Lecture Outline

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Lecture Outline
MAN 6721 Strategic Management
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Class 3
The Essence of Creating an Unfair
Advantage Business Level Strategies Friday,
January 20, 2006
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Importance of Unfair Advantage
In an invention or new venture context, fewer
than six in one thousand ideas get funded. The
vase majority lack what it takes to attract the
attention of investors. They do not have an
unfair advantage. Unfair advantage enables
corporations like Genentech, Dell, Cisco, eBay,
Amazon, and Google to remain successful over time.
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Definition Unfair Advantage?

• Unfair Advantage
• Unfair advantage is a unique, consistent
  difference in product attributes and services
  arising from a company capability gap based on
  delivering superior value over long periods of
  time to the customer.

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Attributes of an Unfair Advantage(1 of 2)

• It is unique to one company
• It has to be hard to duplicate
• It must be differentiated
• It is relative, especially compared to the
  competition
• It is very scarce
• It is backed up by a solid company
• It must be well executed
• It must be valuable

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Attributes of an Unfair Advantage(2 of 2)

• It survives over time
• It must scale (it is expandable)
• It is dynamic
• It is able to change over the years
• It appeals to lots of potential customers

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Unfair Advantage Questions
How do you know when you have an unfair advantage?
What else is similar?
How easily can it be copied?
How hard is it to maneuver around?
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Ingredients for Building Unfair Advantage(1 of 4)

• Customers
• What enables you to say We know them and their
  needs and thus gain a competitive advantage
• Competition
• What are the behavior patters of their leaders,
  companies strengths, numbers, chinks in armor,
  patents, and money?
• Capitalization and investors
• Which are the world-class best for your start-up?

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Ingredients for Building Unfair Advantage(2 of 4)

• Strategic partners
• Which are the corporations that add power to your
  new enterprise?
• Strategy
• What are the clever things you will do to
  outmaneuver the competition?
• Progress
• What is your head-start, early-mover advantage
  (if you have one), all about?

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Ingredients for Building Unfair Advantage(3 of 4)

• Culture
• What makes your company a great place to work in
  the eyes of your employees?
• Compensation of workers
• What besides cash and options will attract and
  retain the best employees?
• You core team key contributors
• What is the unfair advantage of each person?

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Ingredients for Building Unfair Advantage(4 of 4)

• Big breaks
• Experience and skill in reacting What is your
  demonstrated ability to make good out of the best
  and the worst surprises?

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Business Level Strategies
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The Strategic Management Process
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
Mission
Objectives
Internal Analysis
Business Level Strategy
Corporate Level Strategy
How to Position a Business in the Market?
Which Businesses to Enter?
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Business Level Strategies

• Two Generic Business Level Strategies
• Cost Leadership
• Generate economic value by having lower costs
  than competitors
• Example Wal-Mart
• Product Differentiation
• Generate economic value by offering a product
  that customers prefer over competitors products
• Example Harley-Davidson

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Cost Leadership Strategy

• Cost Leadership
• Is a generic competitive strategy
• It is a cost advantage over the competition
• For the firm, it means
• Focus on realizing a (sustainable) cost advantage
  over the competition
• It is not necessarily lower prices than
  competitors

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Understanding Cost Advantage

• Managers need to understand who has the cost
  advantage in their market
• It could be the focal firm
• Develop a strategy to exploit the advantage
• It could be a competitor
• Develop a strategy to either capture the
  advantage or compete on some other basis

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Signs That A Company Is Pursuing a
Cost-Leadership Strategy

• Standardized Products
• Where standardization cost efficiency
• Dominant Cultural Values Concern Efficiency, Cost
  Control
• Vision of Ideal Model of Efficiency
• Machine efficiency
• Organizational efficiency
• Or both

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Video Case
Wainwright Industries
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Sources of Cost Advantage(1 of 6)

• Economies of Scale
• Average cost per unit falls as quantity increases
  
• Until the minimum efficient scale is reached
• Are a cost advantage because competitors may not
  be able to match the scale because of capital
  requirements (barrier to entry)
• International expansion may allow a firm to have
  enough sales to justify investing in additional
  capacity to capture economies of scale

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Sources of Cost Advantage(2 of 6)

• Diseconomies of Scale
• Are an advantage for those who do not have
  diseconomies of scale
• Occur when firms become too large and
  bureaucratic
• Are a risk of international expansion
• Example Nucor Steel

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Source of Cost Advantage(3 of 6)

• Learning Curve Economies
• A firm gets more efficient at a process with
  experience
• The more complicated/technical the process, the
  greater the experience advantage
• International expansion may propel a firm down
  the experience curve because of higher volumes
• Example Fuel Injectors

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Source of Cost Advantage(4 of 6)

• Differential Low-Cost Access to Productive Inputs
• May result from
• Historybeing in the right place at the right
  time
• Being first to marketesp. foreign markets
• Natural endowmentowing a mineral deposit
• Locking up a sourcebuying all its output
• Example Quality Carpet Buys

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Source of Cost Advantage(5 of 6)

• Technology Independent of Scale
• May allow small firms to become cost competitive
• Advantage typically accrues to the owner of the
  technologymay or may not be the ones who
  actually use the technology
• Size of the advantage depends both on how
  valuable and protectable the technology is
• Example Vegetable Inspection

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Source of Cost Advantage(6 of 6)

• Policy Choices
• Firm gets to choose how they will serve the
  market
• Well offer level of quality that is inexpensive
  to produce
• Firms can make policy choices that give people
  incentives to reduce cost at every opportunity
• Example Southwest Airlines

