4 strategy module 4 2012

8/13/2019 4 Strategy Module 4 2012

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Building Competitive Advantage throughDistinction

Caselet-1: Nordstrom Inc Caselet-2: A Vision of Industry Dominance-

Nike

Caselet-3: Leveraging Technology-Reinventing Amazon.com Routes to Building Competitive Advantage

Low-Cost Leadership Strategies

Differentiation Strategies

Focus Strategies

Strategy and Competitive Advantage over the life cycle


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Caselet-1: Nordstrom Inc

Deep roots in Seattle, Washington, USA

Initial business was fashion shoes, 1901

Loyal customers awarded

Computerised real time inventory system

1968 women fashion apparels Company ensures distinct customer service by fully

embracing personalised sales

Care for employees and human values

Competition by Neiman Marcus, Saks 5th

avenue,Talbots


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Infrastructure

Strong legacy

of family

emphasis on

service

Human

Resource

Management

Promotion

from within

Development

of service

culture

Training on

service

expectations

Technology

Development

Perpetual

inventory

Developmentof new

ordering

systems

Customerloyalty

programs

Makinginternet as

user friendly

Procurement

Emphasis on

high fashion

labels

PRIMARY

ACTIVITIES

Smaller

stores, higher

store density,

narrower

product line

Higher prices,

emphasis on

classic design

Personalised

friendly,

customer first

policy

Nordstrom di f ferent iat ion from department store chains

SUPPO

RTACTIVITIES

InboundLogistics

Operations OutboundLogistics

Marketing/Sales

Service


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Caselet-2: A vision of Industry Dominance-Nike

Worlds largest shoe maker, Greek goddess of victory, 20% of

athletic market Distinguishes from competitors, Adidas, Reebok, Puma, K-Swiss

through aggressive celebrity marketingand by associating withcollege teams, Olympics and major professional sporting eventsglobally.

Powerful competitive advantage include R&D capabilities, extensiveworldwide production, sourcing networks, cross selling products andfunding of various community based programs.

Nike forms research communities comprising coaches ,athletes,trainers, equipment managers, orthopedists etc

Shox technology adopts having air cushion

Personalized shoe

The backbone is its huge global production and sourcing network

Complete control over supply chain

Focus on independent contractors

Sponsoring events make its aggressive presence


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Caselet-3: Leveraging Technology- Reinventing Amazon.com

Beginning in 1994, leading online retailer

Biggest seller of books, Cd, Video, Gifts and electronicproducts on the internet

Significant discount on net price

Competes with e-Bay, Yahoo and WebMD

Initial focus was on books, open for comments by buyers

Virtual customer, high degree of convenience and security

First time visitors have to punch their billing & credit card info,

email, address etc thus creating a first time visitors have to

punch their billing & credit card info, email, address etc thus

creating personal profile for subsequent usage Uses web based innovations, e-commerce emerging as a

technology and web based virtual platform

Rival threat by overstock.com


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Core Competencies and Strategy

Resources and superior capabilities that aresources of competitive advantage over a

firms rivals

Providing value to customers and gainingcompetitive advantage by exploiting core

competencies in individual product markets

Core

Competencies

Strategy

Business-level

Strategy

An integrated and coordinated set ofactions taken to exploit core competencies

and gain competitive advantage


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Customers: Their Relationship to Business-Level Strategies

Key Issues

in

Business-level

Strategy

Who will be

served?

What needs will

be satisfied?

How will those

needs be satisfied?


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Who:Determining the Customers to Serve

Market segmentationA process used to cluster people with similar needs

into individual and identifiable groups.

All Customers

IndustrialMarkets

ConsumerMarkets


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TABLE4.1 Basis for Customer SegmentationConsumer Markets

Demographic factors (age, income, sex, etc.) Socioeconomic factors (social class, stage in the family life cycle)

Geographic factors (cultural, regional, and national differences)

Psychological factors (lifestyle, personality traits)

Consumption patterns (heavy, moderate, and light users)

Perceptual factors (benefit segmentation, perceptual mapping)

Industrial Markets

End-use segments (identified by SIC code)

Product segments (based on technological differences or

production economics)

Geographic segments (defined by boundaries between countries orby regional differences within them)

Common buying factor segments (cut across product market and

geographic segments)

Customer size segmentsSource:Adapted from S. C. Jain, 2000, Marketing Planning and

Strategy, Cincinnati: South-Western College Publishing, 120.


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What:Determining Which CustomerNeeds to Satisfy

Customer needs are related to a products

benefits and features.

Customer needs are neither right nor wrong,

good nor bad.

Customer needs represent desires in terms of

features and performance capabilities.


