Chapter 6


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  • Once the organizational mission is established and the corporate level strategy identified . . . The next appropriate question to ask is, how should we compete in the chosen industry or business?
  • A single company that operates only w/in 1 industry is also considered a business unit such as McDonalds, Delta Airlines, Wal-Mart or Sherwin-Williams paints - corp level and business unit level strategy are the same. So . . . What is competition?
  • Intensity of the competition will be governed by what? numerous of equally balanced customerss low industry growth high fixed or storage costs lack of differentiation or switching costs capacity must be added in large increments diverse competitors high strategic stakes high exit barriers Greatest competition occurs in situations where there are many sellers and the degree of differentiation among sellers doesn’t exist (pure)
  • Competition can be said to rest within an industry as just described, within a market where intensity is governed on how well different org’s are able to meet the needs of customers (the more the merrier) and another approach is that of identifying competitors within one’s strategic group
  • So, if I’m Mercedes Benz . . . Do I consider the Kia or Hundyi to belong to my strategic group? Identify strategic groups in the airline industry ( go to the board & identify the X & Y axis Identify strategic groups in the restaurant business in Jonesboro Your most relevant competitors are those in your strategic group - thus, the level of intensity of competition depends o how effectively each competitor develops a sustainable competitive advantage and on the competitive strategies and competitive actions that each of the competitors in the strategic group uses
  • Remember what we learned from internal analysis in identify org’l strengths and weaknesses with respect to its use of resources, distinctive capabilities and core competencies to achieve a sustainable competitive advantage? In attempting to create a sustainable competitive to set themselves apart from their competition, they choose a competitive strategy. Firms need to exploit its core competencies to set itself apart from its competitors. One way firms do this is by adopting one of Porter’s Generic Competitive Strategies - they’re generic b/c any firm or org’n of any size in any industry can use them
  • A niche strategy enables the org to know it market very well . . . Remain close to its customers & respond very quickly to their changing needs (often quicker than their larger competitors pursuing broader mrkts.
  • Org’s adopting this strategy produce no-frills products/services for price-sensitive customers in a mrkt niche whose demand for products is characterized as elastic. Emphasize (Go to Table 6-3 pg 233) keeping initial investment low (facility or equip) keeping operating costs down thus purchase from suppliers w/lowest prices, strict financial controls, R&D directed on improving operational processes and seeking to streamline logistical/distribution efficiencies Ideally, the small bus unit adopting this strategy competes only where it enjoys a cost advantage relative to large low-cost competitors - short line RR’s
  • Tech obsolescence relates to preference for technological stability in their org’s which enable them to produce no frills outputs at low costs
  • Org’s adopting this strategy produce highly differentiated, need fullfilling products/services for a the specialized needs of a narrow range of customers whose mrkt demand is relatively inelastic & thus can demand higher prices. Cost reduction not emphasized and are deliberately inefficienct b/c they continuously attempt to create new product and/or mrkt opportunities (or respondto them) Higher prices are acceptable to some customers seeking performance, prestige, safety or security. Emphasize: organizational & technological fluidity in order to create or keep pace w/demand R&D spending linked to new product development/improvement
  • In fact, using niche-differentiation in concert w/ lower costs can be a particularly effect strategy for a number (but, not all) small businesses in select industries.
  • How can a business simultaneously differentiate its products or services and lower its costs?
  • These methods which relate to smaller businesses serving a niche apply equally well to larger orgs who adopt a low-cost/differentiation strategy Quality - customer’s perceptions is key criterion - costs of rework, scrap and servicing the product after the sale reduced Process - improves efficiency & lowers costs Product - can both stimulate demand and lower cost Leverage - Saturn’s efforts at public relations and developing a cult following or Ben & Jerry’s image as a “green” and local oriented org’n
  • You can see how Boston Brewing has lower costs, still has high differentiation, but also has greater mrkt share than Red Hook Boston’s 25% mrkt share compared of the micro-brewery business compared to a firm like Red Hook’s 4.7% mkt share which has higher costs.
