5 Strategic Management Competitive Strategies Following the discussion of functional strategies in the previous chapter, the attention now shifts to competition and strategies related to securing a competitive advantage.

Learning Outline What is competitive advantage and how do we get it? Explain the importance of competitive advantage. Describe how an organization’s competitors can be determined. Discuss how resources, capabilities, and core competencies lead to competitive advantage. Explain the relationship between competitive advantage and competitive strategies. The learning outline is in three parts. The first relates to what competitive advantage is and how does an organization get it.

Learning Outline (contd.) What are the competitive strategies? Describe Miles and Snow’s adaptive strategies. Describe Porter’s generic competitive strategies. Explain low-cost and differentiation Explain what is meant by “stuck in the middle.” Describe an integrated low-cost differentiation strategy. Explain Mintzberg’s generic competitive strategies. The second learning objective is to look at various typologies that help explain competitive strategies.

Learning Outline (contd.) Implementing, evaluating, and changing competitive strategy Describe how an organization’s competitive strategies are implemented, evaluated, and changed. Explain what role functional strategies play in an organization’s competitive strategies. Discuss the various competitive postures and actions an organization can take. The final learning objective of this chapter is to see how competitive strategies are implemented, evaluated, and, if necessary, changed.

Competitive Advantage Competitive advantage exists when a firm’s strategy gives it an edge in Defending against competitive forces and Securing customers Convince customers firm’s product / service offers superior value Offer buyers a good product at a lower price Use differentiation to provide a better product buyers think is worth a premium price Can be eroded easily and quickly by competitors As reiterated continually throughout the text, competitive advantage is a key concept in strategic management. This slide looks at various aspects of competitive advantage.

Understanding the Competitive Environment What is competition? When organizations battle for some desired object or outcome Who are our competitors? Industry perspective Market perspective Strategic groups perspective Because competitive advantage implies that there are other competitors, it is important to first look at the competitive environment. Interestingly, there are three distinct perspectives on who a firm’s competitors are.

Industry and Market Approaches to Defining Competitors Same Product-Service Customer Needs Number of Sellers Degree of Differentiation One Low Pure Monopoly Few Low Pure Oligopoly This slide points out the contrasting view of competitors by the industry and market perspectives. Note that the industry perspective approaches competition from the point-of-view of product or service, while the market approach views it in terms of needs met. Few Medium Differentiated Oligopoly Many High Monopolistic Competition Many None Pure Competition

Identifying Strategic Groups Possible Strategic Dimensions for Identifying Strategic Groups Price • • Quality • Level of vertical integration • Geographic scope • Product line breadth-depth • Level of diversification • R&D expenditures • Market share • Profits • Product characteristics • Any other relevant strategic factor A strategic group (the third perspective on competition) is a set of firms competing within an industry that have similar strategy, resources, and customers. Strategic groups were mentioned earlier in the discussion of Porter’s five forces.

Strategic Groups: Vehicles Industry Group E Nissan Mazda Dayhatsu Group F Porche Ferrari Selective Department Store Mass- Discount Group D RolsRois Kontenental Group C Mercedes BMW Audi Infinity Lexus Distribution Strategy Price and distribution strategy are two factors that are important to the cosmetics industry. Six distinct strategic groups can be identified. Group B Toyota Honda GM Renault Volvo Group A Hayondai Dayoo KIA Low Medium High Price Strategy

Every organization has resources and The Role of Resources and Distinctive Capabilities in Gaining Competitive Advantage Every organization has resources and capabilities to do whatever it’s in business to do Some organizations “can do,” others “can’t do” Competitive advantage implies gaining the edge on others Organizations strive for sustainable competitive advantage and set the stage for competition – intense, moderate, or mild. This slide revisits resources and distinctive capabilities (discussed in detail in chapter 4) and ties them to the concept of competitive advantage. The quest for competitive advantage may be in an intense, moderate, or mild competitive environment.

Competitive Strategy Exploits competitive advantage By finding ways to use resources and distinctive capabilities Which sets the organization apart from its competitors If competitive advantage is the “end,” then competitive strategy is the “means.” This slide introduces the concept of competitive strategy.

