Agenda:

• Traditional approach: Porter’s generic strategies;
• From upstream competitive advantage to downstream;
• The new mantra;
• The big picture approach;

TRADITIONAL APROACH: Porter’s generic strategies;

Porter’s Strategies:

• COST LEADERSHIP: low cost position achieved through aggressive cost reduction and high market share (e.g. Ryanair)

-> Economies of Scale/Learning;

-> New sources of commodities.

• DIFFERENTIATION: differentiate the product or service in order to be perceived as unique (e.g. Mercedes)
• FOCUS: concentrate on a particular customer group, segment of product line or geographical market (e.g. Gore-Tex)

 COMMODITY: product that can not be differentiate (ex sugar);

COST Leadership:

-> DEF: gain CA by being the lowest-cost producer of a service, production process or commodity.

Sources of Cost Advantage:

• Economies of Scale
• Economies of Learning
• Process Technology and Process Design
• Product Design
• Input Cost
• Capacity Utilization
• Managerial Organisational Efficiency

Cost Leadership Strategies:

1. Threat of New Entrants

-> Can frighten off new entrants due to their need to enter on a large scale in order to be cost competitive.

1. Bargaining Power of Buyers

-> Can mitigate buyers’ power by driving prices far below competitors, causing them to exit and shifting power with buyers back to the company.

1. Bargaining Power of Suppliers

-> Can mitigate suppliers’ power by:

• being able to absorb cost increases due to low cost position
• being able to make very large purchases, reducing chance of supplier using power

1. Substitutes

-> Cost leader is well positioned to:

• make investments to be first to create substitutes
• buy patents developed by potential substitutes
• lower prices in order to maintain value position

1. Existing

-> Competitors can use cost leadership strategy to advantage since competitors avoid price wars with cost leaders, creating higher profits for the entire industry.

Risk of Cost Leadership:

• Technological change that nullifies past investments or learning (ex Clinton and GPS satellite).
• Low-cost learning by new players (or followers) through imitation (ex: website design).
• Inability to see required products or marketing change because of attention placed on cost (ex: low-end fast food chains vs high-end fast food chains).
• Inflation in cost that narrows the price differential.

DIFFERENTIATION Strategy:

-> DEF: Value provided by unique features and value characteristics

• Command premium price
• High customer service
• Superior quality
• Prestige or exclusivity
• Rapid innovation

Factors that Drive Differentiation:

• Unique product features
• Unique product performance
• Exceptional services
• New technologies
• Quality of inputs
• Exceptional skill or experience
• Detailed information
• Extensive personal relationships with buyers and suppliers

Tangible VS Intangible Differentiation:

TANGIBLE:	INTANGIBLE:
-> DEF: concerned with the observable characteristics of a product or service that are relevant to the customers; -> EX: size, shape, color, weight, design, material, technology, reliability, consistency, taste, speed, durability, safety	-> DEF: Concerns the social, emotional, psycological considerations that affect customers’ choicer -> EX: status, exclusivity, individuality, security

Differentiation Strategy and fhe Five Forces:

1. Threat of New Entrants

-> Can defend against new entrants because:

• New products must surpass proven products or,
• New products must be at least equal to performance of proven products, but offered at lower prices.

1. Bargaining Power of Buyers

-> Can mitigate buyer power because well differentiated products reduce customer sensitivity to price increases.

1. Bargaining Power of Suppliers

-> Can mitigate suppliers’ power by absorbing price increases due to higher margins

1. Substitutes

-> Well positioned relative to substitutes because brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands and technologies.

1. Existing

-> Can defend against competition because brand loyalty to differentiated product offsets price competition

Risk of Differentiation:

• Cost differential with low-cost competitors becomes too great undermining brand loyalty.
• Customers become more sophisticated and their need for the differentiating factor falls.
• Imitation narrows perceived differentiation.
• Makers of counterfeit goods may attempt to replicate differentiated features of the company’s products.

FOCUS Strategy:

-> DEF: The focus strategy rests on the premise that the company is able to serve its narrow strategic target (customer segment, geographic market, “niche”), more effectively or efficiently than its competitors.

• The company achieves either differentiation from better meeting the needs of the particular target or lower cost in serving the target, or both.
• Always involves a trade-off between profitability and sales volume.

Risk of Focus:

-> The cost differential with broad-range competitors widens and…

… it eliminates the cost advantage of serving a narrow target; or

… it offsets the differentiation achieved by focus.

-> The differences in desired products (or services) between the strategic target and the market as a whole narrows.

-> Competitors find submarkets within the strategic target and outfocus the focuser.

