Chapter Five

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Chapter Five Crafting Business Strategy
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OBJECTIVES
Define generic strategies and show how they
relate to a firms strategic position
1
Describe the drivers of low-cost,
differentiation, and focus strategic positions
2
Identify and explain the risks associated with
each generic strategy position
3
Show how different positions fit with various
stages of the industry life cycle
4
Evaluate the quality of the firms strategy
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JUDO STRATEGY
At its heart, judo strategy is about developing
a deep understanding of your competition and the
moves that will turn your competitors strength
to your advantage. David Yoffie and Mary
Kwak From Judo Strategy
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THE RACE TO THE FUTURE IS ON

• Companies can be classified as
• Drivers
• Passengers
• Road Kill
• Which will get to the future first?

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STRATEGIC POSITIONING SHOULD IMPROVE PROFITABILITY
Definition
Where managers of a company situate that company
relative to its rivals along important
competitive dimensions
Purpose
To reduce the effects of rivalry and thereby
improve profitability
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A FIRM CAN GAIN ADVANTAGE OVER RIVALS IN TWO WAYS
Description
No advantage overrivals
Advantage over rivals
Produce a differentiated product and charge
suffici-ently higher prices to more than off-set
the added costs of differentiation
Differentiation
Produce an essentially equivalent product at a
lower cost
Low-cost
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THE STRATEGIC POSITIONING MODEL
Broad(i.e., industry wide)
Broaddifferentiation
Broad low-costleadership
Strategictarget
Narrow(i.e., particular segment only)
Focused costleadership
Focuseddifferentiation
Low-cost
Differentiation
Strategic advantage
Adapted from poster, M.1980. Competitive
strategy, 1980.
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LOW-COST LEADERSHIP AND DIFFERENTIATION OFFER
GREATER MARKET SHARE AND/OR PROFITS
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STRATEGIC POSITIONING EXAMPLES

• Trek Bicycles
• Coca-cola

• Wal-Mart
• Gallo Wines

Broad
Strategictarget

• Montague
• Mercedes Benz (in US)

Narrow

• Jet Blue

Low-cost
Differentiation
Strategic advantage
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KEY DRIVERS OF COST ADVANTAGE

• Economies of scale

• Learning

• Product technology

• Product design

• Location advantages for sourcing inputs

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ECONOMIES OF SCALE
Economiesof scale

• Economies of scale exist during a period of time
  if the average total cost for a unit of
  production is lower at higher levels of output
• You must review cost to assess whether economies
  of scale exist
• Fixed costs remain the same for different levels
  of production
• Variable costs are the costs of variable inputs
  (such as raw materials and labor) and vary
  directly with output
• Marginal cost is the cost of the last unit of
  production
• Total cost is the sum of all production costs and
  always increases as output goes up
• Average cost is the mean cost of total production
  during a given period (say, a year)

Learning
Economiesof scope
Productiontechnology
Productdesign
Location
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DISECONOMIES OF SCALE SIZE DOES NOT ENSURE
ECONOMIES OF SCALE
Economiesof scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
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LEARNING CURVE AS A SOURCE OF COST ADVANTAGE
Economiesof scale
How Learning Differs from Scale
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
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ECONOMIES OF SCOPE AS A SOURCE OF COST ADVANTAGE
Economiesof scale
If a firm produces two or more products and can
share resources among two or more of these (e.g.,
share manufacturing machines) thereby lowering
the costs of each product it benefits from
economies of scope
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
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PRODUCTION TECHNOLOGY AS A SOURCE OF COST
ADVANTAGE
Economiesof scale
Often, a new entrant who wants to compete against
industry incumbents with significant scale and
experience advantages, tries to match or beat
incumbents costs by introducing a production
technology that is subject to different economics
(e.g., Jet Blue, Nucor Steel)
Learning
Economiesof scope
Productiontechnology
Productdesign
Location
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PRODUCTION DESIGN AS A SOURCE OF COST ADVANTAGE
Economiesof scale
Learning
Product design can sometimes be altered to lower
a firms production costs (e.g., Canon vs. Xerox)
Economiesof scope
Productiontechnology
Productdesign
Location
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LOCATION AS A SOURCE OF COST ADVANTAGE
Economiesof scale
Learning
Sometimes firms try to attain lower production
costs by locating their operations in cheaper
labor markets (e.g., Pacific Cycle manufactures
in China and Taiwan to achieve lower costs than
Trek who manufactures in the US)
Economiesof scope
Productiontechnology
Productdesign
Location
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KEY DRIVERS OF DIFFERENTIATION ADVANTAGES
Key Drivers
Purpose
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DRIVERS AND THREATS TO DIFFERENTIATION AND
LOW-COST ADVANTAGE
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COUNTERFEITING AS A THREAT TO DIFFERENTIATION

• 250 billion annually lost
• to American businesses

• 750,000 jobs lost annually

• 600 billion in counterfeited
• goods

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THE LONG TAIL AND MARKET SEGMENTATION
100,000 CDs

• The industry considers these
• the hits that occupy
• their focus

5,000 CDs
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STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY
LIFE CYCLE
Phases of in-dustry life cycle
Embryonic
Growth
Mature
Decline
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TESTING THE QUALITY OF A STRATEGY