Session 7 HighlightsThree Generic Strategies to overcome the Environment’s Five Forces and Achieve competitive AdvantageAnother Porter Model: Three Generic StrategiesExamplesOverall Cost LeadershipComparing, Contrasting and Evaluating StrategiesSlide 7Slide 8Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five ForcesPitfalls of Overall Cost Leadership StrategiesSlide 11DifferentiationSlide 13Differentiation: Improving Competitive Position vis-à-vis the Five ForcesDifferentiation: Improving Competitive Position vis-à-vis the Five ForcesPotential Pitfalls of Differentiation StrategiesSlide 17Example: Differentiate Or DieFocusSlide 20Focus: Improving Competitive Position vis-à-vis the Five ForcesPitfalls of Focus StrategiesExample: Expensive Golf GearCombination Strategies: Integrating Overall Low Cost and DifferentiationSlide 25Three Combination ApproachesSlide 27Slide 28Combination Strategies: Improving Competitive Position vis-à-vis the Five ForcesPitfalls of Combination StrategiesThe strategic management and planning process builds on previous work. This session, for example, we developed Business-Level Strategy which in part depends on the Five Forces you identified in the External Environment Analysis.Something to Think AboutSession 7 HighlightsBusiness-Level StrategyMGT 670Three Generic Strategies to overcome the Environment’s Five Forces and Achieve competitive AdvantageOverall Low-cost leadershipDifferentiationFocus4-2Another Porter Model: Three Generic Strategies6-3Examples1. Companies pursuing an overall cost leadership strategy–McDonalds–Wal-Mart2. Companies pursuing a differentiation strategy–Harley Davison–Apple3. Companies pursuing a focus strategy–Rolex–Lamborghini6-4Overall Cost LeadershipIntegrated tactics–Aggressive construction of efficient-scale facilities–Vigorous pursuit of cost reductions from experience–Tight cost and overhead control–Avoidance of marginal customer accounts–Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising6-5Comparing, Contrasting and Evaluating StrategiesGeneral featuresImprovements with respect to the Five Forces modelPitfallsOverall Cost LeadershipExperience Curve–How business “learns” to lower costs as it gains experience with production processes –With experience, unit costs of production decline as output increases in most industries6-7Overall Cost LeadershipA firm following an overall cost leadership position:–Must attain competitive parity on the basis of differentiation relative to competitors–Competitive parity on the basis of differentiation•Permits a cost leader to translate cost advantages directly into higher profits than competitors•Allows firm to earn above-average profits6-8Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five ForcesAn overall low-cost position–Protects a firm against rivalry from competitors–Protects a firm against powerful buyers–Provides more flexibility to cope with demands from powerful suppliers for input cost increases–Provides substantial entry barriers from economies of scale and cost advantages–Puts the firm in a favorable position with respect to substitute products6-9Pitfalls of Overall Cost Leadership StrategiesToo much focus on one or a few value-chain activities–Too often managers make big cuts in operating expenses, but don’t question year-to-year spending on capital projects–Should explore all value-chain activities as candidates for cost reductionsAll rivals share a common input or raw material–Vulnerable to price increases 6-10Strategy is imitated too easilyA lack of parity on differentiation–To attain advantage, must obtain level of differentiation–Can be achieved by reputation, quality, through signaling mechanismsErosion of cost advantages when the pricing information available to customers increasesPitfalls of Overall Cost Leadership Strategies6-11DifferentiationDifferentiation can take many forms–Prestige or brand image–Technology–Innovation–Features–Customer service–Dealer network6-12DifferentiationFirms may differentiate along several dimensions at onceFirms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being uniqueRequires integration with all parts of a firm’s value chainImportant aspect is speed or quick response6-13Differentiation: Improving Competitive Position vis-à-vis the Five ForcesDifferentiation–Avoids need for low-cost position by increasing a firm’s margins–Creates higher entry barriers due to customer loyalty and uniqueness in its products or services–Provides higher margins that enable the firm to deal with supplier power6-14Differentiation: Improving Competitive Position vis-à-vis the Five ForcesDifferentiation–Reduces buyer power because buyers lack suitable alternative –Reduces supplier power due to prestige associated with supplying to highly differentiated products–Establishes customer loyalty and hence less threat from substitutes6-15Potential Pitfalls of Differentiation StrategiesUniqueness that is not valuable–Must be unique and possess high customer valueToo much differentiation–Firms may strive for too much qualityToo high a price premium–Customers may desire product, but repelled by price6-16Potential Pitfalls of Differentiation StrategiesDifferentiation that is easily imitatedDilution of brand identification through product-line extensions–Increase short-term revenues, detrimental in long runPerceptions of differentiation may vary between buyers and sellers–“Beauty is in the eye of the beholder”6-17Example: Differentiate Or DieIn one-year period, 1,600 headlines that used the word "differentiate" or "differentiation." In the construction world: "Tile Roofs Add Value, Differentiate Builders“, "Differentiate to Stand Out from your Competition" In automobiles: "Dodge Nitro SUV: Company Figures Out How to Differentiate Its Model in a Crowded Field“In Internet businesses: "Differentiation Can Be Brutal in the Web Search Business" www.forbes.com/opinions/2007/06/28/trout-marketing-differentiate-oped-cx_jt_0629trout.html6-18FocusFocus is based on the choice of a narrow competitive scope within an industry–Firm selects a segment or group of segments (niche) and tailors its strategy