Please read and complete 5 questions.

Key Fundamental Concepts

� Understand the concept of “strategic fit” and how to assess it,

� Gain a preliminary look at the concept of value and cost drivers as they relate to profitability,

� Evaluate the nature of competitors’ moves and responses,

� Gauge the likelihood and timing of competitor response to strategic moves,

� Consider the strategic challenges facing large, established firms,

� Discuss the sources of “organizational tension” and mitigate their risks,

� Analyze the challenges presented by “game-changers” in an industry.

3

Strategy and Competitive Advantage

� The underlying principle defining business strategy:

¾ Who are the customers we are going to serve?

¾ How do we distinguish our company’s offerings from one another?

¾ How do we distinguish our offerings from that of our competitors?

4

Strategy Always Thinks About the Future

� A long-term perspective is essential to prepare for change:

¾ What will our customers want from us in the future?

¾ Who will we compete with in the future?

¾ What are the unanticipated events or factors that could “disrupt” us?

David Lei, Revised, 2011, 2013, 2015, 2017

The Foundation of Strategy

� Profitability = f (Value > Cost):

– The essential equation of business – you can only when the firm captures value from customer purchases that exceed costs.

– Despite its underlying potency, the equation is a bit “static.”

� Profitability = f (Distinction):

– The search for Distinction is the ultimate basis of strategy. Economic theory aside, every business looks for a way to distinguish itself from its rivals. How does it do this? Two steps:

– First, it must understand the industry in which it competes. – Second, it must conceive some type of strategy that enables it to deliver

greater value than its costs through some approach to reach customers.

David Lei, Revised, 2011, 2013, 2015, 2017

Critical Success Factors and Strategy

� Profitability: What is the missing link?

– Every industry has certain essential characteristics that impact each firm competing. Firms can attempt to bypass some of these characteristics but ultimately understand what they are and how to deal with them.

– Each individual firm must design its strategy around its own understanding of how to navigate the industry based on its own source of Distinction.

� Critical Success Factors:

– In essence, what should the firm do to erect barriers to imitation? – What enables the firm to capture greater pricing power? – What organizational attributes facilitate innovation?.

7

Understanding the Strategic Tradeoffs

� By its very nature, every decision entails thinking about tradeoffs:

¾ No one can be all things to all customers.

¾ The set of skills, investments, and technologies to support a given strategy may not be suitable for another type of strategy.

¾ Strategic decisions have a deep impact on the organization – they are hard to reverse or change quickly.

Business Strategy – First-Level SWOT Analysis

Strategy

Internal Strength

External

ThreatWeakness

Opportunity

Apply, sustain

Avert

Discover

Overcome

Different Strategic Imperatives

(1) Apply or Extend Advantage/Strength/Opportunity)Strength Opportunity

Weakness

Internal External

Threat

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Definition: Business-Level Strategy � Business strategy addresses this question: How do we compete to win in this

competitive arena.

� Corporate strategy addresses this question: What businesses should we be in? How do we allocate resources among those businesses we keep?

� Business strategy focuses on developing a game plan to serve a given product-market. It is dependent on understanding how best to evaluate and manage the “five forces” of industry structure.

� The five forces of industry structure include: barriers to entry, supplier power, customer power, power of substitute offerings, and inter-firm rivalry within the industry.

� A firm needs to understand how best it can distinguish itself from its competition.

� Profitability is a direct function of distinctiveness.

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Competition and Industry Structure

� Macroenvironmental factors affect all firms within an industry. However, some firms will feel the impact more or less than others.

� Strategic groups highlight the nature of competition within an industry according to similarities among customers served, products/services offered, use of distribution channels, technology, etc.

� Market segments represent those customers that have well-defined needs and impose specific requirements on firms’ strategies.

Competition and Industry Structure

Industry

Strategic Group

Strategic Group

Strategic Group

SegmentSegmentSegmentSegmentSegmentSegment Segment

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Competition and Industry Structure

� Competition within a strategic group is more intense than competition across strategic groups.

