BA 951
Policy Formulation and Administration
Lecture 4
Strategy and Competitive
Advantage
© Ram Mudambi, Temple University, 2007.
Learning outcomes
A framework for strategy design at the
individual business level
Drawing on the essence of each of the
firm’s business functions to highlight
strategic aspects
Relating business functions to generic
strategy choices
© Ram Mudambi, Temple University, 2007.
4-2
Lecture outline
Business strategies for competitive advantage
 Cost vs. Differentiation
 Leadership vs. focus
 The industry life cycle
Functional strategies for competitive advantage
 Production
 Operations
 Marketing
 R&D
 Human resources
© Ram Mudambi, Temple University, 2007.
4-3
What Is Business-Level Strategy?
Business-level strategy
 A plan of action to use the firm’s resources and
distinctive competencies to gain competitive
Mostly mission and
advantage.
vision development
Abell’s “Business Definition” process
 Customer groups – market segmentation (who?)
 Customer needs – value proposition (what?)
 Distinctive competencies – competitive actions (how?)
Business-level strategy
© Ram Mudambi, Temple University, 2007.
4-4
Recall – Porter’s generic strategies
Offers low priced
products
What
Who
Offers unique or distinctive
products
Competitive Dimension
Cost
Differentiation
Competitive Broad Cost leadership Differentiation leadership
Scope Narrow Cost focus
Differentiation focus
Serves the entire market
© Ram Mudambi, Temple University, 2007.
Serves a specific niche
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A low-cost strategy works best when:

Price competition is vigorous
 Product is standardized or readily
available from many suppliers
 There are few ways to achieve
differentiation that have value

Most buyers use product in same ways
 Buyers incur low switching costs
 Buyers are large and have significant
bargaining power
© Ram Mudambi, Temple University, 2007.
4-6
Price cuts and sales volume
P
D2
P0
P1
Loss
D1
Gain
0
SALES
© Ram Mudambi, Temple University, 2007.
Q
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Pitfalls of low-cost strategies
Being
overly aggressive in cutting price (revenue
erosion of lower price is not offset by gains in sales
volume--profits go down,not up)
Low cost methods are easily imitated by rivals
Becoming too fixated on reducing costs
and ignoring
Buyer interest in additional features
 Declining buyer sensitivity to price
 Changes in how the product is used

Technological
breakthroughs open up cost
reductions for rivals
© Ram Mudambi, Temple University, 2007.
4-8
The appeal of differentiation
strategies
A powerful competitive approach when
uniqueness can be achieved in ways that

