1. Foundations of Strategy PSU MGMT #511
Week # 4 –Biz Strategies
Dave Garten
4/17/2017

2. 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

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

4. 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

5. 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

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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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”
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Dave Garten - Business Strategy

13. Airline Cost/Differentiation
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Dave Garten - Business Strategy

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

15. Dave Garten - Business Strategy
Case Study
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Dave Garten - Business Strategy

16. 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
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Dave Garten - Business Strategy

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

18. 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
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Dave Garten - Business Strategy

19. 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

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