CH-4-5 Business-Level Strategy – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Chapter Notes

This Document Contains Chapters 4 to 5 Chapter 4 Business-Level Strategy LEARNING OBJECTIVES 1. Define business-level strategy. 2. Discuss the relationship between customers and business-level strategies in terms of who, what, and how. 3. Explain the differences among business-level strategies. 4. Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy. 5. Describe the risks of using each of the business-level strategies. CHAPTER OUTLINE Opening Case: Hain Celestial Group: A Firm Focused on “Organic” Differentiation CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-LEVEL STRATEGIES Effectively Managing Relationships with Customers Reach, Richness, and Affiliation Who: Determining the Customers to Serve What: Determining Which Customer Needs to Satisfy How: Determining Core Competencies Necessary to Satisfy Customer Needs Strategic Focus: Continuously Innovating to Satisfy Customers’ Needs THE PURPOSE OF A BUSINESS-LEVEL STRATEGY TYPES OF BUSINESS-LEVEL STRATEGIES Cost Leadership Strategy Differentiation Strategy Strategic Focus: Apple vs. Samsung: Apple Differentiates and Samsung Imperfectly Imitates Focus Strategies Integrated Cost Leadership/Differentiation Strategy SUMMARY MINI-CASE REVIEW QUESTIONS MINDTAP RESOURCES LECTURE NOTES Chapter Introduction: Firms that perform well, even in very competitive industries, will follow some pattern of decision-making and execution that is internally consistent. That is, the firm will line up its resource commitments in a way that reinforces the direction of the enterprise. If these decisions are inconsistent, the outcome will be resource commitments that work against one another and hinder the progress of the business. This chapter lays out the basic strategy patterns that can lead to competitive advantage. Knowing these will help students understand how to make the most of the firm’s potential. OPENING CASE Hain Celestial Group: A Firm Focused on “Organic” Differentiation Hain Celestial Group has built strong capabilities in producing natural and organic foods and has built its strategy to take advantage of the changing consumer trend in the food business. The company grew through a series of acquisitions of entrepreneurial start-ups. These acquisitions allowed Hain Celestial to become the largest supplier to natural food retailer Whole Foods Markets. The natural food trend has allowed the company to sell their branded products to traditional grocery store chains, accounting for about 60 percent of its U.S. sales. Meanwhile, large branded food firms such as Kellogg’s, Kraft Foods Group, Campbell’s, and ConAgra Foods Inc. that have not focused as intensely on this natural segment have stalled their earnings in part because they have not focused on the natural and organic trend desired by consumers as much as Hain Celestial. While larger brands seek to modify existing products by removing less natural ingredients (Nestle) or reducing the use of high fructose corn syrup (Hershey Co and Mars), these types of changes do not allow them to overcome the problem of rapidly changing consumer tastes toward nature food. Grocery stores and restaurants are also attempting to take advantage of the trend towards natural foods. Teaching Note Ask students to evaluate Hain Celestial’s strategy and what they would have done differently to implement it. Ask them to identify Hain’s competitors and how these companies differentiate themselves from one another. Aside from the dimensions listed in the Opening Case, ask students to identify other ways that Hain’s achieves differentiation. Students should come to realize that Hain’s and its competitors have differentiated themselves on several dimensions and that to grow in a saturated and highly competitive industry they need to offer value that exceeds that of its competition. Ask students to identify other firms with a strong competitive advantage that implemented strategies to attract customers following social trends.
1 Define business-level strategy.
BUSINESS-LEVEL STRATEGY Business-level strategies represent integrated and coordinated sets of actions that are taken to exploit core competencies and gain a competitive advantage. To be more specific, strategies are purposeful, precede the taking of actions to which they apply, and demonstrate a shared understanding of the firm’s vision and mission. An effectively formulated strategy marshals, integrates, and allocates the firm’s resources, capabilities, and competencies so that it will be properly aligned with its external environment. A properly developed strategy also rationalizes the firm’s vision and mission along with the actions taken to achieve them. Determining the businesses in which the firm will compete is a question of corporate-level strategy and is discussed in Chapter 6. Competition in individual product markets is a question of business-level strategy. The firm’s core competencies should be focused on satisfying customer needs or preferences through business-level strategies, which detail actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product or service markets. In other words, business-level strategies are developed based on a firm’s core competencies and indicate how an organization chooses to compete in a particular market to gain a competitive advantage over competitors. A customer focus requires that firms simultaneously evaluate or consider •Whom to serve, •What customer needs will be satisfied, and •How those needs will be satisfied through the strategy selected.
2 Discuss the relationship between customers and business-level strategies in terms of who, what, and how.
CUSTOMERS: THEIR RELATIONSHIP WITH BUSINESS-LEVEL STRATEGIES Returns earned from relationships with customers (current and/or new) are the lifeblood of all firms. To survive and achieve strategic competitiveness in the contemporary competitive landscape, firms must: •Identify who their customers are •Determine customer needs or preferences •Focus on satisfying the needs of some group of customers •Determine how to compete (select a strategy) that enables them to satisfy customer needs The firm’s relationships with its customers are strengthened when it delivers superior value to them. Effectively Managing Relationships with Customers Teaching Note A number of companies have become skilled at managing all aspects of their relationship with their customers. For example, Amazon.com is known for the quality of information it maintains about its customers, the service it renders, and its ability to anticipate customers’ needs. It has a strong reputation for being able to successfully do this. Reach, Richness, and Affiliation In the Internet age, firms can maintain competitive advantage by: •Thinking continuously about accessing and connecting with customers (reach) •Maintaining information with depth and detail for (and from) customers (richness) •Facilitating useful interactions with customer (affiliation) Who: Determining the Customers to Serve The first step is to identify customers based on differences in needs or preferences (often called market segmentation). This enables the firm to have a better grasp on what might be important to customers because of the lack of any in-depth insights relevant for decision making that are provided by central tendencies (averages) of the market in general. Table Note It might be interesting to ask students which of the dimensions in this table help identify the most promising market segments for which type of business. TABLE 4.1 Basis for Customer Segmentation Dimensions that can be used to identify potential customers include the following factors:
For consumer markets: •Demographic factors •Socioeconomic factors •Geographic factors •Psychological factors •Consumption patterns •Perceptual factors For industrial markets: •End-use segments •Product segments •Geographic segments •Common buying factor segments •Customer size segments
It is imperative that firms pay careful attention to differences in customer needs among customer groups and not arbitrarily “lump” them together because: •Almost any identifiable human or organizational characteristic can be used to sub-divide a market into segments that differ from one another on a given characteristic. •Customer characteristics are often combined to segment markets into specific groups that have unique needs. •Demographic factors can also be used to segment markets into generations with unique interests and needs. Teaching Note In the US, the teenage market segment is a competitively relevant customer group. Generate discussion by asking students about their assessments of the size, growth, and spending-related characteristics of this market segment. What: Determining Which Customer Needs to Satisfy As noted in Chapter 3, one challenge for firms is to identify ways in which they can bundle their resources and capabilities to create value for customers, because given the choice, customers are most interested in purchasing products that both satisfy their needs and provide value. After the firm decides whom it will serve, it must identify the targeted customer group’s needs that its goods or services can satisfy. This is important in that successful firms learn how to deliver to customers what they want and when they want it. In a general sense, needs (wants) are related to a product’s benefits and features. Having close and frequent interactions with both current and potential customers helps the firm identify those individuals’ and groups’ current and future needs. From a strategic perspective, a basic need of all customers is to buy products that create value for them. The most effective firms continuously strive to anticipate changes in customers’ needs. Failure to do this results in the loss of customers to competitors who are offering greater value in terms of product features and functionalities. In any given industry, there is great variety among consumers in terms of their needs, e.g., high-quality, lower-cost with acceptable quality, quick delivery. Target, a retail store and online marketer, has been successful analyzing its many sources of data through online sources of many customer demographics. It utilizes this information to develop its promotion and marketing strategies. How: Determining Core Competencies Necessary to Satisfy Customers’ Needs As explained in Chapters 1 and 3, core competencies are resources and capabilities that serve as a source of competitive advantage for the firm over its rivals. Firms use core competencies (how) to implement value-creating strategies and thereby satisfy customers’ needs. Only those firms with the capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and hopefully exceed customers’ expectations across time. Companies draw from a wide range of core competencies to produce goods or services that can satisfy customers’ needs. One such method employed by companies such as the large pharmaceutical firm Merck and the software company SAS Institute invest heavily in R&D to sustain competitive advantage in their industries.
