Generic Strategies

1. Generic Strategies Lessons from Crown Cork & Seal and Matching Dell

2. There are two major routes to competitive advantage LowCost CompetitiveAdvantage Different-iation

3. The impact of positioning on firms’ profits • 10-20% of variation in firms’ profits are explained by industry effects • 30-45%, of variation in firms’ profits are explained by within-industry “firm” effects • result of strategic position • relative cost position • ability to differentiate and capture value from delivering higher-value added products (relative to industry competitors)

4. $ Industry average competitor Successful differentiated competitor Successful low-cost competitor Competitor with dual advantage The interplay between cost and differentiation in generating competitive advantage

5. How to Gain Competitive Advantage in a Structurally Unattractive Industry • Find attractive growing segment of the market • Provide quality of service leading to WTP comparable or above others in the industry • Outperform industry on costs • Interlinked strategies

6. Dell’s Low-Cost Strategy Dell Compaq WTP Cost

7. Dell’s Approach • Attractive segment: • Educated business consumers • Raise (or equalize) WTP: • Speed of delivery • Reliability • After sales service • Lower costs: • Direct channel • Build to order • Speed of delivery

8. Crown’s Approach • Attractive segment: • Hard to hold • International • Raise (or equalize) WTP • Sale engineers • Co-location • Rapid delivery (30 days inventory) • Lower costs: • Co-location • Owner-operator mentality • “Lean and mean” SGA

9. Note the common emphasis on barriers to imitation! Complementary ways to view the creation of competitive advantage • Hamel and Prahalad (1990), “Core Competence of the Corp.” • difficult-to-imitate core competencesshould be built • foundation of core products, which in turn support new product development and growth • Collis and Montgomery (1995), “Competing on Resources” • possessing unique, valuable resources, which cannot be procured in efficient factor markets, is the key to out performance • can be physical (a low-cost mine), intangible (brands, capabilities, know-how, etc.) • Porter (1996), “What is Strategy?” • trade-offs are required • systems of interlocking, complementary activities which are guided by these tradeoffs generate sustainable competitive advantage

10. Differentiation • Quality – Vertical Differentiation • Attributes that all consumers agrees upon, such as: (underlined product indicates the product that everyone prefers at a given price) • Pentium 4 2.66GHz vs Pentium 4 3.2 GHz • 2004 BMW 330i getting 28 mpg vs 2004 BMW 330i getting 24 mpg • Anti-biotic that makes you nauseous vs. Anti-biotic with no side effects • Variety – Horizontal Differentiation • Attributes that consumers have different preferences about: • car color • sweetness of a drink • country music vs. hip-hop vs. classical • time of day at which a direct flight from SFO to JFK leaves • location of a grocery store

11. Product Differentiation Experiment: Deciding where to locate in a differentiated market • Consumers are located on a number line from 1 to 63. • There is one consumer at each location. (i.e., one consumer at location 1, one consumer at location 2, …, one consumer at location 63). • Every consumer will pay $1 to buy one unit of the product and will buy it from the nearest store. If there is a tie, then a consumer buys fractional units from all the equally distant stores. • A monopolist operating in this market will earn $63, since all consumers will pay the monopolist $1

12. Product Differentiation Experiment (2) • Costs: • It costs nothing to supply each consumer • It costs $20 to set up shop • Strategy: • If you decide to set up shop, you get to choose a location on the number line (1 through 63) • You must pick an integer (i.e., a counting number 1, 2, 3, … not 3.5)

13. Product Differentiation Experiment (3) • The game: • First person to raise a $20 bill pays me and gets to choose a location • Your entry decision and choice of location is public information • Second person to raise hand pays me $20 and gets to choose a location • etc. • You can locate anywhere on the number line. There is no prohibition against co-location

14. Product Differentiation Experiment (4) • Examples of strategies and payoffs: • Two entrants, one locates at #1 and one locates at #63. Both receive a gross payoff of $31.50, net profit $11.50 • Two entrants, one locates at #1 and one locates at #2. Company at location #1 gets gross payoff of $1 (net $-19) and company at location #2 gets gross payoff of $62 (net $42)

15. Equilibria of the Product Differentiation Experiment • Requirements for an equilibrium 1. All players must make a positive profit 2. No one else in the room can make a positive profit by entering 3. No entrant wishes to move to another position • Equilibrium #1: Three entrants • 11, 32, 53 • Each player makes $1 • Equilibrium #2: Two entrants • 21, 42 • Each player makes $11.50 • (if constraint 2 is changes to no one else makes a loss, then 20 and 43 are also acceptable positions)

16. Intuition from the Product Differentiation Experiment • Between two entrants • Entry is profitable if players are more than 40 units apart • Between another player and an endpoint • Moving toward the other player increases market share • Moving toward the other player makes it more likely that someone else will enter • Optimal location is to enter in a way that guarantees that you make a profit and that no one else can enter profitably • How about location 21 as a starting point? • In real games (as opposed to ideal ones) players make mistakes • Good strategist will take advantage of these mistakes