Chapter 4 Business Level Strategy Pages 96 125 Business Level Strategy How are we going to compete in our industry segment Improving the firm s competitive position Competitive advantages are the single most dependable contributor to above average profitability Porter s Generic Strategies Two fundamental issues Competitive advantage low cost vs uniqueness Competitive Scope broad based vs narrow Pursuit of the generic strategies provides protection from each of the five forces Porter s Generic Strategies Low Cost Overall Low Cost Focused Low Cost Broad Differentiation Focused Differentiation Competitive Advantage Uniqueness Broad Narrow Competitive Scope Porter s Generic Strategies Low Cost Competitive Advantage Uniqueness WalMart Domino s Big Lots Little Caesar s Target Papa John s Nordstrom Papa Murphy s Broad Narrow Competitive Scope Differentiation Offer attributes that customers want and are willing to pay for Leads to premium price higher volume loyalty Maintaining uniqueness can be a challenge Kodak Wrigley s Campbell s Coca Cola Gillette Del Monte and Nabisco all leaders since 1923 Marginal revenue must exceed the costs of differentiation PERCEIVED VALUE versus INCREMENTAL COSTS Differentiation cont Signalling important when nature of differentiation difficult to quantify first time purchase re purchase infrequent buyers unsophisticated Differentiation cont Risky when quick imitation no value in uniqueness over differentiation cell phones premium price costs too high poorly understood changing customer needs Minivan FAO Schwartz costs price become more important than uniqueness unwillingness to offer true differentiation How can Differentiation protect against New Entrants Starbuck s 1 80 Profit Costs Price How can Differentiation protect against New Entrants Joe s Coffee Starbuck s 1 80 Assume Equal Costs How can Differentiation protect against New Entrants Joe s Coffee 99 cents Starbuck s 1 80 How can Differentiation protect against New Entrants Joe s Coffee 99 cents Starbuck s 1 80 Extra Profits How can Differentiation protect against Rivals Joe s Coffee 99 cents Starbuck s 1 80 How can Differentiation protect against Joe s Coffee 99 cents Starbuck s 1 80 Advertising Promotions drive costs UP How can Differentiation protect against Joe s Coffee 99 89 cents Starbuck s 1 80 1 70 Discounts and sales drive prices DOWN How can Differentiation protect against Substitutes Starbuck s 1 80 How can Differentiation protect against Starbuck s 1 80 There is no substitute for the truly differentiated product How can Differentiation protect against Power of Buyers How do powerful buyer s leverage their power Lower Prices Higher Quality How can Differentiation protect against Joe s Coffee Lower 99 89 cents Prices Raise Qualit y Starbuck s 1 80 1 70 How can Differentiation protect against Power of Suppliers How do powerful suppliers leverage their power Drive up costs How can Differentiation protect against Starbuck s 1 70 Joe s Coffee 89 cents Raise Costs How can Differentiation protect against Differentiation does not eliminate any of these forces it just allows the differentiated firm to more easily deal with these forces or offset the power of these forces and potentially remain profitable Low Cost Leadership Design produce and market a comparable product at a lower cost Effective utilization of value chain capital intensive mfg processes efficient scale process not product engineering cost reductions products designed for simple assembly and sharing common components procurement and materials handling low cost distribution Requires organizational culture to support close supervision cost controls Low Cost Leadership cont Attractive when price is dominant consideration commodity low switching costs powerful buyers Low Cost Leadership cont What firms pursue a low cost strategy How do they drive their costs down Risky when technology breakthroughs frequent easy to imitate costs advantages erode more quickly than differentiation causes near sightedness on a few activities sunk costs How can Low Costs provide protection from New Entrants Rubbermaid Tub 1 99 Wal Mart Joe s How can Low Costs provide protection from Rubbermaid Tub 1 99 Higher costs Wal Mart Joe s How can Low Costs provide protection from Rivalry Rubbermaid Tub 1 99 Wal Mart Joe s How can Low Costs provide protection from Rubbermaid Tub 1 89 can push prices down Wal Mart Joe s How can Low Costs provide protection from Rubbermaid Tub 1 99 or push costs up Wal Mart Joe s How can Low Costs provide protection from Substitutes Rubbermaid Tub 1 99 Wal Mart Joes How can Low Costs provide protection from Rubbermaid Tub 1 89 can push prices down Wal Mart Joe s How can Low Costs provide protection from Rubbermaid Tub 1 99 or push costs up Wal Mart Joe s How can Low Costs provide protection from Power of Buyers Rubbermaid Tub 1 99 Wal Mart Joe s How can Low Costs provide protection from Rubbermaid Tub 1 89 can push prices down Wal Mart Joe s How can Low Costs provide protection from Power of Suppliers Rubbermaid Tub 1 99 Wal Mart Joe s How can Low Costs provide protection from Rubbermaid Tub 1 99 can push costs up Wal Mart Joe s How can Low Costs protect against Low cost leadership does not eliminate any of these forces it just allows the low costs firm to more easily deal with these forces or offset the power of these forces and potentially remain profitable Focus Emphasizing a market niche where customers have unique preferences or requirements Either focus low cost or focus differentiation Profitable when niche is large growing niche is not crucial to broad based competitors firm is able to defend position Focus cont What firms pursue a focus strategy What is their niche Risky when competitor outfocuses the focuser broad based competitors have deep pockets homogenization of customer needs economies of scope becomes a dominant KSF Focus cont Market Segmentation clustering of people with similar needs into identifiable groups E g consumer vs industrial demographic sociocultural geographic psychological lifestyle consumption patterns frequency of use Integrated Low Cost Differentiation Combines both generic strategies Difficult to implement Stuck in the Middle Firm s offering are too costly to compete with low costs provider s product and too undifferentiated to command the price premium gained by the differentiated firm