Porter Intro 2006

Strategic Management of Business Units

William K. HolsteinThe College of William and Mary

GSBA

Yip and Porter’s Models

Buyer power

Potential competitors

Rivalry

Substitutes

Supplier power

Firm infrastructure

Human resource management

Technology developmentProcurement

Inboundlogistics

Outboundlogistics

Marketingand

salesServiceOpera-

tions

Mar

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Margin

Drivers: Drivers: in the contextof Porter’s 5-Forces

Leverage:Leverage:in the contextof Porter’sValue Chain

Today

More discussion of Porter’s two models for Industry and Company Analysis

Leaving you with an ‘encyclopedia’ on Porter’s Models

When I knew him!

Strategic Managementaccording to Booz-Allen

Booz-Allen believes the best the best companies manage marketscompanies manage markets not businesses. The constant leadership challenge is to out-performout-perform competition, introduce changeintroduce change into the market, enhance competitiveenhance competitive positionposition, and make things happenmake things happen.

Strategic Managementaccording to Booz-Allen

You create customer satisfaction through quality, productivity, people and ideas ... It all begins with the recognition that your only business is creating your only business is creating sustainable customer satisfactionsustainable customer satisfaction..

John R. RockwellSenior Vice President

Booz-Allen and Hamilton, Consultants

First, Core CompetencyA fundamental idea in Strategy, introduced byGary Hamel and C.K. Prahalad. They have since gone their own ways with new books.

StrategyAn integrated and coordinated set of actions taken to exploit core competenciesexploit core competencies and gain a competitive advantage.

Business Business Level Level StrategyStrategy

Actions taken to provide value to Actions taken to provide value to customers and gain a competitive customers and gain a competitive advantage by exploiting core advantage by exploiting core competencies in competencies in specific, specific, individual product marketsindividual product markets..

CoreCompetency

The resources and capabilities that have been determined to be a source of competitive source of competitive advantageadvantage for a firm over its rivals.

A brief summary of A brief summary of models used in this models used in this

presentationpresentation

Models in this Presentation

Breadth of Breadth of Competitive Competitive

ScopeScope

Source of Competitive AdvantageSource of Competitive Advantage

BroadBroadTargetTargetMarketMarket

NarrowNarrowTargetTargetMarketMarket

CostCost UniquenessUniqueness

There are 4 ‘generic’ ways to compete, based on cost (price) or uniqueness (value) and whether targeted at a broad or narrow (niche) market

Generic StrategiesGeneric Strategies

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The ‘Value ChainValue Chain’ defines the activities of the firm and how they inter-relate

The ‘Five Forces’‘Five Forces’ describe the competitive environment

in the industry


ScopeScope




CostCost

CostLeadership

How can Generic Business Level Strategies be Applied?

UniquenessUniqueness

Differen-tiation

Focused Differen-

tiation

Focused Low Cost

So, you can apply one of the two strategies ...

To a broad target market Or to a narrow target market, or NICHE

We turn first to the Broad Target MarketBroad Target Market and explore first the Cost Leadership StrategyCost Leadership Strategy


ScopeScope




CostCost

CostLeadership

Generic Business Level Strategies


Cost Leadership Business Level Strategy

Key Criteria Lowest competitive price

Relatively standardized products

Features acceptable to many customers

Choices that Drive Costs

Economies of scale Asset utilization Capacity utilization pattern

Seasonal, cyclical Interrelationships

Order processing and distribution Value chain linkages

Advertising & Sales Logistics & Operations

Choices that Drive Costs (cont.)

Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product Features Hiring, training, motivation

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Value Creating ActivitiesValue Creating Activities common to a common to a Cost Leadership Cost Leadership Business Level StrategyBusiness Level Strategy


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Inbound LogisticsHighly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes

Located in Close Proximity with Suppliers

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Relatively Few Management Layers to Reduce Overhead

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Timing of Asset Purchases

Efficient Plant Scale to Minimize Manufacturing Costs

Selection of Low Cost Transport Carriers

Delivery Schedule that Reduces Costs

Products Priced to Generate Sales Volume

Small, Highly Trained Sales Force

Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes

Frequent Evaluation Processes to Monitor Suppliers’ Performances

Policy Choice of Plant Technology

Organizational Learning

Efficient Order SizesO

pera

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OperationsEfficient Plant Scale to Minimize Mfg. Costs

Timing of Asset Purchases

Policy Choice of Plant Technology

Organizational Learning

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National Scale Advertising



Effective Product Installations to Reduce Frequency and Severity of Recalls


Efficient Order Sizes

Interrelationships with Sister Units

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Outbound Logistics



Efficient Order SizesInterrelationships with Sister Units

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National Scale Advertising



Marketing & Sales

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ServiceEffective Product Installations to Reduce Recalls


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MARGINProcurement

Systems and Procedures to Find the Lowest Cost Products to Purchase Raw Materials


Procurement

Value Creating Activities common to a Cost Leadership Business Level Strategy

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MARGINTechnological Development

Technological DevelopmentEasy-to-Use Manufacturing Technologies

Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes


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Human Resource ManagementConsistent Policies to Reduce Turnover Costs

Effective Training Programs to Improve Worker Efficiency and Effectiveness


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Firm Infrastructure

Firm InfrastructureCost Effective MIS Systems

Relatively Few Management Layers to Reduce Overhead

Simplified Planning Practices to Reduce Planning Costs


We turn now to analyzing the effects of a strategy on the Five ForcesFive Forces

Can frighten off New EntrantsNew Entrants due to the need to:

Enter at large scale to be Cost Competitive

Take time to move down “Learning Curve”

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive

*

*

Can mitigate Customer (Buyer) PowerBuyer) Power by:Driving prices far below competitors which may cause exit and shift power back to firm

