Class #7: Strategic Positioning Relative to Opportunities and Competitors

Two Different Ideas of Positioning Exist Ries and Trout – a creative exercise done with an existing product Focus on communications strategies and brand-building Customer’s know brands in the form of product ladders Three alternatives: Strengthen own current position in customer’s mind Grab an unoccupied position De-position or re-position Treacy and Wiersema – use concept of value disciplines What values to customers can differ on several dimensions Companies cannot excel on several dimensions simultaneously Companies can aspire to three kinds of excellence: Product leader Operational excellence Customer intimate Both ideas believe a company needs to focus on how many ideas of values to promote

Ries and Trout – a creative exercise done with an existing product

Focus on communications strategies and brand-building

Customer’s know brands in the form of product ladders

Three alternatives:

Strengthen own current position in customer’s mind

Grab an unoccupied position

De-position or re-position

Treacy and Wiersema – use concept of value disciplines

What values to customers can differ on several dimensions

Companies cannot excel on several dimensions simultaneously

Companies can aspire to three kinds of excellence:

Product leader

Operational excellence

Customer intimate

Source: “Can You Say What Your Strategy Is?”, David Collis and Michael Rukstad. Harvard Business Review . Apr2008, Vol. 86 Issue 4. Finding a Sustainable and Attractive Space is Key. An Unoccupied Space is Even Better!

Determine How You Serve Current Customers and Identify Opportunities Not Yet Recognized Source: ”Competing for the Future” by C.K. Prahalad and Gary Hamel, Harvard Business School Press, 1994, p. 103. Unserved Unarticulated Articulated Customer Types Needs Served Unexploited Opportunities

An Alternative View – Finding Insights from Blue Ocean Strategy Source: Kim and Mauborgne, Blue Ocean Strategy , 2006 Creating New Markets Eliminate What factors that the industry has taken for granted should be eliminated? Raise What factors should be raised well above the industry standard? Create/Add What factors that the industry has never offered should be created or added? Reduce What factors should be reduced well below the industry standard?

Make Explicit Decisions to Establish a Position that Clearly is “Blue Ocean” Source: Adapted from CSC Consulting based on framework of Kim and Mauborgne, Blue Ocean Strategy , 2006 Example: McDonald’s and Fast Food

Make Explicit Decisions to Establish a Position that Clearly is “Blue Ocean” Source: Kim and Mauborgne, Blue Ocean Strategy , 2006 Example: [yellow tail] and the Wine Industry

Porter (once again) introduced a map of generic competitive strategies Source: Reprinted with permission of The Free Press, an imprint of Simon & Schuster, from The Competitive Advantage of Nations by Michael E. Porter, p. 39. Copyright © 1990 by Michael E. Porter. Differentiation Broad Target (Many Kinds of Customers) Competitive Advantage Cost Leadership Differentiation Cost Focus Focused Differentiation Competitive Scope Lower Cost Narrow Target (One Kind of Customers)

Differentiation Requires Integrated Capabilities and Fit to Create Customer Value Provide distinct goods at a premium price, but still in proximity of competitors’ prices Offer products at higher quality levels and/or with unique product features and characteristics Select one or more characteristics to emphasize that are widely valued. Add costs only in those areas that are valued by buyers. Concentrate on differentiated features in communications.

Provide distinct goods at a premium price, but still in proximity of competitors’ prices

Offer products at higher quality levels and/or with unique product features and characteristics

Select one or more characteristics to emphasize that are widely valued.

Add costs only in those areas that are valued by buyers.

Concentrate on differentiated features in communications.

Differentiation can happen at every step of the consumption chain! Source: Zanthus

Cost Leadership Requires a Commitment to Sustain a Significant Cost Gap over Time Cost leadership demands a good quality, relatively standardized, product that is priced at or below the industry average. Sustain margins due to volume of product sold even while the rest of the competition competes away their profits when they try to match prices. Cost advantage comes from many places throughout the business Economies of scale & high asset utilization Learning curve and process technology Vertical integration / disintegration/value chain linkages Service, promotion, sales policies support Operations, Materials Mgmt, Info Systems Cost leadership must be integrated into the company’s culture and incentives requiring intense attention to the company’ cost position and that of its competitors.

Cost leadership demands a good quality, relatively standardized, product that is priced at or below the industry average.

Sustain margins due to volume of product sold even while the rest of the competition competes away their profits when they try to match prices.

Cost advantage comes from many places throughout the business

Economies of scale & high asset utilization

Learning curve and process technology

Vertical integration / disintegration/value chain linkages

Service, promotion, sales policies support

Operations, Materials Mgmt, Info Systems

Cost leadership must be integrated into the company’s culture and incentives requiring intense attention to the company’ cost position and that of its competitors.

Wal-Mart is an excellent example of a firm that established what constituted its value proposition is and then delivers on it. Source: “Can You Say What Your Strategy Is?”, David Collis and Michael Rukstad. Harvard Business Review . Apr2008, Vol. 86 Issue 4.

How do you Focus? Use either cost leadership (low scale economies) or differentiation (exploit distinct knowledge, specialization) Innovation, speed How? Find a group of underserved customers Discover opportunities to do a narrow task well and cheaply Fill gaps left by established firms

Use either cost leadership (low scale economies) or differentiation (exploit distinct knowledge, specialization)

Innovation, speed

How?

Find a group of underserved customers

Discover opportunities to do a narrow task well and cheaply

Fill gaps left by established firms

“ Stuck in the Middle” ! Fail to choose and implement a coherent strategy consistent with resources, capabilities, competencies. No competitive advantage, low profits Environment changes – don’t respond Wrong choices Competitors enter Do Both Cost Leadership & Differentiation? – NO !

“ Stuck in the Middle” !

Fail to choose and implement a coherent strategy consistent with resources, capabilities, competencies.

No competitive advantage, low profits

Environment changes – don’t respond

Wrong choices

Competitors enter

Do Both Cost Leadership & Differentiation? – YES ! Flexible manufacturing High variety but keeps costs low Customers have limited set of options Internet and info technologies Customers do their own service – lower costs Marketing, logistics – cheap and custom Globalization Manufacture in low cost areas, but still have differentiation Higher variety of customers – some willing to pay more Know what customers value – do inside stuff cheaply (if it doesn’t affect their experience)

Flexible manufacturing

High variety but keeps costs low

Customers have limited set of options

Internet and info technologies

Customers do their own service – lower costs

Marketing, logistics – cheap and custom

Globalization

Manufacture in low cost areas, but still have differentiation

Higher variety of customers – some willing to pay more

Know what customers value – do inside stuff cheaply (if it doesn’t affect their experience)

Most Companies Now Agree That Success Requires Making Choices About Differentiation and Costs Source: Copyright © C. W. L. Hill & G. R. Jones, “The Dynamics of Business-Level Strategy,” (unpublished manuscript, 2002).

Orient Product and Brand Management on Your Positioning Like a Laser Where are the gaps with the desired positioning? What are possible fixes? Which gap or gap combinations should be addressed first? What are the costs relative to the potential benefits?

Where are the gaps with the desired positioning?

What are possible fixes?

Which gap or gap combinations should be addressed first?

What are the costs relative to the potential benefits?

Source: “Transforming Strategy One Customer at a Time”. Richard Harrington and Anthony Tian. Harvard Business Review . Mar2008, Vol. 86 Issue 3. Use marketing tools to disaggregate from an overall customer view to distinct segment preferences.

Source: “Transforming Strategy One Customer at a Time”. Richard Harrington and Anthony Tian. Harvard Business Review . Mar2008, Vol. 86 Issue 3. Use marketing tools to disaggregate from an overall customer view to distinct segment preferences.

Source: “Transforming Strategy One Customer at a Time”. Richard Harrington and Anthony Tian. Harvard Business Review . Mar2008, Vol. 86 Issue 3. Then understand how you perform relative to your competitors.

