Triangulation BUS/475 week 3, 3 questions
1) QUESTION :As stated in our reading there are advantages and disadvantages to each of the 5 generic competitive strategies. Based on these, what are your thoughts on these strategies. Are some better than others? Which one would you choose if you opened a business and why? MINIMUM 75 WORDS PLEASE SEE ATTACHMENT “LEARNING” TO COMPLETE —————————– —————————————————————————————————————————————————————————————- 2) QUESTION: How can companies benefit from related diversification? Unrelated diversification? How important is diversification to the long and short term success of the company? MINIMUM 75 WORDS ——————————————- ————————————————————————————————————————————————————————- 3) QUESTION: What are some of the advantages and disadvantages associated with expansion into international markets? Why do we see such drastic differences between those that manage it successfully and those that fail?
Learning from Mistakes
Some of the most widely known brands in the bread and snack foods arena have been owned by the Hostess Corporation.1 Since the 1930s, Hostess Brands (originally founded as Interstate Bakeries) produced a range of popular baked goods, including Wonder Bread, Twinkies, Ring Dings, Yodels, Zingers, and many other products. Even with its iconic brands and sales in of $2.5 billion a year, Hostess Brands found itself in a perilous situation and went into bankruptcy in 2012. Unable to find a workable solution to remain viable, in November 2012, Hostess closed down all of its bakeries and was forced to liquidate and sell off its brands to other bakeries. With the strength of their brands and their longstanding market position, it was a surprise to many seeing the firm fail. What went wrong?
The viability of a firm’s business-level strategy is driven by both the internal operations of a firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the environment. Hostess had long differentiated themselves in the baked goods business by producing simple yet flavorful baked snack goods that were staples in kids’ lunchboxes for generations. Their strong position in the environment was undone by a combination of forces.
Central to Hostess’s decline was a change in customer preferences that they did not effectively respond to. From the 1950s through the 1970s, the heyday of Hostess, customers had a strong demand for tasty processed snack foods. However, in recent years, there has been an increasing trend to more natural and healthier snack products. Hostess was unable to significantly expand their product portfolio with baked goods that met these evolving tastes. As a result, they found themselves with declining demand for their products, seeing their sales drop by 28 percent from 2004 to 2011. Additionally, since their products were fairly simple, they found their ability to differentiate their products declining as other bakeries imitated their core products. This left them with very little ability to increase their prices to generate a profit.
Along with declining demand and product differentiation, Hostess had a cost structure that severely hampered their ability to rebuild their market position. Hostess’s workforce of 19,000 was mostly unionized, and their labor contracts made it hard for Hostess to rein in their cost structure and operations to match the demand conditions they faced. Rather than having a single relationship with their workforce, they had 372 contractual agreements with dozens of different labor unions. These agreements limited their ability to close any of their 36 bakery plants or over 500 distribution centers to match the lower demand for their contracts. They also limited the firm’s ability to streamline their distribution system. As a result, rather than having one delivery truck service per store, they often sent a number of trucks to deliver different brands to a single store.
Hostess found itself with a high cost operating structure in a market where their products were no longer highly differentiated and experiencing reduced demand. This is not a winning combination. Not surprisingly, Hostess lost $342 million in 2011 and was unable to meet its debt obligations in 2012. Its brands will survive under new ownership, but the new owners will need to either figure out how to better differentiate their products in today’s demanding market or produce these products at a lower cost.
How challenging is it to differentiate Hostess’ products in today’s health conscious marketplace?
Should the new owners of the Hostess brands strive to develop more health conscious snack goods or ignore the health trends and produce as tasty and rich a product as possible?
In order to create and sustain a competitive advantage, companies such as Hostess need to analyze the needs and preferences of their customers and work to reinforce the value of their products for customers. They should not focus only on their internal operations. By not listening to their customers and responding to their evolving needs, Hostess and many other firms have seen their performance drop and even their existence challenged.
a strategy designed for a firm or a division of a firm that competes within a single business.
The central role of competitive advantage in the study of strategic management, and the three generic strategies: overall cost leadership, differentiation, and focus.
Types of Competitive Advantage and Sustainability
Michael Porter presented three generic strategies that a firm can use to overcome the five forces and achieve competitive advantage.2 Each of Porter’s generic strategies has the potential to allow a firm to outperform rivals in their industry. The first, overall cost leadership, is based on creating a low-cost-position. Here, a firm must manage the relationships throughout the value chain and lower costs throughout the entire chain. Second, differentiation requires a firm to create products and/or services that are unique and valued. Here, the primary emphasis is on “nonprice” attributes for which customers will gladly pay a premium.3 Third, a focus strategy directs attention (or “focus”) toward narrow product lines, buyer segments, or targeted geographic markets and they must attain advantages either through differentiation or cost leadership.4 Whereas the overall cost leadership and differentiation strategies strive to attain advantages industrywide, focusers have a narrow target market in mind. Exhibit 5.1 illustrates these three strategies on two dimensions: competitive advantage and strategic target.
basic types of business level strategies based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low cost versus uniqueness).
Both casual observation and research support the notion that firms that identify with one or more of the forms of competitive advantage outperform those that do not.5 There has been a rich history of strategic management research addressing this topic. One study analyzed 1,789 strategic business units and found that businesses combining multiple forms of competitive advantage (differentiation and overall cost leadership) outperformed businesses that used only a single form. The lowest performers were those that did not identify with any type of advantage. They were classified as “stuck in the middle.” Results of this study are presented in Exhibit 5.2.6
For an example of the dangers of being “stuck in the middle,” consider the traditional supermarket.7 The major supermarket chains, such as Kroger, Ralphs, and Albertsons, used to be the main source of groceries for consumers. However, they find themselves in a situation today where affluent customers are going upmarket to get their organic and gourmet foods at retailers like Whole Foods Market and budget-conscious consumers are drifting to discount chains such as Walmart, Aldi, and Dollar General.
EXHIBIT 5.1 Three Generic Strategies
Source: Adapted and reprinted with the permission of The Free Press, a division of Simon & Schuster Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved.
EXHIBIT 5.2 Competitive Advantage and Business Performance
Overall Cost Leadership
The first generic strategy is overall cost leadership. Overall cost leadership requires a tight set of interrelated tactics that include:
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
a firm’s generic strategy based on appeal to the industrywide market using a competitive advantage based on low cost.
Exhibit 5.3 draws on the value-chain concept (see Chapter 3) to provide examples of how a firm can attain an overall cost leadership strategy in its primary and support activities.
One factor often central to an overall cost leadership strategy is the experience curve, which refers to how business “learns” to lower costs as it gains experience with production processes. With experience, unit costs of production decline as output increases in most industries. The experience curve, developed by the Boston Consulting Group in 1968, is a way of looking at efficiency gains that come with experience. For a range of products, as cumulative experience doubles, costs and labor hours needed to produce a unit of product decline by 10 to 30 percent. There are a number of reasons why we find this effect. Among the most common factors are workers getting better at what they do, product designs being simplified as the product matures, and production processes being automated and streamlined. However, experience curve gains will only be the foundation for a cost advantage if the firm knows the source of the cost reduction and can keep these gains proprietary.
the decline in unit costs of production as cumulative output increases.
To generate above-average performance, a firm following an overall cost leadership position must attain competitive parity on the basis of differentiation relative to competitors.8 In other words, a firm achieving parity is similar to its competitors, or “on par,” with respect to differentiated products.9 Competitive parity on the basis of differentiation permits a cost leader to translate cost advantages directly into higher profits than competitors. Thus, the cost leader earns above-average returns.10
a firm’s achievement of similarity, or being “on par,” with competitors with respect to low cost, differentiation, or other strategic product characteristic.
EXHIBIT 5.3 Value-Chain Activities: Examples of Overall Cost Leadership
Source: Adapted from: Porter, M.E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.
The failure to attain parity on the basis of differentiation can be illustrated with an example from the automobile industry—the ill-fated Yugo. Below is an excerpt from a speech by J. W. Marriott, Jr., Chairman of the Marriott Corporation:11
… money is a big thing. But it’s not the only thing. In the 1980s, a new automobile reached North America from behind the Iron Curtain. It was called the Yugo, and its main attraction was price. About $3,000 each. But the only way they caught on was as the butt of jokes. Remember the guy who told his mechanic, “I want a gas cap for my Yugo.” “OK,” the mechanic replied, “that sounds like a fair trade.”
Yugo was offering a lousy value proposition. The cars literally fell apart before your eyes. And the lesson was simple. Price is just one component of value. No matter how good the price, the most cost-sensitive consumer won’t buy a bad product.
Gordon Bethune, the former CEO of Continental Airlines, summed up the need to provide good products or services when employing a low cost strategy this way: “You can make a pizza so cheap, nobody will buy it.”12
Next, we discuss some examples of how firms enhance cost leadership position.
Aldi, a discount supermarket retailer, has grown from its German base to the rest of Europe, Australia, and the United States by replicating a simple business format. Aldi limits the number of products (SKUs in the grocery business) in each category to ensure product turn, to ease stocking shelves, and to increase its power over suppliers. It also sells mostly private label products to minimize cost. It has small, efficient, and simply designed stores. It offers limited services and expects customers to bring their own bags and bag their own groceries. As a result, Aldi can offer their products at prices 40 percent lower than competing supermarkets.13
Tesco, Britain’s largest grocery retailer, has changed how they view waste in order to become more efficient. To cut their costs, they have begun shipping off food waste to bio-energy plants to convert the waste to electricity. This allows Tesco to both avoid landfill taxes of $98 per ton and also save on the cost of their electricity by providing the fuel for the power plant. Tesco is saving $3 million dollars a year alone in landfill taxes by simply sending their used cooking oil and chicken fat to be used to generate bioenergy rather than putting it in a landfill. Overall, Tesco estimates that energy saving efforts are shaving over $300 million a year from its energy bills.14
Harley Davidson has also worked to streamline its operations to significantly improve its cost position. In their York, Pennsylvania, plant, they have moved to a flexible production system that requires only five job classifications rather than the 62 they had before. Workers now have a wider variety of skills and can move where needed in the plant. They have also automated their production process, allowing them to reduce their production workforce from over 1,000 workers down to around 500. They have made similar changes in other plants. This has allowed them to keep production in the United States and cut production costs by at least $275 million. As a result, Harley’s operating profit margin rose from 12.5 percent in 2009 to 16 percent in 2012.15
A business that strives for a low-cost advantage must attain an absolute cost advantage relative to its rivals.16 This is typically accomplished by offering a no-frills product or service to a broad target market using standardization to derive the greatest benefits from economies of scale and experience. However, such a strategy may fail if a firm is unable to attain parity on important dimensions of differentiation such as quick responses to customer requests for services or design changes. Strategy Spotlight 5.1 discusses how Renault is leveraging a low cost strategy to draw in auto buyers in Europe.
Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces An overall low-cost position enables a firm to achieve above-average returns despite strong competition. It protects a firm against rivalry from competitors, because lower costs allow a firm to earn returns even if its competitors eroded their profits through intense rivalry. A low-cost position also protects firms against powerful buyers. Buyers can exert power to drive down prices only to the level of the next most efficient producer. Also, a low-cost position provides more flexibility to cope with demands from powerful suppliers for input cost increases. The factors that lead to a low-cost position also provide substantial entry barriers position with respect to substitute products introduced by new and existing competitors.17
How the successful attainment of generic strategies can improve a firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability.
A few examples will illustrate these points. Harley Davidson’s close attention to costs helps to protect them from buyer power and intense rivalry from competitors. Thus, they are able to drive down costs and enjoy relatively high power over their customers. By increasing productivity and lowering unit costs, Renault both lessens the degree of rivalry it faces and increases entry barriers for new entrants. Aldi’s extreme focus on minimizing costs across its operations makes it less vulnerable to substitutes, such as discount retailers like Walmart and dollar stores.