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How:Determining Core CompetenciesNecessary to Satisfy Customer Needs

Firms use core competencies to implement value

creating strategies that satisfy customersneeds.

Only firms with capacity to continuously improve,innovate and upgrade their competencies can

expect to meet and/or exceed customer

expectations across time.


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The Purpose of a Business-Level Strategy

Business-Level StrategiesAre intended to create differences between the firms

position relative to those of its rivals.

To position itself, the firm must decide whether itintends to:

Perform activities differently or

Perform different activities as compared to its rivals.


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Types of Potential Competitive Advantage

Achieving lower overall coststhan rivalsPerforming activities differently (reducing process

costs)

Possessing the capability to differentiatethefirms product or service and command a

premium price

Performing different (more highly valued) activities.


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Competitive Scope

Broad ScopeThe firm competes in many

customer segments.

Narrow ScopeThe firm selects a segment or

group of segments in the

industry and tailors its strategy

to serving them at theexclusion of others.


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Types of Business-Level Strategies

Cost Uniqueness

DifferentiationCost Leadership

Focused

Differentiation

Focused Cost

Leadership

Integrated Cost

Leadership/

Differentiation

Broad

Target

Narrow

Target

Competitive Advantage

Competitive

Scope


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FIGURE4.2 Five Business-Level Strategies

Source:Adapted with the

permission of The Free Press, an

imprint of Simon & Schuster AdultPublishing Group, from Competitive

Advantage: Creating and Sustaining

Superior Performance, by Michael E.

Porter, 12. Copyright 1985, 1998

by Michael E. Porter.


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Cost Leadership Strategy

An integrated set of actions taken to producegoods or services with features that are

acceptable to customers at the lowest cost,

relative to that of competitors with features that

are acceptable to customers.Relatively standardized products

Features acceptable to many customers

Lowest competitive price


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Cost Leadership Strategy

Cost saving actions required by this strategy:Building efficient scale facilities

Tightly controlling production costs and overhead

Minimizing costs of sales, R&D and serviceBuilding efficient manufacturing facilities

Monitoring costs of activities provided by outsiders

Simplifying production processes


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How to Obtain a Cost Advantage

Determine

and control

Cost Drivers

Reconfigure

Value Chain

if needed

Alter production process

Change in automation

New distribution channel New advertising media

Direct sales in place of

indirect sales

New raw material

Forward integration

Backward integration Change location relative

to suppliers or buyers


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Value-Creating Activities for Cost Leadership

Cost-effective MIS

Few management layers

Simplified planning

Consistent policies

Effecting training

Easy-to-use manufacturing

technologies

Investments in technologies

Finding low cost raw materials

Monitor suppliersperformances

Link suppliersproducts to

production processes

Economies of scale Efficient-scale facilities

Effective delivery schedules

Low-cost transportation

Highly trained sales force

Proper pricing


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Cost Leadership Strategy: Competitors

Due to cost leadersadvantageous position:

Rivals hesitate to compete

on basis of price.Lack of price competition

leads to greater profits.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Rivalry withExisting Competitors


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Cost Leadership Strategy: Buyers

Can mitigate buyerspower by:

Driving prices far below

competitors, causing

them to exit, thus

shifting power with

buyers back to the firm.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Bargaining Powerof Buyers


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Cost Leadership Strategy: Suppliers

Can mitigate supplierspower by:

Being able to absorb

cost increases due tolow cost position.

Being able to make very

large purchases,

reducing chance ofsupplier using power.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Bargaining Powerof Suppliers


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Cost Leadership Strategy: New Entrants

Can frighten off newentrants due to:

Their need to enter on a

large scale in order to becost competitive.

The time it takes to move

down the learning curve.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

The Threat ofPotential Entrants


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Cost Leadership Strategy: Substitutes

Cost leader is wellpositioned to:

Make investments to be

first to create substitutes.Buy patents developed by

potential substitutes.

Lower prices in order to

maintain value position.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

ProductSubstitutes


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Cost Leadership Strategy (contd)

Competitive RisksProcesses used to produce and distribute good or

service may become obsolete due to competitors

innovations.

Focus on cost reductions may occur at expense ofcustomersperceptions of differentiation

Competitors, using their own core competencies, may

successfully imitate the cost leaders strategy.


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Differentiation Strategy

An integrated set of actions taken to producegoods or services (at an acceptable cost) that

customers perceive as being different in ways

that are important to them.

Focus is on nonstandardized products

Appropriate when customers value differentiated

features more than they value low cost.