Understand Why Customers are not Adopting the Product

What are Key Take-Aways? Each generic strategy (cost leadership, differentiation, cost focus, and focused differentiation) require different capabilities and has its own pros and cons. Successful strategies arise out of consistent activities throughout the value chain. Cost leaders must be committed to maintain a significant advantage over time – and use a wide variety of tools and techniques.

Each generic strategy (cost leadership, differentiation, cost focus, and focused differentiation) require different capabilities and has its own pros and cons.

Successful strategies arise out of consistent activities throughout the value chain.

Cost leaders must be committed to maintain a significant advantage over time – and use a wide variety of tools and techniques.

Dealing with Competition

Identifying a strategic direction requires a good deal of analysis – using a wide variety of tools. Commonly Used Analytic Tools Environmental Scanning Forecasting and Scenario Analysis Five Forces Model Strategic Group Analysis Competitive Analysis Benchmarking Game Theory (PARTS) SWOT Analysis VRINE Value Chain Analysis

Commonly Used Analytic Tools

Environmental Scanning

Forecasting and Scenario Analysis

Five Forces Model

Strategic Group Analysis

Competitive Analysis

Benchmarking

Game Theory (PARTS)

SWOT Analysis

VRINE

Value Chain Analysis

Competitive Analysis Why? Better understand rivals Better understand your own position How? Constant vigilance Searching in unusual places Benchmarking

Why?

Better understand rivals

Better understand your own position

How?

Constant vigilance

Searching in unusual places

Benchmarking

Competitive Strategy is Often Thought of “as War” with Attack and Defensive Strategies Regardless of which specific strategy, remember the principles of mass and objective! Attacker Defender (3) Encirclement attack (4) Bypass attack (2) Flank attack (5) Guerilla attack (1) Frontal attack

Key Principles of Traditional Game Theory and Competitive Positioning Look forward, reason back Competitor’s reactions Decision trees Consider how choices today affect later outcomes Plan sequential and/or simultaneous moves Know thy rival Consider the payoff matrix

Look forward, reason back

Competitor’s reactions

Decision trees

Consider how choices today affect later outcomes

Plan sequential and/or simultaneous moves

Know thy rival

Consider the payoff matrix

“ Look Forward, Reason Back” Often Uses Decision Trees Example: UPS’s Pricing Strategy

A Payoff Matrix Can Be Used to Find the Most Profitable Dominant Strategy Example: A Payoff Matrix for GM and Ford When each company picks its “best” strategy, the resulting combination offers the lowest profits to the competitors. This sets up a prisoner’s dilemma situation, in which competition leads to low outcomes while cooperation results in higher outcomes.

Brandenburger and Nalebuff provide an Alternate View, Also Based on Game Theory. P - A - R - T - S - Coopetition is a great source for more on this topic!

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Brandenburger and Nalebuff’s Six Traps Accepting the game you’re in (you can change it) Seeing it as “win-lose” (can be “win-win”) Thinking you need a unique activity (imitation can be beneficial) Failing to see the whole game (remember complementors) Not thinking methodically (use PARTS, other frameworks) Assuming it’s a one –time change (process is ongoing)

Accepting the game you’re in (you can change it)

Seeing it as “win-lose” (can be “win-win”)

Thinking you need a unique activity (imitation can be beneficial)

Failing to see the whole game (remember complementors)

Not thinking methodically (use PARTS, other frameworks)

Assuming it’s a one –time change (process is ongoing)

The Form and Intensity of Rivalry Can Change the Risk of Price Wars Industry Characteristic Raises Risk of a Price War Lowers Level of a Price War Type of product/service Undifferentiated Differentiated Market growth rate Stable/decreasing Increasing Price visibility to competitors High Low Buyer price sensitivity High Low Overall industry cost trend Declining Stable Industry capacity utilization Low High Number of competitors Many Few

Four Nonprice Competitive Strategies

Toyota’s Use of Market Development and Product Proliferation Has Covered Almost Every Market Segment

What are Key Take-Aways? Understand competitors’ goals, strategies, strengths and weaknesses -- qualitatively and quantitatively Use scenarios to challenge assumptions and prepare for future possibilities Before making a strategic move, anticipate the likelihood and potential success of competitor responses Look beyond the past since historical reactions are not necessarily what a competitor will do in the future Remember when the stakes are high, or a company feels caged in, the response may be unpredictable, fierce and fast. Consider imitation rather than leadership since imitation might be as profitable as innovation.

