Copyright Guy Harley 2004 Technology & Organisational Change Business Level Strategy Week 4

Copyright Guy Harley 2004 Outline  Customers, Who, What and How?  Types of business level strategy  Cost leadership  Differentiation  Focused cost leadership  Focused Differentiation  Cost leadership\differentiation

Copyright Guy Harley 2004 Strategic Competitiveness To achieve strategic competitiveness, firms must:  Identify who their customers are  Determine customer needs/preferences  Focus on satisfying the needs of some group of customers  Select a strategy that enables them to satisfy customer needs

Copyright Guy Harley 2004 Internet Competitive Advantage In the Internet age, firms can maintain competitive advantage by:  Thinking continuously about accessing & connecting with customers (reach)  Maintaining info with depth & detail for and from customers (richness)  Determining how to build relationships with customers (relationship)

Copyright Guy Harley 2004 Determining which customers to serve  Need to identify customers on basis of needs or preferences  Firm must determine whether differences in needs/preferences are significant  If not, can offer a standardised product.

Copyright Guy Harley 2004 Basis for Customer Segmentation  Customer Markets  Demographic factors  Socio-economic factors  Geographic factors  Psychological factors  Consumption patterns  Perceptual factors

Copyright Guy Harley 2004 Basis for Customer Segmentation (cont.)  Industrial Markets  End-use segments  Product segments  Geographic segments  Common buying factor segments  Customer Size segments

Copyright Guy Harley 2004 Standardised Product When would a firm offer a standardised product?  When it can’t easily be customised or differentiated  Or when firm’s core competencies are best suited to producing standardised products.  Typically offer them at lowest competitive price as they follow a cost leadership strategy.

Copyright Guy Harley 2004 Increasing segmentation of markets  Availability of sophisticated info processing technologies allows firms to identify unique bundles of customer characteristics and needs  Competitors are becoming adept at identifying small but strategically relevant differences in customer needs  Trend towards smaller and smaller segments

Copyright Guy Harley 2004 Determining what needs to satisfy  Customers want needs satisfied and they want value  Need to identify key customer groups, needs and preferences.  Thus customer knowledge must be a priority for top level managers since they determine policy, technology etc

Copyright Guy Harley 2004 Customer knowledge  Becomes more important as firms attempt to perpetuate or sustain competitive advantage. By listening to customers, firms can correctly anticipate their future needs and create product innovations ahead of competitors- first mover advantage

Copyright Guy Harley 2004 Core Competencies Determining core Competencies to satisfy customer needs  Need to decide how to bundle resources & core competencies to satisfy customer needs to by implementing value creating strategies

Copyright Guy Harley 2004 Core Competencies This means that:  Firms must improve their ability to convert innovation and new technologies into commercial products  New products should be based on core competencies or technology  New products must meet present or future needs

Copyright Guy Harley 2004 Generic Strategies  Now look at 4 generic strategies, and how they relate to the 5 competitive forces, the applicability of the value chain, risks associated with each  A firms position in an industry relative to competitors and to the 5 forces of competition  Rivalry with existing competitors  Bargaining power of suppliers  Bargaining power of buyers  Potential entrants  Product substitutes

Copyright Guy Harley 2004 Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Focused Differen- tiation Focused Differen- tiation Cost Leadership Cost Leadership Differen- tiation Differen- tiation Focused Low Cost Generic Business- Level Strategies Uniqueness

Copyright Guy Harley 2004 Generic strategy: Cost-leadership  Offers relatively standardised product – minimum differentiation at lowest competitive price  Reducing price is not necessarily a cost leadership strategy- need to give consumer value- includes quality

Copyright Guy Harley 2004 Cost reduction strategies  Building efficient scale facilities  Tight control of production & overhead costs  Minimising costs of sales, R&D and service  State of the art manufacturing technologies

Copyright Guy Harley 2004 Critical focus  Efficiency  Cost reduction  Still can’t ignore sources of differentiation that customers value- e.g. styling, minimal levels of service, quality

Copyright Guy Harley 2004 Strategy 1:Cost Leadership  Even when competitive forces are strong, a firm that has cost leadership can still earn above average profits.

