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Business Strategy: Differentiation, Cost Leadership, and Integration
Business Strategy: Differentiation, Cost Leadership, and Integration
Business Strategy: Differentiation, Cost Leadership, and Integration
McGraw-Hill/Irwin
Define business-level strategy and describe how it determines a firms strategic position. Examine the relationship between value drivers and differentiation strategy. Examine the relationship between cost drivers and cost-leadership strategy. Assess the benefits and risks of cost-leadership and differentiation business strategies vis--vis the five forces that shape competition. Explain why it is difficult to succeed at an integration strategy. Evaluate value and cost drivers that may allow a firm to pursue an integration strategy. Describe and evaluate the dynamics of competitive positioning.
Chapter Case 6
Business Strategy and Competitive Advantage A business-level strategy is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by utilizing core competencies in specific individual product markets.
Definition of Business
EXHIBIT 6.1
imitates the first mover? How fast does new imitation occur once it starts?
These
of correspondence between market share and profit rates. IBM was a clear market leader in terms of market share but had only mediocre economic performance relative to its rivals. High market share is no guarantee of high rates of profitability.
(e.g., good service capabilities at Caterpillar), unobserved by us, that causes both high profitability and high market share.
In
this case, we would see a correlation between profitability and market share but no causal explanation.
Business Strategy and Competitive Advantage When can market share work to generate and sustain an advantage?
Scale economies combined with high exit costs may make
The knowledge is not observable in use; The knowledge is (socially) complex, rather than simple.
Strategic Position
Determined by Firms Business-Level Strategy
Two primary competitive levers:
Value (V) Cost (C)
Competitive Advantage
Differentiation Advantage
Cost-Leadership
Similar Value; Lower Cost Timex
Scope of Competition
Narrow (Focused) Rolex Broad Timex
EXHIBIT 6.2
Define business-level strategy and describe how it determines a firms strategic position. Examine the relationship between value drivers and differentiation strategy. Examine the relationship between cost drivers and cost-leadership strategy. Assess the benefits and risks of cost-leadership and differentiation business strategies vis--vis the five forces that shape competition. Explain why it is difficult to succeed at an integration strategy. Evaluate value and cost drivers that may allow a firm to pursue an integration strategy. Describe and evaluate the dynamics of competitive positioning.
Capabilities Defending
Isolating mechanisms
Retain customers & Prevent imitation
Superior Contribution
Sustainable Position
Competitive Advantage
2/28/2003 Southern Methodist University Slide # 6
The value customers receives less the cost to the firm Product
value Buyer surplus Suppliers profit
Southern Methodist University
Slide # 7
Value Created
Differentiation Advantage
Differentiation Advantage, a concept developed by economist Joan Robinson, occurs when a firm is able to obtain from its differentiation a price premium in the market which exceeds the cost of providing differentiation.
EXHIBIT 6.3
Differentiation:
Product features, customer service, customization, and complements Competitive advantage = economic value created (V-C) > competitors Marriott line of Hotels
LS400 line required recall a little over a year after launch Turned threat into opportunity to establish reputation for superior customer service
Two years after launch Lexus ranked first on quality and customer satisfaction by J.D. Powers
Needed to exhibit superior customer responsiveness again 8 million vehicles recalled was much more challenging
125
EXHIBIT 6.4
Cost Leadership:
Cost of input factors, economies of scale, and learning-curve and
experience-curve effects
Competitive advantage = economic value created (V-C) >
competitors
No window shades on older planes, seats dont recline, etc. Fares as low as $8 Numerous fees and surcharges: pillows, blankets, check-in, etc. 20+% of revenues flow from ancillary services
127
1 Bottle of Water, $3.50 Ad Revenue, $2 Priority Boarding, $4 Pillow & Blanket, $5 Subsidy from More Expensive Flights, $5.50
Ticket Price, $8
ECONOMIES OF LEARNING
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
EXHIBIT 6.5
Economies Economies of of Scale: Scale: The The Long-Run Long-Run Cost Cost Curve Curve for for a a Plant Plant
Sources of scale economies: - technical input/output relationships - indivisibilities - specialization Cost per unit of output
31
Box 2 x 2 x 2 Volume 8
Box 3 x 3 x 3 Volume 27
Cube-Square Rule:
Each dimension increases 50% (2 goes to 3) BUT Each volume increases 237.5% (8 goes to 27) !!
EXHIBIT 6.6
innovations.
Define business-level strategy and describe how it determines a firms strategic position. Examine the relationship between value drivers and differentiation strategy. Examine the relationship between cost drivers and cost-leadership strategy. Assess the benefits and risks of cost-leadership and differentiation business strategies vis--vis the five forces that shape competition. Explain why it is difficult to succeed at an integration strategy. Evaluate value and cost drivers that may allow a firm to pursue an integration strategy. Describe and evaluate the dynamics of competitive positioning.
