Business Policy Exam #3

Business Level Strategy

 Goal-directed actions managers take

– To achieve competitive advantage

– In a single product market

 “How will we compete to gain & sustain competitive

advantage?”

– Who: which customer segments will we serve?

– What: customer needs, wishes, and desires will we

satisfy?

– Why: do we want to satisfy them?

– How: will we satisfy our customers’ needs?

Industry and Firm effects

determine competitive advantage

Strategic Trade-offs

choices between a cost or value position

Strategic Trade-offs

tension between:

• value creation and

• pressure to keep costs in check

Strategic Trade-offs

Purpose is to maximize the firm’s:

• economic value creation

• profit margin

differentiation

A strategy where a firm competes across a broad market by offering unique products or services that customers are willing to pay more for

– Seeks to create higher value than competitors

– Offers products or services with unique features

– Keeps the firm’s cost structure as low as possible

– Charges higher prices

cost leadership

A strategy where a firm competes across a broad market by offering the lowest cost products in the industry.

– Seeks to create similar value than competitors

– Products or services delivered at lower cost

– Charges lower prices

Focused Strategies

 Focus on a narrower competitive scope (Niche)

 Types:

– Focused Differentiation

– Focused Cost Leadership

 Scope of competition:

– The size (narrow or broad) of the market in which

a firm chooses to compete

Focused Differentiation

 strategy that targets a narrow market niche by offering specialized, unique products or services.

Ex: Mont Blanc: exquisite pens at several hundred dollars

Focused Cost Leadership

A strategy that targets a narrow market niche while maintaining the lowest cost within that segment

Ex: BIC: disposable pens and lighters at low cost

Scope of competition

The size (narrow or broad) of the market in which a firm chooses to compete

strategic position

The basis on which a firm competes—either through cost advantage or differentiation

Differentiation Strategy

A strategy where a firm offers unique features or services that increase the value of its products, allowing it to charge higher prices.

Key Idea of Differentiation

Firms may have higher costs, but customers are willing to pay more because of the added value.

Customer Behavior in Differentiation

Consumers are willing to pay a premium price for products they perceive as unique or higher quality

Focus of Competition (Differentiation)

Firms compete based on creating unique value, not lowest price.

Unique Product Features

Distinct characteristics or innovations that make a product stand out from competitors.

Service (Differentiation)

Providing exceptional customer service or experience to increase perceived value.

New Product Launches

Introducing innovative products to stay ahead of competitors and maintain uniqueness.

Marketing and Promotion

Using branding, advertising, and positioning to highlight uniqueness and value

Competitive Advantage (Differentiation)

Achieved when a firm’s Value – Cost is greater than competitors, meaning customers perceive more value than the cost to produce

Economies of Scale

– Decreases in cost per unit.

– Achieved as output increases

Economies of Scope

– Savings that come from producing two outputs at less cost

– Shares the same resources or technology

Drivers of Perceived Value

Factors that make customers see a product as more valuable, allowing firms to differentiate and charge higher prices.

Product Features

Enhancements or innovations that turn basic commodities into differentiated products, often requiring strong R&D

Customer Service (Value Driver)

Providing better service experiences to increase customer satisfaction and perceived value.

Free Shipping (Value Driver)

A service benefit that reduces customer cost perception, increasing overall value

Complements

Products or services that are used together, increasing the overall value when bundled.

Ex: Products like Internet, phone, and TV services that are often consumed together.

Goal of Cost Leadership

– Reduce the firm’s cost below its competitors

– Offer adequate value

Cost Leadership Resources

focused on:

– Reducing cost

 To manufacture a product

 To offer a service

– Reducing prices for customers

– Optimizing the value chain to achieve low-cost

Four Main Cost Drivers

 Cost of input factors

 Economies of scale

 Learning-curve effects

 Experience-curve effects

Four Main Cost Drivers

Develop strategies that:

 Appeal to the bargain-conscious buyer

 Offer lower prices than competitors

 Attract an increased volume of sales

 Can be profitable over a long period of time

Sources of Value (Differentiation)

• Unique features

• Customer service

• Effective marketing

Cost Implication (Differentiation)

Differentiation can increase costs, especially due to innovative R&D activities.