� Competition within a given market segment is more intense than competition across different market segments (even those segments that come from the same strategic group).

� Business models that apply to one strategic group (or segment) do not automatically transfer over or work in another one.

� The more specific the customer need, the greater the likelihood that specialized firms will have a more sustainable advantage.

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Business Strategy Challenges

� All products standardize.

� All markets eventually saturate.

� All customers eventually become smarter.

� All organizations eventually slow down.

Core Tradeoffs in Generic Strategic Approaches

Cost Leadership

Differentiation

Segment or Niche Focus

Generic Competitive Strategies

Cost Leadership Differentiation Segment/Niche Focus Profit Source Large market share Price premium and

customer intimacy Repeat business or specialization

Value Drivers Standardized and con- sistent offering with little product change

Product enhancement to increase buyer value, both genuine and perceived

Novel offering, often highly customized or targeted to narrow niche

Cost Drivers • Process efficiency • Lean operations • Volume purchases • Bargaining power • Fast inventory turns

• Quality • Service • Workmanship • Materials • Engineering

• Specialized skills • Cutting-edge

technology • Deep knowledge

of buyer

Economic Drivers of Competitive Strategies � Cost leadership strategy:

¾ Predicated on attaining large market share to drive down unit costs ¾ Economies of scale drives decisions regarding procurement, production, distribution

and sales ¾ Often results in high degree of product standardization ¾ Value proposition based on low prices drive volume

� Differentiation strategy: ¾ Enhanced value proposition gives more latitude to charge higher prices ¾ Sustainable differentiation must provide buyer with both genuine and perceived

enhanced value ¾ Unit cost often higher than that of low-cost leader; quality and uniqueness provide

some barrier to imitation from other rivals

� Focus strategy: ¾ Predicated on crafting a value proposition for a very specialized need or customer

segment ¾ Seeks to avoid price-based competition by targeting customers larger firms avoid ¾ Often will attempt to “mass customize” or “personalize” offerings to individual

customers ¾ Sustainable only when there is high repeat purchase

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Evolution of Competitive Advantage and Sustainability

Established Firm

Pioneer or New Entrant

Industry Price

Time

C om

pe tit

iv e

A dv

an ta

ge

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

New Technology’s Impact on Competitive Advantage

� A competitive advantage in an earlier time period could well become a competitive disadvantage in a future time period.

� New entrants have the initiative to shape industry evolution early on, but are not guaranteed future success.

� Established organizations face increasing danger from a “game- changer” the longer they delay.

� Reinventing the business often means questioning everything you do – including how your value and cost drivers.

� Reinvention is very difficult because existing organizational practices reinforce inertia.

� The longer an organization is in business, the greater the inertia built up over time.

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Key Topics in Innovation: Critical Distinctions

Difference Between Invention and Innovation

� Invention: The creation of a product concept or technology based on an idea discovered through thought (individual or group) scientific research, or even accident.

� Innovation: The commercialization of the invention (idea) into a value proposition.

� Example: The Chinese invented gunpowder, but did little to innovate the idea into a military technology trump card.

David Lei © Revised, 2014, 2016

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

What Do We Know About Innovation � Innovation is about realizing an idea or concept into a tangible value

proposition that generates positive returns.

� Innovation can occur along a variety of dimensions:

– Product – Process – Business Model – Management – Application – Personalization

� Technology has no commercial value by itself (not a value driver) – only its potential application to a product, process or service.

� Too many organizations regard investing in technology as equivalent to fostering innovation.