3 Explain the differences among business-level strategies.

4 Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy.

5 Describe the risks of using each of the business-level strategies.
• Teaching Note The next section of the chapter describes generic business-level strategies that can be implemented to provide customers with distinctive products that meet customer needs and enable the firm to achieve a competitive advantage and earn above-average returns. Indicate that the business-level strategies are considered generic because they generally apply across industries, products, and the public and private sectors. THE PURPOSE OF A BUSINESS-LEVEL STRATEGY Business-level strategy creates differences between the firm’s position and those of its competitors. To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform different activities. TYPES OF BUSINESS-LEVEL STRATEGIES Business-level strategy is concerned with a firm’s position in an industry, relative to competitors. Firms are challenged to select business-level strategies to position themselves favorably by performing activities differently or performing different activities as compared to its rivals. Thus, the firm’s business-level strategy is a deliberate choice about how it will perform the value chain’s primary and support activities in ways that create unique value. Figure Note: As illustrated in Figure 4.1, firms select their business-level strategies based on a combination of competitive (market) scope and competitive advantage (product uniqueness or low cost). FIGURE 4.1 Five Business-Level Strategies Firms can choose one of five strategies from the generic strategy matrix based on the source of competitive advantage - uniqueness or cost - and breadth of competitive scope - broad or narrow. A firm choosing to compete across a broad market determines that it should compete in a number of customer segments. Competitive advantage is achieved either by offering unique products - a differentiation strategy - or by establishing a low-cost position and providing standardized products at the lowest competitive price - a cost leadership strategy. Firms that choose to compete in narrow customer segments select a focus strategy, which may be either a focused differentiation strategy (few segments, unique products) or a focused cost leadership strategy (narrow segment, standardized products at the lowest competitive price). An integrated cost leadership/differentiation incorporates both of these emphases. None of the five business-level strategies shown in Figure 4.1 is inherently or universally superior to the others. The effectiveness of each strategy is contingent both on the opportunities and threats in a firm’s external environment and on the possibilities provided by the firm’s unique resources, capabilities, and core competencies. It is critical, therefore, for the firm to select a business-level strategy that is based on a match between the opportunities and threats in its external environment and the strengths of its internal environment as shown by its core competencies. Cost Leadership Strategy The cost leadership strategy is an integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors. Firms that choose a cost-leadership strategy generally offer relatively standardized products with characteristics or features that typical customers accept (but with competitive levels of differentiation) at the lowest competitive price. Firms that wish to be successful by following a cost-leadership strategy must maintain constant efforts aimed at lowering costs (relative to rivals’ costs) and creating value for customers. Cost-reduction strategies can include: •Building efficient-scale facilities •Establishing tight control of production and overhead costs •Minimizing the costs of sales, product research and development, and service •Investing in state-of-the-art manufacturing technologies Implementing and maintaining a cost leadership strategy means that a firm must consider its value chain of primary and secondary activities (as discussed in Chapter 3) and effectively link those activities, if it is to be successful (as illustrated in Figure 4.2). As primary activities, inbound logistics and outbound logistics often account for much of the total cost to produce some goods and services. Research suggests that a competitive advantage in logistics creates more value with cost leadership strategies than with differentiation strategies, prompting cost leaders to focus on these primary activities. Cost leaders also carefully examine all support activities to find additional sources of potential cost reductions. Figure Note Figure 4.2 points out that the critical focus in successfully implementing a cost leadership strategy is on efficiency and cost reduction throughout the value delivery system. FIGURE 4.2 Examples of Value-Creating Activities Associated with the Cost Leadership Strategy As suggested in Figure 4.2, the firm’s focus throughout each of its value chain activities and support functions is on the following: •Simplification of processes and procedures •Achieving efficiency and effectiveness •Reducing costs •Monitoring costs of activities provided by others that interface with the firm’s inbound or outbound logistics A firm that successfully implements a cost leadership strategy can earn above-average returns even when the five competitive forces are strong. Rivalry with Existing Competitors Achieving the lowest cost position means that a firm’s rivals will hesitate to compete based on price because, in a price war, the low cost firm will still earn profits even after its competitors compete away all profits. Having the low-cost position is a valuable defense against rivals. For example, the changes Walmart made to attract upscale customers created vulnerability in its low-cost position to rivals. Amazon, Dollar Store, and other took advantage of the opportunity and have siphoned off some of Walmart’s customers. Bargaining Power of Buyers (Customers) Achieving the low cost position provides some protection against powerful customers who attempt to drive down prices. If customers attempt to drive prices below the cost of the next most efficient firm, that firm might choose to exit the market (rather than remain and earn below average profits), leaving the low cost firm with a monopoly position. If that happens, customers would lose any bargaining power as the monopoly firm would be in a position to raise prices. Bargaining Power of Suppliers Because they have achieved the lowest cost position in the industry, the cost leadership strategy enables a firm to absorb a greater amount of cost increases from powerful suppliers before it must raise prices charged to customers. This may enable the firm to be alone among its competitors in earning above-average returns. In addition, a low-cost leader that also has a dominant market share may be in a position to force suppliers to reduce prices or to hold down the level of price increases, and thus reduce the power of suppliers. Again, Walmart is a good example of a firm that follows this pattern. Potential Entrants Firms successfully following cost leadership strategies generally must produce and sell in large volumes to earn above-average returns. And with a continuous focus on efficiency and reducing costs, cost leadership firms create barriers to entry. New entrants must either enter the industry at a large scale (large enough to achieve the same economies of scale as the next lowest cost firm) or be satisfied with average profits until they move sufficiently far down the experience curve to match the efficiencies of the low-cost leader. Product Substitutes The cost leader is in a more attractive position relative to substitute products than are other firms in the industry. To retain customers, the cost leader can more easily reduce prices to maintain the price-value relationship and retain customers. Competitive Risks of the Cost Leadership Strategy Despite the attractiveness of the cost leadership strategy, it is accompanied by risks such as the following: •Technological innovations by competitors could eliminate the cost leader’s cost advantage. •Overly focusing on process efficiency may cause the cost leader to overlook needed differentiation features. •Competitors may successfully imitate the low-cost leader’s value chain configuration. In the event of any of the above, the low-cost leader is challenged to increase value to customers. This may mean reducing prices or adding product features without raising prices. However, if prices are reduced too low, it may be difficult for the firm to earn satisfactory margins and customers may resist any price increases. Differentiation Strategy In contrast to the cost leadership strategy, implementation of a differentiation strategy means that value is provided to customers through the unique features and characteristics of a firm’s products rather than by the lowest price. Because differentiated products satisfy customers’ unique needs or preferences, firms can charge a premium price for differentiated products. But the premium cannot exceed what customers are willing to pay. For the firm to be able to outperform its competitors and earn above-average returns, the price charged for the differentiated product must exceed the cost of differentiation. In other words, the price charged must exceed total product cost. Because of