Customer Willingness to Pay

Customers are willing to pay a price premium for differentiated products

Threat of entry

Cost Leadership:

Benefits:

• Protection against entry due to economies of scale

Risks:

• Erosion of margins

• Replacement

Threat of entry

Differentiation:

Benefits:

• Protection against entry due to intangible resources such as a reputation for innovation, quality, or customer service

Risks:

• Erosion of margins

• Replacement

Power of Suppliers

Cost Leadership:

Benefits:

• Protection against increase in input prices, which can be absorbed

Risks:

• Erosion of margins

Power of Suppliers

Differentiation:

Benefits:

• Protection against increase in input prices, which can be passed on to customers

Risks:

• Erosion of margin

Power of Buyers

Cost Leadership:

Benefits:

• Protection against decrease in sales prices, which can be absorbed

Risks:

• Erosion of margins

Power of Buyers

Differentiation:

Benefits:

• Protection against decrease in sales prices, because well-differentiated products or services are not perfect imitations

Risks:

• Erosion of margins

Threat of Substitutes

Cost Leadership:

Benefits:

• Protection against substitute products through further lowering of prices

Risks:

• Replacement, especially when faced with innovation

Threat of Substitutes

Differentiation:

Benefits:

• Protection against substitute products due to differential appeal

Risks:

• Replacement, especially when faced with innovation

 Rivalry Among Existing Competitor

Cost Leadership:

Benefits:

• Protection against price wars because lowest-cost firm will win

Risks:

• Focus of competition shifts to non-price attributes

• Lowering costs to drive value creation below acceptable threshold

 Rivalry Among Existing Competitor

Differentiation:

Benefits:

• Protection against competitors if product or service has enough differential appeal to command premium price

Risks:

• Focus of competition shifts to price

• Increasing differentiation of product features that do not create value but raise costs

• Increasing differentiation to raise costs above acceptable threshold

“Blue Ocean” Strategy

• Successfully combining differentiation and cost-leadership activities (e.g. Trader Joe’s)

• Uses value innovation to reconcile trade-offs

 The metaphor of means:

– Untapped market space

– The creation of additional demand

– The opportunity for highly profitable growth

It is very difficult to be successful with this strategy

Stuck in the Middle

• A firm fails to achieve either cost leadership or differentiation

• Results in no clear competitive advantage

Successful Blue Ocean Strategy

• Changes the competitive landscape

• Opens up new areas of competition

• Requires firms to:

– Reconcile trade-offs

– Increase value

– Lower production costs

– Pursue both business strategies simultaneously

Innovation

competitive weapon

Innovation

• creates and destroys value

• comes in waves

EX: typewriters to PCs to mobile devices

Rapid Innovation

 New business models make innovation possible.

– Ex: Dell’s direct to consumer model

 Satellite and cable distribution systems

– Enable mass media such as radio and TV

 The emergence of the internet

– Social networking

– Viral messaging

The Innovation Process

1. Idea

2. Invention

3. Innovation

4. Imitation

Idea

– Abstract concepts or research findings

Invention

– Transformation of an idea into a product or process

– The modification and recombination of existing ones

Innovation

– Commercialization of an invention by entrepreneurs

Imitation

– Copying a successful innovation

Innovation

A NOVEL AND USEFUL IDEA THAT IS SUCCESSFULLY IMPLEMENTED

1st industrial revolution

Steam power and mechanization in 1780s

2nd industrial revolution

Electricity, mass production, assembly line in the 1870s

3rd industrial revolution

Computers, electronics, automation in the 1970s.

