Strategic management involves creating a unique and valuable competitive position through differentiating activities that are difficult for competitors to imitate. A strategy establishes a competitive advantage by widening the gap between what customers are willing to pay and a company's costs. For long-term success, a strategy requires trade-offs that limit a company's ability to pursue other positions, as well as ensuring fit among its functional policies. Examples demonstrate how analyzing customer needs, capabilities, and the industry environment can help companies establish advantageous strategic positions.
Strategic management involves creating a unique and valuable competitive position through differentiating activities that are difficult for competitors to imitate. A strategy establishes a competitive advantage by widening the gap between what customers are willing to pay and a company's costs. For long-term success, a strategy requires trade-offs that limit a company's ability to pursue other positions, as well as ensuring fit among its functional policies. Examples demonstrate how analyzing customer needs, capabilities, and the industry environment can help companies establish advantageous strategic positions.
Strategic management involves creating a unique and valuable competitive position through differentiating activities that are difficult for competitors to imitate. A strategy establishes a competitive advantage by widening the gap between what customers are willing to pay and a company's costs. For long-term success, a strategy requires trade-offs that limit a company's ability to pursue other positions, as well as ensuring fit among its functional policies. Examples demonstrate how analyzing customer needs, capabilities, and the industry environment can help companies establish advantageous strategic positions.
Strategic management involves creating a unique and valuable competitive position through differentiating activities that are difficult for competitors to imitate. A strategy establishes a competitive advantage by widening the gap between what customers are willing to pay and a company's costs. For long-term success, a strategy requires trade-offs that limit a company's ability to pursue other positions, as well as ensuring fit among its functional policies. Examples demonstrate how analyzing customer needs, capabilities, and the industry environment can help companies establish advantageous strategic positions.
Framework of Analysis By David Markozashvili What is Strategy? Strategy: Objectives and Constraints A firm has a competitive advantage, if it can increase the wedge between what buyers are willing to pay and the costs the company incurs. Ideally create sustainable profit improvements
Constraints on competitive strategy:
Sustainability - If everyone understands and can do it, you can’t make money at it (Example: Intuit and customer service) Harnischfeger Example
Forklift
Portal Crane Harnischfeger Example Supplier Harnischfeger International share share Paper share
$2.0m $2.5m ? $7.5m
Supplier Willingness opportunity Cost Price to pay cost
Cost of the forklift - $1.0m
Savings in operating costs - $6.5m Cost of the crane - $2.5m
Value created – $5.5m
Harnischfeger Example Supplier Harnischfeger share share
$2.0m $2.5m $7.5m
Supplier Kranco share share
Harnischfeger Added Value ? 0
How can a company establish an advantage? There are two basic ways a firm can establish an advantage: 1. To raise customers’ willingness to pay without incurring big increase in costs (Differentiation Strategy) Example: Accenture, Apple
2. To reduce costs without heavily sacrificing consumers’
willingness to pay (Low-cost Strategy) Example: Southwest Airlines Analysis of Activities 1. Catalog the firm’s activities
2. Examine the costs associated with each activity, and use
differences in activities to understand how and why costs differ from those of competitors
3. Analyze how each activity generates customer willingness to pay,
and use differences in activities to examine how and why customers are willing to pay more or less for the goods or services of rivals
4. Consider changes in the firm’s activities. The objective is to
identify changes that will widen the wedge between costs and willingness to pay Example: Betsy Baking and Collins Kitchen Between 1990-1995 Betsy Baking market share increased from 1% to 20%, while that of Collins Kitchen fell from 45% to 25%
Betsy Baking Collins Kitchen
Raw Materials - $0.18 Inexpensive Raw Materials, Simple product line- $0.21 Operations and labor costs- $0.15 Usage of preservatives/Simple product line = less frequent deliveries Logistics- $0.26 Logistics- $0.13 Marketing- $0 Marketing- $0.12 TOTAL- $0.34 TOTAL- $0.71 How to analyze Willingness to Pay? ⚫ Define who the real buyer is ⚫ Understand what the buyers want ⚫ Narrow down the long list of customers’ needs to a manageable size. Ignore the needs, which are well satisfied by all current products (New Balance shoes) ⚫ Customers differ in what they want and how badly they want (Horizontal and Vertical Differentiations) ⚫ Analyze how successful you are into fulfilling customers’ needs Strategy rests on unique activities Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value Examples: Southwest Airlines, Ikea
One of the base of the positioning is to serve most of the needs of
particular group of customers (Needs-based positioning) Example: Bessemer Trust Company VS Citibank Another one is to segment customers who are accessible in different ways (Access-based positioning) Example: Carmike Cinema What is Strategy? Strategy is the creation of unique and valuable position, involving a different set of activities What is a sustainable competitive advantage? Competitive advantage is said to exist when a company has created a wider wedge between willingness-to-pay and the cost this company has to incur than its competitors
Competitive advantage is sustainable if the advantage is
sustained over time Sustainable position requires Trade-offs Choosing an unique position is not enough to guarantee a sustainable advantage. A valuable position will attract imitation