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Key Topics in Innovation: Classification

The Different Types of Innovation � Product: New products that advance to a higher level of

performance or value

� Process: Enhances the value creation process to be more efficient or powerful

� Business Model: Redefines the firm’s capability to offer a value proposition or its place within the industry

� Application: Apply existing products to new markets

� Management: New organization designs or incentives to enhance performance

� Personalization: Takes customization to a new, higher level

David Lei © Revised, 2014, 2016

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Key Topics in Innovation: A System-wide Perspective

David Lei © Revised, 2014, 2016

Incremental Radical Descriptive

Product • VCR evolution (2 & 4-head) • DVD, TiVo and DVR’s • Portable solid-state hard drives in iPhones

Process • Software: C+, C++ • Syringes: Glass • Medical Records: Digitized

• Software: OOD • Syringes: Molded plastic • Provider-specific digital

systemwide coding

• Software: Open Source • Transdermal patches • Digital Patient ID cards

Business Model

• IBM’s services bundling • Blockbuster rental model • Individual firm supply chains

• Dell’s Supply Chain • Netflix • Web-based aggregators

• IBM’s On-demand service • Video streaming/storage

(e.g., Roku) • Perpetual replenishment

Application • Web-based e-mail • Airbag cell-phone sensors

• VOIP • OnStar services from GM

• Free bandwidth (4G & 5G) • Electronic driving & safety

monitoring

Management • Time and motion studies • Large sales forces

• Piece-rate incentives • Sales automation and CRM

• Empowerment initiatives

Personalization • Traditional lens eyewear • Standard off-the-rack suits

• Disposable contact lenses • One-of-a-kind custom suits

• LASIK & lens replacement • Advanced fiber technology

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Key Topics in Innovation: Product & Process

Product Process

• Attributes • Underlying design architecture • Packaging • Delivery method • Variety • Customer setting • Substitutes

• Value-creation activity • Nature of operations, production • Number of involved steps • Interchangeability • Flexibility across product family • Impact on cost drivers • Skill set requirements

David Lei © Revised, 2014, 2016

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Key Topics in Innovation: Characteristics

Incremental Innovation • Product or process improvements along a trajectory • Often has a sequential logic to it: 1st → 2nd → 3rd • Emphasis on reducing uncertainty in evolution

Radical Innovation • Breakthrough product or process that changes the

underlying technology • Often results in rapid industry standard change • Represents a “frame break:” Lots of new entrants

Disruptive Innovation • Impacts customer, technology, and organization • Introduces uncertainty on all three dimensions

David Lei © Revised, 2014, 2016

David Lei, SMU, Revised, 2011, 2013, 2015, 2017

Key Topics in Innovation: Difficulties

Underlying Assumptions and Mindsets • Past successes create “recipes” & formulas • High performance reinforces behavior • “Mental aperture” narrows over time

Core Organizational Processes • Predictable behavior is rewarded • Managers become uneasy with risk-taking • Current methodologies trump experimentation

Existing Social Capital and Relationships • Current customers weigh more than new • Vendors and distributors don’t like change

David Lei © Revised, 2014, 2016

Revisiting Key Strategy Ideas From Last Week

� Initial business ideas must uncover some unmet or unfulfilled need. � Identifying the need in itself does not guarantee business success. � The targeted customer group provides unexpected insights that

should continuously update and refresh the strategy. � Growth away from a niche/focus strategy requires making critical

choices regarding alignment of value drivers, cost drivers, and profit models. � Cost leadership profit model: value drivers should foster high sales volume and

large market share; cost drivers should seek out scale economies in every business activity.

� Differentiation profit model: value drivers built on premium pricing and an enhanced offering; cost drivers cultivate superior inputs, skills, approaches.

� Niche/focus profit model: scarcity/specialization of offering and/or high repeat purchases.

� Alignment among value and cost drivers essential to execution.

David Lei, Revised, 2017evised, 2017

General Strategy Lessons

� There are three broad types of competitive strategies: cost leadership, differentiation, and niche/focus.

� Each broad type of competitive strategy compels you to think about and execute alignment on these key attributes: ¾ Value drivers (what attracts the customer to the offer – increase pleasure, reduce

pain, novelty – at a price that triggers interest) ¾ Cost drivers (critical inputs, skills, technologies, methods, practices) ¾ Profit model (identifying and isolating the revenue and cost flows/models) ¾ Distinction (building on unique critical success factors that impede imitation)

� All businesses/entrepreneurial ventures in reality start out as niche/focus on some key value-adding dimension.

� It is very difficult to pursue more than one type of competitive strategy without incurring mission fog/stuck-in-the-middle problems.