this, the differentiated product’s premium prices generally exceed the low price of the standard product. Firms that follow a differentiation strategy concentrate or focus on product innovation and developing product features that customers value rather than on maintaining the lowest competitive price (the case for cost leadership strategy). Often this strategy seeks to differentiate the product/service on as many dimensions as possible. Products can be differentiated in a number of ways so that they stand apart from standardized products: •Superior quality •Unusual or unique features •More responsive customer service •Rapid product innovation •Advanced technological features •Engineering design and performance •Additional features •An image of prestige or status Some examples of differentiation strategies include the following: •Ralph Lauren differentiates its clothing lines through image. •Lexus cars are differentiated by prestige and image. •Apple (iPod and iPhone) are differentiated by innovative design. •McKinsey and Company offers differentiated consulting services. Successfully implementing (and maintaining) a differentiation strategy requires a firm to consider its value chain of primary and secondary activities and effectively link those activities as illustrated in Figure 4.3. Figure Note Use Figure 4.3 to show that the critical focus in a successful differentiation strategy is on quality and product innovation, regardless of the value-creating activity. FIGURE 4.3 Examples of Value-Creating Activities Associated with the Differentiation Strategy As suggested in Figure 4.3, the firm’s focus in its value chain activities and support functions is on: •Establishing the importance of quality •Accuracy, speed, and responsiveness •Understanding and meeting customers’ unique preferences •Monitoring the speed, reliability, and quality of activities provided by others that interface with the firm’s inbound and outbound logistics Teaching Note The chapter mentions that firms following differentiation strategies cannot completely ignore costs and the need for minimal spending on process-related innovations. Porter refers to this as maintaining “parity” on the alternative dimension. When speaking of cost leadership strategies, a useful example of “differentiation parity” comes from the automobile manufacturing industry. Hyundai has been able to compete based on cost, but it still produces a car that is “in the ballpark” on differentiation. Failed manufacturer Yugo offered a very inexpensive car (introduced at a mere $1995 in the early 1980s), but these were of such poor quality that buyers refused to purchase them once news of their reliability problems got out. A car that will not run is not a value, even if it sells for only a fraction of the price of all other available models! In a similar way, a company that competes on differentiation must maintain “cost parity” so that the differentiated features that customers want are not beyond the reach of their pocketbooks. Consumers recognize the superior quality of Sony televisions, but the premium charged is justifiable, given the quality of the product. Obviously, controlling costs plays an important part in pricing possibilities. A firm that successfully implements a differentiation strategy can earn above-average returns even when the five competitive forces are strong. Rivalry with Existing Competitors Achieving customer loyalty means differentiating products in ways that are meaningful to customers. Brand loyalty means that customers will be less sensitive to price increases. As long as the firm satisfies the differentiated needs of loyal customers, it may be insulated from price-based competition. Bargaining Power of Buyers (Customers) Through meaningful differentiation, firms develop products that are considered unique. This uniqueness may insulate the firm from competitive rivalry and reduce customer sensitivity to price increases (similar to the insulation from rivalry with existing competitors). STRATEGIC FOCUS Apple vs. Samsung: Apple Differentiates and Samsung Imperfectly Imitates Apple is a successful product innovator that creates new markets and then dominates them as a first mover. Samsung has become a successful challenger to Apple by imitating Apple’s innovations as a fast second mover. Using this strategic approach Samsung imitates desirable Apple features (with some changes) and improves on some in ways that customers value. The cycle of innovation/imitation occurs in multiple product groups. Even though Samsung appears to be an imitator, it invests about three times as much money in R&D as Apple (5.4% of sales vs 2.2%). Teaching Note Students will undoubtedly be familiar with products of both companies profiled in the Strategic Focus. Ask students to speculate about the future battles involving Apple and Samsung? Based on information in the Strategic Focus, do they think Samsung is destined to be a perpetual second mover, or will its R&D investments overtake Apple’s leadership position? Ask them to identify other companies that are locked into similar cycles of innovation and imitation. By satisfying customer preferences in ways that no competitor can, firms also are able to charge higher prices (because there are no comparable product alternatives). Bargaining Power of Suppliers Because of the differentiator’s focus on product quality and responsiveness to customer preferences, suppliers also may be forced to provide differentiators with higher quality materials, components, or services, which can drive up the firm’s per-unit costs. Since the differentiator charges premium prices, they are somewhat insulated from suppliers’ price increases (as the differentiator can absorb a greater level of cost increases from powerful suppliers through its higher margins). Alternatively, because of lower price sensitivity by customers, differentiators may be able to raise prices to cover increased supplier-related costs. Potential Entrants The principal barrier to entry is customers’ loyalty to the uniquely differentiated brand. This means that a potential entrant must either overcome (or surpass) the uniqueness of existing products or provide similarly differentiated products at a lower price to increase customer value. Product Substitutes Brand loyalty may insulate differentiated products from substitutes. Without brand loyalty, customers may switch to substitutes that offer similar features at a lower price or to products with more attractive features at the same price. Competitive Risks of the Differentiation Strategy Like the cost leadership strategy, the differentiation strategy also carries risks such as the following: •Customers may decide that the cost of uniqueness is too high. In other words, the price differential between the standardized and differentiated product is too high. Perhaps the firm provides a greater level of uniqueness than customers are willing to pay for. •The firm’s means of differentiation no longer provides value to customers. For instance, what is the value of prestige or exclusivity? And, how long will they last as customers become more sophisticated? •Customer learning may reduce the customer’s perception of the value of the firm’s differentiation. Through experience, customers may learn that the extra price for a differentiated good is no longer a value. Teaching Note This loss of value through customer learning or changes in customer perceptions can be illustrated by the experiences of IBM. Initially, the IBM name on a personal computer signaled value to customers; however, clones soon challenged IBM’s preeminent position in the PC market. As customers learned that the clone machines offered similar features at lower prices, the value attached to the IBM brand name diminished and IBM’s sales suffered. •A fourth risk is concerned with counterfeiting. Increasingly, counterfeit goods (products that attempt to convey differentiated features to customers at significantly reduced prices) are a concern for many firms using the differentiated strategy. In the event of any of the above, differentiators are challenged to increase value to customers. This may mean reducing prices, adding product features without raising prices, or developing new efficiencies in its value chain of primary and secondary activities. Focus Strategies By implementing a cost leadership or differentiation strategy, firms choose to compete by exploiting their core competencies on an industry-wide basis and adopt a broad competitive reach. Alternatively, firms can choose to follow a focus strategy by seeking to use their core competencies to serve the needs of a particular customer group in an industry. In other words, firms focus on specific, smaller segments (or niches) of customers rather than across the entire market. Markets can be segmented by: •Particular buyer group (e.g., youths or senior citizens) •Different segments of a product line (e.g., products for professionals or “do-it-yourselfers”) •Different geographic market (e.g., the eastern or western United States) Firms may choose to follow a focus strategy because: •They can serve a narrow segment more effectively than competitors that choose to compete industry wide •The narrow segment’s needs are so special that industry-wide competitors choose not to meet them •Certain narrow segments are being poorly served by industry-wide competitors Teaching Note