© ram mudambi, temple university, 2007. lecture 4 strategy and competitive advantage ba 951 policy...

© Ram Mudambi, Temple University, 2007.

Lecture 4Lecture 4

Strategy and Competitive Strategy and Competitive AdvantageAdvantage

BA 951BA 951Policy Formulation and Policy Formulation and

AdministrationAdministration

© Ram Mudambi, Temple University, 2007. 4-2

Learning outcomesLearning outcomes

A framework for strategy design at the A framework for strategy design at the individual individual businessbusiness level level Drawing on the essence of each of the Drawing on the essence of each of the firm’s business firm’s business functionsfunctions to highlight to highlight strategic aspectsstrategic aspectsRelating business functions to generic Relating business functions to generic strategy choicesstrategy choices


Lecture outlineLecture outline

Business strategies for competitive advantageBusiness strategies for competitive advantage Cost vs. DifferentiationCost vs. Differentiation Leadership vs. focusLeadership vs. focus The industry life cycleThe industry life cycle

Functional strategies for competitive advantageFunctional strategies for competitive advantage ProductionProduction OperationsOperations MarketingMarketing R&DR&D Human resourcesHuman resources


What Is Business-Level What Is Business-Level Strategy?Strategy?Business-level strategyBusiness-level strategy

A plan of action to use the firm’s resources and A plan of action to use the firm’s resources and distinctive competencies to gain competitive distinctive competencies to gain competitive advantage.advantage.

Abell’s “Business Definition” processAbell’s “Business Definition” process Customer groups – market segmentation (who?)Customer groups – market segmentation (who?) Customer needs – value proposition (what?)Customer needs – value proposition (what?) Distinctive competencies – competitive actions (how?)Distinctive competencies – competitive actions (how?)

Mostly mission and Mostly mission and vision developmentvision development

Business-level strategyBusiness-level strategy

4-5© Ram Mudambi, Temple University, 2007.

Recall – Porter’s generic Recall – Porter’s generic strategiesstrategies

What Competitive DimensionWho Cost Differentiation

Competitive Broad Cost leadership Differentiation leadership

Scope Narrow Cost focus Differentiation focus

Offers low priced products

Offers unique or distinctive products

Serves the entire market Serves a specific niche


A low-cost strategy works best A low-cost strategy works best whenwhen::

Price competition is vigorousPrice competition is vigorous Product is standardized or readily Product is standardized or readily available from many suppliersavailable from many suppliers There are few ways to achieve There are few ways to achieve differentiation that have valuedifferentiation that have value Most buyers use product in same waysMost buyers use product in same ways Buyers incur low switching costs Buyers incur low switching costs Buyers are large and have significant Buyers are large and have significant bargaining powerbargaining power


Price cuts and sales volumePrice cuts and sales volume

P

Q0

D1

P0

P1

D2

Loss

Gain

SALES


Pitfalls of low-cost strategiesPitfalls of low-cost strategiesBeing overly aggressive in cutting price (revenue Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales erosion of lower price is not offset by gains in sales volume--profits go down,not up)volume--profits go down,not up)Low cost methods are easily imitated by rivalsLow cost methods are easily imitated by rivalsBecoming too fixated on reducing costsBecoming too fixated on reducing costsand ignoringand ignoring

Buyer interest in additional featuresBuyer interest in additional features Declining buyer sensitivity to priceDeclining buyer sensitivity to price Changes in how the product is usedChanges in how the product is used

Technological breakthroughs open up cost Technological breakthroughs open up cost reductions for rivalsreductions for rivals


The appeal of differentiation The appeal of differentiation strategiesstrategiesA powerful competitive approach when A powerful competitive approach when uniquenessuniqueness can be achieved in ways thatcan be achieved in ways that

Buyers perceive asBuyers perceive as valuablevaluable Rivals find Rivals find hard to hard to

match or copymatch or copy Can be incorporated Can be incorporated

at a at a cost well below cost well below thethe price premium price premium that buyers will paythat buyers will pay

Which hat is unique?


Achieving Superior QualityAchieving Superior Quality

Quality as reliabilityQuality as reliability They do the jobs they were designed for and do They do the jobs they were designed for and do

them wellthem well

Quality as excellenceQuality as excellence Perceived by customers to have superior attributesPerceived by customers to have superior attributes

Quality can be thought of in terms of two dimensions:

GENERIC STRATEGY?GENERIC STRATEGY?


