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Strategy Management

Strategy Management
Robert E. Hoskisson; Michael A. Hitt; R. Duane Ireland

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  • Business-Level Strategy According to Michael Porter, the essence of business-level strategy is “to perform activities differently or to perform different activities than rivals.” The who, what, and how of selecting a business-level strategy are determined when a firm establishes (1) who will be served; (2) what needs those target customers have that it will satisfy; and (3) how those needs will be satisfied. The instructor notes for this chapter discuss the following strategies: • Reach, Richness, and Affiliation • Cost leadership • Differentiation • Focused cost leadership • Focused differentiation • Integrated cost leadership/differentiation Instructor notes begin on the following slides: • Managing Relationships with Customers • Five Generic Strategies • Cost Leadership Strategy • Differentiation Strategy • Structure for Differentiation Strategy
  • Managing Relationships with Customers Reach, Richness and Affiliation (pp. 137–138) Some view information as “the glue that holds value chains and supply chains together” (Evans and Wurster, 2000, p. 13) and argue that the transfer of information is a “trade-off between richness and reach” (Evans & Wurster, 2000, p. 23). “Newspaper advertisements reach a wide range of possible customers but have a limited, static content. Direct mail or telemarketing are a bit richer in customization and interactivity but are much more expensive, and therefore have to be targeted. A sales representative giving his or her pitch offers the highest level of customization, dialogue, and empathy, but only with one customer at a time” (Evans and Wurster, 2000, p. 37). However, with the advent of powerful information and communication technologies, this historic trade-off between Rich and Reach—in general the greater the reach, the less the richness, and vice-versa—may no longer apply. It is now possible to have the benefits of both Reach and Rich. This change in strategic possibilities has come through greater connectivity through electronic networks and, increasingly, the adherence to standards for transmitting and receiving information in a digital format. Connectivity and standards have led to the deconstruction of business structures and the disintermediation of traditional intermediaries (Evans and Wurster, 2000, p. 69). Thus, firms try to establish a competitive advantage through relationship with customers along reach (access and connection to customers.), richness (the depth and detail of the information between the firm and the customer), and affiliation (facilitating useful interactions with customers). (Continued on next slide.)
  • The Central Role of Customers Reach, Richness and Affiliation (pp. 137–138) (cont.) While it is intuitively simple to grasp the meaning and applications of Reach and Richness, the notion of Affiliation is a bit more complex. Hence, what follows is an example of Affiliation. Of the 45 million automobiles sold in the U.S. last year, 34 million of them were previously owned. Through pairing with Automotive Information Systems (AIS), Microsoft’s MSN Autos helps Internet users with all phases of their automotive research and shopping. To be more precise, determining vehicle reliability is an exacting task that requires skills, knowledge, and a wealth of information. That is why MSN Autos affiliates with AIS for reliability data on all listed automobiles. AIS’s Identifix™ is a large source of automotive repair data on vehicle parts that break, model lines affected, and how best to make repairs. AIS operates primarily as a technical support service for professional automotive technicians. Subscribers telephone AIS’s specialists for assistance when stumped by any automotive diagnostic or repair problem. Thirty-one automotive specialists make up the core AIS staff. Each is a factory-trained “Certified Master Technician” with years of professional field experience performing vehicle diagnostics and repairs. (Continued on next slide.)