Emphasize again that focus strategies can be based either on cost leadership or differentiation. Focused Cost Leadership Strategy Firms that compete by following cost leadership strategies to serve narrow market niches generally target the smallest buyers in an industry. They look for those who purchase in such small quantities that industry-wide competitors cannot serve them at the same low cost. Global furniture retailer IKEA provides customers with “good design and function at low prices” through use of the focused cost leadership strategy. IKEA does this by offering low-cost, modular furniture (assembled by customers), using self-service as an alternative to having sales associates follow and pressure customers to buy. IKEA displays its products in room-like settings so that customers can view different combinations of furniture, eliminating the need for assistance from sales associates or decorators to visualize the setting and reducing employee costs. Customers also pick up their own purchases to reduce the firm’s costs. However, the company also differentiates somewhat. For example, stores address the needs of shoppers (e.g., extended hours and in-store childcare) while they shop. Focused Differentiation Strategy Firms following focused differentiation strategies produce customized products for small market segments. They can be successful when either the quantities involved are too small for industry-wide competitors to handle economically, or when the extent of customization (or differentiation) requested is beyond the capabilities of the industry-wide competitors. The text uses the new generation of lunch trucks offering high-end fare prepared by highly trained chefs and often owned by well-known restaurants to illustrate this strategy. Teaching Note: Other examples of focused differentiators include: •Upscale apartment buildings in various locations are being designed to serve the needs of technologically savvy city dwellers, offering differentiated features such as high-speed digital Internet access and other sophisticated telecommunications services. •Manufacturers such as Ferrari, Aston Martin, and Lamborghini compete in the tiny supercar category with prices starting at $150,000 and running as high as $600,000. These cars are more than just transportation. Just as was noted for industry-wide differentiators and low-cost producers, firms choosing to focus must be particularly adept at completing primary and secondary value chain activities in a superior way. Issues related to the five competitive forces are similar to those discussed for the differentiation and cost leadership strategies; however, the competitive scope of the focus is on a narrow segment rather than the industry. Students should review Figures 4.3 and 4.4 (Value-Creating Activities) as well as the earlier discussion of the five competitive forces for the cost leadership and differentiation strategies. Competitive Risks of Focus Strategies The competitive risks of focus firms are similar to those previously noted for the cost leadership and differentiation strategies with the following additions: •Competitors may successfully focus on an even smaller segment of the market, “outfocusing” the focuser, or focus only on the most profitable slice of the focuser’s chosen segment. Teaching Note For example, Confederate Motor Co. is producing a highly differentiated motorcycle that might appeal to some of Harley-Davidson’s customers. Obsessed with making a “fiercely American motorcycle” (one that is even more American than are Harley’s products), Confederate’s motorcycles are produced entirely by hand labor. In fact, a full week is required to make a single bike. Digital technology is used to design Confederate’s products, which have a radical appearance. At a price of $62,000 or more, the firm’s products will appeal only to customers wanting to buy a truly differentiated product such as the F113 Hellcat (which is receiving “rave reviews in the motorcycling press”). •An industry-wide competitor may recognize the attractiveness of the segment served by the focuser and mobilize its superior resources to better serve the segment’s needs. •Preferences and needs of the narrow segment may become more similar to the broader market, reducing or eliminating the advantages of focusing. STRATEGIC FOCUS RadioShack’s Failed Focus Strategy: Strategic Flip-Flopping The Strategic Focus makes the point that in many industries, firms must continually innovate to provide superior value to customers. However, many firms are slow to innovate for fear of losing current customers. This allows new entrants in the industry to introduce innovations that capture customers served by incumbent firms. RadioShack, after filing for bankruptcy in February 2015, failed to maintain a consistent strategic approach, resulting in unrecoverable financial deterioration after nearly a century of being a mainstay throughout the United States. Teaching Note: Students will undoubtedly be familiar with the company profiled in the Strategic Focus. Ask students to speculate about what information the innovation decisions were based on? Ask them to identify other companies’ innovations in the same market and speculate about what drove these innovations. The discussion should address how conditions in the external environment created opportunities to provide customer value. Integrated Cost Leadership/Differentiation Strategy This hybrid strategy may become even more important - and more popular - as global competition rises. Compared to firms relying on a single generic strategy, firms that integrate the generic strategies may position themselves to improve their ability to adapt quickly to environmental changes. Successfully pursuing the cost leadership and differentiation strategies simultaneously yields additive benefits: •Differentiation enables the firm to charge premium prices. •Cost leadership enables the firm to charge the lowest competitive price. •The firm is thus able to achieve a competitive advantage by delivering value to customers based on both product features and low price. •A variety of other factors also may enable firms to gain a competitive advantage and earn above-average returns from an integrated cost leadership/differentiation strategy. Flexible Manufacturing Systems A flexible manufacturing system is a computer-controlled process used to produce a variety of products in moderate, flexible quantities. It enables firms to achieve the flexibility necessary to simultaneously respond to changes in customer needs and preferences while maintaining the low-cost advantages of large-scale manufacturing. This increases a firm’s ability to engage in an integrated low-cost/differentiation strategy. Information Networks Information networks enable a firm to coordinate interdependencies between internally and externally performed value-creating activities to increase flexibility and responsiveness. Examples include real-time linkages between manufacturers and suppliers or subcontractors, or between retailers and suppliers. These linkages can improve time-to-market of new products by coordinating design and production activities and reduce out-of-stock occurrences by shortening the order-restock cycle. Customer relationship management (CRM) is one form of an information-based network process that firms use to better understand customers and their needs. An effective CRM system provides a 360-degree view of the company’s relationship with customers, encompassing all contact points, involving all business processes, and incorporating all communication media and sales channels. The firm can then use this information to determine the trade-offs its customers are willing to make between differentiated features and low cost, which is vital for companies using the integrated cost leadership/differentiation strategy.
Enterprise Resource Planning Systems: A Mini-Lecture Enterprise Resource Planning is an information system used to identify and plan the resources required across the firm to receive, record, produce, and ship customer orders. For example, salespeople for aircraft parts distributor Aviall use handheld equipment to scan barcode labels on bins in customers’ facilities to determine when parts need to be restocked. Data gathered through this procedure are uploaded via the Web to the Aviall back-end replenishment and ERP system, allowing the order fulfillment process to begin within minutes of scanning. Growth in ERP applications such as the one used at Aviall has been significant. Full installations of an ERP system are expensive, running into the tens of millions of dollars for large-scale applications. Improving efficiency on a company-wide basis is a primary objective of using an ERP system. Efficiency improvements result from the use of systems through which financial and operational data are moved rapidly from one department to another. The transfer of sales data from Aviall salespeople to the order entry point at the firm’s manufacturing facility demonstrates the rapid movement of information from one function to another. Integrating data across parties that are involved with detailing product specifications and then manufacturing those products and distributing them in ways that are consistent with customers’ unique needs enable the firm to respond with flexibility to customer preferences relative to cost and differentiation.