Understand competitors’ goals, strategies, strengths and weaknesses -- qualitatively and quantitatively

Use scenarios to challenge assumptions and prepare for future possibilities

Before making a strategic move, anticipate the likelihood and potential success of competitor responses

Look beyond the past since historical reactions are not necessarily what a competitor will do in the future

Remember when the stakes are high, or a company feels caged in, the response may be unpredictable, fierce and fast.

Consider imitation rather than leadership since imitation might be as profitable as innovation.

Supplementary Slides

Resources & Capabilities for Differentiation Strong marketing abilities Creative flair Product engineering skills Cooperation from channels Coordination among R&D, Marketing, Operations Reputation for quality and/or technical leadership Amenities to attract highly skilled labor, scientists, and/or creative people

Strong marketing abilities

Creative flair

Product engineering skills

Cooperation from channels

Coordination among R&D, Marketing, Operations

Reputation for quality and/or technical leadership

Amenities to attract highly skilled labor, scientists, and/or creative people

Pros and Cons of Differentiation Pros Insulate from rivalry Consumers are less price sensitive Can increase market share; create markets Loyalty barriers develop Buyer and supplier power reduced Cons May result in differentiation wars (product proliferation) May be hard to sustain price premium - switching Threat of products becoming commodities Customer tastes can change Can overtax firm resources

Pros

Insulate from rivalry

Consumers are less price sensitive

Can increase market share; create markets

Loyalty barriers develop

Buyer and supplier power reduced

Cons

May result in differentiation wars (product proliferation)

May be hard to sustain price premium - switching

Threat of products becoming commodities

Customer tastes can change

Can overtax firm resources

Resources & Capabilities for Cost Leadership Sustained capital investment and access to capital Process engineering skills Products designed for ease of manufacture Low cost distribution system Tight cost controls and reporting systems Structured organization and responsibilities Incentives based upon qualitative targets Not every company can sustain a cost leadership strategy!

Sustained capital investment and access to capital

Process engineering skills

Products designed for ease of manufacture

Low cost distribution system

Tight cost controls and reporting systems

Structured organization and responsibilities

Incentives based upon qualitative targets

Not every company can sustain a cost leadership strategy!

Pros and Cons of Cost Leadership Pros Can increase market share Convince competitors not to engage in price wars Low costs and prices provide a barrier to entry Can handle supplier price increases Volume purchases reduces supplier power Can reduce prices to compete with substitutes Cons Requires large asset base and capital investment May be easily copied Can create myopia to industry changes Typically, only one player can do May lose touch with customer needs

Pros

Can increase market share

Convince competitors not to engage in price wars

Low costs and prices provide a barrier to entry

Can handle supplier price increases

Volume purchases reduces supplier power

Can reduce prices to compete with substitutes

Cons

Requires large asset base and capital investment

May be easily copied

Can create myopia to industry changes

Typically, only one player can do

May lose touch with customer needs

Pros and Cons of Focus Pros Broader competitors ignore the niche Can improve other value-adding services to further specialize and tie in customers May gain unique advantages serving a specialized market segment -> monopolistic Customer loyalty reduces buyer power and threat of new entrants Cons Niche may shift toward broader market Larger firms may intrude Niche may disappear – tastes change, technology Can overtax firm resources May be costly with suppliers due to low volumes May be difficult to find growth opportunities

Pros

Broader competitors ignore the niche

Can improve other value-adding services to further specialize and tie in customers

May gain unique advantages serving a specialized market segment -> monopolistic

Customer loyalty reduces buyer power and threat of new entrants

Cons

Niche may shift toward broader market

Larger firms may intrude

Niche may disappear – tastes change, technology

Can overtax firm resources

May be costly with suppliers due to low volumes

May be difficult to find growth opportunities