  • Basis for Customer Segmentation Reach, Richness and Affiliation (discussed on pp. 137-138) (cont.) Operations The growing complexity of automobiles has created a niche for information companies like AIS. “Today’s vehicles require a technician to have access to over a million pages of manufacturers’ technical reference materials,” says Jeff Sweet, the company’s CEO. “In 1980, you would have needed 19 inches of shelf space for the shop manuals of a single GM model year. Today you’d need eleven feet!” Out of necessity, most automotive shops rely on repair manuals and CD-ROMs containing information consolidated from the vast amount available. But AIS works with the original source documents. That means over 5,200 factory service manuals totaling some 1.5 million pages—the most complete onsite library of automobile manufacturer’s service information in the nation. AIS also examines new cars in their own diagnostics garage. Moreover, since factory service manuals contain inaccuracies (modifications seldom find their way back to the manuals), AIS gathers information from its callers and corrects its manuals. Products and Services The products and services AIS offers include technical hotlines serving 30,000 enrolled automotive shops; aftermarket technical service bulletins distributed through an automated voice retrieval system; documents containing over 40,000 automotive wiring diagrams; and consulting services to automotive equipment manufacturers. On average, AIS fields 250,000 calls per year, and since the company’s beginning, it has helped technicians perform over one million automotive repairs.
  • Five Generic Strategies Business-Level Strategy (p. 141) Firms choose from among five business-level strategies (see Figure 5.1 in the text) to establish and defend their desired strategic position against rivals: • Cost leadership • Differentiation • Focused cost leadership • Focused differentiation • Integrated cost leadership/differentiation Examples of cost leadership and differentiation strategies are discussed on later slides.
  • Cost Leadership Strategy: The Vanguard Group uses a cost leadership strategy. Portraying fees and costs as evil and extolling efficiency, the corporate culture encourages employees’ commitment to controlling costs while designing and completing their work. Vanguard’s performance outcomes demonstrate the firm’s low-cost position. In 1999, for example, the firm incurred average operating costs of 0.27 percent of its assets—less than one-fourth of the estimated average operating costs of 1.31 percent for the mutual fund industry. Other cost-saving activities include Vanguard’s low trading levels and its policy of discouraging customers from rapid buying and selling—activity that drives up costs. The firm also searches for the least costly, yet still effective, means of providing customer service and of marketing its products. Vanguard’s low-cost position for many investment products suggests the quality of its cost control efforts.
  • Differentiation Strategy Rather than costs, a firm using the differentiation strategy tries to invest in and develop features that differentiate its goods or services in ways that customers value. Commonly recognized differentiated goods include Toyota’s Lexus, Ralph Lauren clothing, and Caterpillar’s heavy-duty earthmoving equipment. To give some concrete example, think of a $58,000 watch, dresses that look like newspaper, or an eye-shadow called “Gangrene.” These are items no one really needs, yet millions of consumers worldwide line up to buy them. That’s because LVMH—the world’s largest, most successful purveyor of these and other luxury goods that no one needs—is a master of a differentiation strategy. LVMH has differentiated itself in industries ranging from retailing and cosmetics to jewelry, leather goods, and wines and in 2000 generated $10 billion. What is the company’s secret? LVMH uses a differentiation strategy. LVMH’s brands are simultaneously: • Timeless, eternal. Timelessness takes decades to develop. However, you can create the impression of it sooner through uncompromising quality—by hiring dedicated people with the brand “in their bones” and keeping them for a long time. • Modern, edgy, fashionable, sexy. A modern brand is so new and unique that people feel they must buy it. • Fast growing. To show shareholders you have struck the right balance between timelessness and fashion, and to allow you to charge premium prices. • Profitable. Through disciplined, efficient, and rigorous manufacturing processes that contrast sharply with freewheeling creativity. (Continued on next slide.)
  • Differentiation Strategy (cont.) To execute a differentiated strategy, LVMH suggests these counterintuitive principles: • Free creative people from financial and commercial concerns. Creative types freeze whenever calculator-clutching managers hover nearby. So hire innovative types who want to see their designs succeed “on the street” and then let them run wild. For example, Dior designer John Galliano shocked the fashion world when he clad runway models in newspaper dresses, yet LMVH never flinched. Blocking the plan would have crushed Galliano’s spirit. Later, when Dior manufactured dresses in newspaperprinted fabric, they sold briskly. • Don’t follow consumers. You won’t generate breakthrough products, and people won’t pay premium prices for something they expect. Instead, let creators drive innovation, and listen to focus groups with only one ear. For example, focus groups responded lukewarmly to the new Kenzo perfume, Flower, with its oddly shaped bottle and scentless signature flower, the poppy. LMVH launched Flower anyway because the design team believed in it. Kenzo’s sales rose 75% early in 2001, largely on Flower’s success. (Continued on next slide.)