Buyers perceive as valuable

Rivals find hard to
match or copy

Which hat
is unique?
Can be incorporated
at a cost well below
the price premium
that buyers will pay
© Ram Mudambi, Temple University, 2007.
4-9
Achieving Superior Quality
Quality can be thought of in
terms of two dimensions:
Quality as reliability
They do the jobs they were designed for and do
them well GENERIC STRATEGY?
COST
Quality as excellence
Perceived by customers to have superior attributes
GENERIC STRATEGY?
DIFFERENTIATION
© Ram Mudambi, Temple University, 2007.
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Successful differentiation – price
premia
P
D2
P1
P0
Gain
D1
Loss
0
© Ram Mudambi, Temple University, 2007.
Q
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Choosing an investment strategy at
the Business Level
Investment strategy
 The resources (human, functional, and financial)
required to gain sustainable competitive advantage.
Competitive position
 Market share is an indicator of competitive strength.
 Distinctive competencies are competitive tools.
Life Cycle Effects
 An industry’s life cycle stage affects its attractiveness
to investment prospects.
© Ram Mudambi, Temple University, 2007.
4-12
Size of Competitive Advantage
The industry life cycle & competitive
advantage
OFFENSE
Buildup Period
DEFENSE
Benefit Period
Erosion Period
Shakeout
Strategic
Moves
Produce
Competitiv
e
Advantage
© Ram Mudambi, Temple University, 2007.
Moves by
Rivals
Reduce
Competitive
Advantage
Time
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Choosing an Investment Strategy at
the Business Level
Stage of the
Industry Life Cycle
Strong Competitive
Position
Weak Competitive
Position
Embryonic
Share building
Share building
Growth
Growth
Market concentration
Shakeout
Share increasing
Market concentration or
harvest/liquidation
Maturity
Hold-and-maintain or profit
Harvest or
liquidation/divestiture
Decline
Market concentration or
harvest (asset reduction)
Turnaround, liquidation,
or divestiture
© Ram Mudambi, Temple University, 2007.
4-14
Business assessment – the BCG
Matrix
Relative Market Share
LOW
HIGH
Market LOW
Dog
Cash Cow
Growth HIGH Problem Child
Star
© Ram Mudambi, Temple University, 2007.
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Functional analysis
Production
Operations
Marketing
Custome
r groups
R&D
HRM
© Ram Mudambi, Temple University, 2007.
Cost vs.
differentiation
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The Production function
GENERIC STRATEGY?
Economies of scale
COST
 Lower unit costs due to higher
CURRENT production volumes.
The experience curve
 Systematic unit-cost reductions
that are the result of ACCUMULATED
production volumes.
Much of the experience curve emanates from
learning effects
 Cost reductions due to learning by doing.
© Ram Mudambi, Temple University, 2007.
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Economies of scale – related to Q
Unit costs
Typical long run unit cost curve
Initial decline is very rapid
Subsequent declines
are smaller
Minimum efficient scale
0
Volume of output / unit time
© Ram Mudambi, Temple University, 2007.
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The experience curve – related to Q
A typical experience curve
© Ram Mudambi, Temple University, 2007.
4-19
Learning effects
© Ram Mudambi, Temple University, 2007.
Economies of scale
and learning effects:
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The Operations function
Flexible manufacturing technology (lean
production)
 Reduced setup times
 Increased machine utilization
 Improved quality control
 Lower inventory levels
Mass customization
 Low cost and product customization
Increased
• Quantity
• Diversity
 Increased variety of operations
Ability to achieve higher levels of quality • Quality
Flexible manufacturing cells
© Ram Mudambi, Temple University, 2007.
4-21
Materials Management and JIT
Materials management
 Getting materials into and through
the production process and out
through the distribution system
to the end user.
Just-In-Time (JIT)
 Reduce inventory holding costs by having materials
arrive JIT to enter the production process.
 JIT risk: There are no buffer stocks for non-delivery or
unanticipated increases in demand.
© Ram Mudambi, Temple University, 2007.
4-22
Comparison of Lean and Mass Production
Function
Lean Production
Mass Production
Product Development
Dedicated team
Functional dept
Leadership
Project leader w/ full
authority
Coordinator w/ limited
authority
Innovation, R&D
Focused innovation
Variations on established
technology
Manufacturing Ops
JIT - Resource utilization
Resource stockpiling
Product Supply
Chain
Cost Reduction
Limited suppliers w/
concurrent participation
Many suppliers w/ limited
participation
Value engineering driven
Volume / price driven
Supplier
Relationships
Work with suppliers to
improve performance
Penalize suppliers for bad
performance
Mgmt Style
Team
Hierarchical
© Ram Mudambi, Temple University, 2007.
4-23
The impact of flexible manufacturing
The tradeoff between
costs and product variety
© Ram Mudambi, Temple University, 2007.
4-24
Achieving Superior Quality
Total Quality Management (TQM):
 All company operations focused on continuously
improving product and service quality.
Deming’s Five-Step “Chain Reaction”:
1. Improved quality reduces costs.
2. Improved productivity.
3. Higher market share.
4. Increased profitability.
5. More jobs created.
© Ram Mudambi, Temple University, 2007.
4-25
Deming’s 14 points
1. Constancy of purpose
2. Adopt the philosophy
3. Don’t rely on mass
inspection
4. Don’t award business
on price
5. Constant improvement
6. Training
7. Leadership
© Ram Mudambi, Temple University, 2007.
8. Drive out fear
9. Break down barriers
10. Eliminate slogan and
exhortations
11. Eliminate quotas
12. Pride of workmanship
13. Education & retraining
14. Plan of action
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Implementing TQM
Aspects common to most TQM and
continuous improvement programs
1. Committed leadership
2. Adoption &
communication of TQM
3. Closer customer
relationships
4. Closer supplier
relationships
5. Benchmarking
© Ram Mudambi, Temple University, 2007.
6. Increased training
7. Open organization
8. Employee empowerment
9. Zero-defects mentality
10. Flexible manufacturing
11. Process improvement
12. Measurement
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The Operations function
GENERIC STRATEGY?
COST
Flexible manufacturing
technology (lean production)
Mass customization
Flexible manufacturing cells
Ability to achieve higher
levels of quality
Increased
• Quantity
• Diversity
• Quality
DIFFERENTIATION
© Ram Mudambi, Temple University, 2007.
4-28
The Marketing function
Marketing strategy
 Product design
 Advertising
 Promotion
 Pricing
 Distribution
Principal objectives
 Customer acquisition
Increased
 Customer retention
customer
 Defection increases unit costs
responsiveness
 Per-customer profit increases with relationship
longevity
© Ram Mudambi, Temple University, 2007.
4-29
Relationship between Customer
Loyalty and Profit per Customer
The longer a company holds on to a customer the greater
the volume of customer-generated unit sales that offset fixed
marketing costs and lowers the average cost of each sale.
© Ram Mudambi, Temple University, 2007.
4-30
Achieving Superior Customer
Responsiveness
GENERIC STRATEGY?
Developing a customer focus:
 Top leadership commitment to customers.
 Employee attitudes toward customers.
 Bringing customers into the company.
Satisfying customer needs:
 Customization of the features of products and services to meet
the unique need of groups and individual customers.
 Reducing customer response times:



