strategic management/ business policy power point set #5: business level strategy: cost and...

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.


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.


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.


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.


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.


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?

strategic management/ business policy power point set #5: business level strategy: cost and...

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