RENAULT FINDS LOW COST WORKS WELL IN THE NEW EUROPE
The European economic crisis has changed how Renault, a French car maker, designs and produces cars for European customers. Historically, European car buyers have been sophisticated, demanding well-designed, feature-laden cars from manufacturers. When the economic crisis hit Europe in 2007, automakers saw a dramatic shift in demand. Overall demand dropped, and the customers who did come in to buy became much more cost conscious.
In these difficult conditions, Renault has been able to carve out a profitable market for itself, selling low-cost, no-frills cars. Renault responded to this shift by creating an entry-level car group that was charged with designing and producing cars for these more cost conscious consumers. For example, they took an ultra-cheap car, the Logan, that was originally aimed for emerging markets and redesigned it to meet the new needs of the European market. The boxy sedan, which sells for around $10,000, is now one of Renault’s best sellers. Its entry-level cars accounted for 30 percent of the cars sold by Renault in 2011 and generated operating profit margins over twice the profit margins of the higher priced cars Renault sold.
What is the recipe for success Renault has found to generate high profits on low-priced cars? It uses simple designs that incorporate components from older car designs at Renault and employs a no-discount retail policy. At the center of their design procedure is a “design-to-cost” philosophy. In this process, designers and engineers no longer strive for the cutting edge. Instead, they focus on choosing parts and materials for simplicity, ease of manufacturing, and availability. This often involves using components that were engineered for prior vehicle designs. When needing a new component, Renault begins by assessing how much customers would be willing to pay for certain features, such as air conditioning or power door locks, and then asks suppliers whether they can propose a way to offer this feature at a cost that matches what customers are willing to pay.
As they face imitation of this strategy by Volkswagen and Toyota, Renault is not sitting idle. As Carlos Ghosn, Renault’s CEO, stated, “Our low-cost offering isn’t low-cost enough. So we’re working on a new platform that will be ultra low-cost.”
Sources: Pearson, D. 2012. Renault takes low-cost lead. wsj.com, April 16: np.; and Ciferri, L. 2013. How Renault’s low-cost Dacia has become a “cash cow.” Automotive News Europe, January 3: np.
Potential Pitfalls of Overall Cost Leadership Strategies Potential pitfalls of overall cost leadership strategy include:
The pitfalls managers must avoid in striving to attain generic strategies.
Too much focus on one or a few value-chain activities. Would you consider a person to be astute if he cancelled his newspaper subscription and quit eating out to save money, but then “maxed out” several credit cards, requiring him to pay hundreds of dollars a month in interest charges? Of course not. Similarly, firms need to pay attention to all activities in the value chain.18 Too often managers make big cuts in operating expenses, but don’t question year-to-year spending on capital projects. Or managers may decide to cut selling and marketing expenses but ignore manufacturing expenses. Managers should explore all value-chain activities, including relationships among them, as candidates for cost reductions.
Increase in the cost of the inputs on which the advantage is based. Firms can be vulnerable to price increases in the factors of production. For example, consider manufacturing firms based in China which rely on low labor costs. Due to demographic factors, the supply of workers 16 to 24 years old has peaked and will drop by a third in the next 12 years, thanks to stringent family-planning policies that have sharply reduced China’s population growth.19 This is leading to upward pressure on labor costs in Chinese factories, undercutting the cost advantage of firms producing there.
The strategy is imitated too easily. One of the common pitfalls of a cost-leadership strategy is that a firm’s strategy may consist of value-creating activities that are easy to imitate.20 Such has been the case with online brokers in recent years.21 As
of early 2013, there were over 200 online brokers listed on allstocks.com, hardly symbolic of an industry where imitation is extremely difficult. And according to Henry McVey, financial services analyst at Morgan Stanley, “We think you need five to ten” online brokers.
A lack of parity on differentiation. As noted earlier, firms striving to attain cost leadership advantages must obtain a level of parity on differentiation.22 Firms providing online degree programs may offer low prices. However, they may not be successful unless they can offer instruction that is perceived as comparable to traditional providers. For them, parity can be achieved on differentiation dimensions such as reputation and quality and through signaling mechanisms such as accreditation agencies.
Reduced flexibility. Building up a low-cost advantage often requires significant investments in plant and equipment, distribution systems, and large, economically scaled operations. As a result, firms often find that these investments limit their flexibility, leading to great difficulty responding to changes in the environment. For example, Coors Brewing developed a highly efficient, large-scale brewery in Golden, Colorado. Coors was one of the most efficient brewers in the world, but their plant was designed to mass produce one or two types of beer. When the craft brewing craze started to grow, their plant was not well equipped to produce smaller batches of craft beer, and they found it difficult to meet this opportunity. Ultimately, they had to buy their way into this movement by acquiring small craft breweries.23
Obsolescence of the basis of cost advantage. Ultimately, the foundation of a firm’s cost advantage may become obsolete. In these circumstances, other firms develop new ways of cutting costs, leaving the old cost leaders at a significant disadvantage. The older cost leaders are often locked into their way of competing and are unable to respond to the newer, lower-cost means of competing. This is what happened to the U.S. auto industry in the 1970s. Ford, GM, and Chrysler had built up efficient mass manufacturing auto plants. However, when Toyota and other Japanese manufacturers moved into the North American car market using lean manufacturing, a new and more efficient means of production, the U.S. firms found themselves at a significant cost disadvantage. It took the U.S. firms over 30 years to redesign and retool their plants and restructure the responsibilities of line workers to get to where they were on cost parity with the Japanese firms.
As the name implies, a differentiation strategy consists of creating differences in the firm’s product or service offering by creating something that is perceived industrywide as unique and valued by customers.24 Differentiation can take many forms:
a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industrywide as unique and valued by customers.
Prestige or brand image (Adam’s Mark hotels, BMW automobiles).25
Technology (Martin guitars, Marantz stereo components, North Face camping equipment).
Innovation (Medtronic medical equipment, Apple’s iPhones and iPads).
Features (Cannondale mountain bikes, Honda Goldwing motorcycles).
Customer service (Nordstrom department stores, Sears lawn equipment retailing).
Dealer network (Lexus automobiles, Caterpillar earthmoving equipment).
Exhibit 5.4 draws on the concept of the value chain as an example of how firms may differentiate themselves in primary and support activities.
Firms may differentiate themselves along several different dimensions at once.26 For example, the Cheesecake Factory, an upscale casual restaurant, differentiates itself by
offering high quality food, the widest and deepest menu in its class of restaurants, and premium locations.27
EXHIBIT 5.4 Value-Chain Activities: Examples of Differentiation
Source: Adapted from Porter, M.E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press.
Firms achieve and sustain differentiation advantages and attain above-average performance when their price premiums exceed the extra costs incurred in being unique.28 For example, the Cheesecake Factory must increase consumer prices to offset the higher cost of premium real estate and producing such a wide menu. Thus, a differentiator will always seek out ways of distinguishing itself from similar competitors to justify price premiums greater than the costs incurred by differentiating.29 Clearly, a differentiator cannot ignore costs. After all, its premium prices would be eroded by a markedly inferior cost position. Therefore, it must attain a level of cost parity relative to competitors. Differentiators can do
this by reducing costs in all areas that do not affect differentiation. Porsche, for example, invests heavily in engine design—an area in which its customers demand excellence—but it is less concerned and spends fewer resources in the design of the instrument panel or the arrangement of switches on the radio.30
Many companies successfully follow a differentiation strategy. For example, Zappos may sell shoes, but it sees the core element of its differentiation advantage as service. Zappos CEO Tony Hsieh puts it this way.31
“We hope that 10 years from now people won’t even realize that we started out selling shoes online, and that when you say ‘Zappos,’ they’ll think, ‘Oh, that’s the place with the absolute best customer service.’ And that doesn’t even have to be limited to being an online experience. We’ve had customers email us and ask us if we would please start an airline, or run the IRS.”
This emphasis on service has led to great success. Growing from an idea to a billion dollar company in only a dozen years, Zappos is seeing the benefits of providing exemplary service.
Lexus, a division of Toyota, provides an example of how a firm can strengthen its differentiation strategy by achieving integration at multiple points along the value chain.32 Although the luxury car line was not introduced until the late 1980s, by the early 1990s the cars had already soared to the top of J. D. Power & Associates’ customer satisfaction ratings.
In the spirit of benchmarking, one of Lexus’s competitors hired Custom Research Inc. (CRI), a marketing research firm, to find out why Lexus owners were so satisfied. CRI conducted a series of focus groups in which Lexus drivers eagerly offered anecdotes about the special care they experienced from their dealers. It became clear that, although Lexus was manufacturing cars with few mechanical defects, it was the extra care shown by the sales and service staff that resulted in satisfied customers. Such pampering is reflected in the feedback from one customer who claimed she never had a problem with her Lexus. However, upon further probing, she said, “Well, I suppose you could call the four times they had to replace the windshield a ‘problem.’ But frankly, they took care of it so well and always gave me a loaner car, so I never really considered it a problem until you mentioned it now.” An insight gained in CRI’s research is that perceptions of product quality (design, engineering, and manufacturing) can be strongly influenced by downstream activities in the value chain (marketing and sales, service).
Strategy Spotlight 5.2 discusses how Unilever, a global consumer products firm, uses crowdsourcing to differentiate itself through increased sustainability.
Differentiation: Improving Competitive Position vis-à-vis the Five Forces Differentiation provides protection against rivalry since brand loyalty lowers customer sensitivity to price and raises customer switching costs.33 By increasing a firm’s margins, differentiation also avoids the need for a low-cost position. Higher entry barriers result because of customer loyalty and the firm’s ability to provide uniqueness in its products or services.34 Differentiation also provides higher margins that enable a firm to deal with supplier power. And it reduces buyer power, because buyers lack comparable alternatives and are therefore less price sensitive.35 Supplier power is also decreased because there is a certain amount of prestige associated with being the supplier to a producer of highly differentiated products and services. Last, differentiation enhances customer loyalty, thus reducing the threat from substitutes.36
Our examples illustrate these points. Lexus has enjoyed enhanced power over buyers because its top J. D. Power ranking makes buyers more willing to pay a premium price. This lessens rivalry, since buyers become less price-sensitive. The prestige associated with its brand name also lowers supplier power since margins are high. Suppliers would probably desire to be associated with prestige brands, thus lessening their incentives to drive up
prices. Finally, the loyalty and “peace of mind” associated with a service provider such as FedEx makes such firms less vulnerable to rivalry or substitute products and services.
CROWDSOURCING FOR DIFFERENTIATION IDEAS: UNILEVER’S EFFORTS TO PROPEL FORWARD ITS SUSTAINABILITY INITIATIVES
Unilever, a global manufacturer of consumer products such as Dove soap, Ben and Jerry’s ice cream, Lipton ice tea, Axe deodorants, and many other widely used products, is aiming to lead the market in its ability to run a sustainable business enterprise. As part of this effort, they published their Sustainable Living Plan in November 2010. Included in this plan were their ambitious goals to reduce the environmental footprint of Unilever by 50 percent and source all of their agricultural inputs from sustainable growers by 2020.
Knowing that these goals will be challenging to achieve, Uni-lever turned to the power of the crowd to develop initiatives to meet these targets. In April 2012, they hosted a 24-hour global crowdsourcing event, called the Sustainable Living Lab, to generate creative ideas on how to improve their sustainability. Speaking of the challenges facing Unilever as they strive to lead the market in sustainability, Miguel Pestana, VP of Global External Affairs at Unilever, stated, “We can’t solve these issues on our own. We need to engage with civil society, companies, government, and other key stakeholders.” Unilever designed this as an invitation-only event where they would get input from sustainability leaders and experts. The response they received from invited participants was very positive, with over 2200 individuals, including over 100 Unilever managers, coming together to co-create ideas and solutions to advance Unilever’s agenda of increasing the sustainability of their business and product line. They hosted discussion groups on four broad topics that encompassed activities across the entire value chain of Unilever. The topics discussed were sustainable sourcing, sustainable production and distribution, consumer behavior change, and recycling and waste.