What are the Competitive Strategies? Contrary to expectations, the number of ways to define competitive strategy are limited Traditional approaches New perspectives It is important to underscore that there a limited number of competitive strategy alternatives. The approaches can be classified as either traditional or new.

Characteristics of Miles and Snow’s Adaptive (Competitive) Strategies Strategy Characteristics Organization seeks innovation Demonstrated ability to survey dynamic environment and develop new products-services to fit the changing environment Frequently and continually innovating, developing, and testing new products-services Competitors are uncertain about prospector’s future strategic decisions and actions Searches for market stability Produces only a limited product line for a narrow segment of total potential market Seeks to protect (defend) its well-established business Does whatever is necessary to aggressively prevent competitors from entering their turf Can carve out and maintain niches within its industry that competitors find difficult to penetrate Prospector • • Defender • Miles and Snow’s approach is based on the strategies organizations use to adapt to their uncertain competitive environments. Four strategic postures are possible, the first of which are discussed in this slide.

Characteristics of Miles and Snow’s Adaptive (Competitive) Strategies Strategy Characteristics Strategy of analysis and imitation Thoroughly analyzes new business ideas (products, services, markets) before deciding to jump in Watches for and copies the promising and successful ideas of prospectors Lacks coherent strategic plan Simply reacts to environmental changes Makes strategic adjustments only when finally forced to do so Unable to respond quickly to environmental changes because resources- capabilities are lacking or are not developed or exploited properly Analyzer • • Reactor • Analyzers and reactors are the last two of Miles and Snow strategy types. Miles and Snow proposed their ideas in an 1978 book.

Porter’s Generic Competitive Strategies Competitive advantage comes from only 1 of 2 sources Having the lowest costs in the industry Possessing significant and desirable differences from competitors The second factor is the scope of product-market Mix of these factors provide the basis for: Cost leadership strategy (or low-cost strategy) Differentiation strategy Focus strategy Porter’s ideas were discussed in chapter 3 (the five forces framework) and in chapter 4 (the value chain). Porter’s competitive strategies (introduced in a 1980 book) are called “generic” because they can be pursued by any type or size organization in any type or size industry.

Porter’s Generic Competitive Strategies Advantage Low Costs Product-Service Differences Broad Narrow Cost Leadership Differentiation Competitive Market Scope Following the discussion of the strategy choices that Porter identified (as shown in this slide), it may be a good idea to talk about the concept of “stuck in the middle” – Porter’s term for a company that tries to combine both cost leadership and differentiation. Focus (Differentiation) Focus (Cost)

Contemporary Perspectives on Competitive Strategy Newer perspectives provide an expanded, and perhaps more realistic, description of what competitive strategies organizations are using Integrated low-cost differentiation strategy Mintzberg’s generic competitive strategies The integrated low-cost differentiation strategy flies against the “mutual exclusivity” idea of Porter. However, companies such as Dell are successfully combining both cost leadership and differentiation strategies.

Low-Cost Leadership Make achievement of low-cost relative to rivals the theme of firm’s business strategy Find ways to drive costs out of business year-after-year Low-cost leadership means low Overall costs, not just low manufacturing or production costs!

A. Value Chain Using Traditional Channels - Highest Cost Software development activities production and packaging activities Marketing and promotion of software Warehousing and shipping of wholesaler-retailer orders Technical support activities Activities of software retailers Activities of wholesale distributors of software products C. Value Chain Using Online Sales and Internet Delivery - Lowest Cost Software development activities Online marketing and promotion activities Systems to accept credit card payment and allow immediate download Technical support and customer service activities

When Does it work? It works when Pitfalls with this strategy Price competition is vigorous Product is standardized Buyers incur low switching costs Industry newcomers use introductory low prices to attract buyers and build customer base Pitfalls with this strategy Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Differentiation matters

Differentiation Strategies Incorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals Keys to success Find ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivals Not spending more to achieve differentiation than the price premium that can be charged

Types of Differentiation Unique taste -- Dr. Pepper Wide selection and one-stop shopping -- Home Depot and Amazon.com Superior service -- FedEx, Ritz-Carlton Spare parts availability -- Caterpillar More for your money -- McDonald’s, Wal-Mart Prestige -- Rolex Quality manufacture -- Honda, Toyota Top-of-the-line image -- Ralph Lauren, Chanel

