Managing Industry Competition: Part 2 Competitive Strategies Dr. Ellen A. Drost

Ellen A. Drost, Winter 2007 Lecture Objectives -To extent the industrial organizational model, and to introduce the positioning school  To identify three generic strategies relative to the Porter Five Forces Model

Ellen A. Drost, Winter 2007 Five Forces Model and Competitive Strategy Lessons learned from the Five Forces Model  Not all industries are equal in terms of their profit potential  To assess the opportunities and threats underlying each competitive force affecting an industry, and then estimate the profit potential of the industry  The key is to stake out a position in the industry that is less vulnerable to competitive threats from competitors  Industry positioning school

Ellen A. Drost, Winter 2007 Three Generic Competitive Strategies -Cost Leadership -Differentiation -Focus

Ellen A. Drost, Winter 2007 Cost Leadership High volume, low margin When a Cost Leadership Strategy Works Best 1.When price competition among rival sellers is a dominant competitive force 2.When the industry’s product is a standard, commodity-type item readily available from a variety of sellers 3.When there are not many ways to achieve product differentiation that have value to the buyer 4.When most buyers use the product in the same ways and have much the same needs/requirements 5.When buyers incur low switching costs in changing from one seller to another and are prone to shop for the best price

Ellen A. Drost, Winter 2007 Cost Leadership Commonly Required Skills and Resources 1.Sustained capital investment and access to capital 2.Process engineering skills 3.Intense supervision of labor 4.Products designed for ease in manufacture 5.Low-cost distribution system Common Organizational Requirements 1.Tight cost control 2.Frequent, detailed control reports 3.Structured organization and responsibilities

Ellen A. Drost, Winter 2007 Risks of Overall Cost Leadership 1.Imitation by newcomers or followers in the industry –lost-cost learning –state-of-the-art facilities 2.Inability to see required product or market change because of the attention to cost –buyer desires increased quality or service –declining buyer sensitivity to price

Ellen A. Drost, Winter 2007 Differentiation When a Differentiation Strategy Works Best 1.When there are many ways to differentiate the product/service and these differences are perceived by buyers to have value 2.When buyer needs and uses of the item are diverse 3.When not many rivals are following a similar type of differentiation approach Differentiation strategies are most powerful when buyer needs and preferences are too diverse to be satisfied by a standardized product.

Ellen A. Drost, Winter 2007 Differentiation -What Kind of Differentiation to Pursue -The ones least subject to imitation -Based on long-lasting competitive advantage (core competence) -Technological innovation (3M, Philips) -Quality (Mercedes Benz, Lexus) -Service (Dell, Nordstrom) -Manufacturing (components) -Image (fashion)

Ellen A. Drost, Winter 2007 Signals of Value Buyers Judge Value on the Basis of Signals 1.How attractively the product is packaged 2.How “well-know” the brand is said to be 3.Whether the seller has “prestige” customers 4.How long the firm has been in business 5.Whether the item is “more expensive” 6.Professionalism of seller’s employees 7.Whether the seller has “prestige” facilities Signals of Value versus Actual Value 1.Differences among competing brands are subjective or hard to quantify are subjective or hard to quantify 2.Buyers are making their first-time purchases 3.Repurchase is infrequent 4.Buyers are unsophisticated

Ellen A. Drost, Winter 2007 Differentiation Commonly Required Skills and Resources 1.Strong marketing abilities 2.Product engineering 3.Creative flair 4.Strong capability in basic research 5.Corporate reputation for quality or technological leadership 6.Long tradition in the industry or unique combination of skills drawn from other businesses 7.Strong cooperation from channels (suppliers)

Ellen A. Drost, Winter 2007 Differentiation Common Organizational Requirements 1.Strong coordination among functions in R&D, product development, and marketing 2.Subjective measurement and incentives instead of quantitative measures 3.Amenities to attract highly skilled labor, scientists, or creative people

Ellen A. Drost, Winter 2007 Risks of Differentiation 1.Imitation narrows perceived differentiation –Common as industries mature 2.Cost differential between low-cost competitor and the differentiated firm becomes too great –Buyers forego differentiated feature for large cost savings –Ignoring the need to signal value 3.Buyers need for differentiation falls. This occurs when buyers become more sophisticated. –Example: Kawasaki and other Japanese motorcycle producers have been able to successfully attach differentiated producers such as Harley-Davidson and Triumph in large motorcycles by offering major cost savings to buyers.

Ellen A. Drost, Winter 2007 Focus Strategy  Serving needs of particular segment of industry –Geographical market or type of customer  Differentiators  Cost leaders  Focusing may be successful when a firm possesses intimate knowledge about a particular segment

Ellen A. Drost, Winter 2007 Three Generic Strategies Lessons learned  The essence of strategic choices –Whether to perform activities differently or to perform different activities relative to customers  Two fundamental strategic dimensions: cost or differentiation –Stuck in the middle firms are drifting

Ellen A. Drost, Winter 2007 Debates and Extensions  Clear versus blurred boundaries of an industry  Industry rivalry versus strategic groups  Integrating versus outsourcing  Being stuck in the middle or being an all- rounder

Ellen A. Drost, Winter 2007 Industry Competition and generic strategies  What are your observations regarding generic strategies? –Do they make sense?