Assignment 2: Internal Environmental Analysis/Strategy Analysis and Strategy Selection (Week 6) THE COMPANY IS: IHS MARKIT Purpose: This assignment is the second of three assignments. Students will use the tools and concepts learned in the course and in previous business courses to develop an understanding of how organizations develop and manage strategies to establish, safeguard and sustain its position in a competitive market. Students also have the opportunity to review an organization’s objectives and goals and the key functional areas within the organization. Performing an internal environment analysis helps assess a firm’s internal resources and capabilities and plays a critical role in formulating strategy by identifying a firm’s strengths to overcome weaknesses. Students will then 1) assess long-term objectives, 2) identify and evaluate alternative strategies and 3) recommend strategies for a company to pursue. NOTE: All submitted work is to be your original work. You may not use any work from another student, the Internet or an online clearinghouse. You are expected to understand the Academic Dishonesty and Plagiarism Policy, and know that it is your responsibility to learn about instructor and general academic expectations with regard to proper citation of sources as specified in the APA Publication Manual, 6th Ed. (Students are held accountable for in-text citations and an associated reference list only). Instructions: In completing the assignment, students will use the chapters in the eBook as a guide and perform research on the company from Assignment 1 (IHS MARKIT), answer the questions below in narrative form following the steps provided below: Step 1: Create a double-spaced, 12-point font Word or Rich Text Format (RTF) document. The final product cannot be longer than 16 pages in length, which includes all tables and matrices but excludes the title page and reference page. Those items identified in the technical analysis should appear under the appropriate heading in the paper. Do no use an Appendix. Step 2: Review assignment grading rubric. Step 3: Follow the following format using these topics as headings: • • Title page with title, your name, the course, the instructor’s name; Company Background/Information • • • Internal Environmental Analysis Strategic Analysis & Strategy Selection Reference page Students may use subheadings. Step 4: In writing the analysis, writing in the third person. What this means is that there are no words such as “I, me, my, we, or us” (first person writing), nor is there use of “you or your” (second person writing). If uncertain how to write in the third person, view this link: http://www.quickanddirtytips.com/education/grammar/first-second-and-thirdperson Step 5: In writing this assignment, students are asked to support the reasoning using in-text citations and a reference list. If information is taken from a source document, it has to be cited and referenced. A reference within a reference list cannot exist without an associated in-text citation and vice versa. View the sample APA paper under Week 4 content and How to Cite and Reference, also under Week 4 content. There are also resources located under Course Content>>Student Toolbox. Step 6: In writing this assignment, students are expected to paraphrase and not use direct quotes unless citing the mission statement of a company. Learn to paraphrase by reviewing this link: https://writing.wisc.edu/Handbook/QPA_paraphrase2.html Step 7: Read all course material for weeks 1 through 6 and perform independent research to provide a comprehensive internal environmental analysis, strategy analysis and selection. Step 8: Jot down key facts about the company. Consider making an outline to capture key points in the paper. Step 9: In your paper, respond to the following: • • • • • Background analysis including vision and mission statements and objectives Internal Environmental Analysis Corporate Level Strategy Business Unit Level Strategy Functional Level Strategy o Explain how these strategies align with the company’s vision and mission statements; o Assess the company’s interactions with its stakeholders, the organizational structure, the organizational culture, and communication/decision making among managers within human • resources, marketing production, operations, finance and accounting, R&D, and computer information systems, which can be accomplished by viewing the company’s website, interviews, and surveys. Financial analysis for the last reported fiscal year: o Use the company’s income statement and balance sheet to calculate key, but no less than 10 key financial ratios to the business. There must be a mix of the different ratios so that the ratios do not all come from the same category. Show the calculations. o Using Excel or a Word table, record key financial ratios in the first column; o Research the industry average financial ratios for the same ratios above and record in a second column. If you cannot find an industry average, then select another ratio; o In the third column, indicate whether the financial ratio is a strength, a weakness or a neutral factor. o Explain the results and compare and contrast the company financials to the industry. • Technique Analysis: develop and explain an IFE, BCG matrix, Grand Strategy Matrix, and QSPM. The expectation is not to copy from the Internet but to develop one's own. The various tools are to appear in the appropriate area of the paper and not in one section of the paper. • • Strategy Analysis: Identify and explain company strengths and weaknesses. Discuss success factors and what the company must do to perform successfully in the industry? Discuss what strategies would allow the company to capitalize on its major strengths. Discuss strategies that would allow the company to improve upon its major weaknesses Generate a minimum of three possible alternative strategies for the company; o Identify and discuss cultural factors that should be considered in analyzing and choosing among the alternative strategies; Prioritize and explain the selection of alternative strategies Recommend the best one or two strategies among the alternative strategies and explain why these strategies are the best; • • • Step 10: Create an introductory paragraph. The Introduction should clearly and concisely convey the main points of the assignment’s requirements. Review the following website to learn how to write an introductory paragraph: http://www.writing.ucsb.edu/faculty/donelan/intro.html Step 11: Write a summary paragraph. A summary paragraph restates the main idea(s) of the essay. Make sure to leave a reader with a sense that the essay is complete. The summary paragraph is the last paragraph of a paper. Step 12: Using the grading rubric as a comparison, read through the paper to ensure all required elements are presented. Step 13: Proofread the paper for spelling and grammatical issues, and third person writing. • • • Use the spell and grammar check in Word as a first measure; Have someone who has excellent English skills to proof the paper; Consider submitting the paper to the Effective Writing Center (EWC). The EWC will provide 4-6 areas that may need improvement. Step 14: Submit the paper in the Assignment Folder. Rubric Name: Assignment #2 Criteria Outstanding 2.8 points Superior Good Substandard Failure 2.38 points 2.1 points Background Background including including vision, vision, mission and mission and objective are objective are presented presented with good Content: and Backgrou thoroughly discussion; G nd ood discussed; including Vision, missi discussion Vision, about on, and Mission vision, missi objectives and Objectives are on, and objectives thoroughly discussed in are terms of the discussed in definition. Fo terms of the definition but r example, could be vision is more forward thinking and thorough. mission is Background including vision, mission and objective are presented with some discuss ion; Vision, missi on, and objectives are provided but not discussed in any detail. (1.96 - 2.23) 1.82 points Attempted to discuss background or vision, mission and objectives but key points were missing or superficially presented. (1.68 - 1.95) 0 points Failed to discuss the backgroun d and vision, mission and objectives. (0 – 1.67) about goals (2.24 - 2.51) and values of organization). (2.52 - 2.8) 2.8 points Internal Environment al Analysis including corporate, business and functional analysis are presented and thoroughly discussed. T horough discussion of stakeholders, Content: organizationa Internal l structure, Environm organizationa ental Analysis l culture, and communicati on/decision making among managers within human resources, marketing production, operations, finance and accounting, R&D, and computer information systems (2.52 - 2.8) 2.38 points Internal Environment al Analysis including corporate, business and functional analysis are presented with good discussion; G ood discussion about stakeholders, organizationa l structure, organizationa l culture, and communicati on/decision making among managers within human resources, marketing production, operations, finance and accounting, R&D, and computer information systems but could be more 2.1 points Internal Environment al Analysis including corporate, business and functional analysis are presented with some discuss ion; stakeholders, organizationa l structure, organizationa l culture, and communicati on/decision making among managers within human resources, marketing production, operations, finance and accounting, R&D, and computer information systems are provided but not discussed in any detail. (1.96 - 2.23) 1.82 points Attempted to discuss Internal Environmental Analysis including corporate, business and functional analysis but key points were missing or superficially presented. St akeholders, organizational structure, organizational culture, and communicatio n/decision making among managers within human resources, marketing production, operations, finance and accounting, R&D, and computer information systems was not included. (1.68 - 1.95) 0 points Failed to present th e Internal Environm ental Analysis. (0 – 1.67) thorough. (2.24 - 2.51) 1.82 points 2.38 points 2.1 points Financial Ana lysis was accurat ely presented withcalculate d key financial ratios shown, industry averages presented, strength/wea kness/neutral identified and company financials to the industry compared and contrasted but could have been more thorough. Financial Ana lysis was presented with calculate dkey financial ratios, industry averages presented, strength/wea kness/neutral identified and company financials to the industry compared and contrasted but were not consistently accurate or thorough in presentation. (2.24 - 2.51) (1.96 - 2.23) 2.38 points 2.1 points 1.82 points Technique A nalysis: accurate development of each technique with some explan ation of IFE, BCG matrix, Technique A nalysis: development of each technique with some explan ation of IFE, BCG matrix, Grand Attempted to complete a technique anal ysis: there were several issues related to the development of each technique - 2.8 points Financial Ana lysis thoroughly and accurately presented with calculate dkey financial ratios, Content: industry Financial averages Analysis presented, strength/wea kness/neutral identified and company financials to the industry compared and contrasted. (2.52 - 2.8) 2.8 points Attempted to provide complete financial analysis but ratios were taken from website rather than showing calculations or calculations not shown/Financi alanalysis is superficial or fails to provide accurate information or there was evidence of missing information or only partial presentation was seen. 0 points Failed to present Financial Analysis. (0 – 1.67) (1.68 - 1.95) 0 points Technique Analysis: Content: accurate Technique development Analysis of each technique with thoroughly explanation of IFE, BCG Failed to present Technique Analysis. (0 – 1.67) matrix, Grand Strategy Matrix and QSPM; techniques are thoroughly discussed in terms of overall analysis. Grand Strategy Matrix and QSPM; techniques are discussed in terms of overall analysis. (2.24 - 2.51) (2.52 - 2.8) Strategy Matrix and QSPM; techniques are briefly discussed in terms of overall