CHAPTER

Business Strategy: Differentiation, Cost Leadership, and Integration

Team 3: Steve Case, Lori Kosarue, Jesse Montie, Nikki Thomsen

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Lori

Business-Level Strategy: How to Compete for Advantage?

Answer the Who, What, Why, and How

Who - which customer segments to serve?

What needs, wishes, desires will we satisfy?

Why do we want to satisfy them? How will we satisfy customers needs?

Details actions managers take in quest for competitive advantage

Single product or group of similar products

Using Siena Heights University Jointly Determine Competitive Advantage

To formulate an effective business strategy, managers need to keep in mind that a firms competitive advantage is determined jointly by industry characteristics and firm characteristics.
Industry Effects Industry Attractiveness Within Industry Strategic Groups

Firm Effects

Value Position Relative to Competitors Cost Position Relative to Competitors

Competitive Advantage
Business Strategy Cost, Differentiatio n, Integration

The more attractive an industry is, the more profitable it is.

Exhibit 6-1

Strategic Position
Determined by Firms Business-Level Strategy
Two primary competitive levers:
Value (V) Cost (C)

Economic Value Created: (V-C)

The greater (V-C) = Competitive Advantage

Strategic Position Based on:

Value creation Cost
6-5

Strategic Trade-offs
Cost or Value Position?

Higher Value = Higher Costs

Value Creation Costs = Value Gap A business strategy is more likely to lead to competitive advantage if either:
Perform Similar Activities Differently OR Perform Different Activities

Than Rivals
6-6

 Product Features

Value Drivers

Increase the perceived value Adding unique product features allow firms to turn commodity products into differentiated products
Command premium price

Value Drivers Customer Service

Increase perceived value by focusing on customer service Nordstrom Apple Disney

Whatever you do, do it well. Do it so well that when people see you do it, they will want to come back and see you do it again and they will want to bring others and show them how well you do what you do. Walt Disney http://www.disneydreamer.com/walt/quotes.htm

Value Drivers
Customization
Tailoring for specific customers
Nike BMW
$135

$67,000

Value Drivers Complements

Add value when consumed in tandem
Comcast Bundling TV, Internet, Phone and now Verizon Cell service Banks and Credit Unions checking, savings, personal loans, home loans, business products, CD, IRA, Trusts (better rates when you have multiple products)

http://www.comcast.com/

Nikki

EXHIBIT 6.4

Cost Drivers: Cost-Leadership

Cost Leadership:
Cost of input factors, economies of scale, and learning-curve and

experience-curve effects
Walmart vs. Kmart

Competitive advantage = economic value created (V-C) > competitors

Dell vs. Compaq, Gateway, & HP

6-12

Ryanair: Lower Cost than the Low-Cost Leader!

The Southwest Airlines of Europe

Lowest-cost airline in the world

No window shades on older planes, seats dont recline, etc. Fares as low as $8 Numerous fees and surcharges: pillows, blankets, check-in, etc. 20+% of revenues flow from ancillary services

113

6-13

Ryanair Sample Revenue Calculation

1 Bottle of Water, $3.50 Ad Revenue, $2 Priority Boarding, $4 Pillow & Blanket, $5 Subsidy from More Expensive Flights, $5.50

Ticket Price, $8

Credit Card Fee, $6

Revenue $87 Cost $70 Profit $17

Online Check-in, $7.50

Checking Two Bags, $45

6-14

Small Group Exercise Ryanair

How to make profits on an $8 ticket? Are extra fees properly disclosed ? Check out www.ryanair.com Are the fees transparent? If you were a competitor (e.g., Aer Lingus or Lufthansa) How would you compete against Ryanair?

Cost parity is unlikely

6-15

Cost Drivers: Inputs & Scale

Input Factors

Lower-cost materials, money or labor.

De Beers diamonds Alcoa bauxite GE Capital

Economies of Scale
Increased output decreased cost per unit Spread fixed costs Cube-square rule
Boeing Aircraft Carrefour retailer
6-16

EXHIBIT 6.5 Economies of Scale and Diseconomies of Scale

6-17

Leadership Cost: Can a small company be too BIG?