The boards generated a large volume of discussion and also triggered a follow-up survey completed by over 400 participants. Unilever sees this event as a starting point, noting the need to remain committed to further developing the ideas generated in the event. Specifically, they plan to use the discussions as a basis on which to extend current and develop new partnerships with participating firms and organizations to help them achieve their sustainability goals. As one participant noted, “This was a great step to enable external specialists to collaborate with internal Unilever experts on key issues. This in itself was a significant step. The next step is to see how this could lead to collaboration that helps Uni-lever to drive more change to create a more sustainable sector.”
Sources: Holme, C. 2012. How Unilever crowdsourced creativity to meet its sustainability goals. Greenbiz.com, June 7, np; and Peluso, M. 2012. Unilever to crowdsource sustainability. MarketingWeek, April 10, np.
Potential Pitfalls of Differentiation Strategies Potential pitfalls of a differentiation strategy include:
Uniqueness that is not valuable. A differentiation strategy must provide unique bundles of products and/or services that customers value highly. It’s not enough just to be “different.” An example is Gibson’s Dobro bass guitar. Gibson came up with a unique idea: Design and build an acoustic bass guitar with sufficient sound volume so that amplification wasn’t necessary. The problem with other acoustic bass guitars was that they did not project enough volume because of the low-frequency bass notes. By adding a resonator plate on the body of the traditional acoustic bass, Gibson increased the sound volume. Gibson believed this product would serve a particular niche market—bluegrass and folk artists who played in small group “jams” with other acoustic musicians. Unfortunately, Gibson soon discovered that its targeted market was content with their existing options: an upright bass amplified with a microphone or an acoustic electric guitar. Thus, Gibson developed a unique product, but it was not perceived as valuable by its potential customers.37
Too much differentiation. Firms may strive for quality or service that is higher than customers desire.38 Thus, they become vulnerable to competitors who provide an appropriate level of quality at a lower price. For example, consider the expensive
Mercedes-Benz S-Class, which ranged in price between $93,650 and $138,000 for the 2011 models.39 Consumer Reports described it as “sumptuous,” “quiet and luxurious,” and a “delight to drive.” The magazine also considered it to be the least reliable sedan available in the United States. According to David Champion, who runs their testing program, the problems are electronic. “The engineers have gone a little wild,” he says. “They’ve put every bell and whistle that they think of, and sometimes they don’t have the attention to detail to make these systems work.” Some features include: a computer-driven suspension that reduces body roll as the vehicle whips around a corner; cruise control that automatically slows the car down if it gets too close to another car; and seats that are adjustable 14 ways and that are ventilated by a system that uses eight fans.
Too high a price premium. This pitfall is quite similar to too much differentiation. Customers may desire the product, but they are repelled by the price premium. For example, Duracell (a division of Gillette) recently charged too much for batteries.40 The firm tried to sell consumers on its superior quality products, but the mass market wasn’t convinced. Why? The price differential was simply too high. At a CVS drugstore just one block from Gillette’s headquarters, a four-pack of Energizer AA batteries was on sale at $2.99 compared with a Duracell four-pack at $4.59. Duracell’s market share dropped 2 percent in a recent two-year period, and its profits declined over 30 percent. Clearly, the price/performance proposition Duracell offered customers was not accepted.
Differentiation that is easily imitated. As we noted in Chapter 3, resources that are easily imitated cannot lead to sustainable advantages. Similarly, firms may strive for, and even attain, a differentiation strategy that is successful for a time. However, the advantages are eroded through imitation. Consider Cereality’s innovative differentiation strategy of stores which offer a wide variety of cereals and toppings for around $4.00.41 As one would expect, once their idea proved successful, competitors entered the market because much of the initial risk had already been taken. Rivals include an Iowa City restaurant named the Cereal Cabinet, the Cereal Bowl in Miami, and Bowls: A Cereal Joint in Gainesville, Florida. Says David Roth, one of Cereality’s founders: “With any good business idea, you’re faced with people who see you’ve cracked the code and who try to cash in on it.”
Dilution of brand identification through product-line extensions. Firms may erode their quality brand image by adding products or services with lower prices and less quality. Although this can increase short-term revenues, it may be detrimental in the long run. Consider Gucci.42 In the 1980s Gucci wanted to capitalize on its prestigious brand name by launching an aggressive strategy of revenue growth. It added a set of lower-priced canvas goods to its product line. It also pushed goods heavily into department stores and duty-free channels and allowed its name to appear on a host of licensed items such as watches, eyeglasses, and perfumes. In the short term, this strategy worked. Sales soared. However, the strategy carried a high price. Gucci’s indiscriminate approach to expanding its products and channels tarnished its sterling brand. Sales of its high-end goods (with higher profit margins) fell, causing profits to decline.
Perceptions of differentiation may vary between buyers and sellers. The issue here is that “beauty is in the eye of the beholder.” Companies must realize that although they may perceive their products and services as differentiated, their customers may view them as commodities. Indeed, in today’s marketplace, many products and services have been reduced to commodities.43 Thus, a firm could overprice its offerings and lose margins altogether if it has to lower prices to reflect market realities.
EXHIBIT 5.5 Potential Pitfalls of Overall Cost Leadership and Differentiation Strategies
Exhibit 5.5 summarizes the pitfalls of overall cost leadership and differentiation strategies. In addressing the pitfalls associated with these two generic strategies there is one common, underlying theme. Managers must be aware of the dangers associated with concentrating so much on one strategy that they fail to attain parity on the other.
A focus strategy is based on the choice of a narrow competitive scope within an industry. A firm following this strategy selects a segment or group of segments and tailors its strategy to serve them. The essence of focus is the exploitation of a particular market niche. As you might expect, narrow focus itself (like merely “being different” as a differentiator) is simply not sufficient for above-average performance.
a firm’s generic strategy based on appeal to a narrow market segment within an industry.
The focus strategy, as indicated in Exhibit 5.1, has two variants. In a cost focus, a firm strives to create a cost advantage in its target segment. In a differentiation focus, a firm seeks to differentiate in its target market. Both variants of the focus strategy rely on providing better service than broad-based competitors who are trying to serve the focuser’s target segment. Cost focus exploits differences in cost behavior in some segments, while differentiation focus exploits the special needs of buyers in other segments.
Let’s look at examples of two firms that have successfully implemented focus strategies. LinkedIn has staked out a position as the business social media site of choice. Rather than compete with Facebook head on, LinkedIn created a strategy that focuses on individuals who wish to share their business experience and make connections with individuals with whom they share or could potentially share business ties. In doing so, they have created an extremely strong business model. LinkedIn monetizes their user information in three ways: subscription fees from some users, advertising fees, and recruiter fees. The first two are fairly standard for social media sites, but the advertising fees are higher for LinkedIn since the ads can be more effectively targeted as a result of LinkedIn’s focus. The third income source is fairly unique for LinkedIn. Headhunters and human resource departments pay significant user fees, up to $8,200 a year, to have access to LinkedIn’s recruiting search engine that can sift through LinkedIn profiles to identify individuals with desired skills and experiences. The power of this business model can be seen in the difference in user value for LinkedIn when compared to Facebook. For every hour that a user spends on the site, LinkedIn generates $1.30 in income. For Facebook, it is a paltry 6.2 cents.44
Marlin Steel Wire Products, a Baltimore-based manufacturing company, has also seen great benefit from developing a niche-differentiator strategy. Marlin, a manufacturer of commodity wire products, faced stiff and ever-increasing competition from rivals based in China and other emerging markets. These rivals had labor-based cost advantages that Marlin found hard to counter. Marlin responded by changing the game they played. Drew Greenblatt, Marlin’s president, decided to go upmarket, automating his production and specializing in high-end products. For example, Marlin produces antimicrobial baskets for restaurant kitchens and exports its products globally. Marlin saw its sales grow from $800,000 in 1998 to $3 million in 2007.45
Strategy Spotlight 5.3 illustrates how BMW was able to build a strong niche position with its Mini line of cars.
MINI: STAKING OUT A SUCCESSFUL COMPACT CAR NICHE
BMW had a clear vision when it resurrected the vintage British automotive brand in 2001. It was simply to be the first premium brand in the compact car segment. Have they succeeded? Today, Mini sells nearly 300,000 cars a year and grew by over 20 percent from 2011 to 2012. It currently generates almost three times the sales of its most direct competing brand, Smart. BMW is also able to price the Mini at a premium relative to its key competitors, with a typical Mini selling for between $20,000 and $25,000. According to Jurgen Pieper, an analyst with Bankhaus Metzler, the Mini brand is quite profitable, earning about $250 million a year in a fairly difficult automotive market.
BMW was able to create this premium compact car niche using a business model with a set of mutually reinforcing attributes. First, they designed the car to offer a unique combination of modern features and capabilities with a classic design. The Mini nameplate was originally on a small British car in 1959. While the model launched by BMW in 2001 has little in common with the original, the basic style of the car reflects the look of the original and allowed it to clearly stand out from the modern SUVs and sedans that dominate today’s car market. Thus, the look of the car was one of its key selling points. Second, they set the car apart from most other brands by using low-cost, event-focused advertisements to push the car. For example, rather than advertise on TV during sporting events, they placed a cardboard model of the car seated in football stadiums like a fan appearing to watch the game. BMW also benefited by having the car used as a central element in Hollywood movies, such as Austin Powers in Goldmember in 2002 and The Italian Job in 2003. Today, Mini continues their different advertising methods, spending over half their advertising budget on digital media, such as social networking, online videos, and ads targeted to mobile devices. Third, they have regularly extended Mini’s product line while keeping a consistent look and styling. In addition to the basic model, they now have seven different models and could go up to 10 different models, but they all are easily recognizable as Minis.
The challenge that the leaders of Mini face is one that niche differentiators regularly face. They must regularly strive to freshen their product line and look for opportunities to grow their business without losing their focus on what makes Mini different.
Sources: Edmonson, G. & Eidam, M. 2004. BMW’s Mini just keeps getting mightier. businessweek.com, April 4: np; Reiter, C. 2012. BMW’s Mini: Little, but she is fierce! Bloomberg Businessweek, February 6: 24–25; and Foley, A. 2012. Online connections key to Mini’s success, marketing chief says. wardsauto.com, October 24: np.
Focus: Improving Competitive Position vis-à-vis the Five Forces Focus requires that a firm either have a low-cost position with its strategic target, high differentiation, or both. As we discussed with regard to cost and differentiation strategies, these positions provide defenses against each competitive force. Focus is also used to select niches that are least vulnerable to substitutes or where competitors are weakest.
Let’s look at our examples to illustrate some of these points. First, by providing a platform for a targeted customer group, business people, to share key work information, LinkedIn insulated itself from rivalrous pressure from existing social networks, such as Facebook. It also felt little threat from new generalist social networks, such as Google 1. Similarly, the new focus of Marlin Steel lessened the power of buyers since they provide specialized products. Also, they are insulated from competitors, who manufacture the commodity products Marlin used to produce.
Potential Pitfalls of Focus Strategies Potential pitfalls of focus strategies include:
Erosion of cost advantages within the narrow segment. The advantages of a cost focus strategy may be fleeting if the cost advantages are eroded over time. For example, Dell’s pioneering direct-selling model in the personal computer industry has been eroded by rivals such as Hewlett-Packard as they gain experience with Dell’s distribution method. Similarly, other firms have seen their profit margins drop as competitors enter their product segment.
