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 https://next.canvanizer.com/demo/wA-82vhUOBc