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Competitive Strategy and Business Models (1)

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Competitive Strategy and
Business Models
Dr M.K. Nandakumar
Business-Level Strategy (Defined)
•
An integrated and coordinated set of commitments and actions
the firm uses to gain a competitive advantage by exploiting
core competencies in specific product markets (Hitt, Ireland &
Hoskisson (2009).
3
Customers: Their Relationship with
Business-Level Strategies
Who will be
served?
Key Issues
in
Business-level
Strategy
What needs will
be satisfied?
How will those
needs be satisfied?
5
The Purpose of a Business-Level
Strategy
•
Business-Level Strategies
•
•
Are intended to create differences between the firm’s position relative to
those of its rivals.
To position itself, the firm must decide whether it intends to:
•
Perform activities differently or
•
Perform different activities as compared to its rivals.
18
Types of Potential Competitive
Advantage
•
Achieving lower overall costs than rivals
•
•
Performing activities differently (reducing process costs)
Possessing the capability to differentiate the firm’s product or service
and command a premium price
•
Performing different (more highly valued) activities.
19
Southwest Airlines’ Activity System
20
Wal-Mart’s Activity System
21
THE FIVE GENERIC
COMPETITIVE STRATEGIES
Low-Cost Provider
Striving to achieve lower overall costs than rivals on products that attract a
broad spectrum of buyers.
Broad Differentiation
Differentiating the firm’s product offering from rivals’ with attributes that
appeal to a broad spectrum of buyers.
Focused
Low-Cost
Concentrating on a narrow price-sensitive buyer segment and on costs to
offer a lower-priced product.
Focused Differentiation
Concentrating on a narrow buyer segment by meeting specific tastes and
requirements of niche members
Best-Cost Provider
Giving customers more value for the money by offering upscale product
attributes at a lower cost than rivals
5–8
The Five Generic Competitive Strategies
5–9
LOW-COST PROVIDER STRATEGIES
•
•
Effective Low-Cost Approaches:
•
Pursue cost-savings that are difficult imitate.
•
Avoid reducing product quality to unacceptable levels.
Competitive Advantages and Risks:
•
Greater total profits and increased market share gained from underpricing competitors.
•
Larger profit margins when selling products at prices comparable to and competitive with rivals.
•
Low pricing does not attract enough new buyers.
•
Rival’s retaliatory price cutting set off a price war.
5–10
MAJOR AVENUES FOR ACHIEVING
A COST ADVANTAGE
•
Low-Cost Advantage
•
•
A firm’s cumulative costs across its overall value chain must be lower than competitors’ cumulative
costs.
How to Gain a Low-cost Advantage:
1.
Perform value chain activities more cost-effectively than rivals.
2.
Revamp the firm’s overall value chain to eliminate or bypass cost-producing activities.
5–11
COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES
•
•
Cost Driver
•
Is a factor with a strong influence on a firm’s costs.
•
Can be asset- or activity-based.
Securing a Cost Advantage:
•
Use lower-cost inputs and hold minimal assets
•
Offer only “essential” product features or services
•
Offer only limited product lines
•
Use low-cost distribution channels
•
Use the most economical delivery methods
5–12
Cost Drivers: The Keys to Driving Down Company Costs
5–13
COST-CUTTING METHODS
•
Striving to capture all available economies of scale.
•
Taking full advantage of experience and learning-curve effects.
•
Trying to operate facilities at full capacity.
•
Improving supply chain efficiency.
•
Using lower cost inputs wherever doing so will not entail too great a
sacrifice in quality.
•
Using the firm’s bargaining power vis-à-vis suppliers or others in the value
chain system to gain concessions.
•
Using communication systems and information technology to achieve
operating efficiencies.
5–14
COST-CUTTING METHODS (cont’d)
•
Employing advanced production technology and process design to improve
overall efficiency.
•
Being alert to the cost advantages of outsourcing or vertical integration.
•
Motivating employees through incentives and company culture.
5–15
REVAMPING THE VALUE CHAIN SYSTEM TO LOWER
COSTS
•
Use a direct sales force and a company website to bypass the activities and costs of
distributors and dealers.
•
Streamline operations by eliminating low value-added or unnecessary work steps and
activities.
•
Reduce materials handling and shipping costs by having suppliers locate their plants or
warehouses close to the firm’s own facilities.