  • Differentiation Strategy (cont.) • Minimize risk. Don’t put your company at risk by introducing all new products all the time. Let proven products carry you. LMVH made only several thousand innovative Dior handbags ($1,800/each). The rest of the product line was less radical in fabric and design, but the company made more of them and sold them for less, thus encouraging creativity while minimizing risk. • Give star brands time to grow. Star brands need great talent and heritage. Use incubation time to learn. Although the highly creative Christian Lacroix fashion house hasn’t been profitable since its 1991 launch, LMVH uses it as a laboratory, learning how to start a brand from scratch and nurturing it until it has some history. (Continued on next slide.)
  • How to Obtain a Differentiation Advantage Retailing and Airlines: Other examples in two domains Retailing: Discount • Wal-Mart says, “Always low prices”— Cost • K-Mart says, “Martha Stewart & low prices”— Mixed? • Target / Kohl’s say, “Style,” “name brands” (e.g., Mossimo, Liz Lang, etc.), and “not the warehouse ambiance”— Differentiation on “value”; the “feel good” factor • JC Penney / Sears / Belks / Dillard’s say, “We have been here forever” (What is their message?)— Mixed? • Nordstrom’s / Saks 5th Avenue say, “style,” “exceptional service”— Differentiation: service, upscale mystique, high-end products Ask If you parachuted into the cosmetics section of a major department store, could you immediately tell whether you were in Macy’s, Saks 5th Avenue, Bloomingdale’s, or one of their competitors? If the product names were disguised, could you immediately distinguish the Estée Lauder counter from dedicated Lancôme counter? Put another way, when was the last time you caught your breath as you walked past the cosmetics counter in some big department store? When was the last time you stopped, looked around, and thought, “This is so cool”? Never? Well, that’s no surprise. The way cosmetics are merchandised and sold has hardly changed over the past couple of decades. It seems, therefore, that many cosmetics companies are happy with the status quo of mostly imitating each others’ incremental strategies. (Continued on next slide.)
  • How to Obtain a Differentiation Advantage (cont.) Retailing and Airlines: Other examples in two domains (cont.) Airlines • Southwest Airline says, “low prices lead to freedom,” “airline with personality,” “ Click’n Save,” the “fun factor”— Differentiate on cost and fun ambiance • Midwest Express Airline says, “the best care in the air,” “high-quality travel experience,” “ The best airline in the U.S.” (7 consecutive years), “Most comfortable coach seat” (10 consecutive years); typical meal: Filet mignon with lobster, a roll with butter, spinach, mandarin salad, and chocolate banana-split cake— Differentiate on prestige, comfort • United, US Airways, Delta, American Airlines, etc. says more flights to . . ., more schedule flexibility, and if you want low cost you will need to be flexible on your schedule— Mixed For example, Delta’s Fan Fares offers travel bargains to cities hosting special sports events, concerts, exhibitions, etc., but travel is restricted to this coming weekend. United offers various “specials” from E-Fares, last minute fares “priced to go,” etc. Finally, American Airlines offers “AAdvantage Net SAAver Awards.” Like their rivals, these are next weekend travel for either fewer miles than normally required or for lower fare and “ must be purchased by Friday.” Ask Assume that you were placed in one of the above airlines’ jets, but all company logos and emblems were removed. Would be able to tell whether you were seated in a United, American, or Delta Airlines aircraft?
