Today: Strategic Coherence Current Events Chapter 5: Strategy Formulation Handout on Strategic Coherence Choose Team Presentation Day Assign American Airlines Case WEBSITE:

Business Strategies Competitive Strategy creates a defendable position in an industry so that a firm can outperform competitors. Cooperative Strategy gain competitive advantage by working with rather than against other firms.

Competitive Strategy Porter’s Generic Competitive Strategies Lower cost strategy – design, produce and market a comparable product more efficiently than competitors. Differentiation strategy – provide unique and superior value to buyers

Generic Competitive Strategies Cost Leadership Focused Differentiation Cost Focus Differentiation Lower CostDifferentiation Narrow Target Broad Target Competitive Advantage Competitive Scope

Cost Leadership Drivers for Controlling Costs  Economies of Scale  Learning / Experience curve  Cost of key resource inputs

Cost Leadership Advantages, if successful Reduce risk of pricing pressures Lower rivalry Increased barriers on to entry Decreased power of substitutes Decreased supplier power

Cost Leadership Risks Imitable Chasing cost leadership can be a trap Efficiency as only competitive objective Changes in environment

Differentiation Advantages, if successful Decrease in rivalry Lower buyer power No real substitutes Brand loyalty as entry barrier

Differentiation Risks Real differentiation vs. perceived differentiation Pricing of substitutes Changes in environment Branding challenge Inefficiencies

Middling All things to all people Success stories – how do they do it? Toyota Intel What does research tell us?

Hypercompetition What is it? Escalation – how does it happen? Perfect competition What is the common result? How does an industry avoid hypercompetition?

Tactics – Market Location Offensive Tactics Frontal Assault (Head-to-Head) Key: superior resources and will to persevere Example: Sprint and MCI/WorldComm versus AT&T Flanking Maneuver Key: attack competitors’ weakness Example: Cyrix

Tactics – Market Location Offensive Tactics Encirclement Key: product variety and market reach Example: Honda motorcycles Bypass Key: obsolete competitors’ product Example: MS Windows

Tactics – Market Location Offensive Tactics Guerilla Warfare Key: “hit and run” Example: Microbreweries

Tactics – Market Location Defensive Tactics Raise Structural Barriers Saturate market with product Block channel access by signing exclusive agreements with distributors Decrease first-time product purchase barriers Economies of scale Government controls

Tactics – Market Location Defensive Tactics Increase Expected Retaliation Stay vigilant Ready retaliatory tactics Maintain adequate resources Lower Inducement for Attack Attractiveness of market “Fly below the radar”

Environmental Dynamics Environment changes FAST! Question: Should we commit all of our resources to one specific strategy or keep our options open?

First Mover Advantage Definition: A first mover is a firm that takes an initial competitive action. Commitment is valuable Game theory (visible, understandable, and credible) Product/market framework New Product: DVD (Toshiba, Sony) Geographic Market: First Foreign Investor in China

Sources of First Mover Advantage Product patent/industry standard Economies of Scale Experience or Learning Curve Effects Brand Equity/Customer loyalty Political support - How are you going to use these effects to get a first mover advantage? - How does this lead to a sustainable advantage?

Disadvantages of first movers - Risky! Imitation Scooter Technological improvement Computer chips Changing consumer tastes Saturn vs. Chrysler Cost

Second Mover Advantages How can you compete with an entrenched competitor? Learning From Their Mistakes An Absolute Cost Advantage Leveraging Customer Knowledge Positioning The Uncovered or Emerging Niche A Focused Customer Base The Scale of Entry Judo Economics Microbreweries vs. National Brewers

Strategic Flexibility u Sometimes, the smartest thing you can do is... Wait!

Strategic Coherence Complement and Reinforce Sustainable competitive advantage Spill-over effects

Cooperative Strategies Strategic Alliance Mutual Service Consortium Joint Venture Licensing Value-Chain Partnership

Company Profiles Rank Team 1: Krispy Kreme2 Team 2: Nike1 Team 3: Hollywood Video3 Team 4: Vivendi/Universal4 Team 5: Herman Miller, Inc.5

Team 1 Natalie Abrams Aurea Calvo Howard Lazier Jennie Bones

Team 2 Annalisa Bansen Lisa Conley Jay Lee Pavel Yeremenko

Team 3 Telena Correa Kevin Joyce Danielle Parmelee Heather Walker

Team 4 Stephanie Best Steve Crowder Jaime Johnson Anthony Pham

Team 5 Cynthia Gilstrap Matt Lawrence Kristi Plump Melissa Sakouhi

Questions for American Airlines Case How should American Airlines proceed? What strengths can they leverage? What are relevant threats? What other options might they have? Which areas of the value chain need to be modified to execute a dramatic change in strategy? How will they measure success? Should they do this immediately or wait?

Next Time: Strategy Formulation Read Chapter 6 & 7 Handout on Strategic Flexibility Analyze American Airlines Guest Speaker Steve Rosenbaum, Co-Founder/CEO POPART, LLC WEBSITE: