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Session 4.docx

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York University
Administrative Studies
ADMS 4900
You- Ta Chuang

Session 4 2 Types of Strategy Business-level strategy: in a given market, how should you compete? Corporate-level strategy: in several markets, what market should you compete in to create a synergy for your company? PCV Model Price, Cost, Value In most cases, firms compete for profit margin, you don’t want negative profit margin. Price – Cost = Profit Margin  To increase price you need to increase value (product differentiation firm)  Another way to increase PM is to decrease cost (cost leadership firm) Sources of cost advantage  Economies of scale: require capital  Learning-curve: cannot be imitated easily because it requires time  Low-cost access to factors of production How does overall cost leadership improve a firm’s position in the industry? CLFirm vs Avg Firm  Threat of new entrants: lower for CLFirm because new competitor has no benefit from learning curve & economies of scale  Supplier power: Supplier will have less power over CLFirm vs. Avg Firm (Economies of Scale) o If the supplier increases the price when commodity prices increase, the CLFirm can either  Absorb the cost because they have the ability to, due to a greater profit margin that already existed in comparison to an Avg Firm  They can also transfer the cost to buyer, because they will still be able to supply a cheaper product than the Avg Firm  Buyer power: Buyer will have less power over CLFirm vs Avg Firm (CLFirm can reduce price due to low cost, therefore buyer cannot find it this cheap anywhere else) o If the buyers as a whole demand a lower price, the CLFirm can either  Absorb the demand because they have the ability to, due to a greater profit margin that already exists in comparison to an Avg Firm  Transfer the demand to the suppliers because they have power over the suppliers  Threat of Substitutes: lower over CLFirm Product Differentiation PDFirm vs. Avg Firm  Threat of New Entry: Lower threat of new entry, because it is difficult to imitate “customer loyalty”  Supplier Power: Supplier power is higher because PDFirm is offering a unique product.  Buyer Power: Buyer power is lower because PDFirm has control over cost due to unique product, and customer loyalty How does a PDFirm be sustainable:  Continue to invest in R&D (create value)  increase switching cost to buyer  Imitation will occur eventually but you can deal with it by o Lower down your learning curve ASAP, so when imitation occurs, you can compete by offering a lower price Difficult to pursue both Cost Leadership and Product Differentiation because CLfirm focuses on efficiency vs PDFirm focuses on R&D and marketing, and these two sets of skills will at times have conflict. Introduction: PDFirm, different from your substitutes Decline: PDFirm, different from your competitors How do you determine rivalry?  Firm size  Market size  Number of firm Porter’s model talks nothing about motivation, or incentive. They only care about attributes and structure, not behavior. Model of competitive dynamics Key Concepts  Market dependence: the degree to which a firm’s profit derives from a particular market. (e.g. laptop market vs. phone market vs. tablet market; laptop market 80%, dependence is high)  Market commonality: the degree of market/customer overlap between firms  Resource similarity: the degree of overlap in factor markets between firms o Factor markets: input material (labour, equip etc.)  Types of action: o strategic action, involve major resource commitment/ long term planning (e.g M&A, new product launch) o tactical action: refinement or extension of current strategies e.g. pricing/marketing activity AMC Model Attacker:  Awareness of these two factors will lead to an attack o New market opportunity o High market dependence  Factors that will Motivate the firm attack o Past performance (performance poor, more likely to do something) o Likelihood of success of attack  Capability o Resources/Capability: respond in what you are better at (product differentiation vs. cost) Defender (Counter-attack)  Awareness o Attributes of attackers: If there is market overlap, more likely to respond o Attribute of attack: more market commonality and similarity, more likely to respond o If market dependence is high, more likely to respond  Motivation o Impact of attack: will the attack be successful and impact will be huge, motivation to respond will be higher o Past performance: if past performance is bad, something must be done quickly. If good, might be hesitant to respond. o Likelihood of success of defense (won’t do it if you don’t think it will be successful)  Capability o Resources/capability; come from internal resources and external relationships AMC Model  Model is at the dyadic level  Principles: o Rivalry between firms can be described by action and response, not by industry structure o Action and response are determined by AMC of firms  Therefore, this model emphasizes on a firms judgment and perception Chapter 5: Business Level Strategy Without competitive advantages, firms are only able to earn, at best “economic profits” – the level of normal returns that one could expect from any investments that have the same level of risk. Strategy formulation, the second main aspect of strategic management, is about the processes and the decisions managers make to address 1. The choices of businesses in which to compete 2. How to compete in these businesses Porter says: “competitive advantages is about two choices: target market (industry wide vs. particular segment) and type of competitive advantage (differentiation vs. cost leadership) Overall Cost Leadership: based on creating a low-cost position relative to a firm’s peers. Firm must manage the relationships throughout the entire value chain and be devoted to lowering costs throughout the entire chain.  