EXHIBIT 6.7
Define business-level strategy and describe how it determines a firms strategic position. Examine the relationship between value drivers and differentiation strategy. Examine the relationship between cost drivers and cost-leadership strategy. Assess the benefits and risks of cost-leadership and differentiation business strategies vis--vis the five forces that shape competition. Explain why it is difficult to succeed at an integration strategy. Evaluate value and cost drivers that may allow a firm to pursue an integration strategy. Describe and evaluate the dynamics of competitive positioning.
EXHIBIT 6.8
EXHIBIT 6.9
2008 bought Jaguar & Land Rover Prestigious differentiated products 2009 Tata Motors creates a Nano car Lowest-priced car in the world! Zero to 60 mph in 30 seconds No radio or glove box Targets bicyclists to move to cars
Define business-level strategy and describe how it determines a firms strategic position. Examine the relationship between value drivers and differentiation strategy. Examine the relationship between cost drivers and cost-leadership strategy. Assess the benefits and risks of cost-leadership and differentiation business strategies vis--vis the five forces that shape competition. Explain why it is difficult to succeed at an integration strategy. Evaluate value and cost drivers that may allow a firm to pursue an integration strategy. Describe and evaluate the dynamics of competitive positioning.
The Dynamics of Competitive Positioning Strategic Positions need to change over time
eBay withdrew from selling new goods & sold Skype
Productivity Frontier
Value-cost relationship Captures the best practices at a point in time
Mobile Devices
2005 Apple differentiator, Dell cost leader 2010 Apple still differentiator, HP moving to successful integrator, Dell shifting toward integrator
The Dynamics of Competitive EXHIBIT 6.10 Positioning: Apple, HP, and Dell
Differentiation Differentiationvs. vs. Cost Cost Leadership Leadership as asa a Basis Basisfor forCompetitive Competitive Advantage Advantage
Highest return on equity among top 200 US companies, 2002
(%) (%)
Colgate Palmolive 367.8 Caremark Rx 303.2 American Standard 161.4 Yum Brands 98.1 Kellogg 80.5 Anheuser-Busch 63.4 Nextel Communications 58.3 Sara Lee 58.0 Altria Group 57.0 Wyeth 54.5
Gillette H.J. Heinz Pfizer Dell Computer TJX Oracle PepsiCo 3M Eli Lilly Sysco
53.8 48.5 45.7 43.0 41.3 36.4 35.6 32.9 32.7 31.9
QUESTION: Which is the primary basis for competitive advantage in the above companies: cost or differentiation?
Take-Away Concepts
LO 6-1 Define business-level strategy and describe how it determines a
differentiation strategy.
The goal of a differentiation strategy is to increase the perceived value of goods and services so that customers will pay a higher price for additional features.
Take-Away Concepts
In a differentiation strategy, the focus of competition is on non-price attributes. Some of the unique value drivers managers can manipulate are product features, customer service, customization, and complements. Value drivers contribute to competitive advantage only if their increase in value creation (V) exceeds the increase in costs (C). LO 6-3
Take-Away Concepts
LO 6-4 Assess the benefits and risks of cost-leadership and
differentiation business strategies vis--vis the five forces that shape competition.
The five forces model helps managers use generic business strategies to protect themselves against the industry forces that drive down profitability. Differentiation and cost-leadership strategies allow firms to carve out strong strategic positions, not only to protect themselves against the five forces, but also to benefit from them in their quest for competitive advantage. Exhibit 6.7 lists benefits and risks of each business strategy.
Take-Away Concepts
LO 6-5 Explain why it is difficult to succeed at an integration strategy. A successful integration strategy requires that trade-offs between differentiation and low cost be reconciled. Integration strategy often is difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another. When firms fail to resolve strategic trade-offs between differentiation and cost, they end up being stuck in the middle. They then succeed at neither strategy, leading to a competitive disadvantage. LO 6-6 Evaluate value and cost drivers that may allow a firm to pursue
an integration strategy.
To address the trade-offs between differentiation and cost leadership at the business level, managers may leverage quality, economies of scope, innovation, and the firms structure, culture, and routines. The trade-offs between differentiation and low cost can either be addressed at the business level or at the corporate level.
Take-Away Concepts
LO 6-7 Describe and evaluate the dynamics of competitive
positioning.
Strategic positions need to change over time as the environment changes. Best practices determine the productivity frontier at any given time. Reaching the productivity frontier enhances the likelihood of obtaining a competitive advantage. Not reaching the productivity frontier implies competitive disadvantage if other firms are positioned at the productivity frontier.