analysis but there was missing information or analysis could have been better presen ted. IFE, BCG matrix, Grand Strategy Matrix and QSPM; techniques were performed but no discussion in terms of overall analysis or superficially presented. (1.68 - 1.95) (1.96 - 2.23) Content: Strategy Analysis 2.8 points 2.38 points 2.1 points 1.82 points Strategy Anal ysis accurately and thoroughly presented with discussion about strengths and weaknesses, success factors, how strategies can capitalize on major strengths, improve upon weaknesses, at least fivealter native strategies; cultural Strategy Anal ysis accurately and thoroughly presented with discussion about strengths and weaknesses, success factors, how strategies can capitalize on major strengths, improve upon weaknesses, at least fouralter native strategies; cultural Strategy Anal ysis accurately and thoroughly presented with discussion about strengths and weaknesses, success factors, how strategies can capitalize on major strengths, improve upon weaknesses, at leastthree alt ernative strategies; cultural Attempted to complete a strategy analy sis but discussion about strengths and weaknesses, success factors, how strategies can capitalize on major strengths, improve upon weaknesses, alternative strategies; cultural factors and prioritized selections is missing information or superficially 0 points Failed to present Strategy A nalysis. (0 – 1.67) factors and selections are prioritized. factors and selections are prioritized. (2.52 - 2.8) (2.24 - 2.51) factors and presented. selections are (1.68 - 1.95) prioritized. T here are weak areas presented throughout this section. (1.96 - 2.23) 2.8 points Recommend ation for the best strategy amo ng alternatives Content: strategies is Recomme thoroughly ndation discussed. T he selected strategy(ies) aligns with all elements of the SM process. 2.38 points Recommend ation for the best strategy amo ng alternatives strategies is briefly discussed. T he selected strategy(ies) aligns with all elements of the SM process. 1.82 points 2.1 points Recommend ation for the best strategy amo ng alternatives strategies is discussed but the selected strategy(ies) may not align with elements of the SM process. Attempted to make recommendati on for the best strategy amon g alternatives strategies but is superficially di scussed. The selected strategy(ies) does not align with elements of the SM process. 0 points Failed to provide recommen dation for the best strategy. (0 – 1.67) (1.96 - 2.23) (2.52 - 2.8) (2.24 - 2.51) 2.8 points 2.38 points 2.1 points 1.82 points 0 points Comments reflect an excellent level of analysis, synthesis, evaluation and reasoning of the case material and Comments reflect a satisfactory level of analysis, synthesis, evaluation and reasoning of the case material and Comments reflect an unsatisfactory level of analysis, synthesis, evaluation and reasoning of the case material and case study Comments reflect an unsatisfact ory level of analysis, synthesis, evaluation and reasoning of the case material Comments reflect a highly Critical accomplished Thinking/ level of Reasoning analysis, synthesis, evaluation and reasoning of the case (1.68 - 1.95) material and case study facts resulting in accurate, thorough, and soundly reasoned conclusions. case study facts resulting in accurately reasoned conclusions. (2.24 - 2.51) (2.52 - 2.8) case study facts resulting in partially correct conclusions that lack development or detail that demonstrates insight into reasoning. facts, resulting in conclusions that are underdevelop ed or lack soundly reasoned conclusions. and case study facts, resulting in failure to draw little to no conclusions . (1.68 - 1.95) (0 – 1.67) (1.96 - 2.23) 2.8 points 2.1 points 2.38 points Presents exceptionally wellsupported arguments or positions with evidence from the readings/exp Applicatio erience; n of ideas go Resources beyond the course material and recognize implications and extensions of the material and concepts. Presents excellent arguments or positions that are mostly supported by evidence from the readings and course content; ideas presented demonstrate understandin g of the material and concepts. (2.24 - 2.51) (2.52 - 2.8) 1.4 points Attention to Instruction s Satisfactory arguments or positions are presented but there is a mix of opinion or unclear view with supported arguments using course readings. Ca se study facts are occasionally used but arguments would be much stronger with use of facts. 0 points 1.82 points Arguments are frequently illogical and unsubstantiate d; Limited use of facts in case study and essential information presented in course readings. Argument s lack meaningfu l explanatio n or support of ideas. Do es not provide facts presented in case study. (1.68 - 1.95) (0 – 1.67) (1.96 - 2.23) 1.19 points 1.05 points 0.91 points 0 points Demonstrate Demonstrate Demonstrate Fails to show Fails to s exceptional s excellent s satisfactory a firm demonstra understandin understandin understandin understanding te g of requirements responding completely to each aspect of assignment including minor aspects of the assignment such as using third person writing, required use of course readings, and assignment format. g of requirements; missed one minor aspect of assignment. g of requirements; missed a key element or two minor aspects of assignment. of requirements; missed two key elements or several minor aspects of assignment. (0.98 - 1.11) (0.84 - 0.97) understan ding of assignme nt requireme nts. (0 – 0.83) (1.12 - 1.25) (1.26 - 1.4) 2.8 points Strictly adheres to standard usage rules of written English, including but not limited to capitalization, Writing Mechanics punctuation, run-on sentences, missing or extra words, stylistic errors, spelling and grammatical errors. No errors found. No 0 points 2.38 points 2.1 points 1.82 points Does not adhere to Excellently Satisfactorily Minimally standard adheres to adheres to adheres to usage standard standard standard rules of usage of usage rules usage rules of mechanic mechanics: of mechanics: s: conventions mechanics: conventions of conventio of written conventions written ns of English, of English, English, written including including including English capitalization, capitalization, capitalization, largely punctuation, punctuation, punctuation, incompreh and spelling. and spelling. and spelling. ensible; or One to three Four to 10 More than 10 errors are errors found. errors found. errors found. too plentiful to count. (2.24 - 2.51) (1.96 - 2.23) (1.68 - 1.95) (0 – 1.67) contractions or jargon used. (2.52 - 2.8) 1.4 points 0.91 points 1.05 points No APA style or usage errors; Proper citation of source material is used APA Style throughout (6th ed.) paper; Reference titles follow APA with only the first word, the first word after a colon and proper nouns capitalized. 1.19 points 0 points Attempts inAttempts in- text citations Attempts in- text citations and reference text citations and lists; Fails to and reference use APA reference list lists; APA citation when but one or style errors appropriate 4two APA are noted 5 times; or style errors throughout presents only noted or fails document; 1-2 in-text to use APA Fails to use citations and citations APA citations reference list when when in a paper that appropriate appropriate 3 requires APA 1-2 times. times in citations document. throughout the document. (1.12 - 1.25) (0.98 - 1.11) (0.84 - 0.97) No attempt at APA style; or attempts either intext citations or reference list but omits the other. (0 – 0.83) (1.26 - 1.4) Overall Score Outstanding 25.2 or more Superior 22.4 or more Good 19.6 or more Substandard 16.8 or more Failure 0 or more Chapter 5 from Mastering Strategic Management was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation. Chapter 5 Selecting Business-Level Strategies LEARNING OBJECTIVES After reading this chapter, you should be able to understand and articulate answers to the following questions: 1. Why is an examination of generic strategies valuable? 2. What are the four main generic strategies? 3. What is a best-cost strategy? 4. What does it mean to be “stuck in the middle”? The Competition Takes Aim at Target On January 13, 2011, Target Corporation announced its intentions to operate stores outside the United States for the first time. The plan called for Target to enter Canada by purchasing existing leases from a Canadian retailer and then opening 100 to 150 stores in 2013 and 2014. [1] The chain already included more than 1,700 stores in forty-nine states. Given the close physical and cultural ties between the United States and Canada, entering the Canadian market seemed to be a logical move for Target. In addition to making its initial move beyond the United States, Target had several other sources of pride in early 2011. The company claimed that 96 percent of American consumers recognized its signature logo, surpassing the percentages enjoyed by famous brands such as Apple and Nike. In March, Fortune magazine ranked Target twenty-second on its list of the “World’s Most Admired Companies.” In May, Target reported that its sales and earnings for the first quarter of 2011 (sales: $15.6 billion; earnings: $689 million) were stronger than they had been in the first quarter of 2010 (sales: $15.2 billion; earnings: $671 million). Yet there were serious causes for concern, too. News stories in the second half of 2010 about Target’s donations to political candidates had created controversy and unwanted publicity. And despite increasing sales and profits, Target’s stock price fell about 20 percent during the first quarter of 2011. Saylor URL: http://www.saylor.org/books Saylor.org 135 Concern also surrounded Target’s possible vulnerability to competition within the retail industry. Since its creation in the early 1960s, Target executives had carved out a lucrative position for the firm. Target offers relatively low prices on brand-name consumer staples such as cleaning supplies and paper products, but it also offers chic clothing and household goods. This unique combination helps Target to appeal to fairly affluent customers. Although Target counts many college students and senior citizens among its devotees, the typical Target shopper is forty-one years old and has a household income of about $63,000 per year. Approximately 45 percent of Target customers have children at home, and about 48 percent have a college degree. [2] Perhaps the most tangible reflection of Target’s upscale position among large retailers is the tendency of some customers to jokingly pronounce its name as if it were a French boutique: “Tar-zhay.” Target’s lucrative position was far from guaranteed, however. Indeed, a variety of competitors seemed to be taking aim at Target. Retail chains such as Kohl’s and Old Navy offered fashionable clothing at prices similar to Target’s. Discounters like T.J. Maxx, Marshalls, and Ross offered designer clothing and chic household goods for prices that often were lower than Target’s. Closeout stores such as Big Lots offered a limited selection of electronics, apparel, and household goods but at deeply discounted prices. All these stores threatened to steal business from Target. Walmart was perhaps Target’s most worrisome competitor. After some struggles in the 2000s, the mammoth retailer’s performance was strong enough that it ranked well above Target on Fortune’s list of the “World’s Most Admired Companies” (eleventh vs. twenty-second). Walmart also was much bigger than Target. The resulting economies of scale meant that Walmart could undercut Target’s prices anytime it desired. Just such a scenario had unfolded before. A few years ago, Walmart’s victory in a price war over Kmart led the latter into bankruptcy. One important difference between Kmart and Target is that Target is viewed by consumers as offering relatively high-quality goods. But this difference might not protect Target. Although Walmart’s products tended to lack the chic appeal of Target’s, Walmart had begun offering better products during the recession of the late 2000s in an effort to expand its customer base. If Walmart executives chose to match Target’s quality while charging lower prices, Target could find itself without a unique appeal for customers. As 2011 continued, a big question loomed: could Target maintain its unique appeal to Saylor URL: http://www.saylor.org/books Saylor.org 136 customers or would the competitive arrows launched by Walmart and others force Target’s executives to quiver? [1] Target Corporation to acquire interest in Canadian real estate from Zellers Inc., a subsidiary of Hudson’s Bay Company, for C$1.825 billion [Press release]. 