5–16
Examples of Value-Creating Activities
Associated with the Low Cost Provider
Strategy
26
SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive
Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.
THE KEYS TO BEING A SUCCESSFUL LOW-COST
PROVIDER
•
Success in achieving a low-cost edge over rivals comes from out-managing rivals in finding
ways to perform value chain activities faster, more accurately, and more cost-effectively by:
•
Spending aggressively on resources and capabilities that promise to drive costs out of the business.
•
Carefully estimating the cost savings of new technologies before investing in them.
•
Constantly reviewing cost-saving resources to ensure they remain competitively superior.
5–18
WHEN A LOW-COST PROVIDER STRATEGY WORKS
BEST
1. Price competition among rival sellers is vigorous.
2. Identical products are available from many sellers.
3. There are few ways to differentiate industry products.
4. Most buyers use the product in the same ways.
5. Buyers incur low costs in switching among sellers.
6. The majority of industry sales are made to a few, large volume buyers.
7. New entrants can use introductory low prices to attract buyers and build a
customer base.
5–19
PITFALLS TO AVOID IN PURSUING
A LOW-COST PROVIDER STRATEGY
•
Engaging in overly aggressive price cutting does not result in unit sales
gains large enough to recoup forgone profits.
•
Relying on a cost advantage that is not sustainable because rival firms
can easily copy or overcome it.
•
Becoming too fixated on cost reduction such that the firm’s offering is
too features-poor to gain the interest of buyers.
•
Having a rival discover a new lower-cost value chain approach or
develop a cost-saving technological breakthrough.
•
Processes used to produce and distribute good or service may become
obsolete due to competitors’ innovations.
5–20
BROAD DIFFERENTIATION STRATEGIES
•
•
Effective Differentiation Approaches:
•
Carefully study buyer needs and behaviors, values and willingness to pay for a unique product or
service.
•
Incorporate features that both appeal to buyers and create a sustainably distinctive product offering.
•
Use higher prices to recoup differentiation costs.
Advantages of Differentiation:
•
Command premium prices for the firm’s products
•
Increased unit sales due to attractive differentiation
•
Brand loyalty that bonds buyers to the firm’s products
5–21
COST-EFFICIENT MANAGEMENT
OF VALUE CHAIN ACTIVITIES
•
A Uniqueness Driver Can:
•
Have a strong differentiating effect.
•
Be based on physical as well as functional attributes of a firm’s products.
•
Be the result of superior performance capabilities of the firm’s human capital.
•
Have an effect on more than one of the firm’s value chain activities.
•
Create a perception of value (brand loyalty) in buyers where there is little reason for it to exist.
5–22
Uniqueness Drivers: The Keys to Creating a Differentiation Advantage
5–23
ENHANCING DIFFERENTIATION BASED ON
UNIQUENESS DRIVERS
•
Striving to create superior product features, design, and performance.
•
Improving customer service or adding additional services.
•
Pursuing production R&D activities.
•
Striving for innovation and technological advances.
•
Pursuing continuous quality improvement.
•
Increasing emphasis on marketing and brand-building activities.
•
Seeking out high-quality inputs.
•
Emphasizing human resource management activities that improve the skills, expertise, and
knowledge of company personnel.
5–24
REVAMPING THE VALUE CHAIN SYSTEM TO INCREASE
DIFFERENTIATION
Approaches
to enhancing differentiation
through changes in the
value chain system
Coordinating with channel
allies to enhance customer perceptions
of value
Coordinating with suppliers
to better address customer needs
5–25
Examples of Value-Creating
Activities Associated
with the Differentiation Strategy
33
SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and
Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.
Delivering Superior Value via a Broad Differentiation
Strategy
Broad Differentiation:
Offering Customers Something That Rivals Cannot
1.
Incorporate product attributes and user features that lower the buyer’s overall costs
of using the firm’s product.
2.
Incorporate tangible features (e.g., styling) that increase customer satisfaction with
the product.
3.
Incorporate intangible features (e.g., buyer image) that enhance buyer satisfaction in
noneconomic ways.
4.
Signal the value of the firm’s product (e.g., price, packaging, placement, advertising)
offering to buyers.
