiation implies:

▪ Products and/or services that are unique & valued

▪ Emphasis on nonprice attributes for which customers will gladly pay a premium

5-6

Three Generic Strategies

▪ A focus strategy requires: ▪ Narrow product lines, buyer segments, or

targeted geographic markets ▪ Advantages obtained either through

differentiation or cost leadership

5-7

Examples: Three Generic Strategies

▪ Companies pursuing an overall cost leadership strategy: ▪ McDonalds ▪ Walmart

▪ Companies pursuing a differentiation strategy: ▪ Apple ▪ Target

▪ Companies pursuing a focus strategy: ▪ Ikea ▪ Costco

5-8

Three Generic Strategies

Exhibit 5.2 Competitive Advantage and Business Performance

5-9

Overall Low-Cost Leadership

▪ Cost leadership involves ▪ Aggressive construction of efficient scale facilities ▪ Vigorous pursuit of cost reductions from

experience ▪ Tight cost & overhead control ▪ Avoidance of marginal customer accounts ▪ Cost minimization in all activities in the firm’s

value chain, such as R&D, service, sales force, & advertising

5-10

Overall Low-Cost Leadership

▪ Cost leadership requires ▪ Learning to lower costs through experience: the

experience curve ▪ With experience, unit costs of production processes

decline as output increases ▪ This strategy also requires competitive parity

▪ Being “on par” with competitors with respect to low- cost, differentiation, or other strategic product characteristics

▪ Permits cost leaders to translate cost advantages directly into higher profits

5-11

Improving Competitive Position vis-à-vis the Five Forces

An overall low-cost position

▪ Protects a firm against rivalry from competitors

▪ Protects the firm against powerful buyers

▪ Provides more flexibility to cope with demands from powerful suppliers who want to increase input costs

▪ Provides substantial entry barriers due to economies of scale and cost advantages

▪ Puts the firm in a favorable position with respect to substitute products

An overall low-cost position

5-12

Pitfalls of Cost Leadership

▪ Too much focus on one or a few value chain activities

▪ Increase in the cost of the inputs on which the advantage is based

▪ The strategy is imitated too easily ▪ A lack of parity on differentiation ▪ Reduced flexibility ▪ Obsolescence of the basis of a cost advantage

5-13

Differentiation

▪ A differentiation strategy can take many forms: ▪ Prestige or brand image ▪ Quality ▪ Technology ▪ Innovation ▪ Features ▪ Customer service ▪ Dealer network

5-14

Differentiation

▪ Differentiation requires: ▪ A level of cost parity relative to competitors ▪ Integration of multiple points along the value chain

▪ Superior material handling operations to minimize damage

▪ Low defect rates to improve quality ▪ Accurate and responsive order processing ▪ Personal relationships with key customers ▪ Rapid response to customer service requests

▪ Differentiation along several different dimensions at once

5-15

Improving Competitive Position vis-à-vis the Five Forces

An overall differentiation strategy

▪ Creates higher entry barriers due to customer loyalty

▪ Provides higher margins that enable the firm to deal with supplier power

▪ Reduces buyer power because buyers lack suitable alternatives

▪ Establishes customer loyalty and hence less threat from substitutes

An overall differentiation strategy

Insights from Research: Creating Customer Loyalty

▪ A differentiation advantage can be driven by a customer service strategy, but this may be hard to do: ▪ Can management require employees to behave

positively toward customers? ▪ Can management use control systems to reward

positive employee-customer interactions? ▪ What happens when extrinsic motivators are used?

▪ Have YOU ever been told you have to be nice to customers, no matter what? How did that make you feel?

5-16

Insights from Research: Creating Customer Loyalty

▪ People have a need for genuine self-expression and authentic functioning

▪ Requiring employees to obey rules may cause them to become “numb” to their real feelings ▪ Scripted responses to customer complaints leave

no opportunity for authentic response ▪ Resulting coping behaviors may distance

employees from customers, creating dissatisfaction on both sides

▪ So how to create customer loyalty through genuine behaviors?

5-17

Insights from Research: Creating Customer Loyalty

▪ Business leaders should model a positive disposition toward customers ▪ Encourage employees to understand the

company’s message or product ▪ Strong identification with company message will lead

employees to spontaneously express natural emotions, leading to authentic responses to customer issues

▪ Allow employees to have a strong personal association with customers ▪ Reward being completely honest with customers ▪ Reward going above and beyond company

expectations

5-18

Insights from Research: Creating Customer Loyalty

▪ Do you have any stories about a company where customer service employees went above and beyond for you?

▪ How did this make you feel? ▪ Were you more likely to be loyal to this company

as a result of how you were treated? ▪ Is this then truly a differentiated competitive

advantage?

