: The Linchpin

TRADE – OFFS

Chapter 5

Competitive advantage depends on making choices that are different from those of rivals,

on making trade-offs

Two ways of understanding1.Manager tend to believe that “more is always

better”. (more customers, more product, more services mean more sales

& Profit)

2. To sustain a competitive advantage. Fact: Temporary advantage---in today’s supercharged, hypercompetitive world which anything will be copied.

Think a minute!If you find a valuable position, imitators will take notice.

Competitive advantage: Companies persist a decades

What Are Trade-offs?

“The Strategic equivalent of a fork in the road.

If you take one path, you cannot simultaneously take the other.”

What Are Trade-offs?

Example: Airline must choose a route system.

1. A Hub-and-spoke configuration--higher cost

2. A point-to-point system--lower cost

Example: Semiconductor manufacturer

1. Design and manufactured their own chips.

2. IDMs had exceed capacity, rent it out to smaller firm.

Dr. Morris Chang

TSMC become a manufacturer for other chip designer and offered intellectual property protection in

addition to manufacturing.

Example: IKEA The Swedish home furnishings giant. Made different choices from the

“Traditional” home furnishings retailers.

Proposition: To provide good design and function at a low cost.

Consumer target: “with a thin wallet” A set of limits: It dose not meet

all the needs of all customers.

1. Product Design:Furniture is modular and ready to assemble.

2. Product Variety:

Scandinavian Style

Limit style to Scandinavian and its offshoots, and offer only a few choices finishes and fabrics.

French CountryAmerican Colonial

Traditional retailers

3.In-Store Service:In exchange for serving themselves, they will be rewarded with Lower Prices.

IKEA’s step:1.Write down the item number.2.Go to pick up item at cavernous

warehouse.3.Load the flat pack onto shopping

cart.4.Go to the payment lines.

4. Delivery and store design:In exchange for serving

themselves, they will be rewarded with Lower

Prices.

4. Delivery and store design:In exchange for serving

themselves, they will be rewarded with Lower

Prices.

In store design and location make it easy to serve yourself.

5. Flat packs and competitive advantage:Customers could “self-

deliver”

Advantage of flat packs:1.Customers willing to carry.2.Do their own assembly not

only pay a lower price.3.With out waiting weeks for

delivery4.Less risk of shipping damage.

IKEA: TRADE – OFFS“Sell fully assembly furniture that has to be shipping. Or you design is to be transported in flat packs and assembled in-home by the customer”

If you have a strategy, you should be able to link it

directly to your P&L

Porter’s saying:

Why Do Trade-off Arise?1. Product features may be

incompatible.Example: IKEA

A nightmare for who want to quick “in and out” purchase

Why Do Trade-off Arise?1. Product features may be

incompatibleExample: BMW“Ultimate driving machine”

Not serve the needs of car buyers looking for cheap.

Why Do Trade-off Arise?1. Product features may be

incompatible. Example: McDonald’s

Not very satisfying for locavores who want healthy, farm-fresh ingredients.

Why Do Trade-off Arise?2. The configuration of activities

can not equally well deliver anotherExample: Four Seasons

Designs “Activity” to provide guests with a high level of assistance.

Why Do Trade-off Arise?3. Inconsistencies in image or

reputationFailure Case: SEARS

“The Place to buy quality tools and appliance”

SEARS tried to sell investment products as well as power saws.

Previous times

After that acquired broker Dean Witter

Real Trade-offs Keep Imitators at Bay

If you are successful and competitors will try to copy

what you do. But trade-offs will get in their way.

Trade-offs are choices that make strategies sustainable

because they not easy to match or too neutralize.

Case: Not-So-Fast-Food

Position: Speed & ConsistencyPosition: Customize your menu

Campaign: Made for you (Customization) Results of Campaign:

1.Customized food preparation takes more time.

2.The Greater the customization more difficult it is to achieve consistency.

: TRADE – OFFS“It’s couldn’t copy Burger King’s

strategy with out messing up its own”

Porter’s saying:

McDonald’s tried to do “Straddling”.The straddler; tries to match the benefits

of the successful position while at the same time maintaining its existing

position.

Case: Movies- Direct vs Retail BOLCKBUSTER: The largest operator of

video rental store in USA.

NETFLIX: Subscribers ordered movies online for home delivery by mail

These are two different value propositions &

value chain

Porter’s saying:

Trade-off impose real economic penalties for companies that try to complete in two

ways at once

Case: Straddling in the skies

2 Positions in the same business: Failure to be full service on some route and low cost on other. Competitive in in 2 ways at once turned out to be too expensive and too complicated

TRADE – OFFSTo create a separate organization

with the freedom to choose its own

Case: Straddling in the skies

News subsidiary

Slogan “the new low cost airline from British airways”Failure : A Low cost airline was inconsistent with its position as a premium carrier. (low fare airline but gave passengers seat assignments and contracted food service to a high-end catering outfit)

Case: Home Improvement- Men vs WomanValue proposition:

It offered do-it-yourselfers(mainly men)o The widest selection of items

in hugeo Warehouse-style store that

average over 130,000 square feet

o Well-trained associates

New Value proposition: “Women are the driving force for major home improvement project”o Product assortment & merchandisingo Line items for appeal to women; home fashion, kitchen, lawn and garden

“Trade-offs are choices that make strategies sustainable because they are not easy to

match or to neutralize.”

Choosing What Not to Do

Companies tend over time to add function and features to their products.

“More is Better”

When you try to offer something for everyone, you tend to relax the trade-offs that underpin your

competitive advantage

Choosing What Not to Do

The purveyor of fresh food & fresh prepared

IN-N-OUT took the opposite fork in the road. They actually hired his own butcher to provide a reliable source o f fresh beef.

“New Technology”

Choosing What Not to Do

Jones understand customer wants;• A face-to-face relationship with an individual,

not an unfamiliar voice at a call • Conservative financial products combined with a steady• Low risk• Buy-and-hold approach to investing

“Online trading”

TRADE – OFFS: “When We Say No”o It’s doesn’t serve high roller and day traders.o It’s doesn’t sell derivative, commodities, or penny stocks.o It’s doesn’t offer online trading

Choosing What Not to Do

Southwest’s Strategies: o No assigned seat.o No first class.o No Meals.o No Planes other than

737s.o No. baggage transfer.

“Clarity about what you won’t do that is the best way to

succeed at what you do choose to do.

Porter’s saying:

Strategy is making trade-offs in competing.

The essence of strategy is cho0sing what not to do