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How to Obtain a Differentiation Advantage

ControlCost Drivers

if needed

Reconfigure

Value Chainto

maximize

Lower buyerscosts

Raise performance of product or service

Create sustainability through:

Customer perceptions of uniqueness

Customer reluctance to switch to non-

unique product or service


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Value-Creating Activities and Differentiation

Highly developed MIS

Emphasis on quality

Worker compensation for

creativity/productivity

Use of subjective performance

measures

Basic research capability

Technology

High quality raw materials

Delivery of products

High quality replacement parts

Superior handling of incoming

raw materials

Attractive products

Rapid response to customer

specifications

Order-processing procedures

Customer credit

Personal relationships


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Differentiation Strategy: Competitors

Defends againstcompetitors because brand

loyalty to differentiated

product offsets price

competition.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power ofbuyers

Threat of

substitute

products

Rivalry withCompetitors


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Differentiation Strategy: Buyers

Can mitigate buyerspowerbecause well differentiated

products reduce customer

sensitivity to price increases.Threat ofnew

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power ofbuyers

Threat of

substituteproducts

Bargaining Powerof Buyers


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Differentiation Strategy: Suppliers

Can mitigate supplierspower by:

Absorbing price increases

due to higher margins.

Passing along highersupplier prices because

buyers are loyal to

differentiated brand.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power ofbuyers

Threat of

substituteproducts

Bargaining Powerof Suppliers


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Differentiation Strategy: New Entrants

Can defend against newentrants because:

New products must surpass

proven products.

New products must be at leastequal to performance of proven

products, but offered at lower

prices.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power ofbuyers

Threat of

substituteproducts

The Threat ofPotential Entrants


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Differentiation Strategy: Substitutes

Well positioned relative tosubstitutes because:

Brand loyalty to a

differentiated product tends

to reduce customerstesting

of new products or switching

brands.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power ofbuyers

Threat of

substituteproducts

ProductSubstitutes


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Competitive Risks of Differentiation

The price differential between the differentiators product

and the cost leaders product becomes too large.

Differentiation ceases to provide value for which

customers are willing to pay.

Experience narrows customersperceptions of the valueof differentiated features.

Counterfeit goods replicate differentiated features of the

firms products.


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Focus Strategies

An integrated set of actions taken to producegoods or services that serve the needs of a

particular competitive segment.

Particular buyer groupyouths or senior citizens

Different segment of a product lineprofessional

craftsmen versus do-it-yourselfers

Different geographic marketsEast coast versus

West coast


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Focus Strategies (contd)

Types of focused strategiesFocused cost leadership strategy

Focused differentiation strategy

To implement a focus strategy, firms must be

able to:Complete various primary and support activities in a

competitively superior manner, in order to develop

and sustain a competitive advantage and earn above-

average returns.


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Factors That Drive Focused Strategies

Large firms may overlook small niches.

A firm may lack the resources needed to compete in the

broader market.

A firm is able to serve a narrow market segment more

effectively than can its larger industry-wide competitors.

Focusing allows the firm to direct its resources to certain

value chain activities to build competitive advantage.


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Competitive Risks of Focus Strategies

A focusing firm may be outfocusedby its competitors.

A large competitor may set its sights on a firms niche

market.

Customer preferences in niche market may change to

more closely resemble those of the broader market.


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Integrated Cost Leadership/Differentiation Strategy

A firm that successfully uses an integrated cost

leadership/differentiation strategy should be in a

better position to:

Adapt quickly to environmental changes.

Learn new skills and technologies more quickly.

Effectively leverage its core competencies while

competing against its rivals.


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Integrated Cost Leadership/Differentiation Strategy (contd)

Commitment to strategic flexibility is necessary

for implementation of integrated cost

leadership/differentiation strategy.

Flexible manufacturing systems (FMS)

Information networks

Total quality management (TQM) systems



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Stage Introductory Growth Mature Decline

Nature of

Competitive Rivalry

Limited focus on

Comp; product is

centre of attention

Firms take out key

positions in market

Firms try to survive

shakeout, many exit or

fail

Remaining firms seek

to reduce intensity of

comp

Nature of Entry Pioneering forms

define industry

Large scale entry by

Firms seeking profits

Growth slows and

entry less attractive

Few, if any entrants

Product Technology Emerging, nodominant design

Competing designshope to set standard

Dominant design forindustry

No real productchange

Process Technology General purpose tools Growing investment in

specialised tools

Emphasis on

efficiency

Processes do not

change, may become

exit barrier

Marketing emphasis Focus on Innovators,

volatile prices

Building brand

awareness, prices

begin to decline

Promote to as many

segments, prices

stable

Marketing emphasis

changes to preserving

Investment intensity Very High Massive expenditure

reinforce position

De-emphasis on

adding new capacity

Begin gradual exit and

even divest activities

Profitability levels Unprofitable, high

cash required

Move to high profits Peak profits, cash high Profits decline, cash

flow too decline

4 strategy module 4 2012

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