COSTCOST

DIFFERENTIATIONDIFFERENTIATION


Successful differentiation – price Successful differentiation – price premiapremia

P

Q0

D1

P0

D2

P1

Loss

Gain


Choosing an investment Choosing an investment strategy at the Business Levelstrategy at the Business Level

Investment strategyInvestment strategy The resources (human, functional, and financial) The resources (human, functional, and financial)

required to gain sustainable competitive advantage.required to gain sustainable competitive advantage.

Competitive positionCompetitive position Market share is an indicator of competitive strength.Market share is an indicator of competitive strength. Distinctive competencies are competitive tools. Distinctive competencies are competitive tools.

Life Cycle EffectsLife Cycle Effects An industry’s life cycle stage affects its attractiveness An industry’s life cycle stage affects its attractiveness

to investment prospects.to investment prospects.


The industry life cycle & The industry life cycle & competitive advantagecompetitive advantageS

ize

of

Co

mp

etit

ive

Ad

van

tag

e

Time

Benefit Period Erosion PeriodBuildup Period

StrategicMovesProduceCompetitiveAdvantage

Moves byRivalsReduceCompetitiveAdvantage

OFFENSE DEFENSE

Embryonic

Growth Maturity

Shakeout

Decline


Choosing an Investment Choosing an Investment Strategy at the Business LevelStrategy at the Business Level

Stage of the Stage of the Industry Life CycleIndustry Life Cycle

Strong CompetitiveStrong CompetitivePositionPosition

Weak CompetitiveWeak CompetitivePositionPosition

EmbryonicEmbryonic Share buildingShare building Share buildingShare building

GrowthGrowth GrowthGrowth Market concentrationMarket concentration

ShakeoutShakeout Share increasingShare increasing Market concentration or Market concentration or harvest/liquidationharvest/liquidation

MaturityMaturity Hold-and-maintain or profitHold-and-maintain or profit Harvest or Harvest or liquidation/divestitureliquidation/divestiture

DeclineDecline Market concentration or Market concentration or harvest (asset reduction)harvest (asset reduction)

Turnaround, liquidation,Turnaround, liquidation,or divestitureor divestiture


Business assessment – the BCG Business assessment – the BCG MatrixMatrix

LOW HIGHMarket LOW Dog Cash CowGrowth HIGH Problem Child Star

Relative Market Share


Functional analysisFunctional analysis

BU

SIN

ES

S

Customer groups

Production

Operations

Marketing

R & D

H R M Cost vs.Cost vs.differentiationdifferentiation


The Production functionThe Production function

Economies of scaleEconomies of scale Lower unit costs due to higher Lower unit costs due to higher CURRENT production volumesCURRENT production volumes..

The experience curveThe experience curve Systematic unit-cost reductions Systematic unit-cost reductions that are the result of that are the result of ACCUMULATED ACCUMULATED production volumesproduction volumes..

Much of the experience curve emanates from Much of the experience curve emanates from learning effectslearning effects

Cost reductions due to learning by doing.Cost reductions due to learning by doing.


COSTCOST


Economies of scale – related to QEconomies of scale – related to Q

Minimum efficient scale

Uni

t co

sts

0Volume of output / unit time

Typical long run unit cost curve

Initial decline is very rapid

Subsequent declines are smaller


The experience curve – related to The experience curve – related to QQ

A typical experience curveA typical experience curve


Learning effectsLearning effectsEconomies of scaleEconomies of scale

and learning effects:and learning effects:


The Operations functionThe Operations functionFlexible manufacturing technology (lean Flexible manufacturing technology (lean production)production)

Reduced setup timesReduced setup times Increased machine utilizationIncreased machine utilization Improved quality controlImproved quality control Lower inventory levelsLower inventory levels

Mass customizationMass customization Low cost and product customizationLow cost and product customization

Flexible manufacturing cellsFlexible manufacturing cells Increased variety of operationsIncreased variety of operations

Ability to achieve higher levels of qualityAbility to achieve higher levels of quality

Increased

• Quantity

• Quality

• Diversity


Materials Management and JITMaterials Management and JIT

Materials managementMaterials management Getting materials into and through Getting materials into and through

the production process and out the production process and out through the distribution system through the distribution system to the end user.to the end user.

Just-In-Time (JIT)Just-In-Time (JIT) Reduce inventory holding costs by having materials Reduce inventory holding costs by having materials

arrive JIT to enter the production process.arrive JIT to enter the production process. JIT risk: There are no buffer stocks for non-delivery or JIT risk: There are no buffer stocks for non-delivery or

unanticipated increases in demand.unanticipated increases in demand.


