Strategic Audit Report

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Strategic Management Week 6 – Chapter 5

General Strategies: Differentiation

The Key Steps in a Strategic Audit of a Company

• Understand its goal and strategy Strategy Analysis • Analyze its external environment Industry/External Analysis • Evaluate its resources Resource/Internal Analysis • Assess its performance? Performance Analysis • Make Strategic Recommendations:

– Use the Issues identified in the 5 parts of the analysis above. – Identify several strategic options that the company can follow – Evaluate these options (pros and cons/how likely to address the issues

raised and risks) – Make your recommendations with any warnings to the management.

Where Are We in the SM Process?

Mission Objectives

External Analysis

Internal Analysis

Strategic Choice

Strategy Implementation

Competitive Advantage

Business Level Strategy

Corporate Level Strategy

How to Position a Business

in the Market?

Which Businesses to Enter?

STRATEGY Choice

Good Understanding of the industry (the

industry forces and key success

factors)

Good Understanding Of the firm (Current

Strategy and Performance, Internal Environment including leadership)

Strategy Design

Group Strategy/Vision

Corporate or Divisional Strategy

Business Unit Strategy

Functional Policies

Product/Market Strategies and Tactics

There are more than many levels of Strategy

Source: Professor José De La Torre

Rate of Profit in Excess of the

Competitive Level

Avoid Competitors

Attractive Industry

Attractive Niche

Cost Advantage

Be Better Than Competition

Differentiation Advantage

Sources of Superior Profitability

Chs. 4 & 5: Business-Level Strategies

Two Generic Business Level Strategies Cost Leadership:

• generate economic value by having lower costs than competitors

Product Differentiation:

• generate economic value by offering a product that customers prefer over competitors’ product

Example: Wal-Mart

Example: Harley-Davidson

The Economics of Product Differentiation

Qind

Pff

Dff

MRff

ATCind

MCff

Pind Dind

ATCff

Qff

Focal Firm with No Differentiated Product

Focal Firm with Differentiated Product

Above Normal Profits

Differentiation

• Objective: generate economic value by offering a product that customers prefer over competitors’product

• As a Strategy: increase the perceived value of the focal firm’s products and/or services relative to the value of competitor’s products and/or services – …By satisfying customers’ needs – i.e. style, taste, quality, image, reliability, nostalgia – Your product or service may not have the lowest cost but it

satisfies customer needs most efficiently

Ethics & Strategy

• Do claims regarding product attributes align with reality – Consistently?

• Does industry matter when evaluating ethical promotion?

• Does application of the “gold standard” have negative consequences (accompanying the positive ones)?

Differentiation Sources

– Attributes • Product Features • Product Complexity • Timing of Introduction • Location

– Relationships • Customization • Consumer Marketing • Reputation

– Linkages (Intra-firm, distribution channels, service & support) • Linkages among Functions in the Firm • Linkages with other Firms • Product Mix

Differentiation & Customer Relationships

• Considerations: – Customization – Marketing

• May or may not ∆ in product/service attributes (One or more of the “Seven P’s”)

– Reputation • Needn’t be a “good” reputation as measured by

dominant societal norms

Substitutability of Sources

• Can the sources listed in the pervious slide substitute for one another?

• Is there another way to substitute for the sources listed in the pervious slide? – Internally developed attributes can be substituted

by a competitor engaging in an inter-firm alliance?

Fragmented Emerging Mature Declining

Elevate brand value

Establish market share

Refine/ combine: services & features into final product

Exploit niches by excelling in addressing

strong needs in a customer subset

Influence of Industry Life-Cycle/Structure

Mature DecliningFragmented Emerging

Branding Introduction

First Mover Advantages

Refined Offering

Niche Exploitation

Alternative Typologies

• Dimensions (of Customer Needs): – Functional, Social, & Emotional Dimensions

• Differentiation Sources: – Product Features

• Superior Functional Performance • More Functions • Unique Function

– Quality/Reliability – Convenience – Brand Image

Generic Strategies and Scope

General player whose product or service features command industry average prices but

whose costs are significantly below the industry average

Example: Wal-Mart

Niche player with average Prices and below-average costs

That focuses on a segment of customers or a specific

geography

Example: Columbia Sports

General player whose product or service features command premium prices and whose

costs are at the industry average

Example: Apple

Niche player with average costs but commanding premium

prices that focuses on the high end and customers in a general

or specific geography

Example: Ducati

Scope General Focused

St ra

te gy

D if

fe re

nt ia

ti on

C os

t l ea

de rs

hi p

VRIO

• (Perceived) Rarity is presumed if differentiation is achieved

• Value and Rareness are assumed if a firm successfully differentiates

• Imitability – Historical uniqueness – Causal ambiguity – Social complexity

Stuck in the Middle?

• Can cost leadership be combined with a high differentiation strategy – There’s risk of not being distinct enough to command a

semi-premium price – But… it may come down to preceived customer value:

Benefit/Cost – Is this uniform for all customers?

• Integrated Differentiation-Cost Leadership • Does this fit any firm (i.e. can there be insurmountable

misalignments from established strategy)?

Integrated Differentiation-cost leadership Integrated Differentiation-cost leadership • A set of actions

designed to differentiate the firm’s product in the marketplace while simultaneously maintaining relative low cost

Target

• Processes, Policies, and culture • Policy of experimentation? • Lily Pulitzer for Target, Marimekko for Target,

Neiman Marcus for Target, Jason Wu for Target, & Missoni for Target – Are the Target lines of with designers equivalent to the

designers’ “regular” labels? – Does it matter?

• Does Wal-Mart offer something similar?

• Organizational culture/identity

Implementing Differentiation Internationally

Business-level and International Expansion Strategies

Generally, but not always…

• structure, control, & compensation policies are similar as follows:

Cost leadership

Product differentiation

Global

Multi-domestic

(international integration, efficiency)

(local responsiveness)

Implementing Differentiation Internationally

Global Multi-Domestic

• standardized product

• little variance in tastes & preferences

• centralized control

• focused on efficiency

• non-standard product

• high variance in tastes & preferences

• decentralized control

• focused on satisfying tastes & preferences

Example: Sony Example: Siemens

Popular Strategies used as a means to avoid or be better than competitors

• Vertical Integration (6) • Corporate Diversification (7) (8 – its

organization) • Strategic Alliances (9) • Mergers and Acquisitions (10) • International Strategies

Blue Ocean Strategy

• Transcend the competition & find new markets • Beating the competition by finding unexplored

territories in competition basis/customer needs – “Value innovation”

• Examples: Yellowtail wine, Cirque du Soleil, Nintendo Wii

• Considerations: – Can organizational inertia be overcome? – Does this generate inimitability/sustainability?

Blue Ocean Strategy

-Kim & Mauborgne, 2005

Keys to Blue Ocean Strategy

• Entails strategic shift – Compete in an uncontested market – Make competition irrelevant – Create & capture new demand – Break the value-cost trade-off – Achieve low cost & differentiation by aligning the

system of internal processes for this pursuit entirely

-Kim & Mauborgne, 2005

Example: Yellow Tail

• ID Basis of competition – Price, Elite packaging image, aging quality, vineyard prestige, taste

complexity, diversity in range of offerings

• Choose which to eliminate – Elite packaging image

• Choose which to reduce well below industry average – Aging quality, vineyard prestige, taste complexity

• Choose which to raise – Price: quality ratio

• Create/ID factors to add that intra-industry competitors don’t offer – Easy drinking, ease of selection, & adventurous spirit