Choice of Business Model: Within an industry, how can a firm create value and for whom?
- Value Proposition
- Differentiation: better product → higher willingness to pay
- Low cost: lower supplier opportunity cost → lower prices - Target Customers
- Broad: “mass market”
- Narrow “niche”
*Strategic positioning: choosing a business model to maximize competitive advantage
Industry Generic Firm Strategies
- Industry-level strategy addresses the question of how a firm will compete in a particular industry.
- A generic strategy is a general way of positioning a firm within a industry.
- Two competitive dimensions are the keys to business-level strategy:
1) Firm’s source of competitive advantage: Low costs v.s. Unique product.
2) Firm’s scope of operations: General v.s. Specific customers
3 Industry Generic Strategies
- Cost leadership strategy: Strategy centers on low costs, low prices and offering better value to customers. Target mass market customers with little or no product differentiation. (i.e. high volume, low margin approach).
- Differentiation strategy: Targets customers in smaller, well-defined segments who are willing to pay premium prices. Products must have unique attributes. (i.e. low volume, high margin approach).
- Focus strategy: Strategy targets to serve the needs of a particular segment or niche of an industry. A focused firm is either a focused differentiator or a focused cost leader (focused differentiation strategy v.s. focused cost leadership strategy)
Focused Cost Leadership v.s. Focused Differentiation
Focused Cost Leadership Strategy:
- Competes based on price to target a narrow market
- Charge lower prices relative to other firms in the market
- Does not necessarily create innovative products but charges lower prices
- E.g., Dollarama, Walmart, Costco, RyanAir (Europe)
Focused Differentiation Strategy:
- Requires offering unique features that fulfil demands of a narrow market
- Unique features are often specialized to or for a niche market.
- Often create innovative products and charges a premium for it
- Kopi Luwak, Bugatti, Rolls Royce
Major Avenues to Achieve a Cost Advantage
- Low-cost advantage:
- Cumulative costs across the overall value chain must be lower than competitors’ cumulative costs. - Securing a cost advantage:
- Use lower-cost inputs and hold minimal assets.
- Offer only “essential” product features or services.
- Offer only limited product lines.
- Use low-cost distribution channels.
- Use the most economical delivery methods.
Cost Drivers: The Keys to Driving Down Costs
Cost Drivers Include:
- Economies of scale
- Learning and experience
- Capacity utilization
- Supply chain efficiencies
- Input costs
- Production technology and design
- Communication systems and Information technology
- Bargaining Power
- Outsourcing or vertical Integration
- Incentive systems and culture
Revamping a Firm’s model to lower costs:
- Selling directly to consumers and bypassing the activities and costs of distributers and dealers by using a direct sales force and a company website - think Tesla, Peloton.
- Streamlining operations to eliminate low value-added or unnecessary work steps and activities - think Amazon and AI/Robots.
- Reduce materials-handling and shipping costs by having suppliers locate their plants or warehouses close to the firm’s own facilities - think Apple and Foxconn.
When low cost strategy works best:
1. Price competition among rival sellers is vigorous.
2. Identical products are readily available from many sellers.
3. There are few ways to differentiate industry products to add buyer value
4. Buyer incur low costs in switching among sellers (low switching costs)
5. Buyers are price sensitive or have the power to bargain down prices.
Major Avenues to Achieve a Differentiation Strategy
Effective Differentiation Approaches:
- Carefully study buyer needs and behaviours, values, and willingness to pay for a unique product or service (iPhone v.s. BlackBerry)
- Incorporate features that both appeal to buyers and create a sustainably distinctive product offering.
- Use higher prices to recoup differentiation costs.
Advantages of Differentiation:
- Command premium prices for the firm’s products.
- Increased unit sales due to attractive differentiation.
Brand loyalty that bonds buyers to the differentiating features of the firm’s products.
Value Drivers: The Keys to Creating a Differentiation Advantage
Value Drivers include:
1. Product features and performance
2. Customer services
3. Production R&D
4. Technology and Innovation
5. Input quality
6. Employee skill, training, experience
7. Sales and marketing
8. Quality control processes
Signalling value is important when:
- The nature of differentiation is based on intangible features and is therefore subjective or hard to quantify by the buyer (think Apple).
- Buyers are making a first-time purchase and are unsure what their experience will be with the product.
- Product or service repurchase by buyers is infrequent.
- Buyers are unsophisticated.
* When using Differentiation strategy, coordinating with downstream channel allies to enhance customer perceptions of value is very important.
Differentiation strategy works best when:
- Buyer needs and uses for the product are diverse.
- Few rival firms are following a similar differentiation approach.
- Differentiation that is difficult for rivals to duplicate or imitate include: 1. Company reputation 2. Long-standing relationships with buyers 3. A unique product or service image.
- Differentiation that creates substantial switching costs that lock in buyers: 1. Patent-protected product innovation 2. Relationship-based customer service.
Key Take Aways
- Firms derive their industry level strategies by examining whether competitive advantage is based on price or differentiation and whether their scope of operations target a broad or narrow market.
- The Three Generic strategies firm use are: Cost leadership, Differentiation or Focused strategy.
