Average 64 41 out of 74 above the average 80% or higher – 11 = 15th percentile 70% - 79 – 15 = 35th percentile 60 – 69 – 26 = 70% percentile 50 - 60 – 14 = 89% percentile Other - 8

Chapter 5

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

How do these Firms Compete?

How do these Firms Compete?

How do these Firms Compete?

How do these Firms Compete?

Porter’s Generic Strategies Two fundamental issues Competitive advantage - low cost vs. differentiation Strategic Target - broad based vs. segment Pursuit of the generic strategies provides protection from each of the five forces

Porter’s Generic Strategies Low Cost Competitive Advantage Differentiation

Porter’s Generic Strategies Broad Segment/Focus Strategic Target

Porter’s Generic Strategies Overall Low-Cost Focused Low-Cost Low Cost Competitive Advantage Broad Differentiation Differentiation Focused Differentiation Broad Segment/Focus Strategic Target

Porter’s Generic Strategies NOT one of Porter’s Generic Strategies Low Cost Best-Cost Provider Competitive Advantage Differentiation Broad Segment/Focus Strategic Target

Porter’s Generic Strategies WalMart Domino’s Low Cost Competitive Advantage Differentiation Broad Segment/Focus Strategic Target

Porter’s Generic Strategies WalMart Domino’s Grocery Outlet Little Caesar’s Low Cost Competitive Advantage Differentiation Broad Segment/Focus Strategic Target

Porter’s Generic Strategies WalMart Dominos’s Big Lots Lil Caesar’s Low Cost Competitive Advantage Target Papa John’s Differentiation Broad Segment/Focus Strategic Target

Porter’s Generic Strategies WalMart Domino’s Big Lots Little Caesar’s Low Cost Competitive Advantage Target Papa John’s Nordstrom Papa Murphy’s Differentiation Broad Segment/Focus Strategic Target

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.) What firms pursue differentiation? How or on what basis do they achieve differentiation?

Starbuck’s Differentiation 4 Tablespoons of $10 bag = 40 cents Three cups Double-Tall Latte = $3.22 Double Shot Espresso = $1.85 $3.22 - $1.85 = $1.37 for steamed milk 20 seconds to steam milk $1.37 * 3 * 60 = $246 a hour to steam milk Customers “allow” Starbucks to draw interest in their smart-cards. Millions of dollars annually on the float “You are one of us” “Collectible” Pretax profit margins of 10.5%

Differentiation (cont.) Signalling important when: nature of differentiation difficult to quantify first-time purchase – re-purchase infrequent buyers unsophisticated

To introduce his beer, Coors often gave free sample to gold miners.

..because you can’t sell beer to minors.

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

Can you differentiate……?

Can you differentiate…..? Salt?

Can you differentiate…..? Deodorant

Strong enough for a man, …. But made for a woman

Ph balanced too?????

Can you differentiate…..? Water

Evian spelled backwards - naïve Coincidence? I think not…..

Now, I am going to do a card trick.

I am going to read your mind.

You are going to see a series of cards.

You are going to choose one card.

Once you select your card, clear your mind, and think only of that card.

Are you ready to pick a card?

Pick a card.

Did you pick a card?

Think of it now.

I hear you.

And now, I will remove your card.

Your card is gone….yes?

Problems with P&G’s Differentiation Strategy

How has P&G responded? Introduction of new, higher margined products like battery powered toothbrush and white strips Introduction of “Rejuvenating Effects,” a toothpaste for women marketed as a beauty product Using Emeril Lagasse to hawk their citrus, cinnamon, and herbal mint toothpastes

How can Differentiation protect against…? Starbuck’s $1.80 New Entrants Price Profit Costs

How can Differentiation protect against…? Starbuck’s $1.80 New Entrants Joe’s Coffee Assume Equal Costs

How can Differentiation protect against…? Starbuck’s $1.80 New Entrants Joe’s Coffee 99 cents

How can Differentiation protect against…? Starbuck’s $1.80 New Entrants Joe’s Coffee 99 cents Extra Profits

How can Differentiation protect against…? Starbuck’s $1.80 Rivals Joe’s Coffee 99 cents

How can Differentiation protect against…? Starbuck’s $1.80 Joe’s Coffee 99 cents Advertising & Promotions drive costs UP

How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents Discounts and sales drive prices DOWN

How can Differentiation protect against…? Starbuck’s $1.80 Substitutes

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…? Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents Lower Prices Raise Quality

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

Less than 24 hours after rival HP reported its PC division had lost money one quarter last year, Dell lowered prices by up to 22% Analysts believe Dell has a 5% cost advantage HP forced to choose between market share and profitability

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…. Rubbermaid Tub $1.99 Substitutes 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

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