Signaling Value as Well as Delivering Value Buyers seldom pay for value that is not perceived Signals of value may be as important as actual value when Nature of differentiation is hard to quantify Buyers are making first-time purchases Repurchase is infrequent Buyers are unsophisticated

When does it work? It works when Pitfalls There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Technological change and product innovation are fast-paced Pitfalls Charging too high a price or over differentiating Failing to signal value Not understanding what buyers want or prefer and differentiating on the “wrong” things

Competitive Strategy Principle A low-cost provider strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra differentiating attributes worth paying for! A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying additional money to obtain!

Integrated low-cost / differentiated Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations

Southwest Airlines Integrated Low Cost/Differentiation Strategy Use a single aircraft model (Boeing 737) Focus on customer satisfaction Use secondary airports High level of employee dedication No meals 15 minute turnaround time No reserved seats

Risk of an integrated Provider Strategy Risk – An integrated provider may get squeezed between strategies of firms using low-cost and differentiation strategies Low-cost leaders may be able to siphon customers away with a lower price High-end differentiators may be able to steal customers away with better product attributes

Focus / Niche Strategies Involve concentrated attention on a narrow piece of the total market Objective Serve niche buyers better than rivals Keys to success Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities to serve needs of target buyer segment

Examples of Focus Strategies eBay Online auctions Jiffy Lube International Maintenance for motor vehicles Bandag Specialist in truck tire recapping

What Makes a Niche Attractive for Focusing? Big enough to be profitable and offers good growth potential Not crucial to success of industry leaders Costly or difficult for multi-segment competitors to meet specialized needs of niche members Focuser has resources and capabilities to effectively serve an attractive niche Few other rivals are specializing in same niche Focuser can defend against challengers via superior ability to serve niche members

Risks of a Focus Strategy Competitors find effective ways to match a focuser’s capabilities in serving niche Niche buyers’ preferences shift towards product attributes desired by majority of buyers - niche becomes part of overall market Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

First-Mover Advantages When to make a strategic move is often as crucial as what move to make First-mover advantages arise when Pioneering helps build firm’s image and reputation Early commitments to new technologies, new-style components, and distribution channels can produce cost advantage Loyalty of first time buyers is high Moving first can be a preemptive strike

First-Mover Disadvantages Moving early can be a disadvantage (or fail to produce an advantage) when Costs of pioneering are sizable and loyalty of first time buyers is weak Innovator’s products are primitive, not living up to buyer expectations Rapid technological change allows followers to leapfrog pioneers

Timing and Competitive Advantage Principle 1 Being a first-mover holds potential for competitive advantage in some cases but not in others Principle 2 Being a fast follower can sometimes yield as good a result as being a first mover Principle 3 Being a late-mover may or may not be fatal -- it varies with the situation

Mintzberg’s Generic Competitive Strategies By Price By Marketing Image Differentiation By Product Design By Product Quality By Product Support Mintzberg’s typology identifies six possible competitive strategies. He felt that this typology better reflected the increasing complexity of the competitive environment. Undifferentiated

Implementing Competitive Strategy Without implementation a strategy is nothing more than an idea Implementing competitive strategies The role of functional strategies What strategy is most appropriate? How is that strategy implemented? Competitive postures and actions Offensive moves Defensive moves The competitive strategy an organization is using can be seen by what’s actually being done or implemented. Strategy implementation is critical, because without it (as the slide points out) strategy is nothing more than an idea. Offensive moves are when an organization attempts to exploit and strengthen its competitive position through attacks on a competitor’s position. Defensive moves describe when an organization is attempting to protect its competitive advantage and turf.

Evaluating and Changing Competitive Strategy Responsibility of managing strategically doesn’t stop after implementation Evaluation of competitive strategy assesses: Various functional areas Activities performed in those areas Change when evaluation shows the strategy Doesn’t have the intended impact Hasn’t resulted in desired levels of performance The organization’s competitive moves, actions, and responses being carried out through the various functional strategies need to be monitored and evaluated for performance effectiveness and efficiency.