1. 7/15/20151 Business Strategy & Policy PSU MGMT #562 Dave Garten daveoutside@alum.mit.edu Week # 4 –Biz Strategies

2. 7/15/2015Dave Garten - Business Strategy2 Yet… Inside Outside 3-5 years out Building a collective view of the future… 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

3. 7/15/2015Dave Garten - Business Strategy3 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. 7/15/2015Dave Garten - Business Strategy4 Differentiation Why differentiate? Ways to differentiate X

5. 7/15/2015Dave Garten - Business Strategy5 Differential (Segmentation) Segment via benefits, demographics and psychographics Segmentation is basis for differentiation Determines the value proposition

6. The Basis for Segmentation Opportunities for Differentiation Characteristics of the Buyers Characteristics of the Product Industrial buyers Household buyers Distribution channel Geographical location *Size *Technical sophistication *OEM/replacement *Demographics *Lifestyle *Purchase occasion *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list *Physical size *Price level *Product features *Technology design *Inputs used (e.g. raw materials) *Performance characteristics *Pre-sales & post-sales services Source: Jim Goes

7. 7/15/2015Dave Garten - Business Strategy7 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)

8. Segmentation - U.S. Bicycle Industry SEGMENT Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); KEY SUCCESS FACTORS * 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). *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 Similar to low-price bicycle segment. High-priced bicycles for enthusiasts. Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Source: Jim Goes

9. 7/15/2015Dave Garten - Business Strategy9 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

10. 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

11. 7/15/2015Dave Garten - Business Strategy11 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”

12. 7/15/2015Dave Garten - Business Strategy12 Airline Cost/Differentiation

13. 7/15/2015Dave Garten - Business Strategy13 Low Cost Entry Source: Strategies to Fight Low Cost Rivals, by Nurmalya Kumar, HBR, 2006 (#R0126F)

14. 7/15/2015Dave Garten - Business Strategy14 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

15. 7/15/2015Dave Garten - Business Strategy15 Vertical Integration Market Governance Vertical Integration Alliances Control (opportunism) Flexibility (uncertainty) Plus of vertical integration Minus of vertical integration X

16. 7/15/2015Dave Garten - Business Strategy16 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 Always learn and adjust

17. 7/15/2015Dave Garten - Business Strategy17 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.