Comparison of Lean and Mass Comparison of Lean and Mass ProductionProductionFunctionFunction Lean ProductionLean Production Mass ProductionMass Production

Product DevelopmentProduct Development Dedicated teamDedicated team Functional deptFunctional dept

LeadershipLeadership Project leader w/ full Project leader w/ full authorityauthority

Coordinator w/ limited Coordinator w/ limited authorityauthority

Innovation, R&DInnovation, R&D Focused innovationFocused innovation Variations on established Variations on established technologytechnology

Manufacturing OpsManufacturing Ops JIT - Resource utilizationJIT - Resource utilization Resource stockpilingResource stockpiling

Product Supply Product Supply ChainChain

Limited suppliers w/ Limited suppliers w/ concurrent participationconcurrent participation

Many suppliers w/ limited Many suppliers w/ limited participationparticipation

Cost ReductionCost Reduction Value engineering drivenValue engineering driven Volume / price drivenVolume / price driven

Supplier Supplier RelationshipsRelationships

Work with suppliers to Work with suppliers to improve performanceimprove performance

Penalize suppliers for bad Penalize suppliers for bad performanceperformance

Mgmt StyleMgmt Style TeamTeam HierarchicalHierarchical


The impact of flexible manufacturingThe impact of flexible manufacturing

The tradeoff betweenThe tradeoff betweencosts and product varietycosts and product variety


Achieving Superior QualityAchieving Superior Quality

Total Quality Management (TQM):Total Quality Management (TQM): All company operations focused on All company operations focused on continuouslycontinuously

improving product and service quality. improving product and service quality.

Deming’s Five-Step “Chain Reaction”:Deming’s Five-Step “Chain Reaction”:1.1. Improved quality reduces costs.Improved quality reduces costs.2.2. Improved productivity.Improved productivity.3.3. Higher market share.Higher market share.4.4. Increased profitability.Increased profitability.5.5. More jobs created.More jobs created.


Deming’s 14 pointsDeming’s 14 points

1. 1. Constancy of purposeConstancy of purpose

2. 2. Adopt the philosophyAdopt the philosophy

3. 3. Don’t rely on mass Don’t rely on mass inspectioninspection

4. 4. Don’t award business Don’t award business on priceon price

5. 5. Constant improvementConstant improvement

6. 6. TrainingTraining

7. 7. LeadershipLeadership

8.8. Drive out fear Drive out fear

9.9. Break down barriers Break down barriers

10.10. Eliminate slogan and Eliminate slogan and exhortationsexhortations

11.11. Eliminate quotas Eliminate quotas

12.12. Pride of workmanship Pride of workmanship

13.13. Education & retraining Education & retraining

14.14. Plan of action Plan of action


Aspects common to most TQM and Aspects common to most TQM and continuous improvement programscontinuous improvement programs

1. 1. Committed leadershipCommitted leadership

2. 2. Adoption & Adoption & communication of TQMcommunication of TQM

3. 3. Closer customer Closer customer relationshipsrelationships

4. 4. Closer supplier Closer supplier relationshipsrelationships

5. 5. BenchmarkingBenchmarking

6.6. Increased training Increased training

7.7. Open organizationOpen organization

8.8. Employee empowerment Employee empowerment

9.9. Zero-defects mentality Zero-defects mentality

10.10. Flexible manufacturing Flexible manufacturing

11.11. Process improvement Process improvement

12.12. Measurement Measurement

Implementing TQMImplementing TQM


The Operations functionThe Operations function

Flexible manufacturing Flexible manufacturing technology (lean production)technology (lean production)Mass customizationMass customizationFlexible manufacturing cellsFlexible manufacturing cellsAbility to achieve higher Ability to achieve higher levels of qualitylevels of quality

Increased

• Quantity

• Quality

• Diversity


COSTCOST



The Marketing functionThe Marketing functionMarketing strategyMarketing strategy

Product designProduct design AdvertisingAdvertising PromotionPromotion PricingPricing DistributionDistribution

Principal objectivesPrincipal objectives Customer acquisitionCustomer acquisition Customer retentionCustomer retention

Defection increases unit costsDefection increases unit costs Per-customer profit increases with relationship Per-customer profit increases with relationship

longevitylongevity

Increasedcustomer

responsiveness


Relationship between Customer Relationship between Customer Loyalty and Profit per CustomerLoyalty 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.


Achieving Superior Customer Achieving Superior Customer ResponsivenessResponsiveness

Developing a customer focus:Developing a customer focus: Top leadership commitment to customers.Top leadership commitment to customers. Employee attitudes toward customers.Employee attitudes toward customers. Bringing customers into the company.Bringing customers into the company.