  • Firms using this strategy serve a mass market comprised of price-sensitive customers (elastic). Lower costs in functional areas by seeking discounts from suppliers that offer lowest prices, mass production pursued when possible to lower prod costs, finance seeks to control costs and maximize returns, R&D focused on operational efficiency, and attempts are made to improve logistical & distribution efficiencies. Shun new prod development and expensive mrktg & advertising costs. Different from niche low cost which rely on low initial investment & low operating expenses by relying on large mrkt share and scale economies. Thus, while both strategies seek to keep costs down . . . The means of attaining this goal are different.
  • And thus lead to customers that no longer desire their products.
  • Customers are relatively price insensitive so businesses emphasize quality in functional areas. I.e., purchases from suppliers offering high-quality raw mat’ls, production focusing on quality in lieu of cost considerations, R&D focused on new or improved products, generously supported marketing and advertising and though finance important . . . Doesn’t dominate. Those using this strategy attempt to create new product/mrkt opportunities or respond to them. Requires large mrkt share so that it may establish a distinctive image throughout the industry - relying upon patents or strong brands to create loyalty.
  • Examples include Merecedes Benz and BMW vs the Lexus . . . Xerox copiers vs Canon . . . Merrill Lynch or Morgan Stanley vs Charles Schwab or Scott Trade
  • Must be a low cost/differentiated oriented firm - otherwise norms clash. Lrg business using low cost unlikely to employ mult strats. Low cost and niche/low cost is redundant. Can’t operate in a no-frills environment and also attempt to differentiate, Large bus pursing differentiation unlikely to employ niche-low cost or niche-low cost/differentiation b/c low costs aren’t emphasized. Also lrg firms won’t adopt any niche strategies b/c small mrkt share/low sales can’t justify sizeable R&D, operating, and mrktg costs of lrg firms. Owners of small entrepreneurial firms know this and exploit their niche advantage.
  • Small businesses are more flexible in meeting demands of mrkt or responding to shifts in envrionment - also b/c of lower investment they can capitalize on their small mrkt shares with an image of exclusivity. Rolls Royce Larger businesses have economies of scale and greater bargaining power with suppliers Thus midsize firms have neither advantage of smaller or larger firms
  • Embryo - choice of technology not settled yet - Niche differentiation Growth - increasing # of consumers desire product N/LC, ND or N-LC/D for small and LC, D or LC-D or multiple for larger Shakeout - same as growth Maturity - same as growth Decline N-LC or N-LC/D for small and LC or LC/D or multiple for large
  • Chapter 6

    1. 1. Strategy Formulation Business Unit Level Strategies (Competitive Strategies)
    2. 2. Strategy Formulation <ul><li>A Business Unit is defined as an organizational subsystem that has its own market, a set of competitors, and a mission distinct from those of the other subsystems in the organization </li></ul>
    3. 3. Strategy Formulation <ul><li>Competition amounts to the efforts of multiple organizations that are offering a similar product or service in obtaining desired customers, market share, ranking or resources </li></ul>
    4. 4. Strategy Formulation <ul><li>Strategic Group amounts to a set of firms competing within an industry that have similar strategies and resources. </li></ul>
    5. 5. Strategy Formulation <ul><li>Price </li></ul><ul><li>Quality </li></ul><ul><li>Level of vertical integration </li></ul><ul><li>Geographic scope </li></ul><ul><li>Level of diversification </li></ul><ul><li>R&D expenditures </li></ul><ul><li>Market Share </li></ul><ul><li>Profits </li></ul><ul><li>Product characteristics </li></ul><ul><li>Any other relevant strategic factor </li></ul>Potential Dimensions Used in Defining Strategic Groups
    6. 6. Strategy Formulation <ul><li>VIRO Framework for defining a Sustainable Competitive Advantage </li></ul><ul><li>Value - does it provide a comp advantage? </li></ul><ul><li>Rareness - do other competitors have it? </li></ul><ul><li>Imitability - Is it costly for others to imitate? </li></ul><ul><li>Organization - is the firm organized to exploit the resource? </li></ul>