Copyright Guy Harley 2004 Rivalry with existing competitors  Achieving the lowest cost position means that competitors will hesitate to compete on basis of price because in a price war, the low cost firm will continue to earn profits after competitors have competed away their profits

Copyright Guy Harley 2004 Bargaining power of buyers  Achieving low cost position provides some protection against powerful customers who attempt to drive down prices  If customers drive prices below the cost of the next most efficient firm, the firm might choose to exit the market, leaving the low cost firm in a monopoly position

Copyright Guy Harley 2004 Bargaining power of suppliers  Cost leadership strategy enables a firm to absorb greater amount of cost increases fro powerful suppliers before it must raise prices  If has dominant market share, might be able to force suppliers to lower prices

Copyright Guy Harley 2004 Potential Entrants  Firms generally must produce & sell in large volumes to have cost leadership- this acts as a barrier to entry why?

Copyright Guy Harley 2004 Product substitutes  To retain customers the low cost leader can more easily reduce prices to maintain the price- value relationship and maintain customers

Copyright Guy Harley 2004 Cost Leadership Competitive risks of the cost leadership strategy:  Tech innovations by competitors could eliminate advantage  Over focus on efficiency might cause lack of focus on consumer preferences  Competitors might imitate low cost leaders value chain configuration

Copyright Guy Harley 2004 Strategy 2: Differentiation  Value is provided through the unique features of the product  Can charge premium price  Price charged must exceed the cost of the differentiation  Focus on product innovation and product features

Copyright Guy Harley 2004 Means of differentiation  Superior quality  Unusual or unique features  More responsive customer service  Rapid product innovation  Advanced technological features  Engineering design  Additional features  Image of prestige

Copyright Guy Harley 2004 Achieving above average returns  Even when competitive forces are strong

Copyright Guy Harley 2004 Rivalry with existing competitors  Brand loyalty means that customers will be less sensitive to price increases. As long as the firm satisfies the differential needs of customers it may be insulated from price base competition

Copyright Guy Harley 2004 Bargaining power of buyers  Product considered unique  Reduces customer sensitivity to price

Copyright Guy Harley 2004 Bargaining power of suppliers  Differentiator can absorb a greater level of cost increase from powerful suppliers through its higher margins

Copyright Guy Harley 2004 Potential entrants  Principal barrier is customers loyalty

Copyright Guy Harley 2004 Product substitutes  Brand loyalty insulates differentiated products

Copyright Guy Harley 2004 Differentiation Strategy Competitive risks of differentiation strategy:  Customers may decide the cost of uniqueness is too high  Firms means of differentiation no longer of value to customers  Customer learning may influence customer perception of value  counterfeiting

Copyright Guy Harley 2004 Strategy 3: focus  Firms focus on small segments or niches  Why follow a focus strategy?  Able to serve niche more effectively  Needs are so special that industry wide competitors choose not to meet them  Can be based on cost leadership or differentiation

Copyright Guy Harley 2004 Focused cost leadership strategy  Generally targets the smallest buyers in the industry

Copyright Guy Harley 2004 Focused differentiation strategy  Customised products for small segments  Successful when quantities involved are too small for industry wide competitors, or when the degree of customisation requested is beyond capabilities of the industry wide differentiator

Copyright Guy Harley 2004 Competitive risks of focus strategies  Competitors may successfully focus on an even smaller segment of the market  Industry-wide competitor may recognise the attractiveness of the segment  Preferences of the narrow segment may become similar to those of the wider market

Copyright Guy Harley 2004 Integrated cost-leadership/differentiation  Integrating generic strategies may enable them to:  Adapt quickly to environmental change  Learn new skills and technology  More effectively leverage core competencies across business units and product lines  Produce differentiated products at a relatively low cost

Copyright Guy Harley 2004 Integrated cost leadership/differentiation Benefits  Differentiation enables firm to charge premium price  Cost leadership allows firm to charge lowest price

Copyright Guy Harley 2004 Integrated cost leadership/differentiation Products from integrated cost leadership/differentiation strategy are:  Less differentiated than if firm pursued just a differentiation strategy and  Costs not as low as if pursued cost leadership strategy

Copyright Guy Harley 2004 Integrated cost leadership/differentiation To overcome Competitive Risks must be able to:  Focus consistently on reducing costs  Add differentiated features that customers value and for which they are willing to pay a higher price  Avoid becoming ‘stuck in the middle’ by failing to consistently pay attention to the competitive requirements of either or both generic strategies.