Requires: o Aggressive construction of efficient-scale facilities o Vigorous pursuit of cost reductions from experience o Tight cost and overhead control o Avoidance of marginal customer accounts o Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force and advertising  Economies of scale help reduce costs due to declining per unit cost  Learning curve leads to lower costs through experience o Often, process improvements involve identifying the best practices in other industries and adapting them for implementation in one’s own firm e.g. Nascar  5 forces model application: o Protects against rivalry from competitors because returns are possible even if rivals erode their profits o Protects firms against powerful buyers, price can only be driven down to next most efficient producer o Flexibility to cope with suppliers for input cost increase o Provide substantial entry barriers from economies of scale and cost advantages o Favorable position in relation to substitute products due to low cost  Pitfalls to avoid o Too much focus on one value chain activity – need to focus on entire chain o Vulnerable to price increases in factors of production – less able to pass on price increases o Strategy is easy to imitate  SCA disappears o Cost advantages decrease when pricing info is available to customers  internet increases access to information o Lack of parity on differentiation  product with higher cost may be justified Differentiation: create products and/or services that are perceived unique industry wide and valued as such in the eyes of its customers; make customers pay premium. A differentiator will always week out ways of distinguishing itself from similar competitors to justify price premiums greater than the costs incurred for differentiating.  Can take these forms: o Prestige or brand image o Quality o Technology o Innovation o Features o Customer service o Dealer network  Results in differentiation in a few or all of the value-chain activities e.g. Porche focuses on engine, Lexus focuses on everything  Strong relationships necessary among value activities to strengthen customer’s perception of value e.g. aiding in marketing at dealerships  5 forces model application: o Protection against competition since brand loyalty lowers customer sensitivity to price and raises customer switching cost o Enhanced power over buyers due to high perceived value o Higher entry barriers result because of customer loyalty, and ability ro provide unique product/service o Provides higher margins to deal with supplier power; also certain amount of prestige associated with being the supplier to the firm o Experience high customer loyalty and experience less threat from substitutes  Potential Pitfalls o Uniqueness that is not valuable – perceived invaluable by consumer o Too much differentiation – too much may not be valued by consumer e.g. Mercedes S-Class o Too high a price premium – price differential not worth the differentiation o Differentiation that is easily imitated – advantaged erode through imitation e.g. frequent flyer program o Dilution of brand identification through product-line extensions – adding product lines of inferior quality will ruin existing differentiation through change in consumer perception o Perceptions on differentiation – beauty is in the eye of the beholder Focus Strategy: direct attention toward narrow product lines, buyer segments, or targeted geographic markets. A firm emphasizing a focus strategy must attain advantages either through differentiation or a cost leadership approach. Whereas the overall cost leadership and differentiation strategies strive to attain advantages industry wide. Focuser achieves competitive advantages by dedicating itself to these segments exclusively  Cost Focus: a firm strives to create a cost advantage in its target segment and serve customers within that segment with a lower price than rivals who may either target the whole industry or be unable to match the lower-cost position e.g. Staples vs. Walmart  Differentiation Focus: firm will seek to differentiate itself within a narrow segment. The dimensions of differentiation are similar to those presented earlier; in this case, the firm aims to provide better service, prestige, image, or quality to a well-defined segment e.g. Hermes  leather goods  5 forces model application o Less competition due to targeted market segment o Less bargaining power from buyer because targeted market segments are less price sensitive o Customer loyalty and brand image is a major barrier to entry o Protected from substitute products due to relatively high reputation, brand image and customer loyalty  Potential Pitfalls o Cost advantages within narrow segments will erode over time o Niche markets can be taken over by new entrants and imitation o Too much focus may be harmful when consumer wants convenience Combination Strategies: Integrating Overall Low Cost and Differentiation Successful companies attain both strategies. The primary benefit is the difficulty to imitate the strategies. Goal is to provide unique value in an efficient manner.  3 strategies to combination are: o Autom
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