Business Level Strategy of Bmw

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					Bus 189 – Day 10 – Business-level          strategies

1) Issues in business-level strategies that add to the knowledge we got from Ch. 3
   about Internal Analysis and Ch. 2 about External Analysis. Over the next month and
   a half we‟re looking at what you can do to create distinctive competencies that will be
   really valuable and give you competitive advantage.
       i) The text talks about 5 generic strategies. And in some places it is quite
           confusing, because Table 5-1 only lists 3 generic strategies. I wound up
           looking through the pages for the table with all 5 listed.

       ii) 3 basic “generic” strategies, generic in the sense that any business may
           choose any of them.
           (1) You get 5 from combinations involving the basic 3.
           (2) In some situations making the wrong choice will be completely
               disastrous, but still, any businessperson can follow any of these 3.

       iii) Today we‟re addressing choices every business must make.
            (1) The concept of generic strategies gives you
                (a) fundamental ideas you can use to recognize and solve strategic
                (b) a sense of some things that a lot of companies do that don’t work.

Put strategies on board

Get examples of businesses following some of the strategies.
       Define differentiation.
Talk about „stuck in the middle‟

Follow a cost leader –
       Explain what a „functional unit‟ is
       Ask which is strong at the cost leader.
               Which is weak
       What are strengths of cost leadership as a strategy?
       What are dangers?


Focuser – Foc cost leader
       Foc differentiator

Cost leadership and differentiation.

Strategic groups

2) A lot of this comes from Michael Porter of Harvard who also gave us 5-forces
   analysis. So after today we have two theories from Michael Porter.

   I find it helps in understanding what‟s important about this if we start by thinking
   about what doesn‟t work. What doesn‟t work is letting yourself get
   stuck in the middle.
        i) What is “being stuck in the middle?”
            (1) Failing to make intelligent choices among these 5
            (2) No clarity of what you‟re trying to do.

           (3) Book has a very nice description of what happened to Holiday Inns.
               (a) Old motels on 13th St.
               (b) Founded by Kemmons Wilson to be the best Inns.
               (c) Who were they for?
                   (i) Good systems – air conditioning, ice makers, larger rooms.
                   (ii) 1960 – They were everywhere.

                   (iii)Of the Porter strategies, cost-leadership, differentiation, focus,
                        which is he pursuing?

               (d) In 1970s –
                   (i) Some cheaper – La Quinta, Motel 6
                   (ii) Some more expensive – Hiltons, Marriotts

               (e) Who were they for now?

               (f) Fought back by creating several distinct businesses
                   (i) Hampton Inns competes w La Qunita
                   (ii) Holiday Inn Crowne Plaza competes with Hilton

               (g) Not stuck in the middle any more

So let‟s look at the 3 basic generic strategies

3) First and simplest – cost leadership
   a) Be the cheapest supplier.

      Porter suggests, and to a large extent he is right, that if you choose each of the
      generic strategies, you‟ll necessarily make some specific choices of emphasis
      within your organization. Some functional units are more important for some
      strategies than for others.
   b) The book talks about this on cost leadership in terms of manufacturing. If I‟m a
      manufacturer and I want to pursue a cost leadership strategy, which parts of my
      business – which functional units – do I really have to be really good in? The
      design department? The marketing department?
          (1) Purchasing
          (2) Production

          (3) What are examples of manufacturers who pursue a cost leadership
                  (i) The people who make generic products that sell in supermarkets.
                  (ii) Dell, AMD

          (4) Is product design, quality, features unimportant for cost leaders? No.
              But it is less important than for the guy who wants a premium price.

              (a) Does the cost leader try to do things that will make people perceive his
                  product is different and better?
                  (i) He/she does them cheaply
                      1. Wal-Mart – the greeter at the door
                      2. SouthWest – the friendly flight attendants.

   c) What are some other industries where we can identify some cost leaders?
        (1) SouthWest, Wal-Mart

          (2) What parts of their business do you think are most important?
              Frequent flyer? In-flight entertainment? Design of the cabin?
                  (i) SouthWest – constantly focus on the planes you‟ve got, getting
                       them there on time and at low cost.
                  (ii) Wal-Mart – constantly focus on the stores, the supply chain.
              (b) Info tech is often really central to an effective cost leader in services.

   d) Danger – a new, radically cheaper technology can beat you.
         (1) Integrated steel mills lost to mini-mills. Even the ones that were lower
             cost like Wheeling-Pittsburgh got beaten.