  • Organizational Structure & Business-level strategy (p. 142) Structure and Product Differentiation Which structure is most efficient for multi-product line company like GM? Which structure is most effective? Consider the automobile industry. General Motors GM uses an M-Form Structure, which includes 12 automobile divisions 1. Buick • Geographic reach: U.S., Canada, Israel, and China • Six models: midsize and luxury cars and SUVs emphasizing style and substance • Logo/Slogan: The Spirit of American Style 2. Chevrolet • Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan and China)— Most global brand • 22 models: Ranges from small and midsize cars, trucks, vans, and SUVs emphasizing style and substance • Logo/Slogan: Full Throttle—Charging Ahead 3. Cadillac • Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan, and China) • Six models: luxury cars and SUV emphasizing luxury and performance • Logo/Slogan: Heritage Reborn 4. EV1 • Geographic reach: U.S., California and Arizona only • One model: Electric car emphasizing fuel efficiency and environment • Logo/Slogan: An exceptional car. A different driving experience. 5. GMC Trucks • Geographic reach: U.S., Canada, and Brazil • Eight models: Trucks, vans, and SUVs emphasizing engineering strength • Logo/Slogan: Discover the Advantages of Professional Grade Engineering (Continued on next slide.)
  • General Motors (cont.) 6. Holden / Isuzu • Geographic reach: Australia • 26 Models: Range from small midsize cars, trucks, vans, and SUVs, emphasizing . . . ? • Logo/Slogan: What is their logo/slogan? 7. Hummer • Geographic reach: U.S. • Two models: SUVs, emphasizing uniqueness of rugged style • Logo/Slogan: Like nothing else 8. Oldsmobile • Geographic reach: U.S., Canada • Five models: Range of midsize cars and SUVs, emphasizing driving performance • Logo/Slogan: No logo, brand being phased out 9. Opel • Geographic reach: Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan & China) • Ten Models: Range from small to midsize cars, trucks, vans, and SUVs emphasizing performance • Logo/Slogan: Fresh Thinking—Better Cars 10. Pontiac • Geographic reach: U.S., Canada, and Mexico • Seven models: Range of small to midsize cars, vans, and SUVs emphasizing the one-of-a-kind experience • Logo/Slogan: Fuel for the Soul 11. Saab • Geographic reach: U.S., Canada, Mexico, Europe, Middle East (Israel, Saudi Arabia, etc.), Far East (Japan, Taiwan & China)— Most global brand • 15 Models: Range of small and midsize cars, wagons, and vans emphasizing safety and driving performance • Logo/Slogan: What is their logo/slogan? 12. Saturn • Geographic reach: U.S., Canada) • Five Models: Range small and midsize cars and wagons emphasizing customer satisfaction and reliability • Logo/Slogan: What is their logo/slogan? (Continued on next slide.)
  • Organizational Structure & Business-level strategy (p. 142) General Motors (cont.) Strategic Alliances and Joint Ventures • Fiat • Subaru • Suzuki • Daewoo Facts • GM has multiple divisions beyond its auto division, including Hughes, GMAC (financing), etc. • GM currently supports 17 global brands in 4 geographic arenas: (GMNA, GME, GMLAAM, GMAP) Sales breakdown for automobile division: GMNA—76.7%, GME—17.7, GMLAAM—3.5%, GMAP—3.1% • GM does plan to phase out Oldsmobile brand • GM is branded around a product, company structured around a product line Ask Is GM’s structure a hindrance to a customer-centric perspective? Are GM’s customers brand loyal, (i.e. to Buick or Cadillac) or company loyal, (i.e. to GM)? How does that impact structure and strategy? Assume that you were running Buick or another division of GM, what is your incentive to “share your customer” with the other product lines. For example, moving a current Buick Regal customer to a say Cadillac El Dorado? Where is the customer in this equation? Sources: Evans, P. and Wurster, T.S. 2000. Blown to Bits: How the new economics of information transforms strategy. Boston: Harvard Business School Press; and Harvard Business Review. 2002 (March). The Perfect Paradox of Star Brands: An Interview with Bernard Arnault of LVMH. HBR OnPoint Enhanced Edition.