Total Quality Management Systems These systems have been established to improve product quality (from a customer perspective) and to improve productivity in the performance of the internal value-creating activities. Firms develop and use TQM systems in order to (1) increase customer satisfaction, (2) cut costs, and (3) reduce the amount of time required to introduce innovative products to the marketplace. Improving product quality focuses on product reliability, performance, and utility, and enables the firm to differentiate its products and charge higher prices, while lowering the costs of manufacturing and service. Teaching Note The following are the key assumptions on which total quality management (TQM) systems are based: •The costs of poor quality exceed the costs of developing processes that produce high quality products and services (in other words, it is less costly to do things right the first time). •Employees care about their work and will take the initiative to improve it (but only if the firm provides the resources, tools, and training necessary and management listens to their ideas). •Since organizations are systems of highly interdependent parts, decision processes must be integrated and include participation from all affected functional areas. •Responsibility for effective TQM rests with top-level managers who must support TQM processes and appropriately design the firm so that employees can function effectively. Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy This is an appealing yet risky strategy, as it is difficult for firms to perform primary and support activities in ways that allow them to produce relatively inexpensive products with levels of differentiation that create value for the target customers. Moreover, to properly use this strategy across time, firms must be able to simultaneously reduce costs incurred to produce products (as required by the cost leadership strategy) while increasing products’ differentiation (as required by the differentiation strategy). Being “stuck-in-the-middle” implies that the firm will not be able to manage successfully the five competitive forces and will not achieve strategic competitiveness. In fact, these firms can only earn average profits when industry structure is favorable or when other firms in the industry also are “stuck-in-the-middle.” Chapter 5 Competitive Rivalry and Competitive Dynamics LEARNING OBJECTIVES 1. Define competitors, competitive rivalry, competitive behavior, and competitive dynamics. 2. Describe market commonality and resource similarity as the building blocks of a competitor analysis. 3. Explain awareness, motivation, and ability as drivers of competitive behaviors. 4. Discuss factors affecting the likelihood a competitor will take competitive actions. 5. Describe factors affecting the likelihood a competitor will respond to actions taken by its competitors. 6. Explain competitive dynamics in slow-cycle, in fast-cycle, and in standard-cycle markets. CHAPTER OUTLINE Opening Case: Does Google have competition? Dynamics of the High Technology Markets A MODEL OF COMPETITIVE RIVALRY COMPETITOR ANALYSIS Market Commonality Resource Similarity Strategic Focus: Does Kellogg have the Tiger by the Tail or is it the reverse? DRIVERS OF COMPETITIVE BEHAVIOR COMPETITIVE RIVALRY Strategic and Tactical Actions LIKELIHOOD OF ATTACK First-Mover Benefits Organizational Size Quality LIKELIHOOD OF RESPONSE Type of Competitive Action Actor’s Reputation Market Dependence COMPETITIVE DYNAMICS Slow-Cycle Markets Fast-Cycle Markets Strategic Focus: The Ripple Effect of Supermarket Wars: Aldi is Changing the Markets in Many Countries Standard-Cycle Markets SUMMARY REVIEW QUESTIONS MINI-CASE ADDITIONAL QUESTIONS AND EXERCISES MINDTAP RESOURCES LECTURE NOTES Chapter Introduction: The competitive landscape is characterized by increasing globalization, advanced technological development, and other factors that will lead to an environment that is more dynamic and charged with rivalry. Firms will act and react in a dance of sorts, but one involving very high stakes—even survival. This chapter introduces terms and concepts relevant to the conversation about competitive behavior in a variety of markets. Figure 5.2 is central to the discussion of most of the chapter. OPENING CASE Does Google have competition? Dynamics of the High Technology markets Google is especially known for its search business. In fact, many people now suggest that they “googled it” when explaining that they searched for information on a particular subject. In fact, Google’s market share of the search markets is estimated to be about 75 percent in the U.S., and an even higher 90 percent in Europe. Google is much more than a search business. It has entered many markets and is doing research on and/or preparing to enter many more markets. For example, Google recently opened its first Google retail shop in London and plans to pen several more. The intent is to compete, at least partially, with Apple’s successful retail stores. In another service market, Google recently introduced Android Pay as a competitive response to Apple Pay and Samsung Pay (also in response to Apple’s service product). Google has introduced a new flight search tool, Google Flights, that helps customers find the best (including cheapest) airplane flights. Thus, Google competes in many markets and with multiple rivals. In some markets, Google dominates such as information search. But, in other markets, it is a new entrant with a small market share competing against established and major companies. As a result, Googles competitive actions are exceedingly complex and the competitive dynamics cross multiple markets and competitors. Teaching Note The opening case illustrates the transitory nature of competitive advantage and how tactical and strategic actions are necessary to produce above-average returns. To ensure that students understand the difference between these concepts, ask them to describe Google’s competitive behaviors and how they deal with many competitors in in multiple markets.
1 Define competitors, competitive rivalry, competitive behavior, and competitive dynamics.
DEFINING COMPETITION A strategy’s success is determined not only by the firm’s initial competitive actions, but also by how well it anticipates competitors’ responses to them and by how well the firm responds to its competitor’s initial actions (also called attacks). Some important definitions: •Firms operating in the same market with similar products targeting similar customers are competitors. •Competitive rivalry is the ongoing set of competitive actions and competitive responses occurring between rivals as they compete against each other for an advantageous market position. •Competitive behavior is the set of competitive actions and competitive responses the firm takes to build or defend its competitive advantages and to improve its market position. •Firms competing against each other in several product/geographic markets are in multimarket competition. •All competitive behavior—that is, the total set of actions and responses taken by all firms competing within a market—is called competitive dynamics. Teaching Note Firms must learn to compete differently if they are to achieve strategic competitiveness. To provide an idea of what this means, new ways of competing may include the following: •Bringing new goods and services to market more quickly •The use of new technologies (e.g., Amazon.com) •Diversifying the product line (e.g., Barnes and Noble into music as a catalyst for growth) •Shifting product emphasis (e.g., U-Haul’s focus on accessory sales) •Consolidation (e.g., the merger of Hewlett Packard and Compaq) •Combining online selling with physical stores (e.g., Sears’s acquisition of Lands’ End) The focus of this chapter is on competitive dynamics, the series of competitive actions and competitive responses among firms competing within a particular industry. The implication that should be strongly stated is that the strategic management process (as described in Chapter 1 and Figure 1.1) is dynamic, not static. STRATEGIC FOCUS Does Kellogg have the Tiger by the Tail or is it the reverse? Kellogg has been the leading and largest cereal maker in the U.S. market for some time. It once had 45 percent of the U. S. cereal market. Thus, for a number of years, Kellogg was flying high with its “Tony the Tiger” advertisements, and its leading cereals of Frosted Flakes, Frosted Mini-Wheat’s and Special-K cereals, among others. That is no longer the case, especially with the changes in the breakfast food market. In fact, cereal, which at one time composed approximately 38 percent of the breakfast foods in the U.S., currently accounts for about 28 percent of the breakfast food sales. The U.S. consumer is moving away from processed foods and carbohydrates, to fruit, yogurt and protein such as eggs, for breakfast meals. As a result, Kellogg’s sales of its cereals are slumping, profits are slipping and its stock price is declining. A recent survey of analysts found that 90% recommended selling or a hold on Kellogg stock with only 10 percent recommending that investors buy it. In 2014, sales for 19 of Kellogg’s top 25 cereals declined. While other major cereal makers also struggled, General Mill’s (e.g., Cheerios, Lucky Charms) sales were 50 percent better than Kellogg’s. Obviously, Kellogg is losing market share to its major rivals in the cereal market but also to other firms providing different breakfast foods that are increasingly desired by the U.S. consumer. Kellogg seems unable to make the major changes required to respond to the new demands in the breakfast food market. Its competitors are responding more effectively than it is suggesting a dark future for Kellogg. Teaching Note These are challenging times for Kellogg Ask students to evaluate Kellogg’s competitive behavior. Have they made the right choices and what can they do to regain market share? Have students describe Kellogg’s competitive rivalry with General Mills and Post. FIGURE 5.1 From Competitors to Competitive Dynamics This figure features the key concepts involved in competitive dynamics, which refers to the total set of actions and responses taken by all of the firms competing in a given market. Expanding geographic scope contributes to the increasing intensity in competitive rivalry among firms. That is, firms trying to predict competitive rivalry should anticipate that they will meet a larger number of increasingly diverse competitors in the future; thus, competitive rivalry will affect their strategies more than in the past. Teaching Note Figure 5.2 provides a model of competitive dynamics and rivalry, but it also serves as an outline for this chapter’s discussion. You might briefly summarize the model at this point and comment that students can refer to it throughout your discussion. A MODEL OF COMPETITIVE RIVALRY Competitive rivalry exists when firms jockey with one another to pursue an advantageous market position. When one or more firms competing in an industry feels pressure to act or perceives an opportunity to improve their competitive position, competitive rivalry occurs as various firms initiate a series of actions and responses. Research findings showing that intensified rivalry within an industry results in decreased average profitability for firms competing in it and supports the importance of understanding these effects. FIGURE 5.2 A Model of Competitive Rivalry Viewing the model leads to a number of observations: •Interfirm rivalry or competitive dynamics begins with competitive analysis in terms of market commonality and resource similarity. •Market commonality and resource similarity affect the drivers of competitive behavior—a firm’s awareness, motivation, and ability to attack or respond. •Attack and responses to attack result in competitive outcomes—market position and financial performance. •Feedback from competitive outcomes will affect future competitive dynamics. Teaching Note Competitive rivalry exists because of competitive asymmetry, which describes the fact that firms differ from one another in terms of their resources, capabilities, core competencies, and the opportunities and threats in their competitive environments and industries. It is important that firms see that competition results in mutual interdependence among firms in the industry as each firm tries to establish a sustainable competitive advantage. •As firms strive to achieve strategic competitiveness and above-average returns, they must recognize that strategies are not deployed in isolation from rival’s actions and responses. •The strategic management process represents firms taking a series of actions, fending off counter-actions or responses and developing responses of their own.
