Business Unit Strategy

Winning Business Strategies are grounded in sustainable Competitive Advantage.

* Core Competencies

* Competitive Advantage

Competitive Advantage:

A company has competitive advantage whenever it has an edge over rivals in securing customers and defending against competitive forces.

 

(1) Highest Quality Product

(2) Superior Customer Service

(3) Achieving Lower Costs than Rivals

(4) More Convenient Geographic Location

(5) Better Performing Product

(6) Better Value Product (Quality, Service, Price)

 

The aim of overall cost leadership is to achieve the lowest cost structure relative to other firms in the industry. Cost leadership is a viable strategy for earning above-average returns in an industry.

Cost Leadership requires:

(1) Efficient-scale facilities.

(2) Vigorous cost reductions.

(3) Tight cost and overhead control.

(4) Avoidance of marginal customers.

(5) Cost minimization - R&D, service, ads, etc.

A great deal of managerial attention must be devoted to cost control, though quality, service and other factors cannot be ignored.

(1) Sustained capital investment & access to capital.

(2) Process engineering skills.

(3) Intense supervision of labor.

(4) Products designed for ease of manufacture.

(5) Low-cost distribution system.

 

(1) Tight cost control

(2) Frequent, detailed cost reports

(3) Structured organizational responsibilities

(4) Incentives based on strict quantitative targets.

 

Scrutinize each cost-creating activity, identifying cost drivers

Use knowledge about cost drivers to manage costs of each activity down year after year

Find ways to reengineer how activities are performed and coordinated—eliminate the costs of unnecessary work steps

Be creative in cutting low value-added activities out of value chain system—re-invent the industry value chain

 

Price competition is vigorous

Product is standardized or readily available from many suppliers

There are few ways to achieve differentiation that have value to buyers

Most buyers use product in same ways

Buyers incur low switching costs

Buyers are large and have significant bargaining power

Industry newcomers use introductory low prices to attract buyers and build customer base

 

(1) Technological change.

(2) Low-Cost learning by competitors.

(3) Failure to react to changing consumer preferences.

(4) Costs get out of hand.

 

Low-Cost Strategy Summary:

Cost Leadership imposes severe burdens on the firm to keep up its position, which means reinvesting in modern equipment, ruthlessly scrapping its obsolete assets, avoiding product line proliferation and being alert to technological improvements. Learning curves with production volume do not occur automatically. (Porter, 1980)

 

The generic strategy of differentiation involves creating something that is perceived industrywide as being unique.

 

(1) design or brand image

(2) technology

(3) features

(4) customer service

(5) dealer network, etc.

A differentiation strategy does not allow the firm to ignore costs, but low cost is not the primary strategic target.

 

Differentiation Strategies Are:

A powerful competitive approach when uniqueness can be achieved in ways that

Buyers perceive as valuable and are willing to pay for

Rivals find hard to match or copy

Can be incorporated
at a cost well below
the price premium
that buyers will pay

 

(1) Strong marketing abilities

(2) Product engineering

(3) Creative flair

(4) Strong capability in basic research

(5) Corporate reputation for quality or technology

(6) Long corporate tradition or unique skills

 

Unique taste -- Dr. Pepper

Multiple features -- Microsoft Windows and Office

Wide selection and one-stop shopping -- Home Depot and Amazon.com

Superior service -- FedEx, Ritz-Carlton

Spare parts availability -- Caterpillar

More for your money -- McDonald’s, Wal-Mart

Prestige -- Rolex

Quality manufacture -- Honda, Toyota

Technological leadership -- 3M Corporation, Intel

Top-of-the-line image -- Ralph Lauren, Chanel

 

Buyers seldom pay for value that is not perceived

Signals of value may be as important as actual value when

Nature of differentiation is hard to quantify

Buyers are making first-time purchases

Repurchase is infrequent

Buyers are unsophisticated

 

(1) Strong coordination among functions in R&D, product development & marketing

(2) Subjective measurement & incentives instead of quantitative measures

(3) Amenities to attract highly skilled labor, R&D or creative people

 

There are many ways to differentiate a product that have value and please customers

Buyer needs and uses are diverse

Few rivals are following a similar differentiation approach

Technological change and product innovation are fast-paced

 

Risks of Differentiation:

(1) The cost differential between low-cost competitors and the differentiated firm may become too great for the differentiated firm to hold brand loyalty.

(2) Buyer’s need for the differentiating factor falls. Buyers become more sophisticated.

(3) Imitation narrows perceived differentiation as the industry matures.

 

Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being

Over-differentiating such that product
features exceed buyers’ needs

Charging a price premium that
buyers perceive is too high

Failing to signal value

Not understanding what buyers want or prefer and differentiating on the "wrong" things

 

A low-cost producer strategy can defeat a differentiation strategy when buyers are satisfied with a standard product and do not see extra attributes as worth paying additional money to obtain!

 

Differentiation Summary:

Differentiation will usually sustain only so much of a price differential. If a differentiated firm gets too far behind in cost, a low-cost firm may be in a position to make major inroads. Differentiation sometimes precludes market share. (Porter, 1980)

 

Focus involves targeting a particular buyer group, segment of the product line, or geographic market.

Focus can take many forms.

The premise is that the firm serves a narrow strategic target.

The firm achieves differentiation from meeting the needs of the target, lower cost in serving the target, or both.

 

Involve concentrated attention on a narrow piece of the total market

Serve niche buyers better than rivals

Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs

Develop unique capabilities to serve needs of target buyer segment

 

The focus strategy always some limitation on the over-all market share achievable.

Like differentiation, it may or may not involve a trade-off with overall cost position.

Niche Markets: Firms selecting a focus strategy may want to select targets without substitutes or where competitors are weakest.

 

eBay

Online auctions

Porsche

Sports cars

Horizon and Comair (commuter airlines)

Link major airports with small cities

Jiffy Lube International

Maintenance for motor vehicles

Bandag

Specialist in truck tire recapping

 

Big enough to be profitable and offers good growth potential

Not crucial to success of industry leaders

Costly or difficult for multi-segment competitors to meet specialized needs of niche members

Focuser has resources and capabilities to effectively serve an attractive niche

Few other rivals are specializing in same niche

Focuser can defend against challengers via superior ability to serve niche members

 

Risks of a Focus Strategy:

(1) The cost differential between broad-range competitors and the focused firm become too wide.

(2) The differences in desired products or services between the strategic target and the market as a whole may narrow.

(3) Competitors may find strategic submarkets within the strategic target and outfocus the focuser. (Porter, 1980)

 

Competitors find effective ways to match a focuser’s capabilities in serving niche

Niche buyers’ preferences shift towards product attributes desired by majority of buyers - niche becomes part of
overall market

Segment becomes so attractive
it becomes crowded with rivals,
causing segment profits to
be splintered

 

Being good in business is the most fascinating kind of art…Making money is art and working is art and good business is the best art.

Andy Warhol (1928-1987) From A to B & Back Again