*



Ways to fight off SubstitutesSubstitutes:Make investments to create substitutes first

*

Buy patents developedby potential substitutes

*

Lower prices to maintain value position

*


Can mitigate Supplier PowerSupplier Power by: Low cost position makes them better able to absorb cost increases

*

* More likely to make very large purchases which reduces chance of supplier power


Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry

The Major The Major Risks involved Risks involved with a with a Cost Leadership Cost Leadership Business Level Business Level StrategyStrategy

Dramatic technological change could take away your cost advantage

Focus on efficiency could cause Cost Leader to overlook changes in customer preferences

Competitors may learn how to imitateimitate Value Chain


ScopeScope




CostCost

CostLeadership

Differen-Differen-tiationtiation



Differentiation Business Level Strategy

Key Criteria Value provided by unique features and

value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation

Drivers of Differentiation

Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information

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Value Creating Activities common to a common to a Differentiation Business Level StrategyBusiness Level Strategy

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Inbound Logistics

Superior handling of incoming raw materials to minimize damage and improve the quality of the final product

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Operations

Rapid responses to customers unique manufacturing specifications

Consistent manufacturing of attractive products

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Outbound LogisticsAccurate and responsive order processing procedures

Rapid and timely product deliveries to customers

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Marketing & Sales

Extensive personal relationships with buyers

Strong Coordination among functions in R&D, Marketing and Product Development

Premium Pricing

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Primary ActivitiesSe

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ServiceComplete field stocking of replacement parts


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Primary Activities

Procurement

ProcurementLocated in Close Proximity with Suppliers

Systems and procedures used to find the highest quality raw materials

Purchase of highest quality replacement parts


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Primary Activities


Technological DevelopmentStrong capability in basic research

Investments in technol-ogies to produce highly differentiated products

Coordination among R&D, marketing and product development


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Primary Activities


Human Resource ManagementCompensation programs which encourage worker creativity and productivity

Extensive use of subjective performance measures

Superior personnel training




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Firm Infrastructure

Firm InfrastructureA companywide emphasis on producing high quality products

Highly developed Information Systems to better understand customers’ purchasing preferences


Effectiveness with DifferentiationDifferentiation grows out of Value ChainValue Chain activities activities

Heineken beer Raw materials

Caterpillar tractors Service buyers’ needs quickly anywhere in the world

Steinway pianos Raw materials & Workmanship

Examples:

Intel microprocessors Technological superiority

Mercedes Benz autos Technology and Workmanship

Differentiation Business Level Strategy

Can fend off New EntrantsNew Entrants because• New Products must

surpass proven products• Or be equal to

performance at lower prices

Effective Differentiators can remain profitable even when the Five Forces appear unattractiveEffective Differentiators can remain profitable even when the Five Forces appear unattractive


Can mitigate Customer (Buyer) PowerBuyer) Power by:

* Well differentiated products reduce customer sensitivity to price increases


Ways to fight off SubstitutesSubstitutes:Brand loyalty tends to reduce new product trial and brand switching

*

Effective Differentiators can remain profitable even when the Five Forces appear unattractive

Bargaining Bargaining Power of Power of SuppliersSuppliers


Can mitigate Supplier PowerSupplier Power by: Absorbing price increases due to higher margins*

* Passing on higher supplier prices because buyers are brand loyal


Brand loyalty overcomes much price competition

The Major Risks involved with a Differentiation Business Level Strategy

Customers may decide that the cost of “uniqueness” is too great

The means of uniqueness may no longer be valued by customers

Competitors may learn how to imitate Value Chain


ScopeScope




CostCost

CostLeadership

Differen-tiation


Focused Differen-

tiation

Focused Low Cost


Firm may lack resources to compete industry wide

Large firms may overlook small niches

However.....Opportunities may exist because:

**

* May be able to serve a narrow market segment more effectively than industry-wide competitors

Focused Business Level Strategies involve the same basic approach as Broad Market Strategies

Focused Business Level Strategies

- Bang & Olufsen Upscale electronic components

- Iams Company Premium pet foods

- Snap-on tools High quality mechanics’ tools

May be able to retrofit old factories to keep costs down

Minimize R&D costs by copying innovators*

*Focused Business Level Strategies involve the same basic approach as Broad Market Strategies


Focused Differentiators may thrive by selecting a small market that is underserved by large players

Custom manufacturers of parts for

Harley-Davidson Motorcycles

*Focused Business Level Strategies involve the same basic approach as Broad Market Strategies


The Major Risks involved with a FocusedDifferentiation Business Level Strategy

Firm may be “outfocused” by competitors

Preferences of niche market may change to match those of broad market

Large competitor may set its sights on your niche market

What if a Competitor accomplishes BOTH Strategies?

Cost Leadership

AndAnd

Differentiation


ScopeScope




CostCost

CostLeadership

Differen-tiation


Focused Differen-

tiation

Focused Low Cost

Integrated Low Cost/

Differentiation


Integrated Low Cost/Differentiation Strategy Recognize that the Integrated Low Cost/

Differentiation business level strategy involves a Compromise

The risk is that the firm may become “Stuck in the Middle” lacking a strong commitment to or expertise with either type of generic strategy

Integrated Low Cost/Differentiation Strategy

Low Cost Use a single aircraft model

(Boeing 737) Use secondary airports Fly short routes No meals 15 minute turnaround time No reserved seats No travel agent reservations

Integrated Low Cost/Differentiation Strategy

Differentiation Focus on customer

satisfaction High level of employee dedication

New flight services for business travelers(Phones and faxes)

Others are Following theOut-Performing Strategy

Few can execute it successfully, but IT IS POSSIBLE!

Porter Intro 2006

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Transcript of Porter Intro 2006