2011, January 13. Target Stores. Retrieved from http://pressroom.target.com/pr/news/target-corporation-to-acquire-real-estate.aspx [2] Target fact card. 2007, January 2007. Retrieved from http://sites.target.com/images/corporate/about/pdfs/corp_factcard_101107.pdf Saylor URL: http://www.saylor.org/books Saylor.org 137 5.1 Understanding Business-Level Strategy through “Generic Strategies” LEARNING OBJECTIVES 1. Understand the four primary generic strategies. 2. Know the two dimensions that are critical to defining business-level strategy. 3. Know the limitations of generic strategies. Why Examine Generic Strategies? Business-level strategy addresses the question of how a firm will compete in a particular industry (Figure 5.1 "Business-Level Strategies"). This seems to be a simple question on the surface, but it is actually quite complex. The reason is that there are a great many possible answers to the question. Consider, for example, the restaurants in your town or city. Chances are that you live fairly close to some combination of McDonald’s, Subway, Chili’s, Applebee’s, Panera Bread Company, dozens of other national brands, and a variety of locally based eateries that have just one location. Each of these restaurants competes using a business model that is at least somewhat unique. When an executive in the restaurant industry analyzes her company and her rivals, she needs to avoid getting distracted by all the nuances of different firm’s business-level strategies and losing sight of the big picture. The solution is to think about business-level strategy in terms of generic strategies. A generic strategy is a general way of positioning a firm within an industry. Focusing on generic strategies allows executives to concentrate on the core elements of firms’ business-level strategies. The most popular set of generic strategies is based on the work of Professor Michael Porter of the Harvard Business School and subsequent researchers that have built on Porter’s initial ideas. Saylor URL: http://www.saylor.org/books [1] Saylor.org 138 Figure 5.1 Business-Level Strategies 6 Images courtesy of GeneralCheese, http://en.wikipedia.org/wiki/File:Remodeld_walmart.jpg (top left); unknown author, http://en.wikipedia.org/wiki/File:Nordstrom.JPG (top right); NNECAPA, http://www.flickr.com/photos/nnecapa/2794736274/(bottom left); Debs, http://www.flickr.com/photos/littledebbie11/4537337628/ (bottom right). Saylor URL: http://www.saylor.org/books Saylor.org 139 According to Porter, two competitive dimensions are the keys to business-level strategy. The first dimension is a firm’s source of competitive advantage. This dimension involves whether a firm tries to gain an edge on rivals by keeping costs down or by offering something unique in the market. The second dimension is firms’ scope of operations. This dimension involves whether a firm tries to target customers in general or whether it seeks to attract just a segment of customers. Four generic business-level strategies emerge from these decisions: (1) cost leadership, (2) differentiation, (3) focused cost leadership, and (4) focused differentiation. In rare cases, firms are able to offer both low prices and unique features that customers find desirable. These firms are following a best-cost strategy. Firms that are not able to offer low prices or appealing unique features are referred to as “stuck in the middle.” Understanding the differences that underlie generic strategies is important because different generic strategies offer different value propositions to customers. A firm focusing on cost leadership will have a different value chain configuration than a firm whose strategy focuses on differentiation. For example, marketing and sales for a differentiation strategy often requires extensive effort while some firms that follow cost leadership such as Waffle House are successful with limited marketing efforts. This chapter presents each generic strategy and the “recipe” generally associated with success when using that strategy. When firms follow these recipes, the result can be a strategy that leads to superior performance. But when firms fail to follow logical actions associated with each strategy, the result may be a value proposition configuration that is expensive to implement and that does not satisfy enough customers to be viable. Saylor URL: http://www.saylor.org/books Saylor.org 140 Limitations of Generic Strategies Examining business-level strategy in terms of generic strategies has limitations. Firms that follow a particular generic strategy tend to share certain features. For example, one way that cost leaders generally keep costs low is by not spending much on advertising. Not every cost leader, however, follows this path. While cost leaders such as Waffle House spend very little on advertising, Walmart spends considerable money on print and television advertising despite following a cost leadership strategy. Thus a firm may not match every characteristic that its generic strategy entails. Indeed, depending on the nature of a firm’s industry, tweaking the recipe of a generic strategy may be essential to cooking up success. KEY TAKEAWAY Saylor URL: http://www.saylor.org/books Saylor.org 141 x Business-level strategies examine how firms compete in a given industry. Firms derive such strategies by executives making decisions about whether their source of competitive advantage is based on price or differentiation and whether their scope of operations targets a broad or narrow market. EXERCISES 1. What are examples of each generic business-level strategy in the apparel industry? 2. What are the limitations of examining firms in terms of generic strategies? 3. Create a new framework to examine generic strategies using different dimensions than the two offered by Porter’s framework. What does your approach offer that Porter’s does not? [1] Porter, M. E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press; Williamson, P. J., & Zeng, M. 2009. Value-for-money strategies for recessionary times. Harvard Business Review, 87(3), 66–74. Saylor URL: http://www.saylor.org/books Saylor.org 142 5.2 Cost Leadership LEARNING OBJECTIVES 1. Describe the nature of cost leadership. 2. Understand how economies of scale help contribute to a cost leadership strategy. 3. Know the advantages and disadvantages of a cost leadership strategy. The Nature of the Cost Leadership Strategy It is tempting to think of cost leaders as companies that sell inferior, poor-quality goods and services for rock-bottom prices. The Yugo, for example, was an extremely unreliable car that was made in Eastern Europe and sold in the United States for about $4,000. Despite its attractive price tag, the Yugo was a dismal failure because drivers simply could not depend on the car for transportation. Yugo exited the United States in the early 1990s and closed down entirely in 2008. In contrast to firms such as Yugo whose failure is inevitable, cost leaders can be very successful. A firm following a cost leadership strategy offers products or services with acceptable quality and features to a broad set of customers at a low price. Payless ShoeSource, for example, sells name-brand shoes at inexpensive prices. Its low-price strategy is communicated to customers through advertising slogans such as “Why pay more when you can Payless?” and “You could pay more, but why?” Little Debbie snack cakes offer another example. The brand was started in the 1930s when O. D. McKee began selling sugary treats for five cents. Most consumers today would view the quality of Little Debbie cakes as a step below similar offerings from Entenmann’s, but enough people believe that they offer acceptable quality that the brand is still around eight decades after its creation. Saylor URL: http://www.saylor.org/books Saylor.org 143 Listeners of the popular radio show Car Talk voted the Yugo as the “worst car of the millennium.” Image courtesy of Antp, http://upload.wikimedia.org/wikipedia/commons/e/e7/Yugo.jpg. Perhaps the most famous cost leader is Walmart, which has used a cost leadership strategy to become the largest company in the world. The firm’s advertising slogans such as “Always Low Prices” and “Save Money. Live Better” communicate Walmart’s emphasis on price slashing to potential customers. Meanwhile, Walmart has the broadest customer base of any firm in the United States. Approximately one hundred million Americans visit a Walmart in a typical week. [1] Incredibly, this means that roughly one- third of Americans are frequent Walmart customers. This huge customer base includes people from all demographic and social groups within society. Although most are simply typical Americans, the popular website http://www.peopleofwalmart.com features photos of some of the more outrageous characters that have been spotted in Walmart stores. Cost leaders tend to share some important characteristics. The ability to charge low prices and still make a profit is challenging. Cost leaders manage to do so by emphasizing efficiency. At Waffle House restaurants, for example, customers are served cheap eats quickly to keep booths available for later customers. As part of the effort to be efficient, most cost leaders spend little on advertising, market research, or research and development. Waffle House, for example, limits its advertising to billboards along highways. Meanwhile, the simplicity of Waffle House’s menu requires little research and development. Many cost leaders rely on economies of scale to achieve efficiency. Economies of scale are created when the costs of offering goods and services decreases as a firm is able to sell more items. This occurs because Saylor URL: http://www.saylor.org/books Saylor.org 144 expenses are distributed across a greater number of items. Walmart spent approximately $2 billion on advertising in 2008. This is a huge number, but Walmart is so large that its advertising expenses equal just a tiny fraction of its sales. Also, cost leaders are often large companies, which allows them to demand price concessions from their suppliers. Walmart is notorious for squeezing suppliers such as Procter & Gamble to sell goods to Walmart for lower and lower prices over time. The firm passes some of these savings to customers in the form of reduced prices in its stores. Advantages and Disadvantages of Cost Leadership Each generic strategy offers advantages that firms can potentially leverage to enhance their success as well as disadvantages that may undermine their success. In the case of cost leadership, one advantage is that cost leaders’ emphasis on efficiency makes them well positioned to withstand price competition from rivals. Kmart’s ill-fated attempt to engage Walmart in a price war ended in disaster, in part because Walmart was so efficient in its operations that it could live with smaller profit margins far more easily than Kmart could. Beyond existing competitors, a cost leadership strategy also creates benefits relative to potential new entrants. Specifically, the presence of a cost leader in an industry tends to discourage new firms from entering the business because a new firm would struggle to attract customers by undercutting the cost leaders’ prices. Thus a cost leadership strategy helps create barriers to entry that protect the firm—and its existing rivals—from new competition. In many settings, cost leaders attract a large market share because a large portion of potential customers find paying low prices for goods and services of acceptable quality to be very appealing. This is certainly true for Walmart, for example. The need for efficiency means that cost leaders’ profit margins are often slimmer than the margins enjoyed by other firms. However, cost leaders’ ability to make a little bit of profit from each of a large number of customers means that the total profits of cost leaders can be substantial. In some settings, the need for high sales volume is a critical disadvantage of a cost leadership strategy. Highly fragmented markets and markets that involve a lot of brand loyalty may not offer much of an Saylor URL: http://www.saylor.org/books Saylor.org 145 opportunity to attract a large segment of customers. In both the soft drink and cigarette industries, for example, customers appear to be willing to pay a little extra to enjoy the brand of their choice. Lower-end brands of soda and cigarettes appeal to a minority of consumers, but famous brands such as Coca-Cola, Pepsi, Marlboro, and Camel still dominate these markets. A related concern is that achieving a high sales volume usually requires significant upfront investments in production and/or distribution capacity. Not every firm is willing and able to make such investments. Cost leaders tend to keep their costs low by minimizing advertising, market research, and research and development, but this approach can prove to be expensive in the long run. A relative lack of market research can lead cost leaders to be less skilled than other firms at detecting important environmental changes. Meanwhile, downplaying research and development can slow cost leaders’ ability to respond to changes once they are detected. Lagging rivals in terms of detecting and reacting to external shifts can prove to be a deadly combination that leaves cost leaders out of touch with the market and out of answers. KEY TAKEAWAY x Cost leadership is an effective business-level strategy to the extent that a firm offers low prices, provides satisfactory quality, and attracts enough customers to be profitable. EXERCISES 1. What are three industries in which a cost leadership strategy would be difficult to implement? 