5–27
SUCCESSFUL APPROACHES
TO SUSTAINABLE DIFFERENTIATION
•
•
Differentiation that is difficult for rivals to duplicate or imitate:
•
Company reputation
•
Long-standing relationships with buyers
•
Unique product or service image
Differentiation that creates switching costs that lock in buyers
•
Patent-protected product innovation
•
Relationship-based customer service
5–28
WHEN A DIFFERENTIATION STRATEGY WORKS BEST
Market Circumstances
Favoring Differentiation
Diversity of
buyer needs
and uses for
the product
Many ways that
differentiation
can have value
to buyers
Few rival firms follow a
similar differentiation
approach
Rapid change
in technology and
product
features
5–29
PITFALLS TO AVOID IN PURSUING
A DIFFERENTIATION STRATEGY
•
Relying on product attributes easily copied by rivals.
•
Introducing product attributes that do not evoke an enthusiastic buyer response.
•
Eroding profitability by overspending on efforts to differentiate the firm’s product
offering.
•
Offering only trivial improvements in quality, service, or performance features vis-à-vis
the products of rivals.
•
Adding frills and features such that the product exceeds the needs and use patterns of
most buyers.
•
Charging too high a price premium so that the price differential between the
differentiator’s product and the cost leader’s product becomes too large.
•
Experience narrows customers’ perceptions of the value of differentiated features.
•
Counterfeit goods replicate differentiated features of the firm’s products.
5–30
FOCUSED (OR MARKET NICHE) STRATEGIES
Focused Strategy
Approaches
Focused
Low-Cost
Strategy
Focused Market Niche
Strategy
5–31
WHEN A FOCUSED LOW-COST OR FOCUSED
DIFFERENTIATION STRATEGY IS ATTRACTIVE
•
The target market niche is big enough to be profitable and offers good
growth potential.
•
Industry leaders chose not to compete in the niche—focusers avoid
competing against strong competitors
•
It is costly or difficult for multi-segment competitors to meet the specialized
needs of niche buyers.
•
The industry has many different niches and segments.
•
Rivals have little or no interest in the target segment.
5–32
THE RISKS OF A FOCUSED LOW-COST OR FOCUSED
DIFFERENTIATION STRATEGY
1. Competitors will find ways to match the focused firm’s capabilities in serving the target
niche.
2. The specialized preferences and needs of niche members to shift over time toward the
product attributes desired by the majority of buyers.
3. As attractiveness of the segment increases, it draws in more competitors, intensifying
rivalry and splintering segment profits.
4. A focusing firm may be “out focused” by its competitors.
5–33
BEST-COST PROVIDER STRATEGIES
Differentiation:
Providing desired quality/
features/performance/
service attributes
Low Cost Provider:
Charging a lower price
than rivals with similar
caliber product offerings
Best-Cost Provider
Hybrid Approach
Value-Conscious Buyer
5–34
WHEN A BEST-COST PROVIDER STRATEGY WORKS
BEST
•
Product differentiation is the market norm.
•
There are a large number of value-conscious buyers who prefer midrange products.
•
There is competitive space near the middle of the market for a competitor with either a
medium-quality product at a below-average price or a high-quality product at an average or
slightly higher price.
•
Economic conditions have caused more buyers to become value-conscious.
5–35
THE BIG RISK OF A BEST-COST PROVIDER STRATEGY—
GETTING SQUEEZED ON BOTH SIDES
Low-Cost
Providers
Best-Cost
Provider
Strategy
High-End
Differentiators
5–36
THE CONTRASTING FEATURES OF
THE FIVE GENERIC COMPETITIVE STRATEGIES: A
SUMMARY
•
Each Generic Strategy:
•
Positions the firm differently in its market.
•
Establishes a central theme for how the firm intends to outcompete rivals.
•
Creates boundaries or guidelines for strategic change as market circumstances unfold.
•
Entails different ways and means of maintaining the basic strategy.
5–37
Distinguishing Features of the Five Generic Competitive Strategies
5–38
Distinguishing Features of the Five Generic Competitive Strategies (cont’d)
5–39
SUCCESSFUL COMPETITIVE STRATEGIES ARE
RESOURCE-BASED
•
A firm’s competitive strategy is most likely to succeed if it is predicated on leveraging a
competitively valuable collection of resources and capabilities that match the strategy.
•
Sustaining a firm’s competitive advantage depends on its resources, capabilities, and
competences that are difficult for rivals to duplicate and have no good substitutes.
