Chapter 5 Creating Business Strategy

1. Chapter 5 • Creating Business Strategy

2. OBJECTIVES • Define generic strategies and show how they relate to a firm’s strategic position 1 • Describe the drivers of low-cost, differentiation, and focus strategic positions 2 • Identify the threats associated with each generic strategy position 3 • Show how different strategic positions fit with various stages of the industry life cycle 4 5 • Evaluate the quality of the firm’s strategy

3. STRATEGIC POSITIONING SHOULD IMPROVE PROFITABILITY Definition • Where managers of a company situate that company relative to its rivals along important competitive dimensions Purpose • To reduce the effects of rivalry—and thereby improve profitability

4. 1 • Firm’s resources and capabilities 2 • Industry structure CHOICE OF POSITION DEPENDS ON TWO FACTORS

5. GAIN ADVANTAGE OVER RIVALS IN TWO WAYS • Description • No advantage overrivals • Advantage over rivals • Produce a differentiated product and charge sufficiently higher prices to more than offset the added costs of differentiation • Differentiation • Produce an essentially equivalent product at a lower cost • Low-cost

6. PORTER’S STRATEGIC POSITIONING MODEL • Broad(i.e., industry wide) • Broad costleadership • Broaddifferentiation • Strategictarget • Narrow(i.e., particular segment only) • Focused costleadership • Focuseddifferentiation • Low-cost • Differentiation • Strategic advantage

7. Low-cost leadership • Differentiation • Capture market share by offering lower price, or • Earn higher profits by maintaining price parity • Capture market share by offering higher quality at same price, or • Earn higher margins by raising prices over competitors • Benefits • Pacific Cycle • Gallo Wines • Wal-Mart • Southwest Airlines • Home Depot • Trek Bicycles • Coca-Cola and Pepsi • Mercedes Benz • Harley-Davidson motorcycles • Stouffer’s frozen foods • Examples LOW-COST LEADERSHIP AND DIFFERENTIATION OFFER GREATER MARKET SHARE AND/OR PROFITS

8. STRATEGIC POSITIONING EXAMPLES • Wal-Mart • Gallo Wines • Trek Bicycles • Coca-Cola • Broad • Strategictarget • Montague • Mercedes Benz (in US) • Narrow • JetBlue • Low cost • Differentiation • Strategic advantage

9. KEY DRIVERS OF COST ADVANTAGE • Economies of scale • Learning • Product technology • Product design • Location advantages for sourcing inputs

10. Sourcesof economies • Sourcesof diseconomies • R&D spending • Advertising spending • Specialization of specific production processes • Superior inventory management • Purchasing power • Bureaucracy • High labor costs • Inefficient operations • Coordination costs DISECONOMIES OF SCALE– SIZE DOESN’T ENSURE ECONOMIES OF SCALE • Economiesof scale • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

11. Costs decrease … • Economiesof scale • as the scale of operation increases during any given period of time • Learning curve • with the cumulative level of experience since the production of the first unit LEARNING CURVE • Economiesof scale How Learning Differs from Scale • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

12. LEARNING CURVE • Step 1: Measure • Economiesof scale • Step 2: Calibrate • No. of bikes produced • Hours spent on last bike • y = ax-b • 1 • 2 • 4 • 8 • 16 • 32 • 64 • 128 • 30.00 actual • 27.00 actual • 24.30 actual • 21.87 est. • 19.68 est. • 17.71 est. • 15.92 est. • 14.34 est. • Learning • Economiesof scope • Productiontechnology • Productdesign • Step 3: Project • Location

13. ECONOMIES OF SCOPE • Economiesof scale • If a firm produces two or more products and can share resources among them (e.g., share manufacturing machines) – thereby lowering the costs of each product – it benefits from economies of scope • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

14. PRODUCTION TECHNOLOGY • Economiesof scale • A new entrant that wants to compete against industry incumbents with significant scale and experience advantages may try to match or beat incumbents’ costs by introducing a production technology that is subject to different economics (e.g., JetBlue, Nucor Steel) • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

15. PRODUCT DESIGN • Economiesof scale • Learning • Product design can sometimes be altered to lower a firm’s production costs (e.g., fewer parts, ease of assembly—Xerox vs. Canon example) • Economiesof scope • Productiontechnology • Productdesign • Location

16. LOCATION • Economiesof scale • Firms may try to lower production costs by locating their operations in cheaper labor markets or near supplies of key materials (e.g., Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek, which manufactures in the US) • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

17. To drive up customer’s willingness to pay and generate demand sufficient to • Premium brand image • Customization, styling, or features • Unusually high quality • Speed • Convenient access or service • Recoup added costs, and • Generate enough profits to make strategy worthwhile KEY DRIVERS OF DIFFERENTIATION ADVANTAGES Key Drivers Purpose

18. Drivers • Threats • Economies of scale • Learning • Economies of scope • Superior technology • Product design • Location • New technology • Unacceptably poor quality • Social, political, and economic risks of outsourcing • Low cost • Failure to increase buyer’s willingness to pay higher prices • Underestimating cost of differentiation • Over-fulfillment of buyer’s needs • Lower cost imitation • Differentiation DRIVERS AND THREATS TO DIFFERENTIATION AND LOW-COST ADVANTAGE • Premium brand image • Customization, styling, or features • Unusually high quality • Speed • Convenient access or service

19. STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE • Phases of industry life cycle • Embryonic • Growth • Maturity • Decline

20. TESTING THE QUALITY OF A STRATEGY

21. 1 • Define generic strategies and show how they relate to a firm’s strategic position 2 • Describe drivers of low-cost, differen-tiation, and focus strategic positions 3 • Identify the risks associated with each generic strategy position 4 • Show how different strategic positions fit with various stages of the life cycle 5 • Evaluate the quality of the firm’s strategy SUMMARY