2. What is your favorite cost leadership restaurant? 3. Name three examples of firms conducting a cost leadership strategy that use no advertising. Should they start advertising? Why or why not? [1] Ann Zimmerman and Kris Hudson, “Managing Wal-Mart: How US-store chief hopes to fix Wal-Mart,” Wall Street Journal, April 17, 2006. Saylor URL: http://www.saylor.org/books Saylor.org 146 5.3 Differentiation Figure 5.4Differentiation Images courtesy of _nickd, http://www.flickr.com/photos/_nickd/2313836162/ (top left); Guillermo Vasquez, http://www.flickr.com/photos/megavas/3302486505/ (middle); Derek Saylor URL: http://www.saylor.org/books Saylor.org 148 Hatfield, http://www.flickr.com/photos/loimere/5068068920/(bottom right); Adrian Pingstone,http://en.wikipedia.org/wiki/File:Fedex.a310-200.n420fe.arp.jpg (top right); ChunkySoup, http://en.wikipedia.org/wiki/File:Zoom_elite_2.png(bottom left). LEARNING OBJECTIVES 1. Describe the nature of differentiation. 2. Know the advantages and disadvantages of a differentiation strategy. The Nature of the Differentiation Strategy A famous cliché contends that “you get what you pay for.” This saying captures the essence of a differentiation strategy. A firm following a differentiation strategy attempts to convince customers to pay a premium price for its good or services by providing unique and desirable features (Figure 5.4 "Differentiation"). The message that such a firm conveys to customers is that you will pay a little bit more for our offerings, but you will receive a good value overall because our offerings provide something special. In terms of the two competitive dimensions described by Michael Porter, using a differentiation strategy means that a firm is competing based on uniqueness rather than price and is seeking to attract a broad market. [1] Coleman camping equipment offers a good example. If camping equipment such as sleeping bags, lanterns, and stoves fail during a camping trip, the result will be, well, unhappy campers. Coleman’s sleeping bags, lanterns, and stoves are renowned for their reliability and durability. Cheaper brands are much more likely to have problems. Lovers of the outdoors must pay more to purchase Coleman’s goods than they would to obtain lesser brands, but having equipment that you can count on to keep you warm and dry is worth a price premium in the minds of most campers. Saylor URL: http://www.saylor.org/books Saylor.org 149 Coleman’s patented stove was originally developed for use by soldiers during World War II. Seven decades later, the Coleman Stove remains a must-have item for campers. Image courtesy of B. W. Tullis, http://en.wikipedia.org/wiki/File: Patent_Drawing_for_Coleman_M odel_520_Stove.jpg. Successful use of a differentiation strategy depends on not only offering unique features but also communicating the value of these features to potential customers. As a result, advertising in general and brand building in particular are important to this strategy. Few goods are more basic and generic than table salt. This would seemingly make creating a differentiated brand in the salt business next to impossible. Through clever marketing, however, Morton Salt has done so. Morton has differentiated its salt by building a brand around its iconic umbrella girl and its trademark slogan of “When it rains, it pours.” Would the typical consumer be able to tell the difference between Morton Salt and cheaper generic salt in a blind taste test? Not a chance. Yet Morton succeeds in convincing customers to pay a little extra for its salt through its brand-building efforts. FedEx and Nike are two other companies that have done well at communicating to customers that they provide differentiated offerings. FedEx’s former slogan “When it absolutely, positively has to be there overnight” highlights the commitment to speedy delivery that sets the firm apart from competitors such as Saylor URL: http://www.saylor.org/books Saylor.org 150 UPS and the US Postal Service. Nike differentiates its athletic shoes and apparel through its iconic “swoosh” logo as well as an intense emphasis on product innovation through research and development. Developing a Differentiation Strategy at Express Oil Change Express Oil Change and Service Centers is a chain of auto repair shops that stretches from Florida to Texas. Based in Birmingham, Alabama, the firm has more than 170 company-owned and franchised locations under its brand. Express Oil Change tries to provide a unique level of service, and the firm is content to let rivals offer cheaper prices. We asked an Express Oil Change executive about his firm. [2] Question: The auto repair and maintenance business is a pretty competitive space. How is Express Oil Change being positioned relative to other firms, such as Super Lube, American LubeFast, and Jiffy Lube? Don Larose, Senior Vice President of Franchise Development: Every good business sector is competitive. The key to our success is to be more convenient and provide a better overall experience for the customer. Express Oil Change and Service Centers outperform the industry significantly in terms of customer transactions per day and store sales, for a host of reasons. In terms of customer convenience, Express Oil Change is faster than most of our competitors—we do a ten-minute oil change while the customer stays in the car. Mothers with kids in car seats especially enjoy this feature. We also do mechanical work that other quick lube businesses don’t do. We change and rotate tires, do brake repairs, air conditioning, tune ups, and others. There is no appointment necessary Saylor URL: http://www.saylor.org/books Saylor.org 151 for many mechanical services like tire rotation and balancing, and checking brakes. So, overall, we are more convenient than most of our competitors. In terms of staffing our stores, full-time workers are all that we employ. Full-time workers are better trained and typically have less turnover. They therefore have more experience and do better quality work. We think incentives are very important. We use a payroll system that provides incentives to the store staff on how many cars are serviced each day and on the total sales of the store, rather than on increasing the average transactions by selling the customer items they did not come in for, which is what most of the industry does. We don’t sell customers things they don’t yet need, like air filters and radiator flushes. We focus on building trust, by acting with integrity, to get the customer to come back and build the daily car count. This philosophy is not a slogan for us. It is how we operate with every customer, in every store, every day. The placement of our outlets is another key factor. We place our stores in A-caliber retail locations. These are lots that may cost more than our competitors are willing or able to pay. We get what we pay for though; we have approximately 41% higher sales per store than the industry average. Question: What is the strangest interaction you’ve ever had with a potential franchisee? Larose: I once had a franchisee candidate in New Jersey respond to a request by us for proof of his liquid assets by bringing to the interview about $100,000 in cash to the meeting. He had it in a bag, with bundles of it wrapped in blue tape. Usually, folks just bring in a copy of a bank or stock statement. Not sure why he had so much cash on hand, literally, and I didn’t want to know. He didn’t become a franchisee. Express Oil Change sets itself apart through superior service and great locations. Images courtesy of Express Oil Change Advantages and Disadvantages of Differentiation Saylor URL: http://www.saylor.org/books Saylor.org 152 Each generic strategy offers advantages that firms can potentially leverage to enjoy strong performance, as well as disadvantages that may damage their performance. In the case of differentiation, a key advantage is that effective differentiation creates an ability to obtain premium prices from customers. This enables a firm to enjoy strong profit margins. Coca-Cola, for example, currently enjoys a profit margin of approximately 33 percent, meaning that about thirty-three cents of every dollar it collects from customers is profit. In comparison, Walmart’s cost leadership strategy delivered a margin of under 4 percent in 2010. In turn, strong margins mean that the firm does not need to attract huge numbers of customers to have a good overall level of profit. Luckily for Coca-Cola, the firm does attract a great many buyers. Overall, the firm made a profit of just under $12 billion on sales of just over $35 billion in 2010. Interestingly, Walmart’s profits were only 25 percent higher ($15 billion) than Coca-Cola’s while its sales volume ($421 [3] billion) was twelve times as large as Coca-Cola’s. This comparison of profit margins and overall profit levels illustrates why a differentiation strategy is so attractive to many firms. To the extent that differentiation remains in place over time, buyer loyalty may be created. Loyal customers are very desirable because they are notprice sensitive. In other words, buyer loyalty makes a customer unlikely to switch to another firm’s products if that firm tries to steal the customer away through lower prices. Many soda drinkers are fiercely loyal to Coca-Cola’s products. Coca-Cola’s headquarters are in Atlanta, and loyalty to the firm is especially strong in Georgia and surrounding states. Pepsi and other brands have a hard time convincing loyal Coca-Cola fans to buy their beverages, even when offering deep discounts. This helps keep Coca-Cola’s profits high because the firm does not have to match any promotions that its rivals launch to keep its customers. Meanwhile, Pepsi also has attracted a large set of brand-loyal customers that Coca-Cola struggles to steal. This enhances Pepsi’s profits. In contrast, store-brand sodas such as Sam’s Choice (which is sold at Walmart) seldom attract loyalty. As a result, they must be offered at very low prices to move from store shelves into shopping carts. Beyond existing competitors, a differentiation strategy also creates benefits relative to potential new entrants. Specifically, the brand loyalty that customers feel to a differentiated product makes it difficult Saylor URL: http://www.saylor.org/books Saylor.org 153 for a new entrant to lure these customers to adopt its product. A new soda brand, for example, would struggle to take customers away from Coca-Cola or Pepsi. Thus a differentiation strategy