2 Describe market commonality and resource similarity as the building blocks of a competitor analysis.
• COMPETITOR ANALYSIS A competitor analysis is the first step in predicting the extent and nature of rivalry with each competitor. Appropriate features of this kind of analysis are described below. Market Commonality Market commonality is the extent to which firms compete in the same markets. And market commonality is increasing as more and more firms compete internationally. Teaching Note If firms overlap in a number of markets—sometimes referred to as multipoint competition—this results in a situation where firms compete against each other simultaneously in multiple geographic or product markets. This can have a significant impact on competitive dynamics (e.g., expanding into a new market that the competitor has entered to ensure that the rival does not tap a market opportunity that could then be used to support competition in core markets) In a number of industries (e.g., airlines, chemicals, pharmaceuticals, and consumer foods) the largest domestic firms compete in many of the same markets. Thus there is high market commonality. This means that each has awareness and motivation to respond to competitive interaction. Interestingly, high levels of commonality reduce the likelihood of competitive interaction. For firms that are in many common markets, there generally is competitive peace. However, when one of these firms makes a competitive move, the others are compelled to respond rapidly and aggressively. Resource Similarity Resource similarity is the extent to which a firm’s tangible and intangible resources are comparable to a competitor’s in terms of both type and amount. Firms with similar types and amounts of resources are likely to have similar strengths and weaknesses and to use similar strategies. Teaching Note In contrast to market commonality, assessing resource similarity can be difficult, particularly when critical resources are intangible (e.g., brand name, knowledge, trust, capacity to innovate) rather than tangible (e.g., access to raw materials, ability to borrow capital). In most cases, dissimilar resources may increase the likelihood of an attack whereas firms with similar resources (overlap between their resource portfolios) will be less likely to attack because resource similarity increases the likelihood of retaliation. Teaching Note Coca-Cola and Pepsi’s decision to target the fast-growing market for bottled water provides an example of how resource dissimilarity may cause potential competitors to be overlooked, especially by an industry’s dominant firms. This means that competitive responses of firms such as Perrier Group to protect its key bottled water brands may be delayed due to resource dissimilarity. FIGURE 5.3 A Framework of Competitor Analysis The results of the firm’s competitor analyses can be mapped for visual comparisons. Figure 5.3 shows different hypothetical intersections between the firm and individual competitors in terms of market commonality and resource similarity. These intersections indicate the extent to which the firm and those to which it has compared itself are competitors. For example, the firm and its competitor displayed in quadrant I of Figure 5.3 have similar types and amounts of resources and use them to compete against each other in many markets that are important to each. These conditions lead to the conclusion that the firms modeled in quadrant I are direct and mutually acknowledged competitors. In contrast, the firm and its competitor shown in quadrant III share few markets and have little similarity in their resources, indicating that they aren’t direct and mutually acknowledged competitors. The firm’s mapping of its competitive relationship with rivals is fluid as firms enter and exit markets and as companies’ resources change in type and amount. Thus, those with whom the firm is a direct competitor change across time.
3 Explain awareness, motivation, and ability as drivers of competitive behavior.
DRIVERS OF COMPETITIVE ACTIONS AND RESPONSES Awareness refers to whether or not the attacking or responding firm is aware of the competitive market characteristics such as the market commonality and the resource similarity of a potential attacker or respondent. When managers are not aware of these factors or assess them inaccurately, industry overcapacity or excessive competition may result. For example, this may be a partial explanation for the recent decline in Levi Strauss’ core market as the firm appeared to be unaware of changes in teenagers’ interests as competition for their business intensified. Market commonality affects the firm’s perceptions and resulting motivation. For example, all else being equal, the firm is more likely to attack the rival with whom it has low market commonality than the one with whom it competes in multiple markets. The primary reason is that there are high stakes involved in trying to gain a more advantageous position over a rival with whom the firm shares many markets. Motivation is represented by the incentives that a firm has to either initiate an attack or to respond when attacked. Ability relates to each firm’s resources and the flexibility they provide. Without available resources (such as financial capital and people), the firm lacks the ability to attack a competitor or respond to its actions. However, similar resources suggest similar abilities to attack and respond. Resource dissimilarity also influences competitive actions and responses between firms, in that the greater the resource imbalance between the acting firm and competitors or potential responders, the greater will be the delay in response by the firm with a resource disadvantage. COMPETITIVE RIVALRY Competitive rivalry is the ongoing set of competitive actions and responses occurring between competing firms for an advantageous market position. Because the ongoing competitive action/response sequence between a firm and a competitor affects the performance of both firms, it is important for companies to carefully study competitive rivalry to successfully use their strategies. Strategic and Tactical Actions Firms use both strategic and tactical actions when forming their competitive actions and competitive responses in the course of engaging in competitive rivalry. •A competitive action is a strategic or tactical action the firm takes to build or defend its competitive advantages or improve its market position. •A competitive response is a strategic or tactical action the firm takes to counter the effects of a competitor’s competitive action. •A strategic action or a strategic response is a market-based move that involves a significant commitment of organizational resources and is difficult to implement and reverse. •A tactical action or a tactical response is a market-based move that is taken to fine-tune a strategy; it involves fewer resources and is relatively easy to implement and reverse. •Hyundai Motor Co.’s expenditures on research and development and plant expansion to support the firm’s desire to be one of the world’s largest carmakers by 2010 are strategic actions. •Tactical actions are easily reversed—pricing decisions are often taken by these firms to increase demand in certain markets during certain periods.