Satisfying customer needs:Satisfying customer needs: Customization of the features of products and services to meet Customization of the features of products and services to meet

the unique need of groups and individual customers.the unique need of groups and individual customers. Reducing customer response times:Reducing customer response times:

Marketing that communicates with production.Marketing that communicates with production. Flexible production and materials management.Flexible production and materials management. Information systems that support the process.Information systems that support the process.




The R&D functionThe R&D function

Design easy-to-manufacture productsDesign easy-to-manufacture products Reduce numbers of parts per unit.Reduce numbers of parts per unit. Reduce assembly time.Reduce assembly time. Closely coordinate R&D Closely coordinate R&D

and production activities.and production activities.

Pioneer process innovationsPioneer process innovations Create competitive advantage through gains in Create competitive advantage through gains in

process efficiencies.process efficiencies.

Pioneer product innovationsPioneer product innovations Create competitive advantage by anticipating Create competitive advantage by anticipating

customer needs.customer needs.


Causes of the high failure rate of Causes of the high failure rate of innovationinnovation

UncertaintyUncertainty Quantum innovationQuantum innovation Incremental innovationIncremental innovation

Poor commercializationPoor commercializationPoor positioning strategyPoor positioning strategyTechnological myopiaTechnological myopiaSlowness in marketingSlowness in marketing


Achieving Superior InnovationAchieving Superior Innovation

Building competencies in innovation:Building competencies in innovation: Building skills in basic and applied researchBuilding skills in basic and applied research Project selectionProject selection Project managementProject management Cross-functional integrationCross-functional integration Product development teamsProduct development teams Partly parallel development Partly parallel development

processprocess Leveraging knowledge networksLeveraging knowledge networks


MNCs: The innovation-integration MNCs: The innovation-integration dilemmadilemma

Deg

ree

of lo

cal a

uton

omy

Low

High

Low High

Information connectivity

Isolated control

Isolated freedom

Connected control

Connected freedom

Semi-connectedfreedom


The Development FunnelThe Development Funnel

Gate 1 Gate 2


Sequential and Partly Parallel Sequential and Partly Parallel Development ProcessesDevelopment Processes

Reduced development time& time-to-market

Reduced development time& time-to-market


The Human Resource functionThe Human Resource function

Ways to increase employee productivity and Ways to increase employee productivity and lower unit costs:lower unit costs:

Provide training that upgrades employee skills.Provide training that upgrades employee skills. Establish self-managing teams Establish self-managing teams

to gain a more flexible work forceto gain a more flexible work forceand increased productivity.and increased productivity.

Use pay-for-performance Use pay-for-performance incentives for teams to encourage incentives for teams to encourage meeting productivity and meeting productivity and quality goals.quality goals.


Functional strategies - summaryFunctional strategies - summaryFunctionFunction ActionsActions

ProductionProduction 1. Pursue economies of scale and learning economies.1. Pursue economies of scale and learning economies.2. Map scale efficiency gains against output quality2. Map scale efficiency gains against output quality3. Implement flexible manufacturing systems / JIT.3. Implement flexible manufacturing systems / JIT.

ManufacturingManufacturing 1. Achieve customization and pro-activeness1. Achieve customization and pro-activeness2. Rationalize suppliers / help them implement TQM2. Rationalize suppliers / help them implement TQM3. Trace defects to suppliers3. Trace defects to suppliers

MarketingMarketing 1. Adopt aggressive customer acquisition to ride down the 1. Adopt aggressive customer acquisition to ride down the experience curve.experience curve.

2. Limit customer defection rates by building brand loyalty2. Limit customer defection rates by building brand loyalty3. Provide customer feedback on quality3. Provide customer feedback on quality

R&DR&D 1. Design products for ease of manufacture.1. Design products for ease of manufacture.2. Seek product and process innovations2. Seek product and process innovations3. Bring customers into product development3. Bring customers into product development

Human Human ResourcesResources

1. Institute training programs to build quality and customer skills1. Institute training programs to build quality and customer skills2. Implement self-managing teams.2. Implement self-managing teams.3. Implement pay for performance.3. Implement pay for performance.


SummarySummary

Business level strategy is mainly concerned Business level strategy is mainly concerned with answering the “how?” questionwith answering the “how?” question

Value proposition

Customer groups

Two generic business strategies – cost and Two generic business strategies – cost and differentiationdifferentiationFunctional strategies must support the Functional strategies must support the chosen business strategy chosen business strategy

© ram mudambi, temple university, 2007. lecture 4 strategy and competitive advantage ba 951 policy...

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