helps create barriers to entry that protect the firm and its industry from new competition. The big risk when using a differentiation strategy is that customers will not be willing to pay extra to obtain the unique features that a firm is trying to build its strategy around. In 2007, department store Dillard’s stopped carrying men’s sportswear made by Nautica because the seafaring theme of Nautica’s brand had lost much of its cache among many men. [4] Because Nautica’s uniqueness had eroded, Dillard’s believed that space in its stores that Nautica had been occupying could be better allocated to other brands. In some cases, customers may simply prefer a cheaper alternative. For example, products that imitate the look and feel of offerings from Ray-Ban, Tommy Bahama, and Coach are attractive to many valueconscious consumers. Firms such as these must work hard at product development and marketing to ensure that enough customers are willing to pay a premium for their goods rather than settling for knockoffs. In other cases, customers desire the unique features that a firm offers, but competitors are able to imitate the features well enough that they are no longer unique. If this happens, customers have no reason to pay a premium for the firm’s offerings. IBM experienced the pain of this scenario when executives tried to follow a differentiation strategy in the personal computer market. The strategy had worked for IBM in other areas. Specifically, IBM had enjoyed a great deal of success in the mainframe computer market by providing superior service and charging customers a premium for their mainframes. A business owner who relied on a mainframe to run her company could not afford to have her mainframe out of operation for long. Meanwhile, few businesses had the skills to fix their own mainframes. IBM’s message to customers was that they would pay more for IBM’s products but that this was a good investment because when a mainframe needed repairs, IBM would provide faster and better service than its competitors could. The customer would thus be open for business again very quickly after a mainframe failure. This positioning failed when IBM used it in the personal computer market. Rivals such as Dell were able to offer service that was just as good as IBM’s while also charging lower prices for personal computers than IBM charged. From a customer’s perspective, a person would be foolish to pay more for an IBM Saylor URL: http://www.saylor.org/books Saylor.org 154 personal computer since IBM did not offer anything unique. IBM steadily lost market share as a result. By 2005, IBM’s struggles led it to sell its personal computer business to Lenovo. The firm is still successful, however, within the mainframe market where its offerings remain differentiated. Firms following a differentiation strategy must “watch” out for counterfeit goods such as the faux Rolexes shown here. Image courtesy of US Customs and Border Patrol, http://en.wikipedia.org/wiki/File:Counterfeit_Rolex_Watch, _dsc4577_5f270.jpg. KEY TAKEAWAY x Differentiation can be an effective business-level strategy to the extent that a firm offers unique features that convince customers to pay a premium for their goods and services. EXERCISES 1. What are two industries in which a differentiation strategy would be difficult to implement? 2. What is an example of a differentiated business near your college or university? 3. Name three ways businesses that provide entertainment that might better differentiate their services. How might they do this? Saylor URL: http://www.saylor.org/books Saylor.org 155 [1] Porter, M. E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press. [2] Excerpted from Ketchen, D. J., & Short, J. C. 2010. The franchise player: An interview with Don Larose. Journal of Applied Management and Entrepreneurship, 15(4), 94–101. [3] Profit statistics drawn from Standard & Poor’s stock reports on Coca-Cola and Walmart. [4] Kapner, S. 2007, November 1. Nautica brand losing ground. CNNMoney. Retrieved from http://money.cnn.com/2007/10/31/news/companies/Kapner_Nautica.fortune/index.htm Saylor URL: http://www.saylor.org/books Saylor.org 156 5.4 Focused Cost Leadership and Focused Differentiation LEARNING OBJECTIVES 1. Describe the nature of focused cost leadership and focused differentiation. 2. Know the advantages and disadvantages of focus strategies. Companies that use a cost leadership strategy and those that use a differentiation strategy share one important characteristic: both groups try to be attractive to customers in general. These efforts to appeal to broad markets can be contrasted with strategies that involve targeting a relatively narrow niche of potential customers. These latter strategies are known as focus strategies. [1] The Nature of the Focus Cost Leadership Strategy Focused cost leadership is the first of two focus strategies. A focused cost leadership strategy requires competing based on price to target a narrow market. A firm that follows this strategy does not necessarily charge the lowest prices in the industry. Instead, it charges low prices relative to other firms that compete within the target market. Redbox, for example, uses vending machines placed outside grocery stores and other retail outlets to rent DVDs of movies for $1. There are ways to view movies even cheaper, such as through the flat-fee streaming video subscriptions offered by Netflix. But among firms that rent actual DVDs, Redbox offers unparalleled levels of low price and high convenience. Another important point is that the nature of the narrow target market varies across firms that use a focused cost leadership strategy. In some cases, the target market is defined by demographics. Claire’s, for example, seeks to appeal to young women by selling inexpensive jewelry, accessories, and ear piercings. Claire’s use of a focused cost leadership strategy has been very successful; the firm has more than three thousand locations and has stores in 95 percent of US shopping malls. Saylor URL: http://www.saylor.org/books Saylor.org 157 Redbox machines are available on university campuses nationwide. Image courtesy of Valerie Everett, http://www.flickr.com/photos/valeriebb/2224649723. In other cases, the target market is defined by the sales channel used to reach customers. Most pizza shops offer sit-down service, delivery, or both. In contrast, Papa Murphy’s sells pizzas that customers cook at home. Because these inexpensive pizzas are baked at home rather than in the store, the law allows Papa Murphy’s to accept food stamps as payment. This allows Papa Murphy’s to attract customers that might not otherwise be able to afford a prepared pizza. In contrast to most fast-food restaurants, Checkers Drive In is a drive-through-only operation. To serve customers quickly, each store has two drive-through lanes: one on either side of the building. Checkers saves money in a variety of ways by not offering indoor seating to its customers—Checkers’ buildings are cheaper to construct, its utility costs are lower, and fewer employees are needed. These savings allow the firm to offer large burgers at very low prices and still remain profitable. The Nature of the Focused Differentiation Strategy Saylor URL: http://www.saylor.org/books Saylor.org 158 Focused differentiation is the second of two focus strategies. A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market. As with a focused low-cost strategy, narrow markets are defined in different ways in different settings. Some firms using a focused differentiation strategy concentrate their efforts on a particular sales channel, such as selling over the Internet only. Others target particular demographic groups. One example is Breezes Resorts, a company that caters to couples without children. The firm operates seven tropical resorts where vacationers are guaranteed that they will not be annoyed by loud and disruptive children. While a differentiation strategy involves offering unique features that appeal to a variety of customers, the need to satisfy the desires of a narrow market means that the pursuit of uniqueness is often taken to the proverbial “next level” by firms using a focused differentiation strategy. Thus the unique features provided by firms following a focused differentiation strategy are often specialized. When it comes to uniqueness, few offerings can top Kopi Luwak coffee beans. High-quality coffee beans often sell for $10 to $15 a pound. In contrast, Kopi Luwak coffee beans sell for hundreds of dollars per pound. [2] This price is driven by the rarity of the beans and their rather bizarre nature. As noted in a 2010 article in the New York Times, these beans are found in the droppings of the civet, a nocturnal, furry, long-tailed catlike animal that prowls Southeast Asia’s coffee-growing lands for the tastiest, ripest coffee cherries. The civet eventually excretes the hard, indigestible innards of the fruit—essentially, incipient coffee beans—though only after they have been fermented in the animal’s stomach acids and enzymes to produce a brew described as smooth, chocolaty and devoid of any bitter aftertaste. [3] Although many consumers consider Kopi Luwak to be disgusting, a relatively small group of coffee enthusiasts has embraced the coffee and made it a profitable product. This illustrates the essence of a focused differentiation strategy—effectively serving the specialized needs of a niche market can create great riches. Saylor URL: http://www.saylor.org/books Saylor.org 159 Larger niches are served by Whole Foods Market and Mercedes-Benz. Although most grocery stores devote a section of their shelves to natural and organic products, Whole Foods Market works to sell such products exclusively. For customers, the large selection of organic goods comes at a steep price. Indeed, the supermarket’s reputation for high prices has led to a wry nickname—“Whole Paycheck”—but a sizable number of consumers are willing to pay a premium to feel better about the food they buy. The dedication of Mercedes-Benz to cutting-edge technology, styling, and safety innovations has made the firm’s vehicles prized by those who are rich enough to afford them. This appeal has existing for many decades. In 1970, acid-rocker Janis Joplin recorded a song called “Mercedes Benz” that highlighted the automaker’s allure. Since then Mercedes-Benz has used the song in several television commercials, including during the 2011 Super Bowl. Janis Joplin’s musical tribute to Mercedes-Benz underscores the allure of the brand. Image courtesy of de.wp, http://en.wikipedia.org/wiki/File:S-Klasse_W221.jpg. Developing a Focused Differentiation Strategy at Augustino LoPrinzi Guitars and Ukuleles Augustino LoPrinzi Guitars and Ukuleles in Clearwater, Florida, builds high-end custom instruments. The founder of the company, Augustino LoPrinzi, has been a builder of custom guitars for five decades. While a reasonably good mass-produced guitar can be purchased elsewhere for a few hundred dollars, LoPrinzi’s handmade models start at $1,100, and some sell for more than $10,000. The firm’s customers have included professional musicians such as Dan Fogelberg, Leo Kottke, Herb Ohta (Ohta-San), Lyle Ritz, Saylor URL: http://www.saylor.org/books Saylor.org 160 Andrés Segovia, and B. J. Thomas. Their instruments can be found athttp://www.augustinoloprinzi.com. We asked Augustino about his firm. [4] Question: Were there other entrepreneurial opportunities you considered before you began making guitars? Augustino Loprinzi: I originally thought of pursuing a career in commercial art, but I found my true love was in classical guitar building. I was trained by my father to be a barber from a very young age, and after my term in the service, I opened a barbershop. Question: What is the most expensive guitar you’ve ever sold? Loprinzi: $17,500. Question: How old were you when you started your first business in the guitar industry? Loprinzi: I was in my early twenties. Question: How did you get your break with more famous customers? Loprinzi: I think word of mouth had a lot do with it. Question: You have been active in Japan. Do the preferences of Japanese customers differ from those of Americans? Loprinzi: Yes. The Japanese want only high-end instruments. Aesthetics are very important to the Japanese along with high-quality materials and workmanship. The US market seems to care in general less about ornamentation and more about quality workmanship, tone, and playability. Question: How do you stay ahead in your industry? Loprinzi: Always try to stay abreast on what the music industry is doing. We do this by reading several music industry publications, talking with suppliers, and keeping an eye on the trends going on in other countries because usually they come full circle. Also, for the past several years by following the Internet forums and such has been extremely beneficial. Advantages and Disadvantages of the Focused Strategies Each generic strategy offers advantages that firms can potentially leverage to enhance their success as well as disadvantages that may undermine their success. In the case of focus differentiation, one advantage is that very high prices can be charged. Indeed, these firms often price their wares far above what is charged by firms following a differentiation strategy. REI (Recreational Equipment Inc.), for example, commands a hefty premium for its outdoor sporting goods and clothes that feature name brands, such as The North Face and Marmot. Nat Nast’s focus differentiation strategy Saylor URL: http://www.saylor.org/books Saylor.org 161 centers on selling men’s silk camp shirts with a 1950s retro flair. These shirts retail for more than $100. Focused cost leaders such as Checkers Drive In do not charge high prices like REI and Nat Nast do, but their low cost structures enable them to enjoy healthy profit margins. A second advantage of using a focus strategy is that firms often develop tremendous expertise about the goods and services that they offer. In markets such as camping equipment where product knowledge is important, rivals and new entrants may find it difficult to compete with firms following a focus strategy. In terms of disadvantages, the limited demand available within a niche can cause problems. First, a firm could find its growth ambitions stymied. Once its target market is being well served, expansion to other markets might be the only way to expand, and this often requires developing a new set of skills. Also, the niche could disappear or be taken over by larger competitors. Many gun stores have struggled and even gone out of business since Walmart and sporting goods stores such as Academy Sports and Bass Pro Shops have started carrying an impressive array of firearms. In contrast to tacky Hawaiian souvenirs, the quality of Kamaka ukuleles makes them a favorite of ukulele phenom Jake Shimabukuro and others who are willing to pay $1,000 or more for a high-end instrument. Image courtesy of Wikimedia,http://en.wikipedia.org/ wiki/File:Jake_Shimabukuro.jpg. Saylor URL: http://www.saylor.org/books Saylor.org 162 Finally, damaging attacks may come not only from larger firms but also from smaller ones that adopt an even narrower focus. A sporting goods store that sells camping, hiking, kayaking, and skiing goods, for example, might lose business to a store that focuses solely on ski apparel because the latter can provide more guidance about how skiers can stay warm and avoid broken bones. Strategy at the Movies Zoolander One man’s trash is another man’s fashion? That’s what fashion mogul Jacobim Mugatu was counting on in the 2001 comedy Zoolander. In his continued effort to be the most cutting-edge designer in the fashion industry, Mugatu developed a new line of clothing inspired “by the streetwalkers and hobos that surround us.” His new product line, Derelicte, characterized by dresses made of burlap and parking cones and pants made of garbage bags and tin cans, was developed for customers who valued the uniqueness of his…eclectic design. Emphasizing unique products is typical of a company following a differentiation strategy; however, Mugatu targeted a very specific set of customers. Few people would probably be enticed to wear garbage for the sake of fashion. By catering to a niche target market, Mugatu went from a simple differentiation strategy to a focused differentiation. Mugatu’s Derelicte campaign in Zoolander is one illustration of how a particular firm might develop a focused differentiation strategy. KEY TAKEAWAY x Focus strategies can be effective business-level strategies to the extent that a firm can match their goods and services to specific niche markets. EXERCISES 1. What are three different demographics that firms might target to establish a focus strategy? 2. What is an example of a business that you think is focused in too narrow a fashion to be successful? How might it change to be more successful? [1] Porter, M. E. 1980. Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: Free Press. Saylor URL: http://www.saylor.org/books Saylor.org 163 [2] http://www.catsasscoffee.com/order3.html [3] Onishi, N. 2010, April 17. From dung to coffee brew with no aftertaste. New York Times. Retrieved from http://www.nytimes.com/2010/04/18/world/asia/18civetcoffee.html?pagewanted=all [4] Excerpted from Short, J. C. 2007. A touch of the masters’ hands: An interview with Augustino and Donna Loprinzi. Journal of Applied Management and Entrepreneurship, 12, 103–109. Saylor URL: http://www.saylor.org/books Saylor.org 164 5.5 Best-Cost Strategy LEARNING OBJECTIVES 1. Describe the nature of a best-cost strategy. 2. Understand why executing a best-cost strategy is difficult. The Challenge of Following a Best-Cost Strategy Some executives are not content to have their firms compete based on offering low prices or unique features. They want it all! Firms that charge relatively low prices and offer substantial differentiation are following a best-cost strategy. This strategy is difficult to execute in part because creating unique features and communicating to customers why these features are useful generally raises a firm’s costs of doing business. Product development and advertising can both be quite expensive. However, firms that manage to implement an effective best-cost strategy are often very successful. Target appears to be following a best-cost strategy. The firm charges prices that are relatively low among retailers while at the same time attracting trend-conscious consumers by carrying products from famous designers, such as Michael Graves, Isaac Mizrahi, Fiorucci, Liz Lange, and others. This is a lucrative position for Target, but the position is under attack from all sides. Cost leader Walmart charges lower prices than Target. This makes Walmart a constant threat to steal the thriftiest of Target’s customers. Focus differentiators such as Anthropologie that specialize in trendy clothing and home furnishings can take business from Target in those areas. Deep discounters such as T.J. Maxx and Marshalls offer another viable alternative to shoppers because they offer designer clothes and furnishings at closeout prices. A firm such as Target that uses a best-cost strategy also opens itself up to a wider variety of potentially lethal rivals. Developing a Best-Cost Strategy at Plain Ivey Jane According to government statistics, women are 60 percent less likely than men to become entrepreneurs. Meanwhile, succeeding within the specialty fashion retailing market is notoriously difficult. These trends do not worry Sarah Reeves, a young entrepreneur and 2007 graduate of Auburn University who is rapidly becoming a key player within the Austin, Texas, retail scene by offering high-end fashion at low prices. Saylor URL: http://www.saylor.org/books Saylor.org 165 On her website (http://www.plainiveyjane.com), Sarah describes Plain Ivey Jane as “the go-to place for women who want to elevate their wardrobes. We offer high end designer names at a discount, and the new overstocked apparel is handpicked from over 70 different brands to offer exactly what Austin needs at a price every girl can afford. To pair with your fabulous new wardrobe, Plain Ivey Jane carries accessories from undiscovered local artisans.” We asked Reeves to discuss her firm. [1] Photo courtesy of Shanti Matulewski. Question: Can you tell us a little about your Plain Ivey Jane concept? Sarah Reeves, Owner: Plain Ivey Jane sells overstock from Anthropologie, Urban Outfitters, Bloomingdales, and other high-end and small designers. Although I buy from the same designers as the big and famous retailers, our dresses and accessories are sold at a fraction of their prices. Question: What differentiates your boutique from competitors? Reeves: I’m one of the lowest-priced retailers in the shopping district that people in Austin call the Second Street area. My niche in the fashion retailing business is that my merchandise is overstock from great brands. There’s maybe one other business in Austin that sells overstock. What makes my concept different is that it has the feel of a high-end retail store Saylor URL: http://www.saylor.org/books Saylor.org 166 versus a basement feel of the typical discount retailer. Question: Do have a lot of regular customers? Reeves: Yes. Once people find out what I offer, they’re in here all the time. I see the same group of people every few months, but getting in new faces is the challenge. I think a lot of people walk by and assume that our clothes are expensive, but nothing could be further from the truth. Question: Were you fearful of starting your own business so young? Reeves: No, I figured this was a great time since I had nothing to lose. I thought getting it out of my system now was a good idea, and it was a good time since I was able to get a great deal on my lease. With the downturn in the economy, the time was right for my lower-priced strategy. Question: What would you say is the biggest key to success for small business? Reeves: Flexibility. Rolling with the punches and definitely the ability to follow up with people. I thought that people who owned their own business must know what they are doing, but many people don’t. At this point, I prefer to do everything myself. At least I can blame myself when things go wrong. Another key is networking with other small-business owners. A lot of the other boutique owners nearby have become close friends. I learn what works for them and what might possibly apply to my concept. Saylor URL: http://www.saylor.org/books Saylor.org 167 The success that 2007 college graduate Sarah Reeves has enjoyed with Plain Ivey Jane may inspire other young women to become entrepreneurs. Photo courtesy of Shanti Matulewski. Figure 5.10 Driving toward a Best-Cost Strategy by Reducing Overhead Saylor URL: http://www.saylor.org/books Saylor.org 168 Images courtesy of Kari Sullivan,http://www.flickr.com/photos/ilovemypit/3726649397/ (top left); Sarah B. Brooks, http://www.flickr.com/photos/foodclothingshelter/4753507671/(bottom left); Samantha Marx,http://www.flickr.com/photos/spam/5166429482/ Pursuing the Best-Cost Strategy through a Low-Overhead Business Model One route toward a best-cost strategy is for a firm to adopt a business model whose fixed costs and overhead are very low relative to the costs that competitors are absorbing (Figure 5.10 "Driving toward a Best-Cost Strategy by Reducing Overhead"). The Internet has helped make this possible for some firms. Amazon, for example, can charge low prices in part because it does not have to endure the expenses that firms such as Walmart and Target do in operating many hundreds of stores. Meanwhile, Amazon offers an unmatched variety of goods. This combination has made Amazon the unquestioned leader in e-commerce. Another example is Netflix. This firm is able to offer customers a far greater variety of movies and charge lower prices than video rental stores by conducting all its business over the Internet and via mail. Netflix’s best-cost strategy has been so successful that $10,000 invested in the firm’s stock in May 2006 was worth more than $90,000 five years later. [2] Hey Cupcake! in Austin, Texas, is a low-overhead bakery that has become a delicious success. Saylor URL: http://www.saylor.org/books Saylor.org 169 Image courtesy of Evan Bench, http://www.flickr.com/photos/austinevan/3237785474. Moving toward a best-cost strategy by dramatically reducing expenses is also possible for firms that cannot rely on the Internet as a sales channel. Owning a restaurant requires significant overhead costs, such as rent and utilities. Some talented chefs are escaping these costs by taking their food to the streets. Food trucks that serve high-end specialty dishes at very economical prices are becoming a popular trend in cities around the country. In Portland, Oregon, a food truck called the Ninja Plate Lunch offers large portions of delectable Hawaiian foods such as pulled pork for around $5. Another Portland food truck is PBJ’s, whose unique and inexpensive sandwiches often center on organic peanut butter. Beyond keeping costs low, the mobility of food trucks offers important advantages over a traditional restaurant. Some food trucks set up outside big-city nightclubs, for example, to sell partygoers a late-night snack before they head home. KEY TAKEAWAY x A best-cost strategy can be an effective business-level strategy to the extent that a firm offers differentiated goods and services at relatively low prices. EXERCISES 1. What is an example of an industry that you think a best-cost strategy could be successful? How would you differentiate a company to achieve success in this industry? 2. What is an example of a firm following a best-cost strategy near your college or university? [1] Excerpted from Ketchen, D. J., & Short, J. C. Forthcoming. The discount diva: An interview with Sarah Reeves. Journal of Applied Management and Entrepreneurship. [2] Statistics drawn from Standard & Poor’s stock report on Netflix. Saylor URL: http://www.saylor.org/books Saylor.org 170 5.6 Stuck in the Middle LEARNING OBJECTIVES 1. Describe the problem of being stuck in the middle of different generic strategies. 2. Understand why trying to please everyone often creates problems when crafting a business-level strategy. Saylor URL: http://www.saylor.org/books Saylor.org 171 Saylor URL: http://www.saylor.org/books Saylor.org 172 Images courtesy of F33, http://www.flickr.com/photos/f33/3204789700/(top right); Ethan Prater,http://www.flickr.com/photos/eprater/4592959910/ (top left); Caldorwards4,http://en.wikipedia.org/wiki/File:Big_Kmart,_Ontario,_Oregon_2006.jpeg(botto m right); Rachel P. Maines, http://en.wikipedia.org/wiki/File:Sears__Aids_That_Every_Woman_Appreciates.jpg (bottom left). Stuck in the Middle: Neither Inexpensive nor Differentiated Some firms fail to effectively pursue one of the generic strategies. A firm is said to be stuck in the middle if it does not offer features that are unique enough to convince customers to buy its offerings, and its prices are too high to compete effectively based on price. Arby’s appears to be a good example. Arby’s signature roast beef sandwiches are neither cheaper than other fast-food sandwiches nor standouts in taste. Firms that are stuck in the middle generally perform poorly because they lack a clear market or competitive pricing. Perhaps not surprisingly, parent company Wendy’s has been trying to sell Arby’s despite having recently acquired the company in 2008. Stockholders apparently agreed with the plan to cut Arby’s loose—the price of Wendy’s stock rose 7 percent the day the plan was announced. [1] Doing Everything Means Doing Nothing Well Michael Porter has noted that strategy is as much about executives deciding what a firm is not going to do [2] as it is about deciding what the firm is going to do. In other words, a firm’s business-level strategy should not involve trying to serve the varied needs of different segment of customers in an industry. No firm could possibly pull this off. Saylor URL: http://www.saylor.org/books Saylor.org 173 Saylor URL: http://www.saylor.org/books Saylor.org 174 This illustration from 1887 captures the lesson of Aesop’s fable “The Miller, His Son, and Their Ass”—a lesson that executives need to follow. Image courtesy of Walter Crane,http://en.wikipedia.org/wiki/File:Can%27t_please_everyone2.jpg. The fable “The Miller, His Son, and Their Ass” told by the ancient Greek storyteller Aesop helps illustrate this idea. In this tale, a miller and his son were driving their ass (donkey) to market for sale. They soon encountered a group of girls who mocked them for walking instead of riding. The father then told his son to ride the animal. Not long after, father and son overheard a man claim that young people had no respect for the elderly. On hearing this opinion, the father told the boy to dismount the animal and he began to ride. They progressed a short distance farther and met a company of women and children. Several of the women suggested that it was both ridiculous and lazy for the father to ride while the young son was forced to walk alone; once again the two changed positions. Another bystander suggested that they could not believe that the man was the owner of the beast, judging from the way it was weighted down. In fact, it would make more sense for the man and his son to carry the ass. On hearing this, the father and his son tied the animal’s legs together and carried it on a pole. As they crossed a bridge near town, the townspeople began to gather and laugh at the unorthodox sight. The noise and the chaos frightened the beast, leading it to thrash around until it tumbled into the river. With tongue in cheek, we note that the moral of the story is that if you try to please everyone, you may lose your ass. [3] Getting Outmaneuvered by Competitors In many cases, firms become stuck in the middle not because executives fail to arrive at a well-defined strategy but because firms are simply outmaneuvered by their rivals. After six decades as an electronics retailer, Circuit City went out of business in 2009. The firm had simply lost its appeal to customers. Rival electronics retailer Best Buy offered comparable prices to Circuit City’s prices, but the former offered much better customer service. Meanwhile, the service offered by discount retailers such as Walmart and Target on electronics were no better that Circuit City’s, but their prices were better. The results were predictable—customers who made electronics purchases based on the service they received went to Best Buy, and value-driven buyers patronized Walmart and Target. Circuit City’s demise was probably inevitable because it lacked a competitive advantage within the electronics business. Although Target was on the winning end of this battle, Target executives need to worry that their firm Saylor URL: http://www.saylor.org/books Saylor.org 175 could become stuck in the middle between Walmart’s better prices on one side and the trendiness of specialty shops on the other. IBM’s personal computer business offers another example. IBM tried to position its personal computers via a differentiation strategy. In particular, IBM’s personal computers were offered at high prices, and the firm promised to offer excellent service to customers in return. Unfortunately for IBM, rivals such as Dell were able to provide equal levels of service while selling computers at lower prices. Nothing made IBM’s computers stand out from the crowd, and the firm eventually exited the business. At its peak in the mid-2000s, Movie Gallery operated approximately 4,700 video rental stores. By 2010, the firm was dead. This rapid demise can be traced to the firm becoming outmaneuvered by Netflix. When Netflix began offering inexpensive DVD rentals through the mail, customers defected in droves from Movie Gallery and other video rental stores such as Blockbuster. Netflix customers were delighted by the firm’s low prices, vast selection, and the convenience of not having to visit a store to select and return videos. Movie Gallery was stuck in the middle—its prices were higher than those of Netflix, and Netflix’s service was superior. Once individuals lacked a compelling reason to be Movie Gallery customers, the firm’s fate was sealed. Saylor URL: http://www.saylor.org/books Saylor.org 176 Saylor URL: http://www.saylor.org/books Saylor.org 177 Netflix and Redbox have left video rental stores such as Movie Gallery and Blockbuster stuck in the middle. Blockbuster filed for bankruptcy in late 2010. Image courtesy of Stu pendousmat,http://en.wikipedia.org/wiki/File:BlockbusterMoncton.JPG. KEY TAKEAWAY x When executing a business-level strategy, a firm must not become stuck in the middle between viable generic business-level strategies by neither offering unique features nor competitive pricing. EXERCISES 1. What is an example of a firm that you would consider to be “stuck in the middle”? What would your advice be to the executives in charge of this firm? 2. Research a company that has gone bankrupt or otherwise stopped operations in the past decade because their strategy was “stuck in the middle” of otherwise viable generic business-level strategies. Could its demise have been prevented? [1] McWilliams, J. 2011, January 21. Wendy’s/Arby’s to try to sell Arby’s. Atlantic Journal-Constitution. Retrieved from http://www.ajc.com/business/wendys-arbys-to- try-810320.html [2] Porter, M. E. 1996. What is strategy? Harvard Business Review, reprint 96608. [3] Excerpted from Short, J. C., & Ketchen, D. J. 2005. Using classic literature to teach timeless truths: An illustration using Aesop’s fables to teach strategic management.Journal of Management Education, 29(6), 816– 832. Saylor URL: http://www.saylor.org/books Saylor.org 178 5.7 Conclusion This chapter explains generic business-level strategies that executives select to keep their firms competitive. Executives must select their firm’s source of competitive advantage by choosing to compete based on low-cost versus more expensive features that differentiate their firm from competitors. In addition, targeting either a narrow or broad market helps firms further understand their customer base. Based on these choices, firms will follow cost leadership, differentiation, focused cost leadership, or focused differentiation strategies. Another potentially viable business strategy, best cost, exists when firms offer relatively low prices while still managing to differentiate their goods or services on some important value-added aspects. All firms can fall victim to being “stuck in the middle” by not offering unique features or competitive prices. EXERCISES 1. Divide your class into four or eight groups, depending on the size of the class. Each group should select a different industry. Find examples of each generic business-level strategy for your industry. Discuss which strategy seems to be the most successful in your selected industry. 2. This chapter discussed Target and other retailers. If you were assigned to turn around a struggling retailer such as Kmart, what actions would you take to revive the company? Saylor URL: http://www.saylor.org/books Saylor.org 179 Chapter 6 Supporting the Business-Level Strategy: Competitive and Cooperative Moves LEARNING OBJECTIVES After reading this chapter, you should be able to understand and articulate answers to the following questions: 1. What different competitive moves are commonly used by firms? 2. When and how do firms respond to the competitive actions taken by their rivals? 