5-19

5-20

Pitfalls of Differentiation

▪ Uniqueness that is not valuable ▪ Too much differentiation ▪ Too high a price premium ▪ Differentiation that is easily imitated ▪ Dilution of brand identification through product

line extensions ▪ Perceptions of differentiation may vary

between buyers and sellers

5-21

Focus

▪ A focus strategy is based on the choice of a narrow competitive scope within an industry. ▪ A firm selects a segment or group of

segments (or niche) and tailors its strategy to serve them

▪ A firm achieves competitive advantages by dedicating itself to these segments exclusively

5-22

Focus

▪ A focus strategy has two variants: ▪ Cost focus

▪ Creates a cost advantage in its target segment ▪ Exploits differences in cost behavior

▪ Differentiation focus ▪ Differentiates itself in its target market ▪ Exploits the special needs of buyers

5-23

Improving Competitive Position vis-à-vis the Five Forces

An overall focus strategy

▪ Creates higher entry barriers due to cost leadership or differentiation or both

▪ Can provide higher margins that enable the firm to deal with supplier power

▪ Reduces buyer power because the firm provides specialized products or services

▪ Focused niches are less vulnerable to substitutes

An overall focus strategy

5-24

Pitfalls of Focus

▪ Erosion of cost advantages within the narrow segment

▪ Highly focused products and services are still subject to competition from new entrants & from imitation

▪ Focusers can become too focused to satisfy buyer needs

5-25

Combination Strategies: Integrating Low-Cost & Differentiation

▪ Integration of low-cost and differentiation strategies makes it difficult for competitors to duplicate or imitate strategy

▪ The goal of a combination strategy is to provide unique value in an efficient manner

5-26

Combination Strategies

▪ Combining overall low-cost and differentiation strategies can take several forms:

▪ Automated & flexible manufacturing systems allow for mass customization

▪ Data analytics allows firms to customize product & services while using resources efficiently

▪ Exploitation of the profit pool concept creates a competitive advantage

▪ Using information technology, firms can integrate activities throughout the extended value chain

5-27

Improving Competitive Position vis-à-vis the Five Forces

An integrated overall low-cost & differentiation strategy

▪ Creates higher entry barriers due to both cost leadership & differentiation

▪ Can provide higher margins that enable the firm to deal with supplier power

▪ Reduces buyer power because of fewer competitors

▪ An overall value proposition reduces threat from substitutes

An integrated overall low-cost & differentiation strategy

5-28

Pitfalls of Combination Strategies

▪ Firms that fail to attain both overall low-cost & differentiation strategies may end up with neither and become “stuck in the middle”

▪ Firms can also underestimate the challenges & expenses associated with coordinating value- creating activities in the extended value chain

▪ Firms can also miscalculate sources of revenue and profit pools in the firm’s industry

5-29

Question?

▪ Which statement regarding competitive advantages is true? A. If several competitors pursue similar differentiation

tactics, they may all be perceived as equals in the mind of the consumer.

B. With an overall cost leadership strategy, firms need not be concerned with parity on differentiation.

C. In the long run, a business with one or more competitive advantages is probably destined to earn normal profits.

D. Attaining multiple types of competitive advantage is a recipe for failure.

5-30

Industry Life Cycle Stages

▪ The industry life cycle ▪ Introduction ▪ Growth ▪ Maturity ▪ Decline

▪ Generic strategies, functional areas, value-creating activities, & overall objectives all vary over the course of an industry life cycle

5-31

Industry Life Cycle Stages

Exhibit 5.6 Stages of the Industry Life Cycle

5-32

Strategies in the Introduction Stage

▪ The introduction stage is when: ▪ Products are unfamiliar to consumers ▪ Market segments are not well-defined ▪ Product features are not clearly specified ▪ Competition tends to be limited

▪ Strategies: ▪ Develop a product and get users to try it ▪ Generate exposure so the product becomes

“standard”

5-33

Strategies in the Growth Stage

▪ The growth stage is: ▪ Characterized by strong increases in sales ▪ Attractive to potential competitors ▪ When firms can build brand recognition

▪ Strategies: ▪ Create branded differentiated products ▪ Stimulate selective demand ▪ Provide financial resources to support

value-chain activities

5-34

Strategies in the Maturity Stage

▪ The maturity stage is when: ▪ Aggregate industry demand slows ▪ Market becomes saturated, few new

adopters ▪ Direct competition becomes predominant ▪ Marginal competitors begin to exit

▪ Strategies: ▪ Create efficient manufacturing operations ▪ Lower costs as customers become price-

sensitive ▪ Adopt reverse or breakaway positioning

5-35

Strategies in the Decline Stage

▪ The decline stage is when: ▪ Industry sales and profits begin to fall ▪ Price competition increases ▪ Industry consolidation occurs

▪ Strategies: ▪ Maintaining the product position ▪ Harvesting profits & reducing costs ▪ Exiting the market ▪ Consolidating or acquiring surviving firms

5-36

Question?

▪ As markets mature, A. costs continue to increase. B. applications for patents increase C. differentiation opportunities increase. D. there is increasing emphasis on efficiency.

5-37

Turnaround Strategies

▪ A turnaround strategy involves reversing performance decline & reinvigorating growth toward profitability through ▪ Asset & cost surgery ▪ Selected market & product pruning ▪ Piecemeal productivity improvements

▪ Example = Ford Motor Company ▪ Example = Jamba Juice