Source: http://www.mindtools.com/pages/article/newLDR_73.htm

 Impoverished Leadership Low Production/Low People

Leadership Styles

This leader is mostly ineffective. He/she has neither a high regard for creating systems for getting the job done, nor for creating a work environment that is satisfying and motivating. The result is disorganization, dissatisfaction and disharmony.

Country Club Leadership High People/Low Production

This style of leader is most concerned about the needs and feelings of members of his/her team. These people operate under the assumption that as long as team members are happy and secure then they will work hard. What tends to result is a work environment that is very relaxed and fun but where production suffers due to lack of direction and control.

Produce or Perish Leadership High Production/Low People

Also known as Authoritarian or Compliance Leaders, people in this category believe that employees are simply a means to an end. Employee needs are always secondary to the need for efficient and productive workplaces. This type of leader is very autocratic, has strict work rules, policies, and procedures, and views punishment as the most effective means to motivate employees.
Source: http://www.mindtools.com/pages/article/newLDR_73.htm

Leadership Styles Continued

Middle-of-the-Road Leadership Medium Production/Medium People
This style seems to be a balance of the two competing concerns, and it may at first appear to be an ideal compromise. Therein lies the problem, though: When you compromise, you necessarily give away a bit of each concern, so that neither production nor people needs are fully met. Leaders who use this style settle for average performance and often believe that this is the most anyone can expect.

Team Leadership High Production/High People

According to the Blake Mouton model, this is the best managerial style. These leaders stress production needs and the needs of the people equally highly. The premise here is that employees understand the organizations purpose and are involved in determining production needs. When employees are committed to, and have a stake in the organizations success, their needs and production needs coincide. This creates a team environment based on trust and respect, which leads to high satisfaction and motivation and, as a result, high production.
Source: http://www.mindtools.com/pages/article/newLDR_73.htm

US Staffing Agency
The Big Cheeses Styles
Produce or Parish vs. Team Leader

Taking a look at the rest of the team

Looking at Theory X & Y employees Assessing strengths and weaknesses with in Leadership Team

Growth = Change
Centralized vs. decentralized decision making process Kicking EVP off the Leadership Team

Cost Drivers: Learning & Experience Curves

Learning Curves Learn by doing Steeper curve more learning Aircraft manufacturing Cardiac surgeons

Experience Curves Combine economy of scale & learning curves Scale comes down a given learning curve Technology allows movement to steeper curve Combination can leapfrog in competitive advantage Walmart high volumes & technology leadership

6-22

The Learning Curve

Per Unit Cost ($)
120 100 80

60

90%

80% 70% 40

20

0 0 50 100 150 200 250

Cumulative Output (units)

6-23

Jesse

EXHIBIT 6.7

Competitive Positioning and the Five Forces

6-25

Cost Leadership Strategy

Definition: By obtaining the lowest-cost position in the industry while offering acceptable value.

www.forbes.com

Which is the right store for you?

127

www.google.com

Differentiation Strategy
Definition: Finding a strategic position that creates higher perceived value while controlling cost.

128

www.google.com

 Customized road-race bicycle with high profile consumers.

Leopard Cycles

What was a $20,000 exotic bike can now be purchased for as low as $1,500. Being a low-cost producer is mutually exclusive with exotic materials; however were a firm believer that you dont have to be the most expensive to be the best. Leopard Cycles

129

INTEGRATION STRATEGY: COST LEADERSHIP AND DIFFERENTIATION

Trade-offs between low cost & differentiation

Value & Cost Drivers of Integration
Quality
Can increase perceived value & lower cost (V-C)

Economies of Scope
Starbucks adding hot tea to its menu

Innovation
IKEA - stylist furniture in flat pack delivery

Structure, Culture, & Routines

Ambidextrous organization explore AND exploit Intel current and future products and services

6-30

EXHIBIT 6.8 Avon Pursuing an Integration Strategy

6-31

EXHIBIT 6.9 Value and Cost Drivers

6-32

Integration Strategy Corporate Level

Conglomerates can coordinate above the SBU level
Tata Group from India
2008 bought Jaguar & Land Rover
Prestigious differentiated products