4 Discuss factors affecting the likelihood a competitor will take competitive actions.
LIKELIHOOD OF ATTACK In addition to market commonality, resource similarity, and the drivers of awareness, motivation, and ability, other factors affect the likelihood a competitor will use strategic actions and tactical actions to attack its competitors. Three of these factors—first-mover incentives, organizational size, and quality—are described below. First-Mover Benefits First movers are the firms that take an initial competitive action, either strategic or tactical. First movers are firms that have the resources, capabilities, and core competencies that enable them to gain a competitive advantage through innovative and entrepreneurial competitive actions. By being early, the first mover hopes to: •Earn above-average returns until competitors respond effectively •Gain customer loyalty, thus creating a barrier to entry by competitors •Gain market share that can be difficult for competitors to take in the future Teaching Note Consider the success of Harley-Davidson in large motorcycles (cruisers). In the 1980s, Harley-Davidson set the standard for low, heavyweight motorcycles and has successfully defended its position by emphasizing its reputation and brand name. The firm trying to predict its rivals’ competitive actions might conclude that they will take aggressive strategic actions to gain first movers’ benefits. However, though a firm’s competitors might be motivated to be first movers, they may lack the ability to do so. First movers tend to be aggressive and willing to experiment with innovation and take higher, yet reasonable, levels of risk. To be a first mover, the firm must have readily available the resources to significantly invest in R&D as well as to rapidly and successfully produce and market a stream of innovative products. Organizational slack is what makes it possible for firms to have the ability (as measured by available resources) to be first movers. Slack is the buffer or cushion provided by actual or obtainable resources that aren’t currently in use? Thus, slack is a liquid resource that the firm can quickly allocate to support the actions (e.g., R&D investments and aggressive marketing campaigns) that lead to first mover benefits. There also are dangers or disadvantages to being a first mover. •It is difficult to accurately estimate the returns that will be earned from introducing product innovations. •The first mover’s cost to develop a product innovation can be substantial, reducing the slack available to support further innovation. •Lack of product acceptance over the course of the competitor’s innovations may indicate less willingness in the future to accept the risks of being a first mover. Second movers are firms that respond to a first mover’s competitive action, typically through imitation. Doing so allows the second mover to •Avoid both the mistakes and the huge spending of the pioneers (first movers) •Have time to develop processes and technologies that are more efficient than those used by the first mover •Respond quickly to first movers’ successful, innovation-based market entries •Rapidly and meaningfully interpret market feedback to respond quickly yet successfully to the first mover’s successful innovations Teaching Note An example of industry dynamics—and how a second mover can succeed—is provided by looking at the competitive dynamics of the athletic shoe industry. •New Balance is a second mover in the athletic shoe industry. •It effectively competes against industry leaders Nike and Reebok by focusing on the needs of a well-defined market segment. •New Balance products are not particularly innovative compared to industry leader, Nike. •New Balance is able to succeed by doing a better job of satisfying the needs of baby boomers, whose ages are significantly higher than those of Nike’s and Reebok’s core customer groups, 42, compared to 25 and 33, respectively. •New Balance offers a new model every 17 weeks, compared to six weeks for most rivals. •New Balance’s success seems to come not from rapid introductions of innovative new products, but by offering high-quality products at moderate prices and by making them available in multiple widths (ranging from AA to EEEE), recognizing that many people do not have “average” feet. Late movers are firms that respond to competitive actions, but only after considerable time has elapsed after the first mover’s action, and the second mover’s response. Typically, a late response is better than no response at all, although any success achieved from the late competitive response tends to be slow in coming and considerably less than that achieved by first and second movers. As late movers are the last to respond to the first and second movers’ actions, late movers tend to be poor performers and often are weak competitors. For example, Avon was a late mover in e-commerce and Dell was a late mover in providing Internet access. Organizational Size An organization’s size affects the likelihood that it will take competitive actions as well as the types of actions it will take and their timing. Small firms are more likely to, and quicker to, launch competitive actions. Large firms are likely to initiate more competitive actions as well as strategic actions during a given time period. Thus, the competitive actions a firm will likely encounter from larger competitors will be different than the competitive actions it will encounter from smaller competitors. Large organizations often have slack resources to launch a larger number of total competitive actions, and thus do. However, smaller firms have the flexibility needed to launch a greater variety of competitive actions. Walmart appears to be an example of a large firm that has the flexibility required to take many types of competitive actions. Analysts believe that Walmart’s tactical actions are critical to its success and show a great deal of flexibility (such as a quick advertising change for 2007 back-to-school sales after disappointing spring 2007 sales). In other words, Walmart’s competitive actions will be a combination of the tendencies shown by small and large companies. Quality Product quality shapes the competitive dynamics in many industries. In fact, product quality is no longer a competitive issue but a necessary or mandatory product attribute if firms expect to successfully implement any of the generic business strategies discussed in Chapter 3—low cost, differentiation, focus, or integrated cost leadership/differentiation. Quality involves meeting or exceeding customer expectations in the products and/or services offered. Although quality is necessary, it is not a sufficient product attribute for firms to achieve strategic competitiveness. An acceptable level of quality merely provides firms with the opportunity to compete. Products and services must continue to meet customer preferences. Quality is as important in the services sector as it is in manufacturing. For the importance of quality to permeate the entire organization (and affect all of its processes and value-creating activities), a dedication to quality must come from the organization’s top-level executives. Quality affects competitive rivalry. •The firm studying a competitor with poor quality products can predict that the competitor’s costs are high and that its sales revenue will likely decline until the quality issues are resolved. •The firm can predict that the competitor is unlikely to be aggressive in terms of taking competitive actions, given that its quality problems must be corrected in order to gain credibility with customers. •Once corrected, the competitor will likely act by emphasizing additional dimensions of competition. Table Note Quality-related dimensions of goods and services are shown in Table 5.1. TABLE 5.1 Quality Dimensions of Goods and Services Indicated in Table 5.1, the quality dimensions of products and services differ slightly from each other. As presented, the quality dimensions of products are more objective or measurable, relating to performance, features, flexibility, durability, conformance, serviceability, aesthetics, and perceived quality. In contrast, the quality dimensions of services are more subjective, dealing with timeliness, courtesy, consistency, convenience, completeness, and accuracy
5 Describe factors affecting the likelihood a competitor will respond to actions taken by its competitors.
LIKELIHOOD OF RESPONSE Once a competitive action has been taken, its success generally is determined by the likelihood and nature of the competitive response. In general, a firm is likely to respond to a competitor’s action when: 1. The action leads to better use of the competitor’s capabilities to gain or produce stronger competitive advantages or an improvement in its market position, 2. The action damages the firm’s ability to use its capabilities to create or maintain an advantage, or 3. The firm’s market position becomes less defensible. To predict how a competitor is likely to respond to competitive actions, firms should consider (see Figure 5.2): •Market commonality and resource similarity •Awareness, motivation, and ability •Type of competitive action, reputation, and market dependence Type of Competitive Action Teaching Note Remember, competitive actions are significant competitive moves taken by a firm that are designed to gain a competitive advantage in a market, with the type of competitive action taken being based on the firm’s strategy (described in Chapter 4). Competitive actions can be classified based on the scope or breadth and significance of the action. The likelihood of a competitive response to an action depends on the type of action taken—strategic or tactical—and the potential effect on competitors. Because strategic actions require the use or dedication of specific organizational resources, are more difficult to implement successfully, are more time consuming, and are difficult (and often costly) to reverse, it is more likely that tactical actions will be implemented and responded to more often. Because tactical actions require fewer organizational resources and are relatively easy to implement and reverse, their effects on the competitive situation are more immediately felt. Some examples of strategic actions include: •Walmart’s entry into the European market •Continental’s decision to initiate flights into Lima, Peru •Bank One’s implementation of an Internet banking company Teaching Note Tactical actions are taken to fine-tune a strategy. They involve fewer and more general organizational resources and are relatively easy to implement and reverse, if necessary. Fare increases (decreases) in the airline industry represent tactical actions. They require few organizational resources (other than communicating new prices), are relatively easy to implement, and can be reversed. Tactical actions also are generally more quickly responded to by competitors than are strategic actions. Teaching Note It can be instructive to compare the rapid response by airlines to competitors’ tactical actions (such as fare reductions) to American Airline’s acquisition of another airline company and its $1 billion purchase of gates at JFK airport to respond to Continental’s efforts to gain market share (strategic actions). Actor’s Reputation To predict the likelihood of a competitor’s response to a current or planned action, the firm studies the responses that that competitor has taken previously when attacked, in that past behavior is assumed to be a reasonable predictor of future behavior. Competitors are more likely to respond to either strategic or tactical actions taken by a market leader. For example, competitive actions taken by Home Depot are almost certain to incite a response from Lowe’s. Teaching Note Some likely effects of reputation are the following: •Actions initiated by firms with a previous history of success also will be more likely to result in quick reactions and imitation. •Actions taken by firms with reputations for risk-taking and for initiating complex and unpredictable actions are less likely to be responded to. •Actions taken by price predators (firms who cut prices to capture market share and then raise prices) are seen as having a negative effect on competitors and their actions receive only minimal response and imitation. Market Dependence Market dependence denotes the extent to which a firm’s revenues/profits are derived from a particular market. Firms that are highly concentrated in—or dependent on—an industry (or market) in which a competitive action has been taken are more likely to respond than are firms who do business in multiple industries and markets.
