04/19/23 1

Business Strategy & Policy PSU MGMT #562

Dave Gartendaveoutside@alum.mit.edu

Week # 4 –Biz Strategies

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Yet…

InsideOutside

3-5 years out

Building a collective view of

the future…

What new core competencies do we need to build?

What new product concepts should we pioneer?

What alliances do we need to form?

What l/t regulatory initiatives do we need to form?

Source: Derived from Competing for the Future by Gary Hamel and C.K. Prahalad

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Differentiation

“increase in perceived value relative to the perceived value of other firms” - Barney

“If you can’t differentiate yourself in this world, you get commoditized instantaneously. So we are constantly driving for more innovation, more differentiation and more technology.”- Jeffrey R. Immelt, Chairman and CEO, GE

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DifferentiationWhy differentiate?

Ways to differentiate

X

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Differential (Segmentation)

Segment via benefits, demographics and psychographics

Segmentation is basis for differentiation Determines the value proposition

The Basis for Segmentation

Opportunities forDifferentiation

Characteristics of the Buyers

Characteristics of the Product

Industrial buyers

Household buyers

Distribution channel

Geographicallocation

*Size*Technical sophistication*OEM/replacement

*Demographics*Lifestyle*Purchase occasion

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Physical size *Price level*Product features *Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

Source: Jim Goes

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Differentiation - observations

5 forces: differentiation lowers threat of rivalry & substitutes (barriers to entry)VRIO tests differentiation: rare & imitable?Differentiation narrows with life cycleBrand can limit differentiation Patents can enhance differentiationOrganization is a source of differentiation Creativity, risk-taking, complexity, cross group

(link to core competency)

Segmentation - U.S. Bicycle IndustrySEGMENT

Low price bicycles sold primarily through department and discount stores, mainly under the retailer’sown brand (e.g. Sears’ “Free Spirit”);

KEY SUCCESS FACTORS

* Low-costs through global sourcing of components & low-wage assembly.* Supply contract with major retailer.

Leading competitors: Taiwanese & Chinese assemblers,some U.S manufacturers, e.g. Murray Ohio, Huffy

Medium-priced bicycles sold primarily under manufacturer’s brandname and distributed mainly throughspecialist bicycles stores;

*Cost efficiency through large scale operation and either low wages or automated manufacturing.*Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers.* International marketing & distribution.

Leading competitors: Raleigh, Giant, Peugeot, Fuji (Japan).

*Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance).*Reputation (e.g. through success in racing, through effective brand management).*Strong dealer relations.Leading competitors: K2, Specialized, Trek

Similar to low-price bicycle segment.

High-priced bicycles for enthusiasts.

Children’s bicycles (and tricycles) soldprimarily through toy retailers (discount toy stores, department stores, and specialist toy stores).

Source: Jim Goes

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Cost Leadership

Manufacturing businesses Conventional: High MSS -> High accumulated

volume low unit cost -> high profitability Experience curve (learning), know-how, IP,

specialization, improvements

Service businesses Know-how; experience curve applies

Diseconomies sometimesCost structure Labor, capital, land, raw materials, geography,

use of technology, government policySource: Derived from Barney, Gaining & Sustaining Competitive Advantage

Drivers of Cost Advantage

• Organizational slack

• Ratio of fixed to variable costs• Costs of installing and closing capacity

• Location advantages• Ownership of low-cost inputs • Bargaining power• Supplier cooperation

• Design for automation• Designs to economize on materials

• Mechanization and automation• Efficient utilization of materials• Increased precision

• Increased dexterity• Improved coordination/ organization

• Indivisibilities• Specialization and division of labor

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

MANAGERIAL/ ORGANIZATIONALEFFICIENCY

ECONOMIES OF LEARNING

ECONOMIES OF SCALE

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Cost Leadership Observations

5 Forces: Entrants often try differentiation to attack Threat of substitution check & balance Scale -> more power relative to

suppliers/customers

VRIO test rarity & imitability Social complexity (learning curve), access to

low cost factors, “software”

Price-cost decoupling TTM, penetration and defensive strategies

Pure play cost leadership Generally not…“Lean and mean”

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Airline Cost/Differentiation

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Low Cost Entry

Source: Strategies to Fight Low Cost Rivals, by Nurmalya Kumar, HBR, 2006 (#R0126F)

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Vertical IntegrationDegree of control over the value chainForward -> toward customerBackward -> toward R&DDriven by relationship, threat of opportunism, specificity, uncertainty

R&D Manufacturing Sales & marketing Distribution Service

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Vertical IntegrationMarket

GovernanceVertical

IntegrationAlliances

Control (opportunism)

Flexibility (uncertainty)

Plus of vertical integration

Minus of vertical integration

X

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Time to MarketLearning curve advantagesFirst use stickiness Brand, differentiation, reputation Creation of “standard,” expectations

Networking effect Interoperability, Value = f(n**2)

“Arrows in the back” Incumbent, imitation, mistake

WindowsAlways learn and adjust

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Mondavi Case

Objective: Evaluation of business strategies used in the wine industryLearnings:

Industries exhibit different structures across geographies.

Use of different strategies is used within an industry to gain competitive advantage.

Consolidation as a strategy is most often driven by economies of scope/scale, but other considerations become factors.