Ch05 Discussion Light Ch05 Discussion Light Presentation Transcript

  • Business-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 5
  • Chapter 2 Strategic Leadership Chapter 4 The Internal Organization Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 9 International Strategy Chapter 1 Introduction to Strategic Management Chapter 3 The External Environment Chapter 5 Business-Level Strategy Chapter 8 Acquisition and Restructuring Strategies Chapter 11 Corporate Governance Strategic Intent Strategic Mission Chapter 7 Corporate-Level Strategy Chapter 10 Cooperative Strategy Chapter 12 Strategic Entrepreneurship Strategic Analysis Strategic Thinking Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities The Strategic Management Process Chapter 5 Business-Level Strategy
  • Discussion Questions
    • What role does the organization’s concern for customers play in shaping its strategy?
    • What is business level strategy? What are some types of business level strategy?
    • What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed?
    Click Here Click Here Click Here More discussion questions Click Here
  • Discussion Questions (cont.)
    • How does establishing the cost leadership position deal with the five competitive forces? What are the risks of pursuing cost leadership?
    • What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed?
    • How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing differentiation?
    Click Here Click Here Click Here
  • Discussion Questions (cont.)
    • When should a focus strategy be implemented? What are the risks of a focus strategy?
    • What is the integrated low-cost differentiation strategy? What are the arguments as to why it is increasing in importance? What are the risks associated with the integrated strategy?
    Click Here Click Here
  • Discussion Question 1
    • What role does the organization’s concern for customers play in shaping its strategy?
  • Managing Relationships With Customers
    • Customer relationships are strengthened by offering them superior value
      • help customers to develop a new competitive advantage
      • enhance the value of existing competitive advantages
    • Successful companies chart new competitive space in order to serve new customers as they simultaneously try to find new ways to better server existing customers
  • Managing Relationships With Customers
    • Establish a competitive advantage along these dimensions:
    • Reach
      • the firm’s access and connection to customers
    • Richness
      • the depth and detail of the two-way flow of information between the firm and customers
    • Affiliation
      • facilitating useful interactions with customers
  • The Central Role of Customers
    • In selecting a business-level strategy, the firm determines
      • 1. who it will serve
      • 2. what needs those target customers have that it will satisfy
      • 3. how those needs will be satisfied
  • Basis for Customer Segmentation Customers Consumer Markets Industrial Markets
  • Market Segmentation: Consumer Markets Demographic factors Consumer Markets Socioeconomic factors Geographic factors Psychological factors Consumption patterns Perceptual factors Dem. Soc. Geo. Psy. Con. Per.
  • Market Segmentation: Industrial Markets Industrial Markets End-use segments Product segments Geographic segments Common buying factor segments Customer size segments Click Here Return to Discussion Questions End Pro. Geo. Buy. Size
  • Discussion Question 2
    • What is business level strategy? What are some types of business level strategy?
  • Core Competencies and Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets Business-level strategy Strategy Core competencies
  • Business-Level Strategy
    • Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
  • Key Issues of Business-Level Strategy
    • What good or service to offer customers
    • How to manufacture or create the good or service
    • How to distribute the good or service in the marketplace
  • Types of Business-Level Strategies
    • Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals
    • To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals
  • Five Generic Strategies Competitive Advantage Competitive Scope Cost Uniqueness Broad target Narrow target Cost Leadership Differentiation Focused Cost Leadership Focused Differentiation Integrated Cost Leadership/ Differentiation Click Here Return to Discussion Questions
  • Discussion Question 3
    • What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed?