4th industrial revolution

Artificial intelligence, cyber-physical systems in the 2020s

entrepreneurship

agents who introduce change

entrepreneurship

Undertake economic risk to innovate

– Create new products, processes & organizations

– Create value for society

– Commercialize ideas and inventions

strategic entrepreneurship

 The pursuit of innovation using tools & concepts

from strategic management

 Fundamental question is:

– How to combine entrepreneurial actions…

– How to create new opportunities…

– How to exploit existing opportunities…

– …in the pursuit of competitive advantage

 Example: Apple

– Innovation in mobile devices

social entrepreneurship

 The pursuit of social goals AND

 Creation of a profitable business

 Example: Jimmy Wales

– Founder of Wikipedia

 500 million users per month

– One of the first to grasp the power of an open

source method

– Goal: provide knowledge on very large-scale

– Wikipedia supports via donations not advertising

 Typifies a sense of idealism

IT & Logistics

– Created overnight express deliveries (Fed Ex)

– Created big-box retailing (Walmart)

The Internet

– Online retailing (Amazon & eBay)

– Revolutionized advertising (Yahoo, Google, Facebook)

Nanotechnology

– Medical diagnostics and surgery

– Lighter and stronger airline components

5 phases of industry lifecycle

1. Introduction

2. Growth

3. Shakeout

4. Maturity

5. Decline

 Supply and demand change as industries age

 Each stage requires different competencies

Introduction Stage

Core competency: R&D

Introduction Stage

Strategic objective: Market acceptance & future growth

Introduction Stage

Emphasis: Uniqueness & performance

Introduction Stage

Capital-intensive

– Trying new ideas

– Producing small quantities

Introduction Stage

Initial market size: small

Introduction Stage

Growth: slow

Introduction Stage

Barriers to entry: high

Growth Stage

Demand increases rapidly.

– First-time buyers rush to purchase.

– Proof of concept completed

Growth Stage

Competitive rivalry: muted

Growth Stage

Product/service standards emerge

– A common set of features and design choices

Growth Stage

Basis of competition: process innovation

Growth Stage

Core competencies:

– Manufacturing

– Marketing

Shakeout Stage

• Pace of industry growth slows

Shakeout Stage

Firms begin to compete more intensely.

– Weaker firms forced out

– The industry consolidates

– Only the strongest competitors survive

Shakeout Stage

Biggest competitive weapon: low price

Maturity Stage

Few large firms remain.

– They enjoy economies of scale

Maturity Stage

Additional market demand is limited

Maturity Stage

Market has reached maximum size

Maturity Stage

Competitive intensity: increases

Decline Stage

Demand falls, often rapidly

Decline Stage

Strong pressure on prices

Decline Stage

Four strategic options to pursue:

– Exit: bankruptcy/liquidation

– Harvest: reduce further investments

– Maintain: support at a given level

– Consolidate: buy rivals

crossing the chasm

Many innovators do not successfully transition from one stage of the industry life cycle to the next.

Overcome the Chasm

 Formulate a business strategy guided by:

– The who, what, why, and how questions of

competition

 Meet customer needs.

– Needs are different for each industry life cycle

stage.

 Bring competencies and capabilities to the table.

– Needs are different for each industry life cycle

stage.

Technology Enthusiasts

 2.5% of the total market potential

 Often have an engineering mind

 Pursue new technology proactively

 Enjoy using beta versions

 Tinker with the product’s imperfections

- Often provide (free) feedback and suggestions

 Example: 8,000 beta testers of Google Glasses

Early Adopters

 13.5% of the total market potential

 Demand is driven by:

– Imagination and creativity

– Intuition and imagination

– “What can this new product do for me / my

business?”

 The firm needs to communicate the product’s potential

applications in a more direct way.

 Example: people in line at Apple Stores waiting for

the Apple Watch

Early Majority

 34% of the total market potential

 Main consideration: “Is this practical?”

 Weigh the benefits and costs carefully.

 Observe early adopters using the product.

– Rely on endorsements

 This group is key to catching the growth wave.

Late Majority

 34% of the total market potential

 Not as confident in their ability to master the technology

 Prefer to wait until standards have emerged

 Prefer to buy from well-established firms

Laggards

 16% of total market potential

 Adopt a new product only if necessary

 Generally, don’t want new technology

 Typically not pursued as future customers

 Their demand is small

Market and Technology Dimension

A conceptual model to categorize innovations:

Market and Technology Dimension

Four types of innovation emerge:

– Incremental

– Radical

– Architectural

– Disruptive