Building Competitive Advantages

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Competitive strategies must be based on some source of competitive advantage to be successful.Companies build competitive advantage when they take steps that enable them togain an edge over their rivals in attracting buyers. These steps vary: for example, making thehighest quality product, providing the best customer service, producing at the lowest cost, orfocusing resources on a specific segment or niche of the industry. Regardless of which avenueto building competitive advantage the firm selects, customers must receive superior valuethan that offered by its rivals. Providing superior value to customers also translates into superiorfinancial performance for the firm. Numerous studies demonstrate that firms providingsuperior value in the form of lower-cost products or services or distinctive, high-quality productsare able to sustain high profitability and competitive advantage.2

Text of Building Competitive Advantages

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    91

    CHAPTER OUTLINE

    CASE 7-Eleven

    Introduction

    Routes to Building Competitive Advantage

    Low-Cost Leadership StrategiesBuilding a Low-Cost AdvantageBenefits and Costs of Low-Cost

    Leadership Strategies

    Differentiation StrategiesBuilding Differentiation-Based AdvantageBenefits and Costs of Differentiation

    Strategies

    Focus StrategiesFocus-Based AdvantagesBenefits and Costs of Focus Strategies

    An Emerging View of Strategy: MassCustomization for Best Value

    Advanced Manufacturing TechnologyModular Product DesignsInternet-Driven Distribution Systems

    New Market Segmentation Techniques

    Distinctive Competence Revisited andWhy Quality Dominates

    The Role of Distinctive CompetenceThe Importance of Quality

    Strategy and Competitive Advantageover the Life Cycle

    Introductory StageGrowth StageMature StageDecline StageLife Cycle Dynamics and Competitive

    Advantage

    Ethical DimensionWorthy NeedSafe ProductAmple Information

    Summary

    Exercises and Discussion Questions

    Opportunities for Distinction:Building Competitive Advantage

    WHAT YOU WILL LEARN

    The three types of genericcompetitive strategies that can beused to build competitive advantage,including low-cost leadership,differentiation, and focus

    The benefits and costs of pursuingeach type of generic strategy

    The rise of mass customization as anew strategy

    The value of quality as a key pillarof any competitive strategy

    The evolution of strategicconsiderations over a productslife cycle

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    92 PART 1 Building Competitive Advantage

    The food retailing industry has long been dominated by large

    chains such as Safeway, Albertsons, and Kroger, and regional

    chains such as Tom Thumb, Fred Meyer, Randalls, H.E.B.,

    Giant Food, and Piggly Wiggly. All these large chains tend to

    follow a similar approach. The established firms operate large

    stores, each designed to serve a given geographical market. By

    operating large stores they can provide wide merchandise selec-

    tion and achieve economies of scale and experience curve

    effects in managing distribution systems and inventory prac-

    tices. In many cases, these firms can garner considerable cost

    savings that they sometimes pass on to customers in the form of

    low prices.

    This competitive arrangement appears quite formidable.

    Nevertheless, until recently, Southland Corporations 7-Eleven

    retailing chain has achieved considerable success over a long

    period from the 1970s to the early 1990s by using a different

    approach. Instead of establishing large stores, 7-Eleven built a

    number of small stores in each geographical region. It also

    lengthened the service time during which stores remained open.

    These two innovations enabled it to enhance customer conven-

    ience in several ways. First, because its stores are much smaller

    than the typical supermarket, shoppers have less difficulty

    locating merchandise. Second, checkout lines are shorter, since

    patrons typically buy only a few items at a time. Third, because

    7-Eleven operates more units within each geographical area, itsstores tend to be somewhat closer to customers than the huge

    units of industry leaders. Finally, by operating longer hours, it

    is accessible to shoppers for more hours of the day.

    Although most supermarket chains have since matched

    many of 7-Elevens innovations (and in some cases, exceeded

    them), 7-Eleven is still considered an important player in the

    food retailing industry. Nevertheless, its approach has left it

    vulnerable in several important ways. Offsetting 7-Elevens ini-

    tial advantages are reduced consumer benefits in two key areas:

    selection and price. Its small stores carry fewer products and

    brands than the typical supermarket, so shoppers have less

    choice when selecting merchandise. 7-Elevens approach is also

    less efficient than the large-store configuration of supermarkets.To earn a profit in the face of its higher costs, it must charge

    higher prices (10 percent to 15 percent on average). These dif-

    ferences are summarized in Exhibit 4-1.