  • Cost Leadership Strategy
    • An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers
      • relatively standardized products
      • features acceptable to many customers
      • lowest competitive price
  • Cost Leadership Strategy
    • Cost saving actions required by this strategy:
      • building efficient scale facilities
      • tightly controlling production costs and overhead
      • minimizing costs of sales, R&D and service
      • building efficient manufacturing facilities
      • monitoring costs of activities provided by outsiders
      • simplifying production processes
  • How to Obtain a Cost Advantage Cost Drivers Value Chain Determine and control Reconfigure, if needed
    • Alter production process
    • Change in automation
    • New distribution channel
    • Direct sales in place of indirect sales
    • New advertising media
    • New raw material
    • Backward integration
    • Forward integration
    • Change location relative to suppliers or buyers
  • Factors That Drive Costs
    • Product features
    • Performance
    • Mix & variety of products
    • Service levels
    • Small vs. large buyers
    • Process technology
    • Wage levels
    • Product features
    • Hiring, training, motivation
    • Economies of scale
    • Asset utilization
    • Capacity utilization pattern
      • Seasonal, cyclical
    • Interrelationships
    • Order processing
    • and distribution
    • Value chain linkages
      • Marketing & sales
      • Logistics & operations
      • Service
  • Questions Leading to Lower Costs
    • 1. How can an activity be performed differently or even eliminated?
    • 2. How can a group of linked value activities be regrouped or reordered?
    • 3. How might coalitions with other firms lower or eliminate costs?
    Click Here Return to Discussion Questions
  • Discussion Question 4
    • How does establishing the cost leadership position deal with the five competitive forces? What are the risks of pursuing cost leadership?
  • Cost Leadership Strategy and the Five Forces of Competition
    • Rivalry Among Competing Firms
    • Can use cost leadership strategy to advantage since:
      • competitors avoid price wars with cost leaders, creating higher profits for the entire industry
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Cost Leadership Strategy and the Five Forces of Competition
    • Bargaining Power of Buyers
    • Can mitigate buyers’ power by:
      • driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Cost Leadership Strategy and the Five Forces of Competition
    • Bargaining Power of Suppliers
    • Can mitigate suppliers’ power by:
      • being able to absorb cost increases due to low cost position
      • being able to make very large purchases, reducing chance of supplier using power
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Cost Leadership Strategy and the Five Forces of Competition
    • Threat of New Entrants
    • Can frighten off new entrants due to:
      • their need to enter on a large scale in order to be cost competitive
      • the time it takes to move down the learning curve
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Cost Leadership Strategy and the Five Forces of Competition
    • Threat of Substitute Products
    • Cost leader is well positioned to:
      • make investments to be first to create substitutes
      • buy patents developed by potential substitutes
      • lower prices in order to maintain value position
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Structure for Cost Leadership Strategy
    • Operations is main function
    • Process engineering is emphasized over R&D
    • Large centralized staff
    • Formalized procedures
    • Structure is mechanical, job roles highly structured
    Office of the President Centralized Staff Marketing Personnel Engineering Operations Accounting
  • Risks of Cost Leadership Strategy
    • Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors’ innovations
    • Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers’ perceptions of “competitive levels of differentiation
    • Competitors may learn how to successfully imitate the cost leader’s strategy
    Click Here Return to Discussion Questions
  • Discussion Question 5
    • What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed?
  • Differentiation Strategy
    • An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them
      • price for product can exceed what the firm’s target customers are willing to pay
      • nonstandardized products
      • customers value differentiated features more than they value low cost
  • Differentiation Strategy
    • Value provided by unique features and value characteristics
    • Command premium price
    • High customer service
    • Superior quality
    • Prestige or exclusivity
    • Rapid innovation
  • Differentiation Strategy
    • Differentiation actions required by this strategy:
      • developing new systems and processes
      • shaping perceptions through advertising
      • quality focus
      • capability in R&D
      • maximize human resource contributions through low turnover and high motivation
  • How to Obtain a Differentiation Advantage Cost Drivers Value Chain Control if needed Reconfigure to maximize customer perceptions of uniqueness customer reluctance to switch to non-unique product
    • Raise performance of product or service
    • Lower buyers’ costs
    • Create sustainability through:
  • Factors That Drive Differentiation
    • Unique product features
    • Unique product performance
    • Exceptional services
    • New technologies
    • Quality of inputs
    • Exceptional skill or experience
    • Detailed information
    • Extensive personal relationships with buyers and suppliers
  • Differentiation Strategy and the Five Forces of Competition
    • Rivalry Among Competing Firms
    • Can defend against competition because:
      • brand loyalty to differentiated product offsets price competition
    Click Here Return to Discussion Questions Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Discussion Question 6
    • How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing differentiation?