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Cost Leadership and Competitive Advantage

• A source of cost advantage will lead to
  competitive advantage if that source is
• Valuable
• Rare
• Costly to imitate
• Organized (Implemented Appropriately)

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Value of Cost Advantage
Entry
Buyers
lowers incentives for buyers
to vertically integrate
increases capital requirements for entrants
Rivalry
Suppliers
Substitutes
competitors rationally avoid price competition
increases importance of the focal firm
to the supplier
limits attractiveness of substitutes
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Imitability as Sources of Cost Advantage(1 of 2)

• Conditions largely determine if a source of cost
  advantage will be costly to imitate
• Cost advantage that can be easily imitated
• Unbalanced Industry Capacity and Demand
• Non-Proprietary Technology
• Highly Observable Technology
• Transactional Exchange

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Imitability as Sources of Cost Advantage(2 of 2)

• Cost advantage that cannot be easily imitated
• Balanced Industry Capacity and Demand
• Path Dependence (Historical Uniqueness)
• Protected Technology
• Highly Unobservable Technology (Casual Ambiguity)
• Relational Exchange (Social Complexity)

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Summary
Business Level Strategy
Cost Leadership
Product Differentiation
Cost Advantages
Competitive Advantage Depends on Meeting VRIO
Criteria
Economies of Scale
Diseconomies of Scale
Emphasis on Organization (Implementation)
Learning Curve Economies
Differential Input Access
Technology
Structure Control
Policy Choices
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Business Level Strategies

• Two Generic Business Level Strategies
• Cost Leadership
• Generate economic value by having lower costs
  than competitors
• Example Wal-Mart
• Product Differentiation
• Generate economic value by offering a product
  that customers prefer over competitors products
• Example Lexus

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Product Differentiation

• A business level strategy intended to
• Increase the perceived value of the focal firms
  products and/or services relative to the value of
  competitors products and/or services
• Create a customer preference for the focal firms
  products and/or services

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Basis of Differentiation(1 of 7)

• A base of differentiation must fill some customer
  need
• Image, hunger, comfort, cleanliness, beauty,
  status, style, taste, safety, quality, service,
  accuracy, furthering a cause, reliability in use,
  nostalgia, belonging.
• A differentiated product fills one or more needs
  better than the products of competitors

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Basis of Differentiation(2 of 7)

• Almost anything can be a basis of differentiation
• The wide range of customer needs can be filled by
  a wide range of bases of differentiation
• Tangible thing (product features, location, etc.)
• Intangible concept (reputation, a cause, an
  ideal, etc.)
• Limited only by managerial creativity.

Example Fred Smith and FedEx
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Basis of Differentiation(3 of 7)

• Three Categories
• Product attributes
• Exploiting the actual product
• FirmCustomer Relationships
• Exploiting relationships with customers
• Firm Linkages
• Exploiting relationship with the firm and/or
  relationships with other firms

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Basis of Differentiation(4 of 7)

• Product Attributes
• Product Features
• The shape of the Oakley glasses
• Product Complexity
• Multiple features on a watch
• Timing of Introduction
• Being first to market
• Location
• Locating next to a freeway exit

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Basis of Differentiation(5 of 7)

• Firm-Customer Relationships
• Customization
• Creating a unique diamond bracelet for a customer
• Consumer Marketing
• Creating brand loyalty to a soap through image
  advertising
• Reputation
• Sponsoring the local homeless shelter to engender
  positive community response

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Basis of Differentiation(6 of 7)

• Firm Linkages
• Linkages among functions in the firm
• Using circuit board designed in one division in
  another division
• Linkages With Other Firms
• A sporting goods store sponsors a benefit race by
  donating running shoes and receives free radio
  advertising in return
• Product Mix
• A furniture store begins to sell home gym
  equipment, computers, and lawn mowers

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Basis of Differentiation(7 of 7)

• Firm Linkages (continued)
• Distribution Channels
• A doughnut shop begins to sell its doughnuts
  through gas stations
• Service and Support
• An oil change shop begins to offer pick up and
  delivery of cars in an office buildings parking
  garage.

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Competitive Advantage

• A product differentiation strategy must meet the
  VRIO criteria if it is to create competitive
  advantage
• Is it valuable?
• Is it rare?
• Is it costly to imitate?
• Is the firm organized to exploit it?

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Immitability of Product Differentiation(1 of 3)

• Logic of costs of imitation
• If would-be imitators face a cost disadvantage of
  imitation, they will rationally choose not to
  imitate
• Sources of costs of imitation
• Historical uniqueness
• Causal ambiguity
• Social complexity

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Immitability of Product Differentiation(2 of 3)
Easy
Duplication of Bases
Timing
Product Mix
May be Costly
Usually Costly
Location
Product complexity
Reputation
Links with other firms
Links between functions
Product customization
Distribution Channels
Consumer marketing
Service and Support
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Immitability of Product Differentiation(3 of 3)

• Substitutes
• Some substitutes may be obvious
• Some substitutes may not be obvious
• If no substitutes are obvious, then we would
  conclude that imitation through substitution will
  be costlyat least for the present time
• If a base of differentiation is valuable, others
  will attempt to imitate it through duplication
  and/or substitution

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Cost Leadership and Product Differentiation
Can a firm pursue both simultaneously?
No
Yes
firms can do both because some bases of
differentiation also lend themselves to low
cost
use of structure, management control, and
compensation policies are nearly opposites
structure, controls, policies are not
opposites
Example Rolex
Example Toyota