5–40
Characteristics of Miles and Snow’s Adaptive
(Competitive) Strategies
16
Strategy clock (1)
The strategy clock provides an alternative approach to generic strategy which gives more
scope for hybrid strategies.
It has two distinct features:
•
It is focused on the prices to customers rather than the costs to organisations.
•
The circular design allows for incremental adjustments in strategy rather than stark choices.
Strategy clock (2)
Source: Adapted from D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995.
Strategy clock – differentiation
•
Strategies in this zone seeks to provide products that offer
perceived benefits that differ from those offered by
competitors.
•
A range of alternative strategies from:
―
differentiation without price premium (12 o’clock) – used to increase market share.
―
differentiation with price premium (1 o’clock) – used to increase profit margins.
―
focused differentiation (2 o’clock) – used for customers that demand top quality and will pay a big
premium.
Strategy clock – low price
Low price combined with low perceived value.
•
•
A standard low price strategy (9 o’clock)
Low prices combined with similar quality to competitors
aimed at increasing market share. Needs a cost advantage
(such as economies of scale) to be sustainable, e.g.
Asda/Walmart in grocery retailing.
A ‘no frills’ strategy (7 o’clock)
Focusing on price sensitive market segments – typified by
low-cost airlines like Ryanair.
Strategy clock – hybrid
Seeks to simultaneously achieve higher benefits and lower
prices relative to those of competitors.
Hybrid strategies can be used:
•
to enter markets and build position quickly
•
as an aggressive attempt to win market share
•
to build volume sales and gain from mass production.
Strategy clock – non-competitive strategies
Increased prices with low perceived product or service
benefits.
•
In competitive markets such strategies will be doomed to
failure.
•
Only feasible where there is strategic ‘lock-in’ or a near
monopoly position.
Strategic lock-in
Strategic lock-in is where users become dependent on a
supplier and are unable to use another supplier without
substantial switching costs.
Lock-in can be achieved in two main ways:
•
Controlling complementary products or services. An example is razors that only work with one
type of blade.
•
Creating a proprietary industry standard. Microsoft with its Windows operating system.
Business Models
A business model depicts the content, structure, and governance of transactions
designed so as to create value through the exploitation of business opportunities
(Amit and Zott, 2001)
A business model is a system of interdependent activities that transcends the
focal firm and spans its boundaries (Zott and Amit, 2010)
A business model is a system that solves the problem of identifying who is (are)
the customer(s), engaging with their needs delivering satisfaction, and
monetizing the value (Baden-Fuller and Haefliger, 2013)
A business model consists of (1) a set of choices and (2) the set of
consequences derived from those choices (Casadesus-Masanell and Ricart,
2009)
49
Policies
Choices
Assets
Governance
Business Model
Flexible
Consequences
Rigid
Source : Casadesus – Masanell R. and Ricart, J.E. (2009), Competing through Business Model (A) : Business Model Essentials,
Harvard Business School Publishing
50
Business Model Representation
A causal loop diagram linking choices and consequences by arrows
representing causality
It is impractical to analyse and evaluate every choice and consequence
Hence representations of business models consisting (1) a subset of all
choices, (2) a subset of all consequences and (3) theories (suppositions
on how choices and consequences are related)
A simplified tractable representation of the business model can be
developed using two methods namely aggregation and decomposability
51
Ryanair’s Business Model
Low commissions
to travel agencies
Reinvest
Low variable
cost
No
Meals
Addition
al
revenue
Nothing
is free
Short – haul
flights
Reputation for
‘fair’ fares
High profit
Low fixed
cost
All passengers
Created
equally
Low quality
Service expected
Young&
Leisure
travelers
Word-of
mouth
Advertisin
g
Low fares
Standardized
Fleet of 737s
High aircraft
utilization
Secondary
airports
Spartan
headquarter
s
High – powered
incentives
Ancillary
Business
(bus
service…)
Bargaining power
with suppliers
Attracts
combative
team
High
volume
Source : Casadesus – Masanell R. and Ricart, J.E. (2009), Competing through Business Model (A) : Business Model Essentials,
Harvard Business School Publishing
Non-unionized
Work force
Ryanair’s Business Model with Theories
Low commissions
to travel agencies
Ryanair less dependent
on Travel agents
Low cost
allows low
prices
Short flights
allow no meals.