  • Differentiation Strategy and the Five Forces of Competition
    • Bargaining Power of Buyers
    • Can mitigate buyer power because:
      • well differentiated products reduce customer sensitivity to price increases
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Differentiation Strategy and the Five Forces of Competition
    • Bargaining Power of Suppliers
    • Can mitigate suppliers’ power by:
      • absorbing price increases due to higher margins
      • passing along higher supplier prices because buyers are loyal to differentiated brand
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Differentiation Strategy and the Five Forces of Competition
    • Threat of New Entrants
    • Can defend against new entrants because:
      • new products must surpass proven products or,
      • new products must be at least equal to performance of proven products, but offered at lower prices
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Differentiation Strategy and the Five Forces of Competition
    • Threat of Substitute Products
    • Well positioned relative to substitutes because:
      • brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands
    Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition
  • Structure for Differentiation Strategy
    • Marketing is the main function for tracking new product ideas
    • New product R&D is emphasized
    • Most functions are decentralized
    • Formalization is limited to foster change and promote new ideas
    • Overall structure is organic; job roles are less structured
    Operations Human Resources President and Limited Staff Marketing New Product R&D R&D Finance Marketing
  • Major Risks of Differentiation Strategy
    • Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large
    • Means of differentiation may cease to provide value for which customers are willing to pay
  • Major Risks of Differentiation Strategy
    • Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products
    • Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products
    Click Here Return to Discussion Questions
  • Discussion Question 7
    • When should a focus strategy be implemented? What are the risks of a focus strategy?
  • Focused Business-Level Strategies
    • A focus strategy must exploit a narrow target’s differences from the balance of the industry by:
      • isolating a particular buyer group
      • isolating a unique segment of a product line
      • concentrating on a particular geographic market
      • finding their “niche”
  • Factors That May Drive Focused Strategies
    • Large firms may overlook small niches
    • Firm may lack resources to compete in the broader market
    • May be able to serve a narrow market segment more effectively than can larger industry-wide competitors
    • Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage
  • Major Risks of Focused Strategies
    • Firm may be “outfocused” by competitors
    • Large competitor may set its sights on your niche market
    • Preferences of niche market may change to match those of broad market
    Click Here Return to Discussion Questions
  • Discussion Question 8
    • What is the integrated low-cost differentiation strategy? What are the arguments as to why it is increasing in importance? What are the risks associated with the integrated strategy?
  • Advantages of Integrated Strategy
    • A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:
      • adapt quickly to environmental changes
      • learn new skills and technologies more quickly
      • effectively leverage its core competencies while competing against its rivals
  • Benefits of Integrated Strategy
    • Successful firms using this strategy have above-average returns
    • Firm offers two types of values to customers
      • some differentiated features (but less than a true differentiated firm)
      • relatively low cost (but now as low as the cost leader’s price)
  • Using the Functional Structure
    • The integrated form of the functional structure
      • must have decision-making patterns that are partially centralized and partially decentralized
      • will have semi-specialized jobs and rules and procedures that call for some formal and some informal job behavior
    • Strategic flexibility is obtained via
      • flexible manufacturing systems
      • information networks
      • total quality management systems
  • Major Risks of Integrated Strategy
    • An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)
    • The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy