Pricing Strategy

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Should the Hampton by Hilton use the same competitive strategy that Motel 6 uses? Explain. Use concepts from this course to make your case. Note that the question is not whether Motel 6 should use the strategies that Hampton uses. Must contain 350 words and contain reference from the uploaded book and 2 other scholary sources.

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Business Unit Strategies S AChapter Outline U7-1 Porter’s Generic Strategies N 7-1a Low-Cost (Cost Leadership) Strategy D 7-1b Focus–Low-Cost Strategy E 7-1c Differentiation Strategy (No Focus) R 7-1d Focus-Differentiation Strategy S 7-1e Low-Cost–Differentiation Strategy 7-1f Focus–Low-Cost/Differentiation Strategy S7-2 R7-3 . 7-4 , 7-5 7-1g Multiple Strategies Miles and Snow’s Strategy Framework Business Size, Strategy, and Performance Assessing Strategies Global Concerns 7-6 Summary Key Terms GReview Questions and Exercises APractice Quiz RNotes RReading 7-1 Y 2 0 9 0 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 7 150 Chapter 7 A Business Unit An organizational entity with its own unique mission, set of competitors, and industry. Generic Strategies Broad competitive Strategies that can be adopted by business units to guide their organizations. Strategic Group A select group of direct competitors who have similar strategic profiles. fter a firm’s top managers have settled on a corporate-level strategy, their focus then shifts to how the firm’s business or businesses should compete. Whereas the corporate strategy concerns the basic thrust of the firm—where top managers would like to lead the firm—the business or competitive strategy addresses the competitive aspect—who the business should serve, what needs should be satisfied, and how a business should develop core competencies and be positioned to satisfy customers’ needs. Another way of addressing the task of formulating a business strategy is to consider whether a business should concentrate its efforts on exploiting current opportunities, exploring new ones, or attempting to balance the two. Exploitation generates returns in the short term; exploration can create forms of sustainable competitive advantage for the long term. The business strategy developed for an organization seeks, among other things, to resolve this challenge.1 A business unit is anSorganizational entity with its own mission, set of competitors, and industry. A single A firm that operates within only one industry is also considered a business unit. Strategic managers craft competitive strategies for U and sustain competitive advantage, a state whereby its each business unit to attain successful strategies cannot N be easily duplicated by competitors.2 In most industries, different competitive approaches can be successful, depending on the busiD ness unit’s resources E with a unique competitive strategy. In the interest Each business competes of simplicity, however, it is useful to categorize different strategies into a limR ited number of generic strategies based on their similarities. Generic strategies S emphasize the commonalities among different business strategies, not their differences. Businesses adopting the same generic strategy comprise what is commonly referred to as a strategic group.3 In the airline industry, for examS may comprise carriers such as Southwest Airlines and ple, one strategic group AirTran that offer low R fares and no frills on a limited number of domestic routes, thereby maintaining their low-cost structures (see Figure 7-1). A second strategic . traditional carriers such as Continental, United, and group may comprise many American that serve both , domestic and international routes and offer extra services such as meals and movies on extended flights. Because industry definitions and strategy assessments are not always clear, identifying strategic groups G within an industry is often difficult. Even when the industry definition is clear, an industry’s business units may be categorized into FIGURE 7-1 A R S tr a te gic R Y Groups in the Air lin e I n dustr y 2 0 9 0 T S 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies any number of strategic groups depending on the level of specificity desired. One or two competitors may also seem to be functioning between groups and thus be difficult to classify. For these reasons, the concept of strategic groups can be used as a means of understanding and illustrating competition within an industry, but the limitations of the approach should always be considered. The challenging task of formulating and implementing a generic strategy is based on both internal and external factors. Because generic strategies by nature are overly simplistic, selecting generic approach is only the first step in formulating a business strategy.4 It is also necessary to fine-tune the strategy and accentuate the organization’s unique set of resource strengths.5 Two generic strategy frameworks—one developed by Porter and another by Miles and Snow—can serve as good starting points for developing business strategies. S 7-1 Porter’s Generic Strategies A Michael Porter developed the most commonly U cited generic strategy framework.6 According to Porter’s typology, a business unit must address two basic competiN tive concerns. First, managers must determine whether the business unit should focus its efforts on an identifiable subset D of the industry in which it operates or seek to serve the entire market as a whole.EFor example, specialty clothing stores in shopping malls adopt the focus concept and concentrate their efforts on limited product lines primarily intended for aRsmall market niche. In contrast, most chain grocery stores seek to serve the mass S market—or at least most of it—by selecting an array of products and services that appeal to the general public as a whole. The smaller the business, the more desirable a focus strategy tends to be, although this is not always the case. S Second, managers must determine whether the business unit should compete primarily by minimizing its costs relative R to those of its competitors (i.e., a lowcost strategy) or by seeking to offer unique. or unusual products and services (i.e., a differentiation strategy). Porter views these two alternatives as mutually exclu, erode a low-cost structure by raising sive because differentiation efforts tend to production, promotional, and other expenses. In fact, Porter labeled business units attempting to emphasize both cost leadership and differentiation simultaG neously as “stuck in the middle.”7 This is not necessarily the case, however, and A alternative for some businesses. the low-cost–differentiation strategy is a viable Combining the two strategies is difficult, but businesses able to do so can perR form exceptionally well. Rin a business unit address the first (i.e., Depending on the way strategic managers focus or not) and second (low-cost, differentiation, or low-cost–differentiation) Y questions, six configurations are possible. A seventh approach—multiple strategies— involves the simultaneous deployment of more than one of the six configurations (see Table 7-1). The low-cost and differentiation 2 strategies with and without focus comprise those in Porter’s original framework. 0 9 Strategy 7-1a Low-Cost (Cost Leadership) 0 produce basic, no-frills products Businesses that compete with a low-cost strategy and services for a mass market of price-sensitive T customers. Because they attempt to satisfy most or all of the market, these businesses tend to be large and established. Low-cost businesses often succeed S by building market share through low prices, although some charge prices comparable to rivals and enjoy a greater margin. Because customers generally are willing to pay only low to average prices 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 151 152 Chapter 7 TA B L E 7-1 Ge n e r ic S tr a te gie s Ba se d on Por te r ’s Ty pology Emphasis on Low Costs and Differentiation Emphasis on Various Factors Depending on Market Differentiation Strategy Low-Cost– Differentiation Strategy Multiple Strategies FocusDifferentiation Strategy Focus–Low-Cost/ Differentiation Strategy Emphasis on Entire Market or Niche Emphasis on Low Costs Emphasis on Differentiation Entire Market Low-Cost Strategy Niche Focus–LowCost Strategy S A for “basic” products orUservices, it is essential that businesses using this strategy keep their overall costs as low as possible. Efficiency is a key to such businesses, as Nby mega-retailer Wal-Mart in recent years. has been demonstrated Low-cost businessesD tend to emphasize a low initial investment and low operating costs. Such organizations tend to purchase from suppliers who offer the lowest prices within a E basic quality standard. Research and development efforts are directed at improving R operational efficiency, and attempts are made to enhance logistical and distribution efficiencies. Such businesses often but not S development of new and improved products or services always deemphasize the that might raise costs, and advertising and promotional expenditures will be minimized (see Strategy at Work 7-1). S T R S R A T E G Y . A T W O R K The Low-Cost ,Strategy at Kola Real Coca-Cola and PepsiCo enjoy substantial profit margins on their soft drinks in Mexico’s $15 billion market, where G the two have waged intense battles for market share A during the past decade. Although Coke usually came out on top, the two collectively controlled sales and R distribution in almost all of the country’s major markets. RIn 2003, Coke had more than 70 percent of Mexican sales, Y and Pepsi had 21 percent. Consumers in Mexico drink more Coke per capita than those in any other nation. In the early 2000s, however, both well-known colas 2 have been challenged by an unlikely upstart from Peru known as Kola Real (pronounced “ray-’al”). Launched 0 in Mexico in 2001, Kola Real captured 4 percent of the 9 Mexican market in its first two years. Bottled by the Ananos family from Peru, Kola Real 0 lacks all of the frills and endorsements associated T with Coke and Pepsi. The strategy is simple: Eliminate all possible costs and offer large sizes at low prices. S Whereas Coke and Pepsi spend nearly 20 percent of 7 - 1 revenues on concentrates, the Ananos family makes its own. Whereas Coke and Pepsi spend millions on promotion and manage their own fleets of attractive trucks, the Ananos family hires third parties for deliveries— even individuals with dented pickup trucks—and relies primarily on word-of-mouth advertising. Central to Kola Real’s success is the fact that the majority of Mexican cola drinkers are relatively poor and consider price to be a major factor in their purchase decisions. In Brazil, so-called B-brands (i.e., lowcost generic or store brands) now account for almost one-third of the country’s cola sales. Fearing this could happen in Mexico, Coke and Pepsi have fought back with price cuts of their own, although they will not be able to challenge Kola Real’s low-cost position on a large-scale basis. Source: Adapted from D. Luhnow and C. Terhune, “A Low-Budget Cola Shakes Up Markets South of the Border,” Wall Street Journal, 27 October 2003, A1, A18. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 153 A cost leader may be more likely than other businesses to outsource a number of its production activities if costs are reduced as a result, even if modest amounts of control over quality are lost in the process. In addition, the most efficient means of distribution is sought, even if it is not the fastest or easiest to manage. It is worth noting that successful low-cost businesses do not emphasize cost minimization to the degree that quality and service decline excessively. In other words, cost leadership taken to an extreme can result in the production of “cheap” goods and services that nobody is willing to purchase. Low-cost leaders depend on unique capabilities not available to others in the industry such as access to scarce raw materials, large market share, or a high degree of capitalization.8 Manufacturers that employ a low-cost strategy, however, are vulnerable to intense price competition that drives down profit margins and limits their ability to improve outputs, to augment their products with superior services, or to spend moreSon advertising and promotion.9 The prospect of being caught in price wars keeps A many manufacturers from adopting the low-cost strategy, although it can affect other businesses as well. Other U to control quality and distribution. low-cost leaders have bought their suppliers Price cutting in the airline industry led to N the demise of several upstarts even before the events of 9/11, and made it even more difficult to raise fares shortly D thereafter.10 Success with the low-cost strategy can E be short lived, however. Low-cost airline AirTran, for example, boasted a 2003 profit of $101 million while Delta R squabbled with its pilots throughout the year in an effort to reduce costs. Delta Sa hub, but has had difficulty cutting dominates Atlanta where AirTran also has costs. In 2004, however, Delta finally made headway and began cutting many of its fares, some by as much as 50 percent. By 2005, AirTran, along with other lowcost airlines, began to feel the squeeze asSmajor airlines such as Delta became more price competitive.11 R Imitation by competitors can also be a concern when the basis for low-cost . leadership is not proprietary and can be easily duplicated. Lego discovered this fact when Canadian upstart Mega Blocks ,began to steal market share by making colorful blocks that not only look like Legos, but also snap into them and sell for a lower price. Lego responded by launching the Quatro line of oversized blocks aimed at the preschool market and carrying G lower prices than traditional Lego playsets.12 A Low-cost businesses are also particularly vulnerable to technological obsolescence. Manufacturers that emphasize technological stability and do not respond R to new product and market opportunities may eventually find that their products R have become obsolete. Y 7-1b Focus–Low-Cost Strategy 2 overall costs while serving a narrow The focus–low-cost strategy emphasizes low segment of the market, producing no-frills 0 products or services for price-sensitive customers in a market niche. Ideally, the small business unit that adopts the 9 focus–low-cost strategy competes only in distinct market niches where it enjoys a cost advantage relative to large, low-cost competitors. 0 The focus concept is clear in theory, but often confusing in practice. In general, a business rejects a focus approach T when it attempts to serve most of the market. In practice, however, virtually every S business focuses its efforts, at least to some extent. Because most is a subjective term, scholars sometimes disagree on whether a particular business should be classified as focus or not. Focus–Low-Cost Strategy: A generic business unit strategy in which a smaller business keeps overall costs low while producing no-frills products or services for a market niche with elastic demand. 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning 154 Chapter 7 Aldi is a clear example of a business that pursues a focus–low-cost strategy. Aldi is an international retailer that offers a limited assortment of groceries and related items at the lowest possible prices. Functional operations are tightly coordinated around a single strategic objective: low costs. Efforts are targeted to consumers with low to moderate incomes. Aldi minimizes costs a number of ways. Most products are private label, allowing Aldi to negotiate rock-bottom prices from its suppliers. Stores are modest in size, much smaller than that of a typical chain grocer. Aldi only stocks common food and related products, maximizing inventory turnover. The retailer does not accept credit cards, eliminating the 2 to 4 percent fee typically charged by banks to process the transaction. Customers bag their own groceries and must either bring their own bags or purchase them from Aldi for a nominal charge. Aldi also takes an innovative approach to the use of its shopping carts. S to unlock a cart from the interlocked row of carts Customers insert a quarter located outside the store A entrance. The quarter is returned with the cart when it is locked back into the group. As a result, no employee time is required U a customer is willing to forego the quarter by not to collect stray carts unless returning the cart! N Adding a focus orientation to cost leadership can enable a firm to avoid D direct competition with a mass-market cost leader. In this manner, grocer SaveA-Lot has found a wayEto compete successfully against Wal-Mart Supercenters. Its prices are competitive with those at Wal-Mart, but Save-A-Lot pursues locaR tions in urban areas that Wal-Mart rejected. Save-A-Lot also generates profits S by opening small, inexpensive stores catering to U.S. households earning less than $35,000 a year. Save-A-Lot stocks mostly its own brand of high-turnover goods to minimize costs and eschews cost-inducing pharmacies, bakeries, and S baggers.13 Like low-cost businesses, R those adopting the focus–low-cost strategy are vulnerable to intense price competition that periodically occurs in markets with no-frills outputs. For .instance, several years ago, Laker Airways successfully used the focus–low-cost , strategy by providing the first no-frills, low-priced transAtlantic passenger service. The major airlines responded by dropping prices, eventually driving Laker out of business. The large competitors, because of their greater financialG resources, were able to weather the short-term financial losses and survive the shakeout.14 Southwest Airlines, in contrast, adopted a A similar strategy and has been able to perform well despite competitive pressure from its large rivals. R To deter price competition, businesses employing the focus–low-cost stratR egy must continuously search for new ways to trim costs. The Irish no-frills air Y carrier Ryanair has surpassed Southwest in this regard. Passengers are required to pay for all food, drinks, and newspapers. Employees pay for their own training and uniforms. The airline even incorporates a strict no-refund policy, even if the airline cancels a2 flight. Even with an average ticket price of about $50, Ryanair faces constant0pressure from its large rivals. In 2004, Ireland’s state carrier Aer Lingus added routes and lowered prices in an attempt to model itself 9 after Ryanair.15 Founded in 2003, 0 Hungary’s low-cost airline Wizz Air specializes in transporting Hungarians, Poles, and other Eastern Europeans to Britain and Ireland Tnd better paying jobs. CEO Jozsef Varadi sees buses—not where many seek and fi other airlines—as their S primary competition. Sparked by recent expansion of the European Union, Wizz Air makes economic sense for its customer base when considering fares and travel time.16 9781111219802, Strategic Management: Theory and Practice, John Parnell - © Cengage Learning Business Unit Strategies 155 Like low-cost businesses that do not adopt a focus approach, focus–low-cost businesses are particularly vulnerable to technological obsolescence. Businesses that value technological stability and do not respond to new product and market opportunities may eventually find that their products have become obsolete and are no longer desired by customers. 7-1c Differentiation Strategy (No Focus) Businesses that utilize the differentiation strategy produce and market to the entire industry products or services that can be readily distinguished from those of their competitors. Because they attempt to satisfy most or all of the market, these businesses tend to be large and established. Differentiated businesses often attempt to create new product and market opportunities and have access to the latest scientific b ...
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Pricing Strategy
When the cost of production is low, it makes it easy for a company to lower the selling
price. A low selling price increases the net revenue thereby increasing the net profit when the
cost of production is low. The method is only useful in case the company is in a position to
produce on a large scale which eventually will enable it to enjoy economies of scale. According
to Parne...

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