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Strategic Management/ Business Policy
Power Point Set #5:
Business Level Strategy: Cost and Differentiation Advantage
Business Strategy and Competitive Advantage
A business-level strategy is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by utilizing core competencies in specific individual product markets.
Business Strategy and Competitive Advantage
Two fundamental questions:
How do you generate advantage?How do you sustain advantage?
Key idea for sustainability is “barriers to imitation.”
How long will it be before the first rival imitates the first mover?How fast does new imitation occur once it starts?
• These two factors determine appropriability.
Business Strategy and Competitive Advantage
Does market share generate competitive advantage?
The computer industry is an excellent example of the lack of correspondence between market share and profit rates. IBM was a clear market leader in terms of market share but had only mediocre economic performance relative to its rivals. High market share is no guarantee of high rates of profitability.
Business Strategy and Competitive Advantage
Does market share generate competitive advantage?
Perhaps high market share causes high profit rates.
But it could equally well be that there is a third factor (e.g., good service capabilities at Caterpillar), unobserved by us, that causes both high profitability and high market share.
• In this case, we would see a correlation between profitability and market share but no causal explanation.
Business Strategy and Competitive Advantage
When can market share work to generate and sustain an advantage?
Scale economies combined with high exit costs may make market share a defensible advantage.
Sustainable Competitive Advantage
Costly Duplication due to:
Historical Conditions;
Uncertainty;
Social Complexity; and
Property Rights Protection.
Business Strategy and Competitive Advantage
An organization’s knowledge or expertise can lead to sustainable advantage if:
The knowledge is tacit rather than articulable;
• Tacit Knowledge: “We know more than we can tell.”
• Tacit Skills: Riding a bike, swimming, “learning by doing,” which is critical for maintaining a manufacturing base
The knowledge is not observable in use;
The knowledge is (socially) complex, rather than simple.
Forms of Competitive Advantage
CompetitiveAdvantage
Cost Advantage
DifferentiationAdvantage
Similar ProductAt Lower Cost
Price PremiumFrom Unique
Product
Drivers of Cost AdvantageDrivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
MANAGERIAL/ ORGANIZATIONALEFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• 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
• Indivisibli\ties• Specialization and division of labor
Ch4-9
Generic Business Level StrategiesGeneric Business Level Strategies
CostCost UniquenessUniqueness
Source of Competitive AdvantageSource of Competitive Advantage
Breadth of Breadth of Competitive Competitive
ScopeScope
BroadBroadTargetTargetMarketMarket
NarrowNarrowTargetTargetMarketMarket
FocusedDifferen-
tiation
FocusedDifferen-
tiation
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Focused Low CostFocused
Low Cost
CostCostLeadershipLeadership
Ch4-13Primary Activities
Su
ppor
tA
ctiv
itie
s
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inbo
und
L
ogis
tics
Op
erat
ions
Ou
tbou
ndL
ogis
tics
Mar
keti
ng
& S
ales
Serv
ice
MARG
IN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Policies to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset
Purchases
Efficient Plant Scale to Minimize Manufacturing Costs
Selection of Low Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Technology
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Value Creating Activities Common to a Cost Leadership Business Level StrategyValue Creating ActivitiesValue Creating Activities Common to a Common to a
Cost LeadershipCost Leadership Business Level StrategyBusiness Level Strategy
Differentiation Advantage
Differentiation Advantage, a concept developed by economist Joan Robinson, occurs when a firm is able to obtain from its differentiation a price premium in the market which exceeds the cost of providing differentiation.
Using the Value Chain to Identify Differentiation Potential on the Supply Side
Using the Value Chain to Identify Differentiation Potential on the Supply Side
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
MIS that supports fast response capabilities
Training to support customer service
excellence
Unique product features. Fast new product
development
Quality of components &
materials
Defect free products.
Wide variety
Fast delivery. Efficient order
processing
Building brand reputation
Customer technical support. Consumer credit. Availability of
spares
Maximizing Cost & Differentiation A dvantages
T y p ica l D ifferen tia ted L o w -C o st D u al A d va n ta g e
W ill in g n e ss to P ayC o st
Differentiation vs. Cost Leadership as a Basis for Competitive Advantage
Differentiation vs. Cost Leadership as a Basis for Competitive Advantage
Highest return on equity among top 200 US companies, 2002
(%) (%)
Colgate Palmolive 367.8 Gillette 53.8Caremark Rx 303.2 H.J. Heinz 48.5American Standard 161.4 Pfizer 45.7Yum Brands 98.1 Dell Computer 43.0Kellogg 80.5 TJX 41.3Anheuser-Busch 63.4 Oracle 36.4Nextel Communications 58.3 PepsiCo 35.6Sara Lee 58.0 3M 32.9Altria Group 57.0 Eli Lilly 32.7Wyeth 54.5 Sysco 31.9
QUESTION: Which is the primary basis for competitive advantagein the above companies: cost or differentiation?