Even product and service offerings that are highly focused are subject to competition from new entrants and from imitation. Some firms adopting a focus strategy may enjoy temporary advantages because they select a small niche with
few rivals. However, their advantages may be short-lived. A notable example is the multitude of dot-com firms that specialize in very narrow segments such as pet supplies, ethnic foods, and vintage automobile accessories. The entry barriers tend to be low, there is little buyer loyalty, and competition becomes intense. And since the marketing strategies and technologies employed by most rivals are largely nonproprietary, imitation is easy. Over time, revenues fall, profits margins are squeezed, and only the strongest players survive the shakeout.
Focusers can become too focused to satisfy buyer needs. Some firms attempting to attain advantages through a focus strategy may have too narrow a product or service. Consider many retail firms. Hardware chains such as Ace and True Value are losing market share to rivals such as Lowe’s and Home Depot that offer a full line of home and garden equipment and accessories. And given the enormous purchasing power of the national chains, it would be difficult for such specialty retailers to attain parity on costs.
Combination Strategies: Integrating Overall Low Cost and Differentiation
Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the difficulty for rivals to duplicate or imitate.46 This strategy enables a firm to provide two types of value to customers: differentiated attributes (e.g., high quality, brand identification, reputation) and lower prices (because of the firm’s lower costs in value-creating activities). The goal is thus to provide unique value to customers in an efficient manner.47 Some firms are able to attain both types of advantages simultaneously.48 For example, superior quality can lead to lower costs because of less need for rework in manufacturing, fewer warranty claims, a reduced need for customer service personnel to resolve customer complaints, and so forth. Thus, the benefits of combining advantages can be additive, instead of merely involving tradeoffs. Next, we consider three approaches to combining overall low cost and differentiation.
How firms can effectively combine the generic strategies of overall cost leadership and differentiation.
firms’ integrations of various strategies to provide multiple types of value to customers.
Automated and Flexible Manufacturing Systems Given the advances in manufacturing technologies such as CAD/CAM (computer aided design and computer aided manufacturing) as well as information technologies, many firms have been able to manufacture unique products in relatively small quantities at lower costs—a concept known as mass customization.49
a firm’s ability to manufacture unique products in small quantities at low cost.
Let’s consider Andersen Windows of Bayport, Minnesota—a $3 billion manufacturer of windows for the building industry.50 Until about 20 years ago, Andersen was a mass producer, in small batches, of a variety of standard windows. However, to meet changing customer needs, Andersen kept adding to its product line. The result was catalogs of ever-increasing size and a bewildering set of choices for both homeowners and contractors. Over a 6-year period, the number of products tripled, price quotes took several hours, and the error rate increased. This not only damaged the company’s reputation, but also added to its manufacturing expenses.
To bring about a major change, Andersen developed an interactive computer version of its paper catalogs that it sold to distributors and retailers. Salespersons can now customize each window to meet the customer’s needs, check the design for structural soundness, and provide a price quote. The system is virtually error free, customers get exactly what they want, and the time to develop the design and furnish a quotation has been cut by 75 percent. Each showroom computer is connected to the factory, and customers are assigned a code number that permits them to track the order. The manufacturing system has been developed to use some common finished parts, but it also allows considerable variation in the final products. Despite its huge investment, Andersen has been able to lower costs, enhance quality and variety, and improve its response time to customers.
EXHIBIT 5.6 Effective Uses of Flexible Production Systems
Source: Randall, T., Terwiesch, C. & Ulrich, K. T. 2005. Principles for User Design of Custom Products. California Management Review, 47(4): 68–85.
Exhibit 5.6 provides other examples of how flexible production systems have enabled firms to successfully engage in mass customization for their customers:51
Exploiting the Profit Pool Concept for Competitive Advantage A profit pool is defined as the total profits in an industry at all points along the industry’s value chain.52 Although the concept is relatively straightforward, the structure of the profit pool can be complex.53 The potential pool of profits will be deeper in some segments of the value chain than in others, and the depths will vary within an individual segment. Segment profitability may vary widely by customer group, product category, geographic market, or distribution channel. Additionally, the pattern of profit concentration in an industry is very often different from the pattern of revenue generation. Strategy Spotlight 5.4 outlines how major consumer electronics retailers are expanding the profit pools in their market with the concept of buyback insurance.
the total profits in an industry at all points along the industry’s value chain.
Coordinating the “Extended” Value Chain by Way of Information Technology Many firms have achieved success by integrating activities throughout the “extended value chain” by using information technology to link their own value chain with the value chains of their customers and suppliers. As noted in Chapter 3, this approach enables a firm to add value not only through its own value-creating activities, but also for its customers and suppliers.
Such a strategy often necessitates redefining the industry’s value chain. A number of years ago, Walmart took a close look at its industry’s value chain and decided to reframe the competitive challenge.54 Although its competitors were primarily focused on retailing—merchandising and promotion—Walmart determined that it was not so much in the retailing industry as in the transportation logistics and communications industries. Here, linkages in the extended value chain became central. That became Walmart’s chosen battleground. By redefining the rules of competition that played to its strengths, Walmart has attained competitive advantages and dominates its industry.
Integrated Overall Low-Cost and Differentiation Strategies: Improving Competitive Position vis-à-vis the Five Forces Firms that successfully integrate both differentiation and cost advantages create an enviable position. For example, Walmart’s integration of information systems, logistics, and transportation helps it to drive down costs and provide outstanding product selection. This dominant competitive position, serves to erect high entry barriers to potential competitors that have neither the financial nor physical resources to compete head-to-head. Walmart’s size—with nearly $450 billion in sales in 2012—provides the chain with enormous bargaining power over suppliers. Its low pricing and wide selection reduce the power of buyers (its customers), because there are relatively few
competitors that can provide a comparable cost/value proposition. This reduces the possibility of intense head-to-head rivalry, such as protracted price wars. Finally, Walmart’s overall value proposition makes potential substitute products (e.g., Internet competitors) a less viable threat.
EXPANDING THE PROFIT POOL OF ELECTRONICS RETAILING WITH BUYBACK INSURANCE
Consumer electronics retailers find themselves in a very competitive market, facing a range of competitors, including other traditional electronics retailers, discount retailers, and online merchants. As a result, the profit margins on the sale of products have declined. The major retailers, including Best Buy, Radio Shack, and Office Depot, have found a new source of profits that taps into consumers’ desires to stay at the forefront of technology.
Many buyers desire to stay current with the latest electronic gadgets, but this can get very expensive and leave individuals with drawers or closets full of barely out-of-date electronics. The major retailers have found a winning solution to address this issue: buy-back insurance. Each retailer’s plan is somewhat unique, but they all follow the same basic pattern. Consumers pay an up-front fee when they purchase new electronics, and, in turn, the retailer agrees to buy back the electronic device for up to half its original cost if a customer returns it within a specified period—usually two or three years. The buyback price declines the longer the consumer keeps the product. For example, if a buyer returns a mobile phone in 6 months, they may get 50 percent of the price back, but it will decline to 20 percent at 18 months.
For the consumers, this provides convenience and a sense of comfort that they can upgrade whenever they want. The retailers also argue that these programs foster sustainability, since they either resell the returned products or recycle products that no longer retain resale value.
For the retailers, these programs are clear winners. The fees associated with the plans can be pretty steep—$60 for a smart-phone or $180 for an HDTV. If customers use the plan, it often stimulates them to upgrade to new products more quickly, so that they can benefit from signing up for the plan. Additionally, retailers can often resell the products for more than the buyback price. However, consumers who opt to sign up for the buyback plans often fail to use the buyback program in the end. In fact, one industry insider estimates that fewer than 10 percent of customers who purchase buyback plans actually use them. In these cases, the buyback fees are simply free money for the retailers.
Sources: Kharif, O. 2011. Buyback insurance on an iPad is $50 and pays out half the cost of the device if you return it within six months. Sound like a deal? Bloomberg Businessweek, August 1: 35–36; and Canning, A. 2011. Best Buy “buy back” insurance hopes to lure early-adopters for tech trade-ins. abcnews.go.com, February 10: np.
Pitfalls of Integrated Overall Cost Leadership and Differentiation Strategies The pitfalls of integrated overall cost leadership and differentiation include:
Firms that fail to attain both strategies may end up with neither and become “stuck in the middle.” A key issue in strategic management is the creation of competitive advantages that enable a firm to enjoy above-average returns. Some firms may become “stuck in the middle” if they try to attain both cost and differentiation advantages. As mentioned earlier in this chapter, mainline supermarket chains find themselves stuck in the middle as their cost structure is higher than discount retailers offering groceries, and their products and services are not seen by consumers as being as valuable as those of high-end grocery chains, such as Whole Foods.
Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain. Integrating activities across a firm’s value chain with the value chain of suppliers and customers involves a significant investment in financial and human resources. Firms must consider the expenses linked to technology investment, managerial time and commitment, and the involvement and investment required by the firm’s customers and suppliers. The firm must be confident that it can generate a sufficient scale of operations and revenues to justify all associated expenses.
Miscalculating sources of revenue and profit pools in the firm’s industry. Firms may fail to accurately assess sources of revenue and profits in their value chain. This can occur for several reasons. For example, a manager may be biased due to his or her functional area background, work experiences, and educational background. If the manager’s background is in engineering, he or she might perceive that proportionately greater revenue and margins were being created in manufacturing, product, and process design than a person whose background is in a “downstream” value-chain activity such as marketing and sales. Or politics could make managers “fudge” the numbers to favor their area of operations. This would make them responsible for a greater proportion of the firm’s profits, thus improving their bargaining position.
A related problem is directing an overwhelming amount of managerial time, attention, and resources to value-creating activities that produce the greatest margins—to the detriment of other important, albeit less profitable, activities. For example, a car manufacturer may focus too much on downstream activities, such as warranty fulfillment and financing operations, to the detriment of differentiation and cost of the cars themselves.
What factors determine the sustainability of a firm’s competitive advantage.
Can Competitive Strategies Be Sustained? Integrating and Applying Strategic Management Concepts
Thus far this chapter has addressed how firms can attain competitive advantages in the marketplace. We discussed the three generic strategies—overall cost leadership, differentiation, and focus—as well as combination strategies. Next we discussed the importance of linking value-chain activities (both those within the firm and those linkages between the firm’s suppliers and customers) to attain such advantages. We also showed how successful competitive strategies enable firms to strengthen their position vis-à-vis the five forces of industry competition as well as how to avoid the pitfalls associated with the strategies.
Competitive advantages are, however, often short-lived. As we discussed in the beginning of Chapter 1, the composition of the firms that constitute the Fortune 500 list has experienced significant turnover in its membership over the years—reflecting the temporary nature of competitive advantages. Consider Dell’s fall from grace. Here was a firm whose advantages in the marketplace seemed unassailable in the early 2000s. In fact, it was Fortune ’s “Most Admired Firm” in 2005. However, cracks began to appear in 2007, and its competitive position has recently been severely eroded by both its traditional competitors and by an onslaught of firms selling tablets and other mobile devices. As a result, Dell’s stock price declined by 56 percent over a five-year period ending at the start of 2013. In short, Dell focused so much on operational efficiency and perfecting its “direct model” that it failed to deliver innovations that an increasingly sophisticated market demanded.55
Clearly, “nothing is forever” when it comes to competitive advantages. Rapid changes in technology, globalization, and actions by rivals from within—as well as outside—the industry can quickly erode a firm’s advantages. It is becoming increasingly important to recognize that the duration of competitive advantages is declining, especially in technology intensive industries.56 Even in industries which are normally viewed as “low tech,” the increasing use of technology has suddenly made competitive advantages less sustainable.57 Amazon’s success in book retailing at the cost of Barnes & Noble, the former industry leader, as well as Blockbuster’s struggle against Netflix and, in turn, Netflix’s difficulty in responding to Redbox in the video rental industry serve to illustrate how difficult it has become for industry leaders to sustain competitive advantages that they once thought would last forever.
