2.  Average 74  80% or higher – 19  70% - 79 – 22  60 – 69 - 11  Other - 4

3. Chapter 5 Building Competitive Advantage Through Business-Level Strategy

4. Business Level Strategy How are we going to compete in our industry/segment? Improving the firm’s competitive position Competitive advantages are the single most dependable contributor to above-average profitability

5. How do these Firms Compete?

9. Porter’s Generic Strategies  Two fundamental issues Competitive advantage - low cost vs. differentiation Strategic Target - broad based vs. segment  Pursuit of the generic strategies provides protection from each of the five forces

10. Porter’s Generic Strategies Low Cost Differentiation Competitive Advantage

11. Porter’s Generic Strategies BroadSegment/Focus Strategic Target

12. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus Competitive Advantage Strategic Target

13. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus WalMart Domino’s Competitive Advantage Strategic Target

14. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus Big Lots Little Caesar’s WalMart Domino’s Competitive Advantage Strategic Target

15. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus WalMart Dominos’s Big Lots Lil Caesar’s Target Papa John’s Competitive Advantage Strategic Target

16. Porter’s Generic Strategies Low Cost Differentiation BroadSegment/Focus WalMart Domino’s Big Lots Little Caesar’s Target Papa John’s Nordstrom Papa Murphy’s Competitive Advantage Strategic Target

17. Differentiation  Offer attributes that customers want, and are willing to pay for. Leads to premium price, higher volume, loyalty  Maintaining uniqueness can be a challenge Kodak, Wrigley’s, Campbell’s, Coca-Cola, Gillette, Del Monte, and Nabisco all leaders since 1923  Marginal revenue must exceed the costs of differentiation PERCEIVED VALUE versus INCREMENTAL COSTS

18. Differentiation (cont.)  What firms pursue differentiation?  How or on what basis do they achieve differentiation?

20. Starbuck’s Differentiation  4 Tablespoons of $10 bag = 40 cents Three cups  Double-Tall Latte = $3.22 Double Shot Espresso = $1.85 $3.22 - $1.85 = $1.37 for steamed milk  20 seconds to steam milk  $1.37 * 3 * 60 = $246 a hour to steam milk  Customers “allow” Starbucks to draw interest in their smart-cards. Millions of dollars annually on the float “You are one of us” “Collectible”  Pretax profit margins of 10.5%

21. Differentiation (cont.)  Signalling important when: nature of differentiation difficult to quantify first-time purchase - re-purchase infrequent buyers unsophisticated

22. To introduce his beer, Coors often gave free sample to gold miners.

23. Differentiation (cont.)  Risky when: no value in uniqueness - over differentiation  cell phones premium price too high quick imitation poorly understood/changing customer needs  Minivan, FAO Schwartz Costs/price become more important than uniqueness

24. Can you differentiate……?

25. Can you differentiate…..?  Salt?

30. Can you differentiate…..?  Deodorant

31. Strong enough for a man, …. But made for a woman

32. Ph balanced too?????

33. Can you differentiate…..?  Water

35.  Evian spelled backwards - naïve  Coincidence? I think not…..

36. Now, I am going to do a card trick.

37. I am going to read your mind.

38. You are going to see a series of cards.

39. You are going to choose one card.

40. Once you select your card, clear your mind, and think only of that card.

41. Are you ready to pick a card?

42. Pick a card.

43. Did you pick a card?

44. Think of it now.

45. I hear you.

46. And now, I will remove your card.

48. Your card is gone….yes?

49. Problems with P&G’s Differentiation Strategy

50. How has P&G responded? Introduction of new, higher margined products like battery powered toothbrush and white strips Introduction of “Rejuvenating Effects,” a toothpaste for women marketed as a beauty product Using Emeril Lagasse to hawk their citrus, cinnamon, and herbal mint toothpastes