3. What moves can firms make to cooperate with other firms and create mutual benefits? Can Merck Stay Healthy? On June 7, 2011, pharmaceutical giant Merck & Company Inc. announced the formation of a strategic alliance with Roche Holding AG, a smaller pharmaceutical firm that is known for excellence in medical testing. The firms planned to work together to create tests that could identify cancer patients who might benefit from cancer drugs that Merck had under development. [1] This was the second alliance formed between the companies in less than a month. On May 16, 2011, the US Food and Drug Administration approved a drug called Victrelis that Merck had developed to treat hepatitis C. Merck and Roche agreed to promote Victrelis together. This surprised industry experts because Merck and Roche had offered competing treatments for hepatitis C in the past. The Merck/Roche alliance was expected to help Victrelis compete for market share with a new treatment called Incivek that was developed by a team of two other pharmaceutical firms: Vertex and Johnson & Johnson. Experts predicted that Victrelis’s wholesale price of $1,100 for a week’s supply could create $1 billion of annual revenue. This could be an important financial boost to Merck, although the company was already enormous. Merck’s total of $46 billion in sales in 2010 included approximately $5.0 billion in revenues from asthma treatment Singulair, $3.3 billion for two closely related diabetes drugs, $2.1 billion for two closely related blood pressure drugs, and $1.1 billion for an HIV/AIDS treatment. Saylor URL: http://www.saylor.org/books Saylor.org 180 Despite these impressive numbers, concerns about Merck had reduced the price of the firm’s stock from nearly $60 per share at the start of 2008 to about $36 per share by June 2011. A big challenge for Merck is that once the patent on a drug expires, its profits related to that drug plummet because generic drugmakers can start selling the drug. The patent on Singulair is set to expire in the summer of 2012, for example, and a sharp decline in the massive revenues that Singulair brings into Merck seemed inevitable. [2] A major step in the growth of Merck was the 2009 acquisition of drugmaker Schering-Plough. By 2011, Merck ranked fifty-third on the Fortune 500 list of America’s largest companies. Rivals Pfizer (thirty-first) and Johnson & Johnson (fortieth) still remained much bigger than Merck, however. Important questions also loomed large. Would the competitive and cooperative moves made by Merck’s executives keep the firm healthy? Or would expiring patents, fearsome rivals, and other challenges undermine Merck’s vitality? Friedrich Jacob Merck had no idea that he was setting the stage for such immense stakes when he took the first steps toward the creation of Merck. He purchased a humble pharmacy in Darmstadt, Germany, in 1688. In 1827, the venture moved into the creation of drugs when Heinrich Emanuel Merck, a descendant of Friedrich, created a factory in Darmstadt in 1827. The modern version of Merck was incorporated in 1891. More than three hundred years after its beginnings, Merck now has approximately ninety-four thousand employees. Saylor URL: http://www.saylor.org/books Saylor.org 181 Merck’s origins can be traced back more than three centuries to Friedrich Jacob Merck’s purchase of this pharmacy in 1688. Image courtesy of Wikimedia,http://upload.wikimedia.org/wikipedia/commons/e/eb/ENGEL_APHOTHEKE.png. For executives leading firms such as Merck, selecting a generic strategy is a key aspect of business-level strategy, but other choices are very important too. In their ongoing battle to make their firms more successful, executives must make decisions about what competitive moves to make, how to respond to rivals’ competitive moves, and what cooperative moves to make. This chapter discusses some of the more powerful and interesting options. As our opening vignette on Merck illustrates, often another company, such as Roche, will be a potential ally in some instances and a potential rival in others. [1] Stynes, T. 2011, June 7. Merck, Roche focus on tests for cancer treatments. Wall Street Journal. Retrieved from online.wsj.com/article/SB100014240527023044323045 76371491785709756.html?mod=googlenews_wsj [2] Statistics drawn from Standard & Poor’s stock report on Merck. Saylor URL: http://www.saylor.org/books Saylor.org 182 6.1 Making Competitive Moves Figure 6.1 Making Competitive Moves Image courtesy of 663highland, http://en.wikipedia.org/wiki/File:Enchoen27n3200.jpg Saylor URL: http://www.saylor.org/books Saylor.org 183 LEARNING OBJECTIVES 1. Understand the advantages and disadvantages of being a first mover. 2. Know how disruptive innovations can change industries. 3. Describe two ways that using foothold can benefit firms. 4. Explain how firms can win without fighting using a blue ocean strategy. 5. Describe the creative process of bricolage. Being a First Mover: Advantages and Disadvantages A famous cliché contends that “the early bird gets the worm.” Applied to the business world, the cliché suggests that certain benefits are available to a first mover into a market that will not be available to later entrants (Figure 6.1 "Making Competitive Moves"). A first-mover advantage exists when making the initial move into a market allows a firm to establish a dominant position that other firms struggle to overcome. For example, Apple’s creation of a user-friendly, small computer in the early 1980s helped fuel a reputation for creativity and innovation that persists today. Kentucky Fried Chicken (KFC) was able to develop a strong bond with Chinese officials by being the first Western restaurant chain to enter China. Today, KFC is the leading Western fast-food chain in this rapidly growing market. Genentech’s early development of biotechnology allowed it to overcome many of the pharmaceutical industry’s traditional entry barriers (such as financial capital and distribution networks) and become a profitable firm. Decisions to be first movers helped all three firms to be successful in their respective industries. [1] On the other hand, a first mover cannot be sure that customers will embrace its offering, making a first move inherently risky. Apple’s attempt to pioneer the personal digital assistant market, through its Newton, was a financial disaster. The first mover also bears the costs of developing the product and educating customers. Others may learn from the first mover’s successes and failures, allowing them to cheaply copy or improve the product. In creating the Palm Pilot, for example, 3Com was able to build on Apple’s earlier mistakes. Matsushita often refines consumer electronic products, such as compact disc players and projection televisions, after Sony or another first mover establishes demand. In many industries, knowledge diffusion and public-information requirements make such imitation increasingly easy. Saylor URL: http://www.saylor.org/books Saylor.org 184 One caution is that first movers must be willing to commit sufficient resources to follow through on their pioneering efforts. RCA and Westinghouse were the first firms to develop active-matrix LCD display technology, but their executives did not provide the resources needed to sustain the products spawned by this technology. Today, these firms are not even players in this important business segment that supplies screens for notebook computers, camcorders, medical instruments, and many other products. To date, the evidence is mixed regarding whether being a first mover leads to success. One research study of 1,226 businesses over a fifty-five-year period found that first movers typically enjoy an advantage over rivals for about a decade, but other studies have suggested that first moving offers little or no advantages. Perhaps the best question that executives can ask themselves when deciding whether to be a first mover is, how likely is this move to provide my firm with a sustainable competitive advantage? First moves that build on strategic resources such as patented technology are difficult for rivals to imitate and thus are likely to succeed. For example, Pfizer enjoyed a monopoly in the erectile dysfunction market for five years with its patented drug Viagra before two rival products (Cialis and Levitra) were developed by other pharmaceutical firms. Despite facing stiff competition, Viagra continues to raise about $1.9 billion in sales for Pfizer annually. [2] In contrast, E-Trade Group’s creation in 2003 of the portable mortgage seemed doomed to fail because it did not leverage strategic resources. This innovation allowed customers to keep an existing mortgage when they move to a new home. Bigger banks could easily copy the portable mortgage if it gained customer acceptance, undermining E-Trade’s ability to profit from its first move. Disruptive Innovation Some firms have the opportunity to shake up their industry by introducing a disruptive innovation—an innovation that conflicts with, and threatens to replace, traditional approaches to competing within an industry. The iPad has proved to be a disruptive innovation since its introduction by Apple in 2010. Many individuals quickly abandoned clunky laptop computers in favor of the sleek tablet format offered by the iPad. And as a first mover, Apple was able to claim a large share of the market. Saylor URL: http://www.saylor.org/books Saylor.org 185 The iPad story is unusual, however. Most disruptive innovations are not overnight sensations. Typically, a small group of customers embrace a disruptive innovation as early adopters and then a critical mass of customers builds over time. An example is digital cameras. Few photographers embraced digital cameras initially because they took pictures slowly and offered poor picture quality relative to traditional film cameras. As digital cameras have improved, however, they have gradually won over almost everyone that takes pictures. Executives who are deciding whether to pursue a disruptive innovation must first make sure that their firm can sustain itself during an initial period of slow growth. Footholds In warfare, many armies establish small positions in geographic territories that they have not occupied previously. These footholds provide value in at least two ways. First, owning a foothold can dissuade other armies from attacking in the region. Second, owning a foothold gives an army a quick strike capability in a territory if the army needs to expand its reach. Similarly, some organizations find it valuable to establish footholds in certain markets. Within the context of business, a foothold is a small position that a firm intentionally establishes within a market in which it [3] does not yet compete. Swedish furniture seller IKEA is a firm that relies on footholds. When IKEA enters a new country, it opens just one store. This store is then used as a showcase to establish IKEA’s brand. Once IKEA gains brand recognition in a country, more stores are established. [4] Pharmaceutical giants such as Merck often obtain footholds in emerging areas of medicine. In December 2010, for example, Merck purchased SmartCells Inc., a company that was developing a possible new treatment for diabetes. In May 2011, Merck acquired an equity stake in BeiGene Ltd., a Chinese firm that was developing novel cancer treatments and detection methods. Competitive moves such as these offer Merck relatively low-cost platforms from which it can expand if clinical studies reveal that the treatments are effective. Blue Ocean Strategy It is best to win without fighting. Saylor URL: http://www.saylor.org/books Saylor.org 186 Sun-Tzu, The Art of War A blue ocean strategy involves creating a new, untapped market rather than competing with rivals in an existing market. [5] This strategy follows the approach recommended by the ancient master of strategy Sun-Tzu in the quote above. Instead of trying to outmaneuver its competition, a firm using a blue ocean strategy tries to make the competition irrelevant. Baseball legend Wee Willie Keeler offered a similar idea when asked how to become a better hitter: “Hit ’em where they ain’t.” In other words, hit the baseball where there are no fielders rather than trying to overwhelm the fielders with a ball hit directly at them. Nintendo openly acknowledges following a blue ocean strategy in its efforts to invent new markets. In 2006, Perrin Kaplan, Nintendo’s vice president of marketing and corporate affairs for Nintendo of America noted in an interview, “We’re making games that are expanding our base of consumers in Japan and America. Yes, those who’ve always played games are still playing, but we’ve got people who’ve never played to start loving it with titles like Nintendogs, Animal Crossing and Brain Games. These games are blue ocean in action.” [6] Other examples of companies creating new markets include FedEx’s invention of the fast-shipping business and eBay’s invention of online auctions. Bricolage Bricolage is a concept that is borrowed from the arts and that, like blue ocean strategy, stresses moves that create new markets. Bricolage means using whatever materials and resources happen to be available as the inputs into a creative process. A good example is offered by one of the greatest inventions in the history of civilization: the printing press. As noted in the Wall Street Journal, “The printing press is a classic combin...
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