In this section, we will discuss some factors that help determine whether a strategy is sustainable over a long period of time. We will draw on some strategic management concepts from the first five chapters. To illustrate our points, we will look at a company, Atlas Door, which created an innovative strategy in its industry and enjoyed superior
performance for several years. Our discussion of Atlas Door draws on a Harvard Business Review article by George Stalk, Jr.58 It was published some time ago (1988), which provides us the benefit of hindsight to make our points about the sustainability of competitive advantage. After all, the strategic management concepts we have been addressing in the text are quite timeless in their relevance to practice. A brief summary follows:
Atlas Door: A Case Example
Atlas Door, a U.S.-based company, has enjoyed remarkable success. It has grown at an average annual rate of 15 percent in an industry with an overall annual growth rate of less than 5 percent. Recently, its pre-tax earnings were 20 percent of sales—about five times the industry average. Atlas is debt free and by its 10th year, the company achieved the number one competitive position in its industry.
Atlas produces industrial doors—a product with almost infinite variety, involving limitless choices of width and height and material. Given the importance of product variety, inventory is almost useless in meeting customer orders. Instead, most doors can be manufactured only after the order has been placed.
How Did Atlas Door Create Its Competitive Advantages in the Marketplace? First, Atlas built just-in-time factories. Although simple in concept, they require extra tooling and machinery to reduce changeover times. Further, the manufacturing process must be organized by product and scheduled to start and complete with all of the parts available at the same time.
Second, Atlas reduced the time to receive and process an order. Traditionally, when customers, distributors, or salespeople called a door manufacturer with a request for price and delivery, they would have to wait more than one week for a response. In contrast, Atlas first streamlined and then automated its entire order-entry, engineering, pricing, and scheduling process. Atlas can price and schedule 95 percent of its incoming orders while the callers are still on the telephone. It can quickly engineer new special orders because it has preserved on computer the design and production data of all previous special orders—which drastically reduces the amount of reengineering necessary.
Third, Atlas tightly controlled logistics so that it always shipped only fully complete orders to construction sites. Orders require many components, and gathering all of them at the factory and making sure that they are with the correct order can be a time-consuming task. Of course, it is even more time-consuming to get the correct parts to the job site after the order has been shipped! Atlas developed a system to track the parts in production and the purchased parts for each order. This helped to ensure the arrival of all necessary parts at the shipping dock in time—a just-in-time logistics operation.
The Result? When Atlas began operations, distributors had little interest in its product. The established distributors already carried the door line of a much larger competitor and saw little to no reason to switch suppliers except, perhaps, for a major price concession. But as a startup, Atlas was too small to compete on price alone. Instead, it positioned itself as the door supplier of last resort—the company people came to if the established supplier could not deliver or missed a key date.
Of course, with an average industry order fulfillment time of almost four months, some calls inevitably came to Atlas. And when it did get the call, Atlas commanded a higher price because of its faster delivery. Atlas not only got a higher price, but its effective integration of value-creating activities saved time and lowered costs. Thus, it enjoyed the best of both worlds.
In 10 short years, the company replaced the leading door suppliers in 80 percent of the distributors in the United States. With its strategic advantage, the company could be selective—becoming the supplier for only the strongest distributors.
Are Atlas Door’s Competitive Advantages Sustainable?
We will now take both the “pro” and “con” position as to whether or not Atlas Door’s competitive advantages will be sustainable for a very long time. It is important, of course, to assume that Atlas Door’s strategy is unique in the industry, and the central issue becomes whether or not rivals will be able to easily imitate their strategy or create a viable substitute strategy.
“Pro” Position: The Strategy Is Highly Sustainable Drawing on Chapter 2, it is quite evident that Atlas Door has attained a very favorable position vis-á-vis the five forces of industry competition. For example, it is able to exert power over its customers (distributors) because of its ability to deliver a quality product in a short period of time. Also, its dominance in the industry creates high entry barriers for new entrants. It is also quite evident that Atlas Door has been able to successfully integrate many value-chain activities within the firm—a fact that is integral to its just-in-time strategy. As noted in Chapter 3, such integration of activities provides a strong basis for sustainability, because rivals would have difficulty in imitating this strategy due to causal ambiguity and path dependency (i.e., it is difficult to build up in a short period of time the resources that Atlas Door has accumulated and developed as well as disentangle the causes of what the valuable resources are or how they can be re-created). Further, as noted in Chapter 4, Atlas Door benefits from the social capital that they have developed with a wide range of key stakeholders (Chapter 1) These would include customers, employees, and managers (a reasonable assumption, given how smoothly the internal operations flow and their long-term relationships with distributors). It would be very difficult for a rival to replace Atlas Door as the supplier of last resort—given the reputation that it has earned over time for “coming through in the clutch” on time-sensitive orders. Finally, we can conclude that Atlas Door has created competitive advantages in both overall low cost and differentiation (Chapter 5). Its strong linkages among value-chain activities—a requirement for its just-in-time operations—not only lowers costs but enables the company to respond quickly to customer orders. As noted in Exhibit 5.4, many of the value-chain activities associated with a differentiation strategy reflect the element of speed or quick response.
“Con” Position: The Strategy Can Be Easily Imitated or Substituted An argument could be made that much of Atlas Door’s strategy relies on technologies that are rather well known and nonproprietary. Over time, a well-financed rival could imitate its strategy (via trial and error), achieve a tight integration among its value-creating activities, and implement a just-in-time manufacturing process. Because human capital is highly mobile (Chapter 4), a rival could hire away Atlas Door’s talent, and these individuals could aid the rival in transferring Atlas Door’s best practices. A new rival could also enter the industry with a large resource base, which might enable it to price its doors well under Atlas Door to build market share (but this would likely involve pricing below cost and would be a risky and nonsustainable strategy). Finally, a rival could potentially “leapfrog” the technologies and processes that Atlas Door has employed and achieve competitive superiority. With the benefit of hindsight, it could use the Internet to further speed up the linkages among its value-creating activities and the order entry processes with its customers and suppliers. (But even this could prove to be a temporary advantage, since rivals could relatively easily do the same thing.)
What Is the Verdict? Both positions have merit. Over time, it would be rather easy to see how a new rival could achieve parity with Atlas Door—or even create a superior competitive position with new technologies or innovative processes. However, two factors make it extremely difficult for a rival to challenge Atlas Door in the short term: (1) the success that Atlas Door has enjoyed with its just-in-time scheduling and production systems—which
involve the successful integration of many value-creating activities—helps the firm not only lower costs but also respond quickly to customer needs, and (2) the strong, positive reputational effects that it has earned with multiple stakeholders—especially its customers.
Finally, it is important to also understand that it is Atlas Door’s ability to appropriate most of the profits generated by its competitive advantages that make it a highly successful company. As we discussed in Chapter 3, profits generated by resources can be appropriated by a number of stakeholders such as suppliers, customers, employees, or rivals. The structure of the industrial door industry makes such value appropriation difficult: the suppliers provide generic parts, no one buyer is big enough to dictate prices, the tacit nature of the knowledge makes imitation difficult, and individual employees may be easily replaceable. Still, even with the advantages that Atlas Door enjoys, they need to avoid becoming complacent or suffer the same fate as the dominant firm they replaced.
How the Internet and Digital Technologies Affect the Competitive Strategies
Internet and digital technologies have swept across the economy and now have an impact on how nearly every company conducts its business. These changes have created new cost efficiencies and avenues for differentiation. However, the presence of these technologies is so widespread that it is questionable how any one firm can use them effectively in ways that genuinely set them apart from rivals. Thus, to stay competitive, firms must update their strategies to reflect the new possibilities and constraints that these phenomena represent. In this section, we address both the opportunities and the pitfalls that Internet and digital technologies offer to companies using overall cost leadership, differentiation, and focus strategies. We also briefly consider two major impacts that the Internet is having on business: lowering transaction costs and enabling mass customization.
How Internet-enabled business models are being used to improve strategic positioning.
information that is in numerical form, which facilitates its storage, transmission, analysis and manipulation.
Overall Cost Leadership
The Internet and digital technologies create new opportunities for firms to achieve low-cost advantages by enabling them to manage costs and achieve greater efficiencies. Managing costs, and even changing the cost structures of certain industries, is a key feature of the digital economy. Most analysts agree that the Internet’s ability to lower transaction costs has transformed business. Broadly speaking, transaction costs refer to all the various expenses associated with conducting business. It applies not just to buy/sell transactions but to the costs of interacting with every part of a firm’s value chain, within and outside the firm. Think about it. Hiring new employees, meeting with customers, ordering supplies, addressing government regulations—all of these exchanges have some costs associated with them. Because business can be conducted differently on the Internet, new ways of saving money are changing the competitive landscape.
Other factors also help to lower transaction costs. The process of disintermediation (in Chapter 2) has a similar effect. Each time intermediaries are used in a transaction, additional costs are added. Removing intermediaries lowers transaction costs. The Internet reduces the costs to search for a product or service, whether it is a retail outlet (as in the case of consumers) or a trade show (as in the case of business-to-business shoppers). Not only is the need for travel eliminated but so is the need to maintain a physical address, whether it’s a permanent retail location or a temporary presence at a trade show.
Potential Internet-Related Pitfalls for Low-Cost Leaders One of the biggest threats to low-cost leaders is imitation. This problem is intensified for business done on the Internet. Most of the advantages associated with contacting customers directly, and even capabilities that are software driven (e.g., customized ordering systems or real-time access to the status of work in progress), can be duplicated quickly and without threat of infringement
on proprietary information. Another pitfall relates to companies that become overly enamored with using the Internet for cost-cutting and thus jeopardize customer relations or neglect other cost centers.
For many companies, Internet and digital technologies have enhanced their ability to build brand, offer quality products and services, and achieve other differentiation advantages.59 Among the most striking trends are new ways to interact with consumers. In particular, the Internet has created new ways of differentiating by enabling mass customization, which improves the response to customer wishes.
Mass customization has changed how companies go to market and has challenged some of the tried-and-true techniques of differentiation. Traditionally, companies reached customers using high-end catalogs, the showroom floor, personal sales calls and products using prestige packaging, celebrity endorsements, and charity sponsorships. All of these avenues are still available and may still be effective, depending on a firm’s competitive environment. But many customers now judge the quality and uniqueness of a product or service by their ability to be involved in its planning and design, combined with speed of delivery and reliable results. Internet and digitally based capabilities are thus changing the way differentiators make exceptional products and achieve superior service. Such improvements are being made at a reasonable cost, allowing firms to achieve parity on the basis of overall cost leadership.
Potential Internet-Related Pitfalls for Differentiators Traditional differentiation strategies such as building strong brand identity and prestige pricing have been undermined by Internet-enabled capabilities such as the ability to compare product features side-by-side or bid online for competing services. The sustainability of Internet-based gains from differentiation will deteriorate if companies offer differentiating features that customers don’t want or create a sense of uniqueness that customers don’t value. The result can be a failed value proposition—the value companies thought they were offering, does not translate into sales.
A focus strategy targets a narrow market segment with customized products and/or services. With focus strategies, the Internet offers new avenues in which to compete because they can access markets less expensively (low cost) and provide more services and features (differentiation). Some claim that the Internet has opened up a new world of opportunities for niche players who seek to access small markets in a highly specialized fashion.60 Niche businesses are among the most active users of digital technologies and e-business solutions, using the Internet and digital technologies to create more viable focus strategies.
Many aspects of the Internet economy favor focus strategies because niche players and small firms have been able to extend their reach and effectively compete with larger competitors. For example, niche firms can more easily employ Twitter and other social media to connect in personalized ways with their focused customer groups. With these social media tools, they can solicit input, respond quickly to customer feedback, and provide overall improvements in customer service. Thus, the Internet has provided many firms that pursue focus strategies with new tools for creating competitive advantages.