Marketing that communicates with production.
Flexible production and materials management.
Information systems that support the process.
DIFFERENTIATION
© Ram Mudambi, Temple University, 2007.
4-31
The R&D function
Design easy-to-manufacture products
 Reduce numbers of parts per unit.
 Reduce assembly time.
 Closely coordinate R&D
and production activities.
Pioneer process innovations
 Create competitive advantage through gains in
process efficiencies.
Pioneer product innovations
 Create competitive advantage by anticipating
customer needs.
© Ram Mudambi, Temple University, 2007.
4-32
Causes of the high failure rate of
innovation
 Uncertainty
Quantum innovation
 Incremental innovation

 Poor commercialization
 Poor positioning strategy
 Technological myopia
 Slowness in marketing
© Ram Mudambi, Temple University, 2007.
4-33
Achieving Superior Innovation
Building competencies in innovation:
 Building skills in basic and applied research
 Project selection
 Project management
 Cross-functional integration
 Product development teams
 Partly parallel development
process
 Leveraging knowledge networks
© Ram Mudambi, Temple University, 2007.
4-34
Degree of local autonomy
MNCs: The innovation-integration
dilemma
High
Isolated freedom
Connected freedom
Semi-connected
freedom
Low
Isolated control
Connected control
Low
High
Information connectivity
© Ram Mudambi, Temple University, 2007.
4-35
The Development Funnel
Gate 1
© Ram Mudambi, Temple University, 2007.
Gate 2
4-36
Sequential and Partly Parallel
Development Processes
Reduced
development time
& time-to-market
© Ram Mudambi, Temple University, 2007.
4-37
The Human Resource function
Ways to increase employee productivity and
lower unit costs:
 Provide training that upgrades employee skills.
 Establish self-managing teams
to gain a more flexible work force
and increased productivity.
 Use pay-for-performance
incentives for teams to encourage
meeting productivity and
quality goals.
© Ram Mudambi, Temple University, 2007.
4-38
Functional strategies - summary
Function
Production
Manufacturing
Marketing
R&D
Human
Resources
Actions
1. Pursue economies of scale and learning economies.
2. Map scale efficiency gains against output quality
3. Implement flexible manufacturing systems / JIT.
1. Achieve customization and pro-activeness
2. Rationalize suppliers / help them implement TQM
3. Trace defects to suppliers
1. Adopt aggressive customer acquisition to ride down the
experience curve.
2. Limit customer defection rates by building brand loyalty
3. Provide customer feedback on quality
1. Design products for ease of manufacture.
2. Seek product and process innovations
3. Bring customers into product development
1. Institute training programs to build quality and customer skills
2. Implement self-managing teams.
3. Implement pay for performance.
© Ram Mudambi, Temple University, 2007.
4-39
Summary
Business level strategy is mainly concerned
with answering the “how?” question
Value
proposition
Customer
groups
Two generic business strategies – cost and
differentiation
Functional strategies must support the
chosen business strategy
© Ram Mudambi, Temple University, 2007.
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