    Following this distinctive approach, 7-Eleven expanded rap-

    idly, quickly achieving a leadership position in the convenience

    store segment of the industry. It ran into trouble in the late

    1980s, however. By then, a number of competitors had entered

    its nicheStop and Go, Circle K, Handimartand many gas

    stations had also begun retailing food. By the early 1990s, the

    larger grocery chains (Albertsons, Safeway, Kroger) began

    offering 24-hour service in some key metropolitan areas, while

    aggressively promoting different products each week with sig-

    nificant discounts. Moreover, new competitors were entering

    the food retailing business, such as the Wal-Mart and K-Mart,

    who began to offer a broad range of grocery offerings at enor-

    mous discounts. Thus, 7-Eleven faced increasing competition in

    its niche. Even more damaging to the company was the grow-

    ing belief among consumers that 7-Elevens prices were too

    high and that its food products were perceived as stale.

    Although many 7-Eleven stores attempted to offer ready-to-

    serve convenience foods, such as hot dogs, sandwiches, and sal-

    ads, the quality of these offerings varied significantly from store

    to store. Inventory management and control also varied sharply

    from store to store, with some products and food staples lan-

    guishing on the shelves for sometimes weeks at a time. The

    combination of these factors, plus the growing capabilities of

    large grocery store chains to match 7-Elevens initial strengths,

    resulted in stagnant growth and gradual eroding of market share

    in some regions during the early 1990s.

    Now, 7-Eleven is in the midst of an aggressive marketing

    and advertising promotion to retake market share that was lost

    to gas stations, other convenience stores, and grocery store

    chains. 7-Eleven is still the top name in convenience stores, andit possesses strong location advantages in major cities and sub-

    urban areas that attract considerable traffic. Its most recent

    advertising blitz stresses 7-Elevens new approach to value pric-

    ing and convenience, with low prices, fast replenishment of

    food to promote freshness, and quality name brands. Some of

    its television advertisements even use well-known comedians to

    poke fun at itself and to show how previous weaknesses have

    been fixed. Since the time 7-Eleven was purchased by the large

    Japanese firm Ito-Yokado in 1990, the company has sought to

    redefine the way it manages its inventories and pricing sched-

    ules. (Ito-Yokado, 7-Elevens joint venture partner in Japan,

    purchased a majority 65 percent interest of 7-Elevens U.S.

    operations because 7-Elevens parent company, Southland Cor-poration, experienced financial difficulties in the late 1980s for

    other reasons stemming from bad real estate deals and declin-

    ing land values.)

    7-Eleven is now making great strides to improve its inven-

    tory activity turnaround. Ito-Yokado is currently helping

    improve 7-Elevens U.S. operations by transferring to U.S.

    stores the sophisticated computer expertise it has developed in

    Japan. There, each 7-Eleven store is equipped with a personal

    (Case) 7-Eleven1

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    CHAPTER 4 Opportunities for Distinction: Building Competitive Advantage 93

    computer network custom-made for 7-Eleven. Every time a

    purchase is made, data are fed directly from the cash register

    into the stores computer. This sophisticated electronic tracking

    system enables fast reordering of products directly from the

    manufacturer. This investment in a similar information technol-

    ogy system made by Wal-Mart during the 1980s was a key fac-

    tor in propelling this once-small discount chain into the largest

    retailer in the United States. Although many grocery chains

    have since installed similar types of computer-intensive track-

    ing and ordering systems, its implementation at 7-Elevens U.S.

    operations has proved somewhat more uneven. To a largeextent, the computerized ordering systems implementation was

    complicated by the fact that 7-Eleven often sells widely differ-

    ent products in different stores, depending on regional prefer-

    ences. While this originally helped 7-Eleven provide those

    items that local neighborhood customers wanted, it also saddled

    the company with a massively complex ordering and inventory

    control system that defied easy product classification across

    numerous geographical sales regions. Now, managers and

    employees at many 7-Eleven stores around the nation are

    receiving training in how to use the system to manage in-store

    operations. When fully implemented nationwide, the informa-

    tion generated by each 7-Eleven will enable store managers to

    make such decisions as what items to drop, which ones to add,

    when to reorder, and what the proper inventory level for differ-

    ent items should be. It also helps relationships with suppliers

    (e.g., Coke, Pepsi, Frito-Lay, Interstate Bakeries). The informa-

    tion downloaded from 7-Elevens computers will enable both

    the company and its suppliers to better forecast demand for

    their own products.Cus