Potential Internet-Related Pitfalls for Focusers A key danger for focusers using the Internet relates to correctly assessing the size of the online marketplace. Focusers can misread the scope and interests of their target markets. This can cause them to focus on segments that are too narrow to be profitable or to lose their uniqueness in overly broad niches, making them vulnerable to imitators or new entrants.
What happens when an e-business focuser tries to overextend its niche? Efforts to appeal to a broader audience by carrying additional inventory, developing additional content, or offering additional services can cause it to lose the cost advantages associated with a limited product or service offering.
Are Combination Strategies the Key to E-Business Success?
Because of the changing dynamics presented by digital and Internet-based technologies, new strategic combinations that make the best use of the competitive strategies may hold the greatest promise.61 Many experts agree that the net effect of the digital economy is fewer rather than more opportunities for sustainable advantages.62 This means strategic thinking becomes more important.
More specifically, the Internet has provided all companies with greater tools for managing costs. So it may be that cost management and control will become more important management tools. In general, this may be good if it leads to an economy that makes more efficient use of its scarce resources. However, for individual companies, it may shave critical percentage points off profit margins and create a climate that makes it impossible to survive, much less achieve sustainable above-average profits.
Many differentiation advantages are also diminished by the Internet. The ability to comparison shop—to check product reviews and inspect different choices with a few clicks of the mouse—is depriving some companies, such as auto dealers, of the unique advantages that were the hallmark of their prior success. Differentiating is still an important strategy, of course. But how firms achieve it may change, and the best approach may be to combine differentiation with other competitive strategies.
Perhaps the greatest beneficiaries are the focusers who can use the Internet to capture a niche that previously may have been inaccessible. However, because the same factors that make it possible for a small niche player to be a contender may make that same niche attractive to a big company. That is, an incumbent firm that previously thought a niche market was not worth the effort may use Internet technologies to enter that segment for a lower cost than in the past. The larger firm can then bring its market power and resources to bear in a way that a smaller competitor cannot match.
A combination strategy challenges a company to carefully blend alternative strategic approaches and remain mindful of the impact of different decisions on the firm’s value-creating processes and its extended value-chain activities. Strong leadership is needed to maintain a bird’s-eye perspective on a company’s overall approach and to coordinate the multiple dimensions of a combination strategy.
Strategy Spotlight 5.5 describes how two legal firms are using Internet and digital technologies to successfully combine both differentiation and overall low-cost advantages.
Industry Life-Cycle Stages: Strategic Implications
The industry life cycle refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry. In considering the industry life cycle, it is useful to think in terms of broad product lines such as personal computers, photocopiers, or long-distance telephone service. Yet the industry life cycle concept can be explored from several levels, from the life cycle of an entire industry to the life cycle of a single variation or model of a specific product or service.
industry life cycle
the stages of introduction, growth, maturity, and decline that typically occur over the life of an industry.
The importance of considering the industry life cycle to determine a firm’s business-level strategy and its relative emphasis on functional area strategies and value-creating activities.
Why are industry life cycles important?63 The emphasis on various generic strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle. Managers must become even more aware of their firm’s strengths and weaknesses in many areas to attain competitive advantages. For example, firms depend on their research and development (R&D) activities in the introductory stage. R&D is the source of new products and features that everyone hopes will appeal
to customers. Firms develop products and services to stimulate consumer demand. Later, during the maturity phase, the functions of the product have been defined, more competitors have entered the market, and competition is intense. Managers then place greater emphasis on production efficiencies and process (as opposed to the product) engineering in order to lower manufacturing costs. This helps to protect the firm’s market position and to extend the product life cycle because the firm’s lower costs can be passed on to consumers in the form of lower prices, and price-sensitive customers will find the product more appealing.
HOW THE INTERNET CHANGES LEGAL SERVICES: INTEGRATING LOW COST AND DIFFERENTIATION STRATEGIES
The Internet has a profound impact on many industries. As highlighted in Strategy Spotlight 2.7, the legal profession underwent some dramatic changes that increased the bargaining power of consumers of legal services. However, the Internet and information technology (IT) are also having a profound impact on the business-level strategies of law firms. While conventional law firms charge hourly fees, reside in prestigious downtown locations, and require face-to-face interactions, a new breed of legal service firms utilizes technology to lower costs while at the same time providing unique services to its customers.
The increasing use of IT systems has had a profound impact on legal matters that are quite standardized but require great attention to detail. Previously, newly minted lawyers spent many hours on routine tasks such as document review. Today, IT systems help law firms to become more cost efficient. For instance, Clearwell Systems Inc. offers software that automates document review in the litigation process and reduces processing time for these standard tasks by up to 50 percent.
Another example is Clearspire.com. Clearspire offers legal services to enterprise customers in a radically new business model. Most notably, Clearspire lawyers work mostly from home in a “virtual office.” This IT system is able to reduce costs for clients and Clearspire alike. Besides becoming more cost efficient, Clearspire provides added value to its clients. Clearspire’s IT system allows 24/7 access to relevant documents and tracks every step of the legal process. Added value comes, for instance, from increased transparency from real-time progress reporting and online billing. Clearspire’s Internet-powered business model is a prime example of utilizing IT technology to becoming more efficient, while at the same time differentiating themselves from the more traditional law firms on attributes that customers value.
Sources: Automating law. 2011. www.diligenceengine.com, July 12: np; Computer use in legal work: How automation software is changing law. 2011. www.lawvibe.com: np; and Alternative law firms: Bargain briefs. 2011. The Economist, August 13: 64.
Exhibit 5.7 illustrates the four stages of the industry life cycle and how factors such as generic strategies, market growth rate, intensity of competition, and overall objectives change over time. Managers must strive to emphasize the key functional areas during each of the four stages and to attain a level of parity in all functional areas and value-creating activities. For example, although controlling production costs may be a primary concern during the maturity stage, managers should not totally ignore other functions such as marketing and R&D. If they do, they can become so focused on lowering costs that they miss market trends or fail to incorporate important product or process designs. Thus, the firm may attain low-cost products that have limited market appeal.
It is important to point out a caveat. While the life cycle idea is analogous to a living organism (i.e., birth, growth, maturity, and death), the comparison has limitations.64 Products and services go through many cycles of innovation and renewal. Typically, only fad products have a single life cycle. Maturity stages of an industry can be “transformed” or followed by a stage of rapid growth if consumer tastes change, technological innovations take place, or new developments occur. The cereal industry is a good example. When medical research indicated that oat consumption reduced a person’s cholesterol, sales of Quaker Oats increased dramatically.65
EXHIBIT 5.7 Stages of the Industry Life Cycle
Strategies in the Introduction Stage
In the introduction stage, products are unfamiliar to consumers.66 Market segments are not well defined, and product features are not clearly specified. The early development of an industry typically involves low sales growth, rapid technological change, operating losses, and the need for strong sources of cash to finance operations. Since there are few players and not much growth, competition tends to be limited.
the first stage of the industry life cycle, characterized by (1) new products that are not known to customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support.
Success requires an emphasis on research and development and marketing activities to enhance awareness. The challenge becomes one of (1) developing the product and finding a way to get users to try it, and (2) generating enough exposure so the product emerges as the “standard” by which all other rivals’ products are evaluated.
There’s an advantage to being the “first mover” in a market.67 It led to Coca-Cola’s success in becoming the first soft-drink company to build a recognizable global brand and enabled Caterpillar to get a lock on overseas sales channels and service capabilities.
However, there can also be a benefit to being a “late mover.” Target carefully considered its decision to delay its Internet strategy. Compared to its competitors Walmart and Kmart, Target was definitely an industry laggard. But things certainly turned out well:68
By waiting, Target gained a late-mover advantage. The store was able to use competitors’ mistakes as its own learning curve. This saved money, and customers didn’t seem to mind the wait: When Target finally opened its website, it quickly captured market share from both Kmart and Walmart Internet shoppers. Forrester Research Internet analyst Stephen Zrike commented, “There’s no question, in our mind, that Target has a far better understanding of how consumers buy online.”
Examples of products currently in the introductory stages of the industry life cycle include electric vehicles and 3D TVs.
Strategies in the Growth Stage
The growth stage is characterized by strong increases in sales. Such potential attracts other rivals. In the growth stage, the primary key to success is to build consumer preferences for specific brands. This requires strong brand recognition, differentiated products, and the financial resources to support a variety of value-chain activities such as marketing and sales, and research and development. Whereas marketing and sales initiatives were mainly directed at spurring aggregate demand—that is, demand for all such products in the introduction stage—efforts in the growth stage are directed toward stimulating selective demand, in which a firm’s product offerings are chosen instead of a rival’s.
the second stage of the product life cycle, characterized by (1) strong increases in sales; (2) growing competition; (3) developing brand recognition; and (4) a need for financing complementary value-chain activities such as marketing, sales, customer service, and research and development.
Revenues increase at an accelerating rate because (1) new consumers are trying the product and (2) a growing proportion of satisfied consumers are making repeat purchases.69 In general, as a product moves through its life cycle, the proportion of repeat buyers to new purchasers increases. Conversely, new products and services often fail if there are relatively few repeat purchases. For example, Alberto-Culver introduced Mr. Culver’s Sparklers, which were solid air fresheners that looked like stained glass. Although the product quickly went from the introductory to the growth stage, sales collapsed. Why? Unfortunately, there were few repeat purchasers because buyers treated them as inexpensive window decorations, left them there, and felt little need to purchase new ones. Examples of products currently in the growth stage include cloud computing data storage services and high-definition television (HDTV).
Strategies in the Maturity Stage
In the maturity stage aggregate industry demand softens. As markets become saturated, there are few new adopters. It’s no longer possible to “grow around” the competition, so direct competition becomes predominant.70 With few attractive prospects, marginal competitors exit the market. At the same time, rivalry among existing rivals intensifies because of fierce price competition at the same time that expenses associated with attracting new buyers are rising. Advantages based on efficient manufacturing operations and process engineering become more important for keeping costs low as customers become more price sensitive. It also becomes more difficult for firms to differentiate their offerings, because users have a greater understanding of products and services.
the third stage of the product life cycle, characterized by (1) slowing demand growth, (2) saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on efficient operations.
An article in Fortune magazine that addressed the intensity of rivalry in mature markets was aptly titled “A Game of Inches.” It stated, “Battling for market share in a slowing industry can be a mighty dirty business. Just ask laundry soap archrivals Unilever and Procter & Gamble.”71 These two firms have been locked in a battle for market share since 1965. Why is the competition so intense? There is not much territory to gain and industry
sales were flat. An analyst noted, “People aren’t getting any dirtier.” Thus, the only way to win is to take market share from the competition. To increase its share, Procter & Gamble (P&G) spends $100 million a year promoting its Tide brand on television, billboards, buses, magazines, and the Internet. But Unilever isn’t standing still. Armed with an $80 million budget, it launched a soap tablet product named Wisk Dual Action Tablets. For example, it delivered samples of this product to 24 million U.S. homes in Sunday newspapers, followed by a series of TV ads. P&G launched a counteroffensive with Tide Rapid Action Tablets ads showed in side-by-side comparisons of the two products dropped into beakers of water. In the promotion, P&G claimed that its product is superior because it dissolves faster than Unilever’s product.
Although this is only one example, many product classes and industries, including consumer products such as beer, automobiles, and athletic shoes, are in maturity.
Firms do not need to be “held hostage” to the life-cycle curve. By positioning or repositioning their products in unexpected ways, firms can change how customers mentally categorize them. Thus, firms are able to rescue products floundering in the maturity phase of their life cycles and return them to the growth phase.
Two positioning strategies that managers can use to affect consumers’ mental shifts are reverse positioning, which strips away “sacred” product attributes while adding new ones, and breakaway positioning, which associates the product with a radically different category.72 We discuss each of these positioning strategies below and then provide an example of each in Strategy Spotlight 5.6.
a break in industry tendency to continuously augment products, characteristic of the product life cycle, by offering products with fewer product attributes and lower prices.
a break in industry tendency to incrementally improve products along specific dimensions, characteristic of the product life cycle, by offering products that are still in the industry but that are perceived by customers as being different.