Business Strategy:

-> Three key principles:

1. Strategy is the creation of a unique and valuable position, involving a different set of activities.
2. Strategy requires you to make trade-offs in competing – to choose what not to do.
3. Strategy involves creating fit among a company’s activities. (Michael Porter, HBR, 2000)

FROM UPSTREAM CA TO DOWNSTREAM’S

-> Businesses have traditionally sought CA in the upstream.

-> Upstream is historically very profitable:

• FORD built huge and streamlined factory (droved per-unit cost) for Model T;
• WALMART build an unbeatale network for moving inventory between its global supply chain and its stores, allowing the company to underprice competitors due to efficiency savings;
• DE BEERS pulverized its competitors as regard diamond market by gaining control of much of the world’s supply of diamonds

-> NOW business world is suffering from erosion of upstream CA, because

• Rapid commoditization of products and production;
• Outsourcing of the upstream activities;
• Short product life–cycle;

=> VALUE is created in the interactions with customers.

• CA is built and sustained in the marketplace.

Value Shift Downstream:

-> The premium price is due to a perceived added value in the eyes of the consumer. The product (What) is the same, but the purchase and consumption is different (how)

VALUE = WHAT + HOW

 so

VALUE shifts from Product to Experience

📌From what  to how. What: difficult to make the difference in the what, is too hard.

THE NEW MANTRA:

Competitive Advantage:

-> Created by uncovering the costs and risks the customer incurs in the buying process and finding ways to eliminate or reduce them before competitors;

Customers’s costs and risks:

-> Customer’s costs and risks can be:

• EXPLICIT: monetary costs and monetary risks;

• HIDDEN:

-> COSTS defined in terms of effort:

• time spent to buy the product
• difficulty in processing the product characteristics
• difficulty in understanding what are the most relevant information in the buying process

-> RISKS defined in terms of poor choice:

• what if my girlfriend doesn’t like my gift
• what if this product is not the best solution for me
• what if next year I won’t use this product anymore

THE BIG PICTURE APPROACH:

-> Firms have access to big pictures => can see more things in the marketplace than the customers;

• The problems that are likely to arise;
• Solutions to problems that plague a particular customer (seen solutcion elsewhere);

How see Customers’ Hidden Costs and Risks:

-> Each customer holds a piece of puzzle;

-> Being able to bring together all the pieces of information that lie dispeser with customers (from DB), firms can see patterns they’ve never seen before.

Business Model:

-> In XI sec companies decided that big picture is their business

-> EX: Bluefin Labs is a recent cCambridge Massachussets that aims to uderstand how the “Twitter-Spere” responds to television programming advertising. It’s able to tell advertiser if had social media impact and whether that impact was positive or negative.

Extracting Value from Big Picture:

-> There are three main ways in which marketplace information can create value for your customer:

• relaying and connecting
• benchmarking and mirroring
• Predicting

-> Technologies born thanks to interaction between companies and the new digital technologies.

Relaying and Connecting:

-> IDEA: take information from one location and apply it in another, to learn from one customer and use the learning to help another;

-> EX: Amazon’s huge success is due to this value proposition: not only does Amazon allow the customer to shop online at any time he or she chooses, in any time zone, but the customers also gets extensive information and advice unavailable in a traditional store, for instance browsing through what other readers think of the book;

Benchmarking and mirroring:

-> DEF: provides customers with the all-important “you are here” location on dimensions that are relevant to them. This information allows them to pinpoint their own position relative to the peers on crucial metrics.

-> CHAR:

• special case of a more general use of the big picture: mirroring (to aggregate and feed back to individuals information about groups of customers)
• value and availability of benchmarking data has increased with the growth of the third-party benchmarking industry, as well as in social comparisons on social networking sites such as Facebook and Linkedin

-> EX: Nike +, for instance, allows runners to measure running performance and upload their running data to Facebook. Benchmarking against other runners and their own past performances motivates Nike’s customers to maintain a training regimen

Predicting:

-> Use marketplace data to discerning patterns and predict future trends;

-> Google Flu Trends is a relevant business case

• A rapidly spreading worldwide flu-like epidemic is considered one of the greatest dangers facing humanity. It’s not surprising that doctors and researchers know a lot about influenza viruses and health authorities devote considerable effort tracking and preventing outbreakes;
• They know when influenza will strike, what strain of influenza will strike in a given year, how the disease progresses and who will likely develop complications, however, they do not know where flu outbreaks will occur;
• This is where Google Flu Trends comes in: Google reasoned that when people feel ill, they tend to turn to the Internet for information before heading to the doctor. Thus Google extracts the value by aggregating the searches and plotting the data over geographical locations;