Business Strategy: Differentiation, Cost Leadership, and Integration Instructor: Dr.Gehan Shanmuganathan McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Part 2 Strategy Formulation 6-2

LO 6-7 Describe and evaluate the dynamics of competitive positioning. LO 6-1 Define business-level strategy and describe how it determines a firm’s strategic position. LO 6-2 Examine the relationship between value drivers and differentiation strategy. LO 6-3 Examine the relationship between cost drivers and cost-leadership strategy. LO 6-4 Assess the benefits and risks of cost-leadership and differentiation business strategies vis-à-vis the five forces that shape competition. LO 6-5 Explain why it is difficult to succeed at an integration strategy. LO 6-6 Evaluate value and cost drivers that may allow a firm to pursue an integration strategy. LO 6-7 Describe and evaluate the dynamics of competitive positioning. 6-3

ChapterCase 6 Trimming Fat at Whole Foods Market Whole Foods…Business Strategy Revitalization Started as small natural-foods store 1980 Became market leader; differentiation through organics and quality Competitive advantage through 2008 CEO John Mackey: Refocused Mission, Reduced Costs 6-4

Business-Level Strategy: How to Compete for Advantage? Answer the “Who, What, Why, and How” Who - which customer segments to serve? What needs, wishes, desires will we satisfy? Why do we want to satisfy them? How will we satisfy customers’ needs? Details actions managers take in quest for competitive advantage Single product or group of similar products 6-5

Industry and Firm Effects Jointly Determine Competitive Advantage EXHIBIT 6.1 6-6

Strategic Position Determined by Firm’s Business-Level Strategy Two primary competitive levers: Value (V) Cost (C) Economic Value Created: (V-C) The greater (V-C) = Competitive Advantage Strategic Position Based on: Value creation Cost 6-7 7

Strategic Position and Competitive Scope: Generic Business Strategies EXHIBIT 6.2 Strategic Position and Competitive Scope: Generic Business Strategies 6-8

Value Drivers Product Features Customer Service Customization Most important & clearest drivers Unique product features>> higher price BMW M3 Customer Service ID unmet customer needs & satisfy them Zappos online retailer Toyota Lexus brand Customization Tailoring for specific customers “Mass customization” Threadless T-shirts Complements Add value when consumed in tandem DVR (i.e., Tivo) 6-9

Toyota’s strategic challenges…. STRATEGY HIGHLIGHT 6.1 Toyota: From “Perfect Recall” to “Recall Nightmare” Toyota’s strategic challenges…. Launched Lexus 1989 Luxury car segment dominated by Mercedes-Benz, BMW, Cadillac LS400 line required recall a little over a year after launch Turned threat into opportunity to establish reputation for superior customer service Two years after launch Lexus ranked first on quality and customer satisfaction by J.D. Powers 2010 Toyota has largest recall in automotive history Needed to exhibit superior customer responsiveness again 8 million vehicles recalled was much more challenging 1–10 6-10 10

Cost Drivers: Cost-Leadership EXHIBIT 6.4 Cost Leadership: Cost of input factors, economies of scale, and learning-curve and experience-curve effects Competitive advantage = economic value created (V-C) > competitors Walmart vs. Kmart Dell vs. Compaq, Gateway, & HP 6-11

INTEGRATION STRATEGY: COST LEADERSHIP AND DIFFERENTIATION Trade-offs between low cost & differentiation Value & Cost Drivers of Integration Quality Can increase perceived value & lower cost (V-C) Economies of Scope Starbucks adding hot tea to its menu Innovation IKEA - stylist furniture in flat pack delivery Structure, Culture, & Routines Ambidextrous organization – explore AND exploit Intel current and future products and services 6-12

EXHIBIT 6.9 Value and Cost Drivers 6-13

The Dynamics of Competitive Positioning: Apple, HP, and Dell EXHIBIT 6.10 6-14

CHAPTERCASE 6 Consider This… Whole Foods continues to seek ways to differentiate 2010 enhanced its “back to school” program 300 salad bars in public schools within 50-mile radius of any Whole Foods store 2011 expanded to 500 elementary, middle, and high schools across the U.S. Expanding in-store educational efforts with “wellness clubs” What value drivers is Whole Foods using to remain differentiated in the face of Walmart and others now selling organic foods? Given the discussion in the ChapterCase about Whole Foods trimming its cost structure, does the firm risk being “stuck in the middle”? Why or why not? What other methods could Whole Foods use to successfully drive its business strategy? Whole Foods – John Mackey Video 6-15