Reverse Positioning This assumes that although customers may desire more than the baseline product, they don’t necessarily want an endless list of features. Such companies make the creative decision to step off the augmentation treadmill and shed product attributes that the rest of the industry considers sacred. Then, once a product is returned to its baseline state, the stripped-down product adds one or more carefully selected attributes that would usually be found only in a highly augmented product. Such an unconventional combination of attributes allows the product to assume a new competitive position within the category and move backward from maturity into a growth position on the life-cycle curve.
Breakaway Positioning As noted above, with reverse positioning, a product establishes a unique position in its category but retains a clear category membership. However, with breakaway positioning, a product escapes its category by deliberately associating with a different one. Thus, managers leverage the new category’s conventions to change both how products are consumed and with whom they compete. Instead of merely seeing the breakaway product as simply an alternative to others in its category, consumers perceive it as altogether different.
When a breakaway product is successful in leaving its category and joining a new one, it is able to redefine its competition. Similar to reverse positioning, this strategy permits the product to shift backward on the life-cycle curve, moving from the rather dismal maturity phase to a thriving growth opportunity.
Strategy Spotlight 5.6 provides examples of reverse and breakaway positioning.
Strategies in the Decline Stage
Although all decisions in the phases of an industry life cycle are important, they become particularly difficult in the decline stage . Firms must face up to the fundamental strategic choices of either exiting or staying and attempting to consolidate their position in the industry.73
the fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2) increasing price competition, and (3) industry consolidation.
The decline stage occurs when industry sales and profits begin to fall. Typically, changes in the business environment are at the root of an industry or product group entering this stage.74 Changes in consumer tastes or a technological innovation can push a product into
decline. Compact disks forced cassette tapes into decline in the prerecorded music industry in the 1980s, and now digital devices have pushed CDs into decline.
REVERSE AND BREAKAWAY POSITIONING: HOW TO AVOID BEING HELD HOSTAGE TO THE LIFE-CYCLE CURVE
When firms adopt a reverse or breakaway positioning strategy, there is typically no pretense about what they are trying to accomplish. In essence, they subvert convention through unconventional promotions, prices, and attributes. That becomes a large part of their appeal—a cleverly positioned product offering. Next, we discuss Commerce Bank’s reverse positioning and Swatch’s breakaway positioning.
While most banks offer dozens of checking and savings accounts and compete by trying to offer the highest interest rates, Commerce Bank, a regional bank on the East Coast, took a totally different approach. It paid among the lowest rates in its market. Further, it offered a limited product line—just four checking accounts, for example. One would think that such a stingy approach would have scared off customers. However, Commerce Bank was very successful. Between 1999 and 2007, it expanded from 120 to 435 branches. Growing from a single branch in 1973, it was purchased by TD Bank in 2007 for $8.5 billion.
Why was it so successful? It stripped away all of what customers expected—lots of choices and peak interest rates and it reverse positioned itself as “the most convenient bank in America.” It was open seven days a week, including evenings until 8 p.m. You could get a debit card while you waited. And when it rained, an escort with an umbrella walked you to your car. Further, the bank offered free coffee and newspapers for customers. Not too surprisingly, despite the inferior rates and few choices, customers regularly flocked to the bank, making it an attractive target for a larger bank to buy.
Interestingly, the name “Swatch” is often misconstrued as a contraction of the words Swiss watch. However, Nicholas Hayek, chairman, affirms that the original contraction was second watch—the new watch was introduced as a new concept of watches as casual, fun, and relatively disposable accessories. And therein lies Swatch’s breakaway positioning.
When Swatch was launched in 1983, Swiss watches were marketed as a form of jewelry. They were serious, expensive, enduring, and discreetly promoted. Once a customer purchased one, it lasted a lifetime. Swatch changed all of that by defining its watches as playful fashion accessories which were showily promoted. They inspired impulse buying—customers would often purchase half a dozen in different designs. Their price—$40 when the brand was introduced—expanded Swatch’s reach beyond its default category (watches as high-end jewelry) and moved it into the fashion accessory category, where it has different customers and competitors. Swatch became the official timekeeper of the Summer Olympics in 1996, has continued to support the Olympics since, and has already signed on as a top sponsor of the 2016 Olympic Games in Rio.
Today, The Swatch Group is the largest watch company in the world. It has acquired many brands over the years, including Omega, Longines, Harry Winston, Calvin Klein, and Hamilton. Revenues have grown to $7.2 billion in 2011, and net income has increased to $1.4 billion. These figures represent increases of 44 percent and 85 percent, respectively, since 2009.
Sources: Moon, Y. 2005. Break free from the product life cycle. Harvard Business Review, 83(5): 87–94; www.hoovers.com; and http://rio2016.com/en/sponsors/omega.
Products in the decline stage often consume a large share of management time and financial resources relative to their potential worth. Sales and profits decline. Also, competitors may start drastically cutting their prices to raise cash and remain solvent. The situation is further aggravated by the liquidation of assets, including inventory, of some of the competitors that have failed. This further intensifies price competition.
In the decline stage, a firm’s strategic options become dependent on the actions of rivals. If many competitors leave the market, sales and profit opportunities increase. On the other hand, prospects are limited if all competitors remain.75
If some competitors merge, their increased market power may erode the opportunities for the remaining players. Managers must carefully monitor the actions and intentions of competitors before deciding on a course of action.
Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, or consolidating.76
Maintaining refers to keeping a product going without significantly reducing marketing support, technological development, or other investments, in the hope that competitors will eventually exit the market. Many offices, for example, still use typewriters for filling out forms and other purposes that cannot be completed on a PC. In some rural areas, rotary (or dial) telephones persist because of the older technology used in central switching offices. Thus, there may still be the potential for revenues and profits.
Harvesting involves obtaining as much profit as possible and requires that costs be reduced quickly. Managers should consider the firm’s value-creating activities and cut associated budgets. Value-chain activities to consider are primary (e.g., operations, sales and marketing) and support (e.g., procurement, technology development). The objective is to wring out as much profit as possible.
a strategy of wringing as much profit as possible out of a business in the short to medium term by reducing costs.
Exiting the market involves dropping the product from a firm’s portfolio. Since a residual core of consumers exist, eliminating it should be carefully considered. If the firm’s exit involves product markets that affect important relationships with other product markets in the corporation’s overall portfolio, an exit could have repercussions for the whole corporation. For example, it may involve the loss of valuable brand names or human capital with a broad variety of expertise in many value-creating activities such as marketing, technology, and operations.
Consolidation involves one firm acquiring at a reasonable price the best of the surviving firms in an industry. This enables firms to enhance market power and acquire valuable assets. One example of a consolidation strategy took place in the defense industry in the early 1990s. As the cliché suggests, “peace broke out” at the end of the Cold War and overall U.S. defense spending levels plummeted.77 Many companies that make up the defense industry saw more than 50 percent of their market disappear. Only one-quarter of the 120,000 companies that once supplied the Department of Defense still serve in that capacity; the others have shut down their defense business or dissolved altogether. But one key player, Lockheed Martin, became a dominant rival by pursuing an aggressive strategy of consolidation. During the 1990s, it purchased 17 independent entities, including General Dynamics’ tactical aircraft and space systems divisions, GE Aerospace, Goodyear Aerospace, and Honeywell ElectroOptics. These combinations enabled Lockheed Martin to emerge as the top provider to three governmental customers: the Department of Defense, the Department of Energy, and NASA.
a firm’s acquiring or merging with other firms in an industry in order to enhance market power and gain valuable assets.
Examples of products currently in the decline stage of the industry life cycle include the video rental business (being replaced by video on demand), hard disk drives (being replaced by solid-state memory and cloud storage), and desktop computers (being replaced by notebook and tablet computers).
The introduction of new technologies and associated products does not always mean that old technologies quickly fade away. Research shows that in a number of cases, old technologies actually enjoy a very profitable “last gasp.”78 Examples include mainframe computers (versus minicomputers and PCs), coronary artery bypass graft surgery (versus angioplasty), and CISC (Complex Instruction Set Computing) architecture in computer processors versus RISC (Reduced Instruction Set Computing). In each case, the advent of new technology prompted predictions of the demise of the older technology, but each of these has proved to be resilient survivors. What accounts for their continued profitability and survival?
Retreating to more defensible ground is one strategy that firms specializing in technologies threatened with rapid obsolescence have followed. For example, while angioplasty may be appropriate for relatively healthier patients with blocked arteries, sicker, higher-risk patients seem to benefit more from coronary artery bypass graft surgery. This enabled the surgeons to concentrate on the more difficult cases and improve the technology itself. The advent of television unseated the radio as the major source of entertainment
from American homes. However, the radio has survived and even thrived in venues where people are also engaged in other activities, such as driving.
Using the new to improve the old is a second approach. Carburetor manufacturers have improved the fuel efficiency of their product by incorporating electronic controls that were originally developed for electronic fuel injection systems. Similarly, CISC computer chip manufacturers have adopted many features from RISC chips.
Improving the price-performance trade-off is a third approach. IBM continues to make money selling mainframes long after their obituary was written. It retooled the technology using low-cost microprocessors and cut their prices drastically. Further, it invested and updated the software, enabling them to offer clients such as banks better performance and lower costs.
Clearly, “last gasps” may not necessarily translate into longer term gains, as the experience of the integrated steel mills suggests. When the first mini-mills appeared, integrated steel mills shifted to higher margin steel, but eventually mini-mills entered even the last strongholds of the integrated steel mills.
A turnaround strategy involves reversing performance decline and reinvigorating growth toward profitability.79 A need for turnaround may occur at any stage in the life cycle but is more likely to occur during maturity or decline.
a strategy that reverses a firm’s decline in performance and returns it to growth and profitability.
Most turnarounds require a firm to carefully analyze the external and internal environments.80 The external analysis leads to identification of market segments or customer groups that may still find the product attractive.81 Internal analysis results in actions aimed at reduced costs and higher efficiency. A firm needs to undertake a mix of both internally and externally oriented actions to effect a turnaround.82 In effect, the cliché “you can’t shrink yourself to greatness” applies.
A study of 260 mature businesses in need of a turnaround identified three strategies used by successful companies.83
The need for turnaround strategies that enable a firm to reposition its competitive position in an industry.
Asset and cost surgery. Very often, mature firms tend to have assets that do not produce any returns. These include real estate, buildings, etc. Outright sales or sale and leaseback free up considerable cash and improve returns. Investment in new plants and equipment can be deferred. Firms in turnaround situations try to aggressively cut administrative expenses and inventories and speed up collection of receivables. Costs also can be reduced by outsourcing production of various inputs for which market prices may be cheaper than in-house production costs.
Selective product and market pruning. Most mature or declining firms have many product lines that are losing money or are only marginally profitable. One strategy is to discontinue such product lines and focus all resources on a few core profitable areas. For example, in the early 1980s, faced with possible bankruptcy, Chrysler Corporation sold off all its nonautomotive businesses as well as all its production facilities abroad. Focus on the North American market and identification of a profitable niche—namely, minivans—were keys to their eventual successful turnaround.
Piecemeal productivity improvements. There are many ways in which a firm can eliminate costs and improve productivity. Although individually these are small gains, they cumulate over a period of time to substantial gains. Improving business processes by reengineering them, benchmarking specific activities against industry leaders, encouraging employee input to identify excess costs, increasing capacity utilization, and improving employee productivity lead to a significant overall gain.
