Apple company analysis

Business-Level Strategy

MGO 403 Strategic Management

 Porter’s Three Generic Strategies

What shall I learn in this course? - -Concepts & Frameworks & Tools

External Analysis

Macro-environmental analysis

Industry analysis (Porter’s Five Forces Model)

Internal Analysis

Value Chain Analysis Resource-Based View

Strategic Choices

Competitive positioning (Cost vs. differentiation) Corporate scope

Strategic Control & Leadership

Organizational structure Evaluation systems

Strategic Decisions

How does the company make

profits?

INDUSTRY ATTRACTIVENESS

----------------------------- In which industry

should the company compete?

COMPETITIVE ADVANTAGE

----------------------------- How should the

company compete in an industry?

CORPORATE STRATEGY

BUSINESS STRATEGY

Example : General Electric

Corporate strategy (choice of corporate scope)

Business strategy (competitive advantage in a business, e.g., in Appliances)

Source of Competitive Advantage

Economic Profit in an industry = Revenue - Cost

Profit

Price

Cost

The key to competitive advantage in an industry is to drive the wedge between customer’s willingness-to-pay and costs

Source of Competitive Advantage

Lowering costs Increasing customer’s willingness to pay

Supplier cost

Material cost Product

price

Willingness to pay

Focal firm’s value share Customer’s value shareSupplier’s value share

Different strategic choices: three generic strategies

Cost Leadership & Differentiation Strategies

Competitive Advantage

Cost Leadership Strategy

Differentiation Strategy

Similar Product At Lower Cost

Price Premium From Unique Product

McDonalds

Wal-Mart

Harley Davidson

Apple

Rolex

Lamborghini

Southwest Airlines

Ikea

Traditional Supermarket such as Kroger, Ralphs

and Albertsons

Three generic strategies

 Overall cost leadership o Low-cost position relative to a firm’s peers o Manage relationships throughout the entire value chain o e.g., Wal-Mart; McDonald’s

 Differentiation o Create products and/or services that are unique and valued by

customers o Non-price attributes for which customers will pay a premium o e.g., Apple; Harley Davison

 Focus strategy o Narrow product lines, buyer segments, or target geographic

markets o Attain advantages either through differentiation or cost

leadership o e.g., Rolex; Lamborghini; Carter’s

Drivers of Cost Leadership Strategy

 Economies of scale o Reduction in average unit cost due to high

volume of production

 Experience curve o How business “learns” to lower costs as it

gains experience with production process o With experience, unit costs of production

declines as output increases in most industries

 Process Technology o Cost reduction from process innovation or

business reengineering o e.g., Ford’s moving assembly line reduced

the time taken to assembly a model from 106 hours to 6 hours between 1912 and 1913

Drivers of Cost Leadership Strategy (cont.)

 Product design o Standardizing designs & components

o Design for manufacturing not just for aesthetics • e.g., ease manufacturing difficulties

 Differential access to low-cost factors of production o location advantage

• e.g., Drilling in Saudi Arabia cheaper than drilling in the North Sea; producing in Asia

o low-cost inputs • e.g., non-union labor(Wal-Mart)

Potential Pitfalls of Cost Leadership Strategy

 Too much focus on one or a few value-chain activities

o e.g., Managers may decide to cut marketing expenses/ human resource training expenses but ignore manufacturing expenses

o Manager should explore ALL value-chain activities as candidates for cost reductions

 All rivals share a common input or raw material

o e.g., manufacturing firms based in China which rely on a common input- low labor cost

 Strategy is imitated too easily

Pitfalls of Cost Leadership Strategy(cont.)

 A lack of parity on differentiation

o E.g., Firms providing online degree programs may offer low prices. However, they may not be successful unless they can offer instructions that is perceived as a comparable to traditional providers

 Erosion of cost advantage when the pricing information available to customers

o e.g., Wal-Mart

• when customers know your cost is low, they ask you to transfer the benefit to the customers

Differentiation Strategy  Definition: provide unique/ distinct product to increase

customers’ willingness to pay o the key is creating value for customers

 Differentiation can take many forms: o Prestige or brand name

• e.g., Coke

o Technology • e.g., North face camping equipment; IBM

o Innovation • e.g., Apple

o Features • e.g., Harley-D: highway riding motorcycle

o Customer service • e.g., Nordstrom

o Dealer Network • e.g., Lexus automobiles

 Firms may differentiate along several dimensions at once o customer service & product quality & design

 Successful differentiation requires integration with all parts of a firm’s value chain

 An important aspect of differentiation is speed or quick response

 Improve competitive position o Create higher entry barriers and less substitutes due to

customer loyalty o Provide higher margins that enable the firm to deal with

powerful buyers/ suppliers

Differentiation Strategy

Uniqueness that is not valuable o A differentiation strategy must provide unique

products/services that customers value highly and are willing to pay

Too much differentiation o Strive for quality or service that is higher than customers

desire

o e.g., Mercedes-Benz S-class: seats are adjustable 14 ways

Too high a price premium o e.g., Duracell: In CVS, a four-pack of Energizer AA batteries

was $2.99 compared with a Duracell four-pack at $4.59

Pitfalls of Differentiation Strategy

Dilution of brand identification through product– line extension

o firm may erode their quality brand image by adding product or services with lower prices and less quality

o e.g., In 1980, Gucci wanted revenue growth. It added a set of lower-prices goods to its product line. In the short term, the strategy works (sales soared), how about the long-term?

Perception of differentiation may vary between buyers and sellers

o “Beauty is in the eye of beholder”

Pitfalls of Differentiation Strategy (cont.)

Focus Strategy

Focus strategy

o Narrow product lines, buyer segments, or target geographic markets

• Firm selects a segment or group of segments and tailors it s strategy to serve them

o Attain advantages either through differentiation or cost leadership

• Cost Focus  Firm strives to create a cost advantage in its target segment

• Differentiation Focus  Firm seeks to differentiate in its target market

Market Segmentation and Targeting

Three generic strategies

Focused Differentiation strategy

Focused Cost leadership strategy

 Erosion of cost advantages within the narrow segment

o Competitors’ cost reduction efforts

o Increasing bargaining power of suppliers

 Competition from new entrants and from imitation

o Airborne Express

 Too focus to satisfy buyer needs

o Hardware chains such as Ace and True Value are losing market share to rivals such as Lowe’s and Home Depot that offer a full line of home and garden equipment and accessories

Automobile manufacturing

Superior MIS that improve fast response capabilities;

widely respected CEO

Training to provide excellent customer

service

Unique features; fast new product development

Use quality materials

Defect free product; wide variety

Fast delivery; high order fulfill rate

Building brand reputation

Rapid response

to customer

service requests

Superior material handling

operations to

minimize damage