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Competitive3 Advantage 3

Creating and Sustaining CompetitiveAdvantages
(demo module)
What Is Strategy?
Operational effectiveness isnotstrategy:
Operational effectiveness means performing similar activitiesbetterthan rivals. It is necessary, but not sufficient, for competitive advantage.
Strategic Positioning
Strategicpositioning means performingdifferentactivities from rivals’ or performing similar activities indifferentways:
Variety-based positioning (producing a subset of products/services)
Needs-based positioning (serving needs of particular group of customers)
Access-based positioning (using different ways to reach customers)
Strategy involves trade-offs, choosing whatnotto do.
Types of Competitive Advantage and Sustainability
Three generic strategies to overcome the five forces and achieve competitiveadvantage:
Overall cost leadership
Low-cost-position relative to a firm’s peers
Manage relationships throughout the entire value chain
Create products and/or services that are unique and valued
Non-price attributes for which customers will pay a premium
Focus strategy
Narrow product lines, buyer segments, or targeted geographic markets
Attain advantages either through differentiation or cost leadership
Aggressive construction of efficient-scale facilities
Vigorous pursuit of cost reductions from experience
Tight cost and overhead control
Avoidance of marginal customer accounts
Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising
Overall Cost Leadership (Cont.)
A firm following an overall cost leadershipposition:
Must attain parity on the basis of differentiation relative to competitors
Parity on the basis of differentiation
Permits a cost leader to translate cost advantages directly into higher profits than competitors
Allows firm to earn above-average profits
Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces
Anoverall low-costposition:
Protects a firm against rivalry from competitors
Protects a firm against powerful buyers
Provides more flexibility to cope with demands from powerful suppliers for input cost increases
Provides substantial entry barriers from economies of scale and cost advantages
Puts the firm in a favorable position with respect to substitute products
Pitfalls of Overall Cost Leadership Strategies
Toomuch focus on one or a few value-chain activities
All rivals share a common input or raw material
The strategy is initiated too easily
A lack of parity on differentiation
Erosion of cost advantages when the pricing information available to customers increases
Differentiation can take manyforms:
Prestige or brand image
Customer service
Dealer network
Firms may differentiate along several dimensions at once
Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique
Successful differentiation requires integration with all parts of a firm’s value chain
An important aspect of differentiation is speed or quick response
Improving CompetitivePosition
Creates higher entry barriers due to customer loyalty
Provides higher margins that enable the firm to deal with supplier power
Reduces buyer power because buyers lack suitable alternative
Reduces supplier power due to prestige associated with supplying to highly differentiated products
Establishes customer loyalty and hence less threat from substitutes
Potential Pitfalls of
Uniqueness that is not valuable
Too much differentiation
Too high a price premium
Differentiation that is easily imitated
Dilution of brand identification through product-line extensions
Perceptions of differentiation may vary between buyers and sellers
Focus is based on the choice of a narrow competitive scope within anindustry:
Firm selects a segment or group of segments (niche) and tailors its strategy to serve them
Firm achieves competitive advantages by dedicating itself to these segments exclusively
Cost focus
Differentiation focus
Creates barriers of either cost leadership or differentiation, or both
Also focus is used to select niches that are least vulnerable to substitutes or where competitors are weakest
Pitfalls of Focus Strategies
Erosionof cost advantages within the narrow segment
Focused products and services still subject to competition from new entrants and from imitation
Focusers can become too focused to satisfy buyer needs
Combination Strategies
Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitatestrategy
Goal of combination strategy is to provide unique value in an efficient manner
Combination Approaches
Automated and flexible manufacturing systems (e.g., “mass customization”)
Exploiting the profit pool concept for competitiveadvantage
Coordinating the “extended” value chain by way of informationtechnology
Best-cost provider strategies – incorporating attractive attributes at a lower cost than rivals
Stages of the Industry Life-Cycle
Generic strategies: differentiation
Market growth rate: low
Number of segments: very few
Intensity of competition: low
Emphasis on product design: very high
Emphasis on process design: low
Major focus: R&D
Overall objective: Increase market share and awareness
Stages of the Industry Life-Cycle
Generic strategies: differentiation
Market growth rate: very large
Number of segments: few
Intensity of competition: growing
Emphasis on product design: very
Emphasis on process design: somewhat moderate
Major focus: sales and marketing
Overall objective: create consumer demand
Stages of the Industry Life-Cycle
Generic strategies: overall cost leadership
Market growth rate: moderate
Number of segments: many
Intensity of competition: very intense
Emphasis on product design: low
Emphasis on process design: high
Major focus: production
Overall objective: defend share and extend PLC
Stages of the Industry Life-Cycle
Generic strategies: segment specific cost leadership
Market growth rate: negative
Number of segments: few
Intensity of competition: very intense
Emphasis on product design: changing
Emphasis on process design: low
Major focus: finance and cost reduction
Overall objective: harvest and prepare for exit
Combination Strategies:
Improving CompetitivePosition
Firms that successfully integrate differentiation and cost strategies obtain advantages of competition from both approaches
High entry barriers
Bargaining power over suppliers
Reduces power of buyers (fewer competitors)
Value position reduces threat from substitute products
Reduces the possibility of head-to-head rivalry
Pitfalls of Combination Strategies
Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”
Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain
Miscalculating sources of revenue and profit pools in the firm’s industry
Industry Life-Cycle States:
Strategic Implications
Life cycle of an industry
Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle
Strategies in the Introduction Stage
Products are unfamiliar to consumers
Market segments not well defined
Product features not clearly specified
Competition tends to be limited
Develop product and get users to try it
Generate exposure so product becomes “standard”
Strategies in the Growth Stage
Characterized by strong increases in sales
Attractive to potential competitors
Primary key to success is to build consumer preferences for specific brands
Brand recognition
Differentiated products
Financial resources to support value-chain activities
Strategies in the Maturity Stage
Aggregate industry demand slows
Market becomes saturated, few new adopters
Direct competition becomes predominant
Marginal competitors begin to exit
Efficient manufacturing operations and process engineering
Low costs (customers become price sensitive)
Strategies in the Decline Stage
Industry sales and profits begin to fall
Strategic options become dependent on the actions of rivals
Exiting the market
Turnaround Strategies
Assetand cost surgery
Selective product and market pruning
Piecemeal productivity improvements
Grand Strategies
Market Development
Product Development
Cooperative Strategies
Joint Ventures
Grand Strategies
Mergerand AcquisitionStrategies:
Horizontal Integration
Vertical Integration (forward and backward)
Related Diversification
Unrelated Diversification
Grand Strategies (cont.)
Unbundling and Outsourcing Strategies
Offensive Strategies
Defensive Strategies
First-Mover, Rapid-Follower, and Late-Mover Strategies
Strategies for Industry Leaders
Strategies for Runner-Up Firms
End of the sample module

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