No meals detract
less from WTP
when
Short – haul
flights are short
Reputation for
‘fair’ fares
flights
Reciprocity
Ryanair has
bargaining
power
No
Meals
Reciprocity
Low variable
cost
Absence of
meals lowers
cost per
passenger
Travelers
Buy additional
Nothing
products
is free
Profit=Volume*
Markup-FC Low cost
allows low
prices Young
Low quality
Service expected
Reinvest
Profit=Volume*
Markup-FC
Additiona
l
revenue
Profit=Volume*
Markup-FC
High profit
Profit=Volume* Markup- FC
Economies
of scale in
All passengers dealing with
passengers
Low fixed
cost
Commission
rates are
Europeans
Low need
Young&
Spartan HQ effective
prefer
for paid ads
Customers willing
Leisure travelers
less costly than
Profit=Volume
equal
traditional HQ
To put up with
*Markup-FC
Raynair
Segment with
Lower fees Spartan
treatment Experience and
Supplier prices
Presence of EOS
s
low ability to pay
can
EOS in
headquarters
Word-of mouth
be
reduced
maintenance
Excitemen
Advertising
Standardized
Secondary
through
t
Low fares
tough
bargaining
Fleet
of
737s
airports
Specially
about low
High – powered
Commitment to one
Individuals
High aircraft valuable
prices
incentives
Individuals
Bargaining power
Reputation for fair fares
model implies large
self-select
utilization in secondary willing to work
Better
utilization
with suppliers
results in larger volume
volume
based on
airports
Supplier prices can
in frugal environment incentives
of fleets
(for insurance,
be
reduced
through
Demand
Absence of union increases likelihood that
traveler’s check
tough bargaining
Ancillary
downward
variable pay will be accepted or individuals
Combative individuals
Raynair fares fast
Business
who like strong incentives do not favor unions
slope
are likely to act as
Volume relative to
‘hard nose” negotiators
(bus service…)
competition is
Non-unionized
Attracts
large enough
Combative
Sufficient volume
combative Individuals Work force
for viability
team
do not like
High
Passengers care
about fares
volume
Created equally
unions
Source : Casadesus – Masanell R. and Ricart, J.E. (2009), Competing through Business Model (A) : Business Model Essentials,
Harvard Business School Publishing
A Method for Constructing Business Model
Representations
1. Prepare a list of choices made by the management
2. Look for direct consequences of every choice based on theories
3. Go on a step further and see whether the consequences identified in
step 2 have significant consequences themselves
4. Repeat step 3 until exhaustion
5. Identify the consequences that are rigid and draw boxes around them.
The distinction between flexible and rigid consequences has
significant implications
6. Beginning in step 3, check whether the identified consequences
enable some of the choices. In such cases draw arrows from such
consequences to choices.
7. Identify virtuous cycles and assess the strength of such cycles
54
Assessing the Effectiveness of Business Models
1. Alignment to goal: Refers to business model choices delivering
consequences that move the organisation toward achieving its
objectives
2. Reinforcement: Refers to choices that complement each other and
it is closely related to the concept of internal consistency.
3. Virtuousness: Refers to the presence of virtuous cycles (positive
feedback loops) that help a business model gain strength over time.
4. Robustness: Refers to the ability of the business model to sustain
its effectiveness over time.
55
Competitive Strategy and Business Models
The available actions for strategy are choices (policies, assets,
governance structures) that constitute the raw material of business
models
Strategy entails designing business models (and redesigning them
as contingencies occur) that allow an organisation to reach its goals
The difference between strategy and tactics is that the “action sets”
available for tactics are constrained by the business model that is in
place. Tactics are courses of action that take place within the
bounds drawn by a firm’s business model
56
Strategy Vs Business Model Vs Tactics
Business
Models
Tactical set A
Tactical set B
Firm
Strategy :
plan of which
business model to
adopt
Tactics :
competitive
choices enabled
by each business
model
Tactical set C
Tactical set D
Source : Casadesus – Masanell R. and Ricart, J.E. (2009), Competing through Business Model (B) Competitive Strategy Vs Business Models
Harvard Business School Publishing
57
Business Model Canvas
https://www.youtube.com/watch?v=_4MHqyf4Vw0
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