Generic Strategies Lessons from Crown Cork & Seal and Matching Dell

There are two major routes to competitive advantage Low Cost Different- iation Competitive Advantage

The impact of positioning on firms’ profits n 10-20% of variation in firms’ profits are explained by industry effects n 30-45%, of variation in firms’ profits are explained by within-industry “firm” effects u result of strategic position F relative cost position F ability to differentiate and capture value from delivering higher-value added products (relative to industry competitors)

The interplay between cost and differentiation in generating competitive advantage $ Industry average competitor Successful differentiated competitor Competitor with dual advantage Successful low-cost competitor

How to Gain Competitive Advantage in a Structurally Unattractive Industry n Find attractive growing segment of the market n Provide quality of service leading to WTP comparable or above others in the industry n Outperform industry on costs n Interlinked strategies

Dell’s Low-Cost Strategy Dell Compaq WTP Cost

Dell’s Approach n Attractive segment: u Educated business consumers n Raise (or equalize) WTP: u Speed of delivery u Reliability u After sales service n Lower costs: u Direct channel u Build to order u Speed of delivery

Crown’s Approach n Attractive segment: u Hard to hold u International n Raise (or equalize) WTP u Sale engineers u Co-location u Rapid delivery (30 days inventory) n Lower costs: u Co-location u Owner-operator mentality u “Lean and mean” SGA

Complementary ways to view the creation of competitive advantage n Hamel and Prahalad (1990), “Core Competence of the Corp.” u difficult-to-imitate core competences should be built F foundation of core products, which in turn support new product development and growth n Collis and Montgomery (1995), “Competing on Resources” u possessing unique, valuable resources, which cannot be procured in efficient factor markets, is the key to out performance F can be physical (a low-cost mine), intangible (brands, capabilities, know-how, etc.) n Porter (1996), “What is Strategy?” u trade-offs are required F systems of interlocking, complementary activities which are guided by these tradeoffs generate sustainable competitive advantage Note the common emphasis on barriers to imitation!

Differentiation n Quality – Vertical Differentiation u Attributes that all consumers agrees upon, such as: (underlined product indicates the product that everyone prefers at a given price) F Pentium GHz vs Pentium GHz F 2004 BMW 330i getting 28 mpg vs 2004 BMW 330i getting 24 mpg F Anti-biotic that makes you nauseous vs. Anti-biotic with no side effects n Variety – Horizontal Differentiation u Attributes that consumers have different preferences about: F car color F sweetness of a drink F country music vs. hip-hop vs. classical F time of day at which a direct flight from SFO to JFK leaves F location of a grocery store

Product Differentiation Experiment: Deciding where to locate in a differentiated market n Consumers are located on a number line from 1 to 63. u There is one consumer at each location. (i.e., one consumer at location 1, one consumer at location 2, …, one consumer at location 63). n Every consumer will pay $1 to buy one unit of the product and will buy it from the nearest store. If there is a tie, then a consumer buys fractional units from all the equally distant stores. u A monopolist operating in this market will earn $63, since all consumers will pay the monopolist $1

Product Differentiation Experiment (2) n Costs: u It costs nothing to supply each consumer u It costs $20 to set up shop n Strategy: u If you decide to set up shop, you get to choose a location on the number line (1 through 63) F You must pick an integer (i.e., a counting number 1, 2, 3, … not 3.5)

Product Differentiation Experiment (3) n The game: u First person to raise a $20 bill pays me and gets to choose a location F Your entry decision and choice of location is public information u Second person to raise hand pays me $20 and gets to choose a location u etc. u You can locate anywhere on the number line. There is no prohibition against co-location

Product Differentiation Experiment (4) n Examples of strategies and payoffs: u Two entrants, one locates at #1 and one locates at #63. Both receive a gross payoff of $31.50, net profit $11.50 u Two entrants, one locates at #1 and one locates at #2. Company at location #1 gets gross payoff of $1 (net $-19) and company at location #2 gets gross payoff of $62 (net $42)

Equilibria of the Product Differentiation Experiment n Requirements for an equilibrium 1. All players must make a positive profit 2. No one else in the room can make a positive profit by entering 3. No entrant wishes to move to another position n Equilibrium #1: Three entrants u 11, 32, 53 u Each player makes $1 n Equilibrium #2: Two entrants u 21, 42 u Each player makes $11.50 u (if constraint 2 is changes to no one else makes a loss, then 20 and 43 are also acceptable positions)

Intuition from the Product Differentiation Experiment n Between two entrants u Entry is profitable if players are more than 40 units apart n Between another player and an endpoint u Moving toward the other player increases market share u Moving toward the other player makes it more likely that someone else will enter n Optimal location is to enter in a way that guarantees that you make a profit and that no one else can enter profitably u How about location 21 as a starting point? n In real games (as opposed to ideal ones) players make mistakes u Good strategist will take advantage of these mistakes