    7. 7. Porter’s Generic Competitive Business Unit Strategies <ul><li>It is critical to envision org’s that are determined to both: </li></ul><ul><li>Serve a narrow or focused market niche versus a broad market (in terms of customers or product). </li></ul><ul><li>Elect to to compete on the basis of having the lowest costs (not price) or by being distinctively different (or differentiated). </li></ul>
    8. 8. Generic Strategies for Small Businesses <ul><li>Niche-Low Cost </li></ul><ul><li>Niche-Differentiation </li></ul><ul><li>Niche-Low Cost/Differentiation </li></ul>Organization Strategy Product Customer Geographical
    9. 9. Generic Strategies for Small Businesses <ul><li>Niche-Low Cost </li></ul><ul><li>Emphasizes keeping overall costs low while serving a narrow or focused segment (niche) of the market. </li></ul>
    10. 10. Niche-Low Cost Cost Differentiation Jet Blue
    11. 11. Generic Strategies for Small Businesses <ul><li>Niche-Low Cost Vulnerabilities </li></ul><ul><li>Technological obsolescence and thus lose sight of shifting cust preferences </li></ul><ul><li>Low cost competencies imitated </li></ul><ul><li>Competition intense in no frill environments & competition may successfully lower their costs more </li></ul>
    12. 12. Generic Strategies for Small Businesses <ul><li>Niche-Differentiation </li></ul><ul><li>Emphasizes offering customers highly differentiated, need fulfilling products or services for a narrow or focused segment (niche) of the market. </li></ul>
    13. 13. Niche-Differentiation Cost Mikimoto Differentiation
    14. 14. Generic Strategies for Small Businesses <ul><li>Niche-Differentiation Vulnerability </li></ul><ul><li>Org must seek to remain unique despite efforts by competitors to copy </li></ul><ul><li>Competitors who also emphasize lowering of costs may be able to offer similar products at predatory prices. </li></ul>
    15. 15. Generic Strategies for Small Businesses <ul><li>Niche-Low Cost/Differentiation </li></ul><ul><li>Emphasizes offering customers highly differentiated, need fulfilling products or services for a narrow or focused segment (niche) of the market while keeping costs low. </li></ul>
    16. 16. Generic Strategies for Small Businesses <ul><li>Niche-Low Cost/Differentiation </li></ul><ul><li>Dedication to quality </li></ul><ul><li>Process innovations </li></ul><ul><li>Product innovations </li></ul><ul><li>Leverage through org’l expertise & image </li></ul>
    17. 17. Niche Low-Cost/Differentiation Cost Red Hook Differentiation Boston Brewing
    18. 18. Generic Strategies for Large Businesses <ul><li>Low Cost </li></ul><ul><li>Differentiation </li></ul><ul><li>Low Cost/Differentiation </li></ul>
    19. 19. Generic Strategies for Large Businesses <ul><li>Low Cost </li></ul><ul><li>Emphasizes keeping overall costs low while serving a broad market industrywide. </li></ul>
    20. 20. Low Cost Strategy Cost Differentiation Wal Mart Neiman- Marcus
    21. 21. Generic Strategies for Large Businesses <ul><li>Low Cost Vulnerabilities </li></ul><ul><li>Remain vulnerable to price competition pressuring margins further aggravated by price wars </li></ul><ul><li>Technological stability causing firms to avoid responding to new mrkt & product opportunities may become obsolete </li></ul>
    22. 22. Generic Strategies for Large Businesses <ul><li>Differentiation </li></ul><ul><li>Emphasizes offering customers industrywide highly differentiated, need fulfilling products or services. </li></ul>
    23. 23. Differentiation Strategy Cost Apple Differentiation
    24. 24. Generic Strategies for Large Businesses <ul><li>Low Cost Vulnerabilities </li></ul><ul><li>New competitors with similar products at lower costs (and prices) </li></ul><ul><li>Remaining unique in customer’s eyes </li></ul>
    25. 25. Generic Strategies for Large Businesses <ul><li>Multiple Strategies </li></ul><ul><li>The use by an organization of more than one of the previously mentioned strategies </li></ul>
    26. 26. Mid Size Firms Perform Poorly <ul><li>“Stuck in the Middle” </li></ul><ul><li>Don’t possess the advantages of either their smaller or larger competitors </li></ul><ul><li>Best they can hope for is to expand their operations over time & take advantage of economies of scale or retrench and become smaller </li></ul>
    27. 27. Selecting a Generic Strategy Industry Life Cycle Embryonic Growth Shakeout Maturity Decline
    28. 28. Getting “Stuck in the Middle” <ul><li>Finding oneself between a niche strategy and a broad target market strategy is a recipe for disaster . . . No competitive advantage and thus “below average” performance is the best that one can expect </li></ul>