Tradeoffs in Competitive Positioning Strategy Dr. Theodore H. K. Clark Associate Professor and Academic Director of MSc in Information Systems Management Degree Program Department of Information & Systems Management Hong Kong University of Science & Technology Formerly Visiting Associate Professor of Operations & Information Management (Information Economics and Strategy Group) The Wharton School of the University of Pennsylvania

HKUST Business School 2 Strategy Involves Tradeoffs You can not do everything well Limited resources (money, materials, factory) Limited time (people, hours in day, attention) Competitive factors (focused competitor skills) Essence of Strategy involves Making Choices What do you need to focus on to do better? Where do you not need to spend as much effort? How can you most effectively use limited resources and time to achieve your goals?

HKUST Business School 3 Competitive Advantage Choice? Comparable Advantage - Something you are better at than almost everyone else Competitive Advantage - A comparable advantage that MATTERS in your market How can or should you invest your time and resources most effectively to develop some advantage in an area that MATTERS to your customers in your market?

HKUST Business School 4 Sustaining Competitive Advantage Drives Choices Achieving COMPETITIVE ADVANTAGE easier than SUSTAINING the Advantage over time Key Challenge is Becoming Hard to Copy Economies of scale and network externalities Access to key skills, resources, or suppliers Customer switching costs and brand preference Government policy (patents, antitrust, etc.) Fast (not First) Mover Advantage also Matters

HKUST Business School Three generic strategies Overall Cost Leadership Differentiation Focus Strategic Target Industry Segment Only Strategic Advantage UniquenessLow cost position ”Determining the cost/value tradeoff you wish to offer consumers is the most critical decision” - Porter

HKUST Business School 6 Porter’s Generic Strategy # 1: Leadership Based on Lower Cost Become low-cost producer in the industry Lowest total cost, not just low variable cost Often driven by economies of scale Must have parity quality or have lowest cost AFTER adjusting for quality differences Leveraging scale is common source of advantage in many industries Information goods may have difficulties with this strategy as costs of duplication are low

HKUST Business School 7 Porter’s Generic Strategy # 2: Differentiation and Segmentation Differentiation means to make your product unique and (hopefully) more valuable Becoming hard to copy is critically important Avoid commodity competition based on price Differentiation must be worth more to customers than it costs to create Horizontal differentiation (segmentation) versus vertical differentiation (quality) Less competition with horizontal differentiation

HKUST Business School 8 Porter’s Generic Strategy # 3: Focus or Niche Target Market Can be based on cost, differentiation or both By targeting a narrow market segment, you may be able to provide targeted products and services to that segment that are both low-cost and differentiated relative to less targeted firms Strategy is by design differentiated based on segment, as target market segment needs must be unique for focus strategy to work May be only option open for new entrants

HKUST Business School 9 Choices in Capstone Simulation What market segments will you compete in, and with what product design attributes? Hard to be good at everything Some skills important in High End don’t matter at all in Low End, and vice versa What areas of business improvement are most important to “win” in your markets? Automation? TQM / Quality? R&D? Training? What level of capacity and finances are needed?

HKUST Business School 10 Getting the Basics Right Some skills are essential to get right regardless of your business strategy Forecasting – get this wrong, and run out of products or out of money (due to high inventory) Marketing – you may need to spend more or less on this function, depending on strategy, but you will always need to spend SOME and spending it efficiently and wisely is important to success Production Planning – Too much or too little capacity for production will hurt your business