Business strategy part 4

Business strategy part 4
Mcenroe ng

Determining Competitive Positioning
• when we think about the key challenge, for the business strategist,
we're trying to focus on this thing that strategy is all about is how to
find that valuable competitive position.
• And remember, this lies at the intersection of the capabilities that a
firm has, what it's able to do well and distinctively well and also what
those market opportunities are.
• And that also has to intersect with the values and the mission and the
purpose of the firm and where all those things come together, that is
the prime opportunity for a valuable competitive position

• an idea from Michael Porter from Harvard Business School, and essentially
this allows us to think about four different ideal types of businesses in a
particular industry or market segment.
• First of all, when we think about the source of competitive advantage, if we
first consider sort of an average firm in an industry, we might think of this
as the marginal firm in the industry, and let's just say they offer a product
or service that's worth $6. And the cost of producing that product, is $5
and that means the profit or rent that can come back to the firm is $1.
• So that's the average sort of source of competitive advantage for firms in
that industry, we might think of a couple of different ways that might vary.

• So let's say they offer the same product or service at that $6 price point.
• So the same price to this consumer, the buyer, but if that firm has a lower cost structure,
then they're able to realize more profits on each unit. In this case, stylized case, they'll
get $2 of profit compared to the average firm's $1 of profit
• So same price to the consumer but because the cost structure is a lower cost structure
the low cost firm is able to realize a little bit more competitive advantage, right? So,
that's one way we might think about competitive advantage. On the other hand, think
about this closest graph to me about a differentiator firm.
• So, in this same industry, let's say that a firm has a differentiated product that they're
able to actually charge more money for the consumer or the buyer, so maybe the
willingness to pay is higher here. In this case it would be $8, and a lot of times that's
associated with a higher cost structure, but again, the differentiator is also in a superior
competitive position as compared to the marginal or the average firm in the industry
because they're able to realize double the amount of profits, but they go about it
differently than the low cost firm.

• So we think of that as being the horizontal axis, going back to this idea of generic
strategies.
• The vertical axis has to do with what we refer to as Competitive Scope, and this is
essentially the extent to which a firm targets multiple product market segments
within an industry. In other words, how broadly does a firm offer different
product lines or different kinds of services within an industry?
• Is it very narrow, or is it broader? And we might think of different ways that that
could vary. An easy way to think about this is geographic markets. So if a firm
operates in a broader set of geographic markets, we would think of them as
having a broader competitive scope versus just one geographic location, right?
• They can also segment the types of services or products they offer based on
consumer or buyer preferences. We know that buyer preferences can differ, and
so firms might offer a broader scope of products or services in order to cater to
each of those individual kinds of buyers.

• Therefore the products and services will vary based on the
characteristics of the product line. So if we think about again those
two axis to help us understand these generic, competitive positions
This helps us sort of sort different types of firms into four ideal types.
• this is a little bit stylized, and it just helps us to understand extremes,
and what the extreme positions would be. But this is helpful for us to
basically understand the dynamics of an industry and the positioning
of a firm relative to its competition.

Generic Competitive Positions, Part 2

Mapping Competitive Positions
• strategy maps are sort of a generic tool.
• They're very commonly used in consulting. And it's basically a way to take
two or three criteria, or factors, or ways of understanding a firm's position
in an industry, and mapping all of the different competitors using those two
or three factors.
• The vertical access can be a second factor. And then In this example, the
size of the circle can graphically or visually represent the third factor.
• So let's take a particular example and let's focus on a particular industry,
say automobiles in the early 2000s. If we look at the automobile industry in
the early 2000s, what we want to do here is understand how the different
firms position themselves with respect to each other within that industry

• That's on the x axis. On the vertical axis, sportiness. If we start in the upper
corner with Porsche, a German auto manufacturer, we can see that the level of
sportiness is quite high, the average vehicle cost is also quite high, but the size of
the circle is is quite small. In other words, Porsche doesn't offer an endless array
of models, but they offer just a fewer number of models, especially as compared
with some of the other auto manufacturers. So this might be an example of what
we would describe as a niche position.
• And remember, a niche generic competitive position is when the competitive
scope of the firm within the industry is quite small, so here that would be about
the size of the circle. But, again, Porsche offers cars that are highly differentiated.
You know, brand recognition is strong. They're quite expensive. They're very
sporty. So we might describe that as a niche position. At the other end of the
spectrum, we might think of an auto manufacturer like Kia. So Kia is down in the
lower corner. And here we have automobiles that are certainly less sporty and
they are certainly less expensive, also not a large number of models, so the size
of the circle is relatively small. So we might think of this as corresponding with

• the focused part arises from that size of that circle being quite small, the competitive
scope. So let's think in contrast about an auto manufacturer like Mercedes-Benz. So
Mercedes, we see here they offer many more models, so the size of the circle is bigger.
And they're sportier and they're more expensive, so a little more distinctive.
• There's more cache associated with the brand. And so here we might think of it as a
classic differentiation strategy. Again, it's not so narrowly focused scope-wise, model-
wise, as Porsche, but we see the same kind of approach towards product distinctiveness,
• Ford might be an example where the level of sportiness is lower, the average vehicle cost
is certainly much lower than Mercedes, and so we might see that as sort of a typical
position of cost leadership
• demonstrating how a strategy map can help us identify and put firms in different areas
on the map. We might think of Toyota, there's a fifth firm we've got up here, as being a
firm that's really trying to occupy an integrated position, so they're trying to capture the
benefits of both cost leadership as well as some differentiation perhaps quality in this
case

• pick a range of different factors and use them instead. Maybe we want to
look at sort of market share, or maybe we want to look at R&D spending,
or quality. There's a number of things we could measure here. And the
thing to remember, here's a tip, as you put a strategy map together, there's
no top three criteria, for example, you should always use in a strategy map
like this.
• But instead, you might try a handful of different criteria and sort of do a
quick kind of back-of-the-envelope sort of calculation and kind of decide
what a strategy map might look like if you used these three criteria, and
maybe use a different three criteria and then see what those might tell
you. And the point here is that it's often not evident at the outset what the
most important or revealing or useful criteria for a strategy map might be,
and, therefore, it's oftentimes just a case of trial and error.

Reference
• University of Virginia

Business strategy part 4

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