Copyright Guy Harley 2004 Competitive dynamics

Copyright Guy Harley 2004 Outline  Increased rivalry  Model of competitive dynamics & rivalry  Likelihood of attack  Likelihood of response  Firms abilities to take action and respond  Outcomes of inter-firm rivalry

Copyright Guy Harley 2004 New ways of competing  Bring new products to the market more quickly  Use of new technology  Diversifying product line  Shifting product emphasis  Consolidation of industries  Combining on-line selling with traditional

Copyright Guy Harley 2004 Changing Competitive Environment Reasons for changing competitive environment  Attention on global market  Advances in ICTs- more info, faster decision making  Innovation  Cooperation between former competitors in development of new technology or formation of strategic alliances

Copyright Guy Harley 2004 Competitive dynamics  When one firm takes action, so do others

Copyright Guy Harley 2004 Model of competitive dynamics & rivalry  Competitive rivalry exists when firms jockey with one another in pursuit of advantageous market position  Exists because of competitive asymmetry- i.e. firms differ in terms of resources, capabilities, core competencies & the opportunities and threats in their environments  Competition results in mutual interdependence

Actions and responses shape the competitive positions of each firm’s business-level strategy Actions taken by one firm elicit responses from competitors A firm’s strategic conduct is dynamic in nature A firm’s strategic conduct is dynamic in nature Competitive responses lead to additional actions from the firm that acted originally Competitive Dynamics

Copyright Guy Harley 2004 Model of Inter-firm Rivalry  Awareness- whether the attacking/responding firm is aware of a potential attacker or respondent.  Motivation- incentives that firm has to attack/respond when attacked  Market commonality- extent to which firms compete in same market

Copyright Guy Harley 2004 Multipoint competition  When firms overlap in several markets (geographic or product)  High levels of commonality reduce the likelihood of competitive interaction- see Strategic Focus- airlines p163

Copyright Guy Harley 2004 Resource similarity  Intensity of competition often based on potential for response- attackers are generally not motivated to target a rival that is likely to retaliate  Firms with dissimilar resources are more likely to attack

Copyright Guy Harley 2004 Likelihood of attack  The model tells us that the firm’s motivation and awareness are developed from competitor analysis of market commonality and resource dissimilarity.  First mover  Take an initial competitive action  Have the resources, capabilities & core competencies that to Gain competitive advantage through innovative and entrepreneurial actions

Copyright Guy Harley 2004 First Mover First mover hopes to:  Gain sustainable competitive advantage  Earn above average returns until competitors respond effectively  Gain customer loyalty

Copyright Guy Harley 2004 First Mover Disadvantage of first mover  Inability to predict success of the action  Second movers through imitation can avoid high development costs

Copyright Guy Harley 2004 Second Movers  Firms that respond to first movers competitive action  Quick response may allow second mover to:  Capture some of the initial customers and gain a degree of brand loyalty  Avoid some of the risks of the first mover  Learn from mistakes and successes  Avoid market development costs

Copyright Guy Harley 2004 Late movers  Respond to competitive action after considerable time  Performance generally suffers

Relative Size Speed Innovation Quality Ability for Action and Response Outcomes Drivers of Competitive Behaviour Awareness Motivation Capability Competitor Analysis Market Commonality Resource Similarity Interfirm Rivalry: Attack & Response Likelihood of Attack First Mover Incentives Likelihood of Response Type of Competitive Action Dependence on the Market Resource Availability Actor’s Reputation Competitive Slow, Standard or Fast Cycle Market Types Competitive Sustained Outcomes Competitive Advantage Temporary Advantage Evolutionary Outcomes Entrepreneurial or Market-Power Growth-Oriented Actions Feedback Model of Interfirm Rivalry: Likelihood of Attack and Response Model of Interfirm Rivalry: Likelihood of Attack and Response

Copyright Guy Harley 2004 Likelihood of response  Depends on  Type of action  Reputation of competitor taking the action  Competitors resource availability

Copyright Guy Harley 2004 Firm’s ability to take action and respond  Relative size of the firm within market  Speed of competitive actions and responses  Extent of innovation by firms in the industry  Quality of firms products

Copyright Guy Harley 2004 Outcomes of inter-firm rivalry  Slow cycle markets-strongly shielded resource positions (monopoly)  Standard cycle- more closely associated with Porter-oligopoly  Fast cycle- largely impossible to achieve sustained competitive advantage

Competitive dynamics and industry evolution outcomes Exploiting Open Niches (Blind Spots) & Competitive Uncertainty Exploiting Factors of Production Firm Resource & Market Strength Time Key Task Entrepreneurial Actions Growth- oriented Actions Emerging StageGrowth Stage Exploiting Market Position Key Task Market-power Actions Mature Stage Renewal Maintenance Decline Key Task Renewal Actions Elaboration Stage