2009 Tata Motors creates a Nano car

Lowest-priced car in the world! Zero to 60 mph in 30 seconds No radio or glove box Targets bicyclists to move to cars

6-33

THE DYNAMICS OF COMPETITIVE POSITIONING

Strategic Positions need to change over time

eBay withdrew from selling new goods & sold Skype

Productivity Frontier
Value-cost relationship Captures the best practices at a point in time

Mobile Devices 2005 Apple differentiator, Dell cost leader 2010 Apple still differentiator, HP moving to successful integrator, Dell shifting toward integrator
6-34

The Dynamics of Competitive Positioning: EXHIBIT 6.10 Apple, HP, and Dell

6-35

Steve

Mini Case 6 JetBlue Background

Founded by David Neeleman in 1998
Split away from Southwest Airlines

Cuts Costs for customers

Lower ticket costs Direct flights

Cuts Costs for business

Direct flights Uses predominantly Airbus A320 Traveled longer distances with more passengers
2013 by The McGraw-Hill Companies, Inc. All rights reserved.
137

Mini Case 6 JetBlue Background cont.

Looked to enhance differential appeal with better customer experience, thus increasing value
More, leather seating TV screens with cable XM Radio Free wi-fi Easy to use website Employs local parents in Rockies (home-sourcing)

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

138

Mini Case 6 JetBlue Issue

Weather problems lead to questions of customer service
2007 several delays lead to passengers stuck on aircrafts for up to 9 hours May 2007 David Neeleman leaves JetBlue January 2014 polar vortex cause 46% of JetBlue flights cancelled, much higher percentage than competitors (Saporito, 2014).

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

139

Mini Case 6 JetBlue Questions

What type of generic business strategy is JetBlue pursuing?
JetBlue does look to have differential appeal, however it hangs its hat on being a low cost leader in the market.

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

140

Mini Case 6 JetBlue Questions

What challenges is JetBlue facing with its chosen business strategy? What is the cause of these challenges? How should they be addressed?
Handling the rapid growth and success that they have had. Shaking the tweener tag. Customer service issues, figuring out what they really want to be. Focus on ways to handle these weather/customer service issues better.
2013 by The McGraw-Hill Companies, Inc. All rights reserved.
141

Mini Case 6 JetBlue Questions

What do you recommend JetBlues top management should do to improve airlines effectiveness?
JetBlues service offeringwhat it does in the sky remains one of the best in the industry.. Ive been stranded by Jet Blue beforeleft overnight in Denver when the plane didnt showbut Im planning to fly JetBlue to Las Vegas in two weeks. If Im lucky, theyll have a jet that can actually make it there (Saporito, 2014). Regain the trust of flyers, a great service means nothing if it isnt reliable.
2013 by The McGraw-Hill Companies, Inc. All rights reserved.
142

References
BMW North America.(n.d.). Retrieved April 24, 2014, from http://www.bmwusa.com/ Comcast Official Site: Cable TV, Internet, and Phone Service Provider . (n.d.). Retrieved April 24, 2014, from http://www.comcast.com Disney Dreamer - Walt Disney Quotes. (n.d.). Retrieved April 24, 2014, from http://www.disneydreamer.com/walt/quotes.htm NIKEiD Customize Shoes and Accessories. (n.d.). Retrieved April 24, 2014, from www.nike.com/us/en_us/c/nikeid Rothaermel, F. T. (2013). Business strategy: Differentiation, cost leadership, and integration. Gordon. B, Strategic management (pp. 139 162, & 374). New York: McGraw-Hill Irwin Saporito, B. (2014, January). JetBlues got bigger problems than the polar vortex. Time. Retrieved from http://business.time.com/2014/01/07/jetbluesgotbigger-problems-than-the-polar-vortex/ The blake mouton managerial grid balancing task- and people-oriented leadership. (n.d.). Retrieved April 27, 2014, from Mind Tools website: http://www.mindtools.com/pages/article/newLDR_73.htm
2013 by The McGraw-Hill Companies, Inc. All rights reserved.
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