Strategic position is not sustainable unless there are trade-offs
with other positions
Trade-offs arise, because of:
⚫ Inconsistencies in image or reputation ⚫ Different positions require different product configurations, different equipment, different skills, different behavior, etc. Examples: Continental Airlines, Neutrogena Corporation What is Strategy? Strategy is the creation of unique and valuable position, involving a different set of activities
Strategy is making trade-offs to compete
Is the fitting of policies important? Fit among company’s functional policies is important, because discrete activities often affect each other There are three types of fit: 1. Consistency – ensures that activities do not erode or cancel themselves out (Example: align all activities with low-cost strategy) 2. Reinforcing – ensures that activities reinforce each other (Example: Neutrogena’s marketing focus – luxury hotels) 3. Optimization – coordination and information exchange between activities (Example: production choice to eliminate the need of after sale service)
The probability that the competitor match any activity is often than 1. The probabilities compound and make matching unlikely. For example 0.9*0.9=0.81, etc. What is Strategy? Strategy is the creation of unique and valuable position, involving a different set of activities
Strategy is making trade-offs to compete
Strategy is creating fit among a company’s activities
The success of a strategy depends on doing many things
well and integrating among them. Types of Strategies Description Examples
The company exploits
Being first can lead to an advantage because of: some true first-mover • Reputation Strategies advantages in a • Small market conditions based on particular • Experience curve advantages pre-emption product-market segment • Customer relationship advantages that pre-empts • Network economies latecomers
Superior abilities can lead to an advantage in:
The company can • Increasing perceived customer value above positively exploit some Capability-b the incremental cost of doing so in a way that superior distinctive ased is not rapidly eroded by competitor imitation capabilities that other strategies • Decreasing costs below rivals’ (while firms lack or cannot minimizing effects on customer valuations) in readily reproduce or a way that is not rapidly imitated by imitate competitors How to establish Advantage 1. Analyze the market environment thru external analysis in view of: (1) Identify where (geography, product range,.) in the industry the forces of competition are the weakest and establish first-mover advantage there (2) Develop strategies to influence industry structure in order to improve industry profitability (e.g. Mergers, creation of barriers, switching costs, etc.)
2. Analyze the company’s resources and capabilities (thru internal analysis)
in view of (1) identifying how they can be set to use to increase perceived customer value above the incremental cost of doing so in a way that others can not rapidly imitate? (2) identifying how they can be set to use to decrease costs below rivals’ (while minimizing effects on customer valuations) in a way that competitors cannot rapidly imitate? Cost Leadership is no guarantee for Success The success of a particular strategic positioning depends on a combination of factors: ⚫ The distribution of customer preferences ⚫ The strategic positioning of other players ⚫ There is no reason to believe that a low cost strategy always pays off as this fundamentally depends on: ⚫ The number of customers who want no frills products or services ⚫ The number of competitors willing and capable of offering low end products
Examples: ⚫ The low cost and low priced automobile marker Yugo failed in the US because there were not enough customers who were willing to give up a minimum quality standard to obtain a lower price ⚫ Low priced white label wines do not take off in many European countries as there are simply too few customers interested in these products Differentiation is no guarantee for Success ⚫ There is no reason to believe that a very differentiated high end market positioning pays off as this fundamentally depends again on ⚫ The number of customers who are willing-to-pay for such products ⚫ The number of competitors willing and capable of offering these products
Examples: ⚫ In the airline industry a highly differentiated service offering is not likely to pay off for the vast majority of passengers as most are not willing to pay for it
⚫ Which automobile models have historically been the most successful in the US? ⚫ Compare to India? Compare to Europe? Compare to Georgia? In many cases companies cannot create a sustainable advantage ⚫ Markets have become so competitive due to deregulation and internationalization that the effectiveness of ‘locating in attractive industries’ or of ‘changing the industry’s structure in your favor’ has declined
⚫ Furthermore, companies and markets have evolved in such a way
that building a competitive strategy based on superior inimitable distinctive resources and capabilities has become un-actionable
⚫ Most competitive strategic problems thus require a forward-looking
approach (rather than a historic-based approach) to generate superior performance even in the absence of sustainable competitive advantages Growth Trap Trade-offs and limits constrain company’s growth Serving one group of customers and excluding others places a limit on revenue growth
Managers are constantly tempted to surpass those limits, but
blur strategic position Example: Maytag extended from washers and dryers to refrigerators and cooking products with acquisition of other companies. Company grew by 300%, but return on sales declined from 8% to 1% Characteristics of Effective Strategies Example of process and deliverables of real strategy design project Example of process and deliverables of real strategy design project References: ⚫ D. Deneffe – Global Strategy ⚫ Michael E. Porter – What is strategy? ⚫ P. Ghemawat – Creating a competitive advantage