51. How can Differentiation protect against…? Starbuck’s $1.80 Costs Profit Price New Entrants

52. How can Differentiation protect against…? Joe’s Coffee Starbuck’s $1.80 Assume Equal Costs New Entrants

53. How can Differentiation protect against…? New Entrants Joe’s Coffee 99 cents Starbuck’s $1.80

54. How can Differentiation protect against…? New Entrants Joe’s Coffee 99 cents Starbuck’s $1.80 Extra Profits

55. How can Differentiation protect against…? Rivals Starbuck’s $1.80 Joe’s Coffee 99 cents

56. How can Differentiation protect against…? Starbuck’s $1.80 Joe’s Coffee 99 cents Advertising & Promotions drive costs UP

57. How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents Discounts and sales drive prices DOWN

58. How can Differentiation protect against…? Substitutes Starbuck’s $1.80

59. How can Differentiation protect against…? Starbuck’s $1.80 There is no substitute for the truly differentiated product

60. How can Differentiation protect against…? Power of Buyers - How do powerful buyer’s leverage their power? Lower Prices, Higher Quality

61. How can Differentiation protect against…? Starbuck’s $1.80 $1.70 Joe’s Coffee 99 89 cents Raise Quality Lower Prices

62. How can Differentiation protect against…? Power of Suppliers - How do powerful suppliers leverage their power? Drive up costs

63. How can Differentiation protect against…? Starbuck’s $1.70 Joe’s Coffee 89 cents Raise Costs

64. How can Differentiation protect against…? Differentiation does not eliminate any of these forces, it just allows the differentiated firm to more easily deal with these forces, or offset the power of these forces, and potentially, remain profitable.

65. Low Cost Leadership Design, produce, and market a comparable product at a lower cost Effective utilization of value-chain capital intensive mfg processes - efficient scale process, not product engineering - cost reductions products designed for simple assembly and sharing common components procurement and materials handling low cost distribution Requires organizational culture to support close supervision, cost controls

67. Low Cost Leadership (cont.) Attractive when price is dominant consideration commodity low switching costs powerful buyers

68. Low Cost Leadership (cont.) What firms pursue a low cost strategy? How do they drive their costs down Risky when: technology breakthroughs frequent easy to imitate costs advantages erode more quickly than differentiation causes near-sightedness on a few activities/sunk costs

69. Less than 24 hours after rival HP reported its PC division had lost money one quarter last year, Dell lowered prices by up to 22% Analysts believe Dell has a 5% cost advantage HP forced to choose between market share and profitability

70. How can Low Costs provide protection from…. New Entrants Wal-Mart Joe’s Rubbermaid Tub $1.99

71. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 Higher costs

72. How can Low Costs provide protection from…. Rivalry Wal-Mart Joe’s Rubbermaid Tub $1.99

73. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.89 …can push prices down….

74. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 … or push costs up

75. How can Low Costs provide protection from…. Wal-Mart Joes Rubbermaid Tub $1.99 Substitutes

76. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.89 …can push prices down….

77. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 … or push costs up

78. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 Power of Buyers

79. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.89 …can push prices down….

80. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 Power of Suppliers

81. How can Low Costs provide protection from…. Wal-Mart Joe’s Rubbermaid Tub $1.99 … can push costs up

82. How can Low Costs protect against…?  Low cost leadership does not eliminate any of these forces, it just allows the low costs firm to more easily deal with these forces, or offset the power of these forces, and potentially, remain profitable.

83. Focus  Emphasizing a market niche where customers have unique preferences or requirements. Either focus-low cost or focus-differentiation  Profitable when niche is large, growing niche is not crucial to broad-based competitors firm is able to defend position

84. Focus (cont.)  What firms pursue a focus strategy?  What is their niche?  Risky when: competitor “outfocuses the focuser” broad based competitors have deep pockets homogenization of customer needs economies of scope becomes a dominant KSF

85. Integrated Low Cost-Differentiation  Combines both generic strategies  Difficult to implement

86. Stuck in the Middle  Firm’s offering are too costly to compete with low costs provider’s product, and too undifferentiated to command the price premium gained by the differentiated firm