Foundations of Strategy PSU MGMT #511 Week # 4 –Biz Strategies Dave Garten daveoutside@alum.mit.edu 4/17/2017

Building a collective view of the future… Yet… Building a collective view of the future… 3-5 years out Inside Outside What new core competencies do we need to build? What new product concepts should we pioneer? What alliances do we need to form? What l/t regulatory initiatives do we need to form? Source: Derived from Competing for the Future by Gary Hamel and C.K. Prahalad 4/17/2017 Dave Garten - Business Strategy

Sources of Competitive Advantage COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE 6

Dave Garten - Business Strategy Differentiation “increase in perceived value relative to the perceived value of other firms” - Barney “If you can’t differentiate yourself in this world, you get commoditized instantaneously. So we are constantly driving for more innovation, more differentiation and more technology.” - Jeffrey R. Immelt, Chairman and CEO, GE 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Differentiation Why differentiate? Ways to differentiate Better chance to be profitable Preference -> loyalty -> stickiness -> profitability (basis for monopolistic competition) X 4/17/2017 Dave Garten - Business Strategy

Differential (Segmentation) Segmentation is basis for differentiation Determines the value proposition Segment via benefits, demographics and psychographics 4/17/2017 Dave Garten - Business Strategy

The Basis for Segmentation *Size *Technical sophistication *OEM/replacement Industrial buyers Characteristics of the Buyers *Demographics *Lifestyle *Purchase occasion Household buyers *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list Distribution channel Opportunities for Differentiation Geographical location *Physical size *Price level *Product features *Technology design *Inputs used (e.g. raw materials) *Performance characteristics *Pre-sales & post-sales services Characteristics of the Product Source: Jim Goes 1

Differentiation - observations 5 forces: differentiation lowers threat of rivalry & substitutes (barriers to entry) VRIO tests differentiation: rare & imitable? Differentiation narrows with life cycle Brand can limit differentiation Patents can enhance differentiation Organization is a source of differentiation Creativity, risk-taking, complexity, cross group (link to core competency) 4/17/2017 Dave Garten - Business Strategy

Segmentation - U.S. Bicycle Industry KEY SUCCESS FACTORS Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); * Low-costs through global sourcing of components & low-wage assembly. * Supply contract with major retailer. Leading competitors: Taiwanese & Chinese assemblers, some U.S manufacturers, e.g. Murray Ohio, Huffy Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; *Cost efficiency through large scale operation and either low wages or automated manufacturing. *Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers. * International marketing & distribution. Leading competitors: Raleigh, Giant, Peugeot, Fuji (Japan). High-priced bicycles for enthusiasts. *Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistance). *Reputation (e.g. through success in racing, through effective brand management). *Strong dealer relations. Leading competitors: K2, Specialized, Trek Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Similar to low-price bicycle segment. Source: Jim Goes 2

Dave Garten - Business Strategy Cost Leadership Manufacturing businesses Conventional: High MSS -> High accumulated volume  low unit cost -> high profitability Experience curve (learning), know-how, IP, specialization, improvements Service businesses Know-how; experience curve applies Diseconomies sometimes Cost structure Labor, capital, land, raw materials, geography, use of technology, government policy Source: Derived from Barney, Gaining & Sustaining Competitive Advantage 4/17/2017 Dave Garten - Business Strategy

Drivers of Cost Advantage Organizational slack Ratio of fixed to variable costs Costs of installing and closing capacity Location advantages Ownership of low-cost inputs Bargaining power Supplier cooperation Design for automation Designs to economize on materials Mechanization and automation Efficient utilization of materials Increased precision Increased dexterity Improved coordination/ organization Indivisibilities Specialization and division of labor PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION MANAGERIAL/ ORGANIZATIONAL EFFICIENCY ECONOMIES OF LEARNING ECONOMIES OF SCALE 13

Cost Leadership Observations 5 Forces: Entrants often try differentiation to attack Threat of substitution check & balance Scale -> more power relative to suppliers/customers VRIO test rarity & imitability Social complexity (learning curve), access to low cost factors, “software” Price-cost decoupling TTM, penetration and defensive strategies Pure play cost leadership Generally not…“Lean and mean” 4/17/2017 Dave Garten - Business Strategy

Airline Cost/Differentiation 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Low Cost Entry Source: Strategies to Fight Low Cost Rivals, by Nurmalya Kumar, HBR, 2006 (#R0126F) 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Case Study 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Vertical Integration Degree of control over the value chain Forward -> toward customer Backward -> toward R&D Driven by relationship, threat of opportunism, specificity, uncertainty R&D Manufacturing Sales & marketing Distribution Service 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Vertical Integration Market Governance Vertical Integration Alliances Control (opportunism) Flexibility (uncertainty) Plus of vertical integration Minus of vertical integration X 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Time to Market Learning curve advantages First use stickiness Brand, differentiation, reputation Creation of “standard,” expectations Networking effect Interoperability, Value = f(n**2) “Arrows in the back” Incumbent, imitation, mistake Windows of opportunity Always learn and adjust 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Mondavi Case Objective: Evaluation of business strategies used in the wine industry Learnings: Industries exhibit different structures across geographies. Use of different strategies is used within an industry to gain competitive advantage. Consolidation as a strategy is most often driven by economies of scope/scale, but other considerations become factors. 4/17/2017 Dave Garten - Business Strategy

Dave Garten - Business Strategy Mondavi Case ~$650M 4/17/2017 Dave Garten - Business Strategy