Software maker Intuit is a case of a quick but well-implemented turnaround strategy. After stagnating and stumbling during the dot-com boom, Intuit, which is known for its QuickBook and TurboTax software, hired Stephen M. Bennett, a 22-year GE veteran, in 1999. He immediately discontinued Intuit’s online finance, insurance, and bill-paying
operations that were losing money. Instead, he focused on software for small businesses that employ less than 250 people. He also instituted a performance-based reward system that greatly improved employee productivity. Within a few years, Intuit was once again making substantial profits and its stock was up 42 percent.84
ALAN MULALLY: LEADING FORD’S EXTRAORDINARY TURNAROUND
Shortly after Alan Mulally took over as Ford’s CEO in September 2006, he organized a weekly meeting with his senior managers and asked them how things were going. Fine, fine, fine were the responses from around the table. To this, an incredulous Mulally exclaimed: “We are forecasting a $17 billion loss and no one has any problems!” Clearly, there were cultural issues at play (such as denial and executive rivalry) but also very serious strategic and financial problems as well.
What a change a few years can make! Ford’s profits for 2011 were $20 billion. This is quite a sharp contrast from its $14.7 billion loss in 2008—a time when high gasoline prices, bloated operations, and uncompetitive labor costs combined with the deep recession to create a perfect storm.
How did Mulally turn Ford around? It took many tough strategic decisions—involving not just company executives but Ford staff and the United Auto Workers (UAW). It involved downsizing, creating greater efficiency, improving quality, selling off the European luxury brands, and mortgaging assets to raise money. Ford’s leaders and the United Auto Workers (UAW) also made transformational changes to lower the company’s cost structure—a critical component to the company’s long-term competitiveness.
Let’s take a closer look at Mulally’s strategic actions. We have to begin with the plan to undertake a dramatic refinancing of the business by raising bank loans secured against the company’s assets. One of his first tasks was to finalize Ford’s recovery plan and sell it to the banks. This financing enabled Ford to be the only major American automaker that avoided government-sponsored bankruptcy. And, as noted by Mulally, “The response that we received because we did not ask for the precious taxpayer’s money has been tremendous.” In fact, Jim Farley, head of marketing for Ford worldwide, estimates that Ford’s standing on its own feet has been worth $1 billion in favorable publicity for the company and has attracted appreciative Americans into its dealers’ showrooms.
Second, he decided that the firm would concentrate resources on the Ford brand and sell off the Premier Automotive Group (PAG) businesses—even if it meant taking a loss. Mulally had ridiculed the idea that top management could focus on Jaguar before breakfast, attend to Volvo or Land Rover before lunch, and then consider Ford and its Lincoln offshoot in North America in the afternoon. Accordingly, in 2007, Aston Martin was sold to private investors; Jaguar and Land Rover were sold to India’s Tata Group in 2008; and a Chinese carmaker, Geely, bought Volvo in 2010. Further, the Mercury brand was phased out.
Third, Mulally realized that in addition to fewer brands, Ford needed a much narrower range of cars, albeit higher quality ones, carrying its familiar blue oval logo in all segments of the market. At one point Ford’s designers had to deal with 97 different models—that was cut to 36 and may go lower.
Fourth, along with rationalizing the product range, Mulally insisted on raising the aspiration level with regard to quality. Although Ford used to talk about claiming parity with Toyota’s Camry, Mulally shifted the emphasis to trying to make each car that Ford sells “best in class.” A number of new cars being created under the One Ford policy are coming from Europe. Quality has improved dramatically according to some of the industry’s outside arbiters, such as J. D. Power.
Fifth, to ensure that regional stars such as the Focus could become global successes, 8 of Ford’s 10 platforms (the floor pan and its underpinnings) are now global platforms. More shared platforms enables Ford to build different models more quickly and economically to account for regional tastes in cars and variations in regulations. For example, the various Fiesta-based cars may look different, but they share about two-thirds of their parts. Such actions are particularly important as Ford focuses (no pun intended) its efforts toward smaller, more fuel-efficient automobiles which traditionally have smaller margins. As noted by Lewis Booth, Ford’s finance director, “Customers’ tastes are converging. Fuel efficiency matters everywhere.”
Sixth, Mulally had to make many painful restructuring decisions in order to match production to the number of cars that Ford could sell. Since 2006, Ford cut half of its shop-floor workforce in North America and a third of its office jobs. By the end of 2011, a total of 17 factories had closed, and Ford’s total employment fell from 128,000 to 75,000. In addition, the number of dealers has been cut by a fifth. Helped by union concessions, Ford has shed about $14 billion in annual operational costs and now can compete with Japan’s “transplant” factories in America.
Regarding Ford’s successful transformation, Mulally cliams: “We have earned the right now to make a complete family of best-in-class vehicles right here in the United States with U.S. workers and competing with the very best in the world. That’s not only good for Ford and our customers and our stakeholders but that’s good for the United States of America.” Without doubt, such a statement a few years ago would have been dismissed as hyperbole.
Sources: Linn, A. 2010. For Ford’s Mulally, big bets are paying off. www.msnbc.com. October 26: nd; Anonymous. 2010. Epiphany in Dearborn. The Economist. December 11: 83–85; Reagan, J. Ford Motor’s extraordinary turnaround. December 10: np; and www.finance.yahoo.com.
Even when an industry is in overall decline, pockets of profitability remain. These are segments with customers who are relatively price insensitive. For example, the replacement demand for vacuum tubes affords its manufacturers an opportunity to earn above normal returns although the product itself is technologically obsolete. Surprisingly, within declining industries, there may still be segments that are either stable or growing. Although fountain pens ceased to be the writing instrument of choice a long time ago, the fountain pen industry has successfully reconceptualized the product as a high margin luxury item that signals accomplishment and success. In the final analysis, every business has the potential for rejuvenation. But it takes creativity, persistence, and most of all a clear strategy to translate that potential into reality.
Strategy Spotlight 5.7 discusses Ford’s remarkable turnaround under the direction of CEO Alan Mulally.
Porsche is a brand of cars with a clear history and identity. Starting in the late 1940s, Porsche began designing and producing high-end sports cars. Starting with the Porsche 356, moving on to the Porsche 550, and finally to the iconic Porsche 911, Porsche carved out a position in the automobile business as one of the great sports car nameplates, along with Ferrari, Mercedes Benz, and Lamborghini. Porsche cemented its reputation as a sports car leader with 16 victories at the 24 Hours of Le Mans and 20 victories at the 24 Hours at Daytona endurance races. Today, it produces some of the most expensive and exclusive sports cars in the world—with the $845,000 limited edition Porsche 918 Spyder supercar at the top end. The 918 Spyder has a 570-horsepower engine, sports a carbon fiber body, and can accelerate from 0 to 60 miles per hour in under 3 seconds.
With all of this history as a leading sports car producer, it surprises many to know that over 50 percent of Porsche’s profits today are generated by an SUV, the Porsche Cayenne, a vehicle sharing the same underlying platform as the VW Touareg and the Audi Q7. Along with its sports cars, the 911, 918, 997, Cayman, and Boxter, Porsche produces the Cayenne and the Panamera, a four-door cruiser. According to forecasts by IHS Automotive, in 2014, Porsche will sell approximately 67,000 sports cars and 110,000 SUVs.
The change in their product portfolio raises a central question for Porsche. The increasing focus outside of the core sports car market gives them an opportunity to sell many more vehicles. However, it also raises a significant risk. The extremely high premium prices they can charge are largely driven by the reputation that Porsche has as an exclusive, high-performance car manufacturer. As Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences, states, “Porsche needs to make sure the brand is not being overstretched and the sporty image prevails.” But some customers perceive that they have already moved too far away from their heritage. Rick Ratliff, a former Porsche driver who also used to run a blog called Porscheophile, summed up his view by saying that “Porsche was the purest of brands,” but it has “sort of lost its luster.”
Is it wise for Porsche to continue to expand their product portfolio out of the sports car market into more practical models?
How should they balance the need to maintain their image with the desire to expand their sales?
Sources: Reiter, C. & Wuestner, C. 2012. Porsche’s identity crisis. Bloomberg Businessweek, July 9: 22–23; Elliott, H. 2013. Porsche head: Most important thing is a sexy brand. Forbes.com, January 14: np; and www.porsche.com/usa.
Reflecting on Career Implications…
Types of Competitive Advantage: Are you aware of your organization’s business-level strategy? What do you do to help your firm either increase differentiation or lower costs? Can you demonstrate to your superiors how you have contributed to the firm’s chosen business-level strategy?
Types of Competitive Advantage: What is your own competitive advantage? What opportunities does your current job provide to enhance your competitive advantage? Are you making the best use of your competitive advantage? If not, what organizations might provide you with better opportunities for doing so? Does your resume clearly reflect your competitive advantage? Or are you “stuck in the middle”?
Understanding Your Differentiation: When looking for a new job or for advancement in your current firm, be conscious of being able to identify what differentiates you from other applicants. Consider the items in Exhibit 5.4 as you work to identify what distinguishes you from others.
Industry Life Cycle: Before you go for a job interview, identify the life cycle stage of the industry within which your firm is located. You are more likely to have greater opportunities for career advancement in an industry in the growth stage than in the decline stage.
Industry Life Cycle: If you sense that your career is maturing (or in the decline phase!), what actions can you take to restore career growth and momentum (e.g., training, mentoring, professional networking)? Should you actively consider professional opportunities in other industries?
How and why firms outperform each other goes to the heart of strategic management. In this chapter, we identified three generic strategies and discussed how firms are able not only to attain advantages over competitors, but also to sustain such advantages over time. Why do some advantages become long-lasting while others are quickly imitated by competitors?
The three generic strategies—overall cost leadership, differentiation, and focus—form the core of this chapter. We began by providing a brief description of each generic strategy (or competitive advantage) and furnished examples of firms that have successfully implemented these strategies. Successful generic strategies invariably enhance a firm’s position vis-à-vis the five forces of that industry—a point that we stressed and illustrated with examples. However, as we pointed out, there are pitfalls to each of the generic strategies. Thus, the sustainability of a firm’s advantage is always challenged because of imitation or substitution by new or existing rivals. Such competitor moves erode a firm’s advantage over time.
We also discussed the viability of combining (or integrating) overall cost leadership and generic differentiation strategies. If successful, such integration can enable a firm to enjoy superior performance and improve its competitive position. However, this is challenging, and managers must be aware of the potential downside risks associated with such an initiative.
We addressed the challenges inherent in determining the sustainability of competitive advantages. Drawing on an example from a manufacturing industry, we discussed both the “pro” and “con” positions as to why competitive advantages are sustainable over a long period of time.
The way companies formulate and deploy strategies is changing because of the impact of the Internet and digital technologies in many industries. Further, Internet technologies are enabling the mass customization capabilities of greater numbers of competitors. Focus strategies are likely to increase in importance because the Internet provides highly targeted and lower-cost access to narrow or specialized markets. These strategies are not without their pitfalls, however, and firms need to understand the dangers as well as the potential benefits of Internet-based approaches.
The concept of the industry life cycle is a critical contingency that managers must take into account in striving to create and sustain competitive advantages. We identified the four stages of the industry life cycle—introduction, growth, maturity, and decline—and suggested how these stages can play a role in decisions that managers must make at the business level. These include overall strategies as well as the relative emphasis on functional areas and value—creating activities.
When a firm’s performance severely erodes, turnaround strategies are needed to reverse its situation and enhance its competitive position. We have discussed three approaches—asset cost surgery, selective product and market pruning, and piecemeal productivity improvements.
SUMMARY REVIEW QUESTIONS
Explain why the concept of competitive advantage is central to the study of strategic management.
Briefly describe the three generic strategies—overall cost leadership, differentiation, and focus.
Explain the relationship between the three generic strategies and the five forces that determine the average profitability within an industry.
What are some of the ways in which a firm can attain a successful turnaround strategy?
Describe some of the pitfalls associated with each of the three generic strategies.
Can firms combine the generic strategies of overall cost leadership and differentiation? Why or why not?
Explain why the industry life cycle concept is an important factor in determining a firm’s business-level strategy.
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