6 Explain competitive dynamics in slow-cycle, in fast-cycle, and in standard-cycle markets.
COMPETITIVE DYNAMICS Teaching Note Recall that Figure 5.1 illustrates the potential outcomes of inter-firm rivalry. Whereas competitive rivalry concerns the ongoing actions and responses between a firm and its competitors for an advantageous market position, competitive dynamics concerns the ongoing actions and responses taking place among all firms competing within a market for advantageous positions. To explain competitive dynamics, it is important to understand the effects of varying rates of competitive speed in different markets (called slow-cycle, fast-cycle, and standard-cycle markets) on the behavior (actions and responses) of all competitors within a given market. Competitive behaviors as well as the reasons or logic for taking them are similar within each market type, but differ across market type. Thus, competitive dynamics differ in slow-cycle, fast-cycle, and standard-cycle markets. The sustainability of the firm’s competitive advantages differs across the three market types. Slow-Cycle Markets Slow-cycle markets are those in which the firm’s competitive advantages are shielded from imitation, often for long periods of time, and where imitation is costly. Thus, competitive advantages are sustainable in slow-cycle markets. Building a unique competitive advantage that is proprietary leads to competitive success in a slow-cycle market. This type of advantage is difficult for competitors to understand. Copyrights, geography, patents, and ownership of an information resource are examples of what leads to unique advantages. Teaching Note Noted in Chapter 3, a difficult-to-understand and costly-to-imitate advantage can be the result of unique historical conditions, causal ambiguity, and/or social complexity. Once a proprietary advantage is developed, the firm’s competitive behavior in a slow-cycle market is oriented toward protecting, maintaining, and extending that advantage. Teaching Note Providing some examples may help students understand what has been involved in establishing and defending a one-of-a-kind competitive advantage. The following are some possibilities: •IBM’s historical dominance of the mainframe computer industry •Boeing’s dominant position in larger, commercial jet aircraft (at least until the Airbus super-jumbo jet hits the market) •Microsoft’s dominant position in the market for PC operating system software (though diminished somewhat by a recent swell of new competitors) •Walmart’s use of local market monopolies as it established its dominant position in discount retailing by setting up stores in small, rural communities Figure Note: The sustainability of competitive actions in slow-cycle markets is illustrated in Figure 5.4. FIGURE 5.4 Gradual Erosion of a Sustained Competitive Advantage As indicated by Figure 5.4, a firm operating in a slow-cycle market may be able to retain its competitive advantage over time. •Returns from the competitive action increase during the early, launch years of the strategy. •When returns level out, the firm exploits its position. •Competitors counterattack or launch strategies that cause the first firm’s bases for competitive advantage to erode. As a result, returns are competed away. Fast-Cycle Markets Fast-cycle markets are those in which the firm’s competitive advantages aren’t shielded from imitation and where imitation happens quickly and somewhat inexpensively through reverse engineering and technology diffusion. Competitive advantages aren’t sustainable in fast-cycle markets. The technology often used by fast-cycle competitors isn’t proprietary, nor is it protected by patents as is the technology used by firms competing in slow-cycle markets. For example, only a few hundred parts readily available on the open market are required to build a PC. Patents protect only a few of these parts, such as microprocessor chips. Fast-cycle markets are more volatile than slow-cycle and standard-cycle markets. Prices fall quickly in these markets, so companies need to profit quickly from their product innovations (e.g., rapid declines in the prices of microprocessor chips produced by Intel and Advanced Micro Devices continuously reduces their prices to end users). Imitation of many fast-cycle products is relatively easy, as demonstrated by Dell and Gateway, along with a host of local PC vendors. All of these firms have partly or largely imitated IBM’s initial PC design to create their products. STRATEGIC FOCUS The Ripple Effect of Supermarket Wars: Aldi is Changing the Markets in Many Countries Aldi started as a small family-owned grocery store by Mrs. Albrecht located in Essen, Germany in 1913. They emphasized low costs from the very beginning and thereby provided very low prices for customers relative to competitors. It operates stores in 18 countries and in the U.S. it has stores in 36 states. Its annual sales revenues in the U.S. are approximately $70 million. Aldi is having a major effect in the retail food markets across countries, especially in the U.K., U.S. and Australia. The retail food industry has largely operated as a standard-cycle market and sold products with small margins. With Aldi’s growing power in the markets, firms are forced to operate with even smaller margins and reduced profits or cut their costs in order to compete on prices. Teaching Note The focus of fast-cycle competition is competitive disruption, an approach where competition is based on one set of resources and then shifted to another—in other words, using price as a first step toward sustaining a competitive advantage, then shifting to quality, then speed, then innovation, and so on. The principle is that the primary basis of the competitive advantage is shifted as the firm disrupts and changes the rules of the game. Firms in fast-cycle markets avoid “loyalty” to any of their products, preferring to cannibalize their own before competitors learn how to do so through successful imitation. This emphasis creates competitive dynamics that differ substantially from slow-cycle markets. Instead of concentrating on protecting, maintaining, and extending competitive advantages, these companies focus on learning how to rapidly and continuously develop superior advantages. Figure Note Figure 5.5 can be used to discuss how competitive advantage would unfold in a fast-cycle market. FIGURE 5.5 Developing Temporary Advantages to Create Sustained Advantage As illustrated, one way in which firms might sustain a competitive advantage is to move continuously from advantage to advantage. This is accomplished by moving from one source of advantage to another, never allowing competitors to catch up. Examples of firms that have successfully followed the incremental approach to sustain competitive advantage are Vodaphone in telecommunications services and Cisco Systems in telecommunications systems. Teaching Note The following has been prescribed as the incremental or step-by-step approach to managing competitive advantages in fast-cycle markets. 1. Disrupt the status quo: A firm should identify new opportunities to meet customer needs, thereby shifting or changing the basis of competition. 2. Create a temporary advantage: The temporary advantage should be based on improved knowledge of customers’ needs, innovative application of technology, and an attempt to define the future basis of customer satisfaction. 3. Seize the initiative¬: Move aggressively and rapidly, forcing competitors to play catch up; take a proactive approach while leaving competitors to be reactive. 4. Sustain the momentum: Continue to develop new sources of advantage; don’t wait for competitors to catch up; stay one step ahead. Teaching Note As discussed earlier, the contemporary competitive landscape requires that firms (1) introduce more new products, (2) develop broader product lines, and (3) provide more rapid product upgrades. Standard-Cycle Markets Standard-cycle markets are those in which the firm’s competitive advantages are moderately shielded from imitation and where imitation is moderately costly. Competitive advantages are partially sustainable in standard-cycle markets, but only when the firm is able to continuously upgrade the quality of its competitive advantages. The competitive actions and responses that form a standard-cycle market’s competitive dynamics find firms seeking large market shares, trying to gain customer loyalty through brand names, and carefully controlling their operations to consistently provide the same usage experience for customers without surprises. Because of large volumes, the size of mass markets, and the need to develop scale economies, the competition for market share is intense in standard-cycle markets. P&G and Unilever are direct competitors—they share multiple markets, have similar types and amounts of resources, and follow similar strategies. For example, they both compete aggressively for market share in laundry detergents, where tiny fractions make a huge difference at the bottom line. Innovation has a substantial influence on competitive dynamics as it affects the actions and responses of all companies competing within a slow-cycle, fast-cycle, or standard-cycle market. Instructor Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838