          (2) Companies focused on customers can find cheaper solutions.
              NorthWest  SouthWest

What is the next basic generic strategy?
4) Differentiation - creating a product that is different from what is standard in a way
   that customers will perceive as better
              Differentiation does not mean just being different.

   a) Examples: BMW. Sony. The top law firms.
   b) How?
         (1) Three of the building blocks of customer advantage.
                (i) Quality, Innovation, Customer responsiveness

                  (ii) A few strong functional units.
                          a. Product design

                          b. After sales service

                          c. The selling floor at Nordstrom‟s

                          d. Ability to listen to customer is key

   c) Organizations that seek differentiation also tend to practice market segmentation
      i) Creating different products or services for different niches

           (1) Sony – many different ways to get your TV.

           (2) (though companies that want to be cost leaders can sometimes do a lot of
               market segmentation with a little.)
                   (i) Chrysler mini-van
                   (ii) Chrysler convertible.

   d) Dangers
      i) What people want may change

       ii) You may get imitated, and the product turn into a commodity
            – HP, Compaq computers
       iii) You can fool yourself about what people want.
               (a) American Express card

5) The last 2 strategies involve going beyond segmentation and actually focus your
   whole company on a particular market niche.
      i) Porsche – focused on a single type of car.

       ii) We have national Home Depot-type chains
             individual lumber yards that are focused on a single market

       iii) Liz Claiborne – big success in professional women‟s clothes.

       iv) We say that this is really 2 strategies because within focus you usually have to
           (1) focused low-cost producer – cheap restaurant.
           (2) Focused differentiator – better restaurant.

       v) A focused company can be so good that it becomes the leader
                    1. Nucor
                    2. SouthWest

                      3. Mercedes beating Cadillac

6) Can a company practice cost leadership and differentiation at the same time
   without getting stuck in the middle?
      i) A few - Toyota. Dell. JetBlue.
      ii) How can they do that?
          (1) New technology
          (2) Quality is free

       iii) You need a coherent policy that really will address customer needs better
            than others.
            (1) Last semester we made a list of companies that succeeded in doing both at
                once and we noticed that a lot were companies like Toyota or SouthWest
                that started out mostly focused on cost and moved up by doing what they
                did so well that they were better than the people who started out seeking
                differentiation. SouthWest is a lot better than American Airlines.

7) So how do we understand the problem of being stuck in the middle.
      i) Typically companies that we find “stuck in the middle” are companies that
          had a solid strategy at one point.
      ii) Then they get attacked, from above and below, like Holiday Inn.
             (a) Liz Claiborne – starts with a clear strategy: professional women‟s
                 clothing. Focused differentiator.
                 (i) She succeeds. Everyone sees what a good business that is.
             (b) So just as Holiday Inn gets attacked at the top by Hilton and from
                 below by Days Inn,
                     1. Top designers [Anne Klein, Donna Karin] come in with lines
                         that are just a little bit better, compete directly with Liz
                     2. Knockoffs in JC Penney.
                     3. The situation could be called: squashed into the middle.

               (c) New CEO solved it with what is really a corporate-level strategy.
                       1. Buy makers of lower-cost clothes.
                       2. Continue selling Liz Claiborne through top stores.
                       3. Do own cheap stuff.
                       4. Own both a differentiator (Liz Claiborne) and a cost leader
                          (Crazy Horse)
       iii) Another way to get stuck in the middle is to start by being focused and try to
            grow too rapidly – People Express.

8) If we take these ideas seriously, they give us one very interesting result.
   strategic groups – in the same industry, pursuing same generic strategy
       i) Drug industry –
           (1) Merck, Pfizer, others – major drug companies
           (2) Generic makers

               then there may be some other common strategies in an industry that aren‟t
               described by Porter‟s characterization
           (3) Over-the-counter makers – Lederle

       ii) Hotels
           (1) Hilton, Marriott, Sheraton
           (2) Days Inn, Best, Super 8

       iii) Cars
            (1) GM Ford Chrysler Toyota
            (2) Daimler, BMW, Jaguar

We’re starting here to examine specific choices managers make in actions and in
business models. We’re looking at specific strategies and understand how they differ
and where they lead.

Neither the generic strategies nor game theory are complete, simple answers. Next
week we’ll look at how a generic strategy has played out for Wal-Mart and look at the
human side of making something like this work.


Dropped matter

9) Second, if we look at how the generic strategies play out through the evolution of
   industries, it can tell us quite a lot.
   a) Growth graph
      If you look for a simple growth path like this, and you try to apply these ideas
      mechanically, you‟ll have trouble.
      i) But the pattern gets broken by shakeouts at any time.
      ii) Se this as a rough description, it‟s very useful.

          Investment strategies
  b) Embryonic industries – Do our generic strategies tell us much about embryonic
     i) Maybe not. The strategy that just about everybody has to practice in
          embryonic industries is typically share building. Create a viable distinctive
          competence that will win you customers.
  c) But then after, phase and competitive position interact.
     i) Growth – You want to grow, achieve strong position for coming shakeout
          (Growth strategy). It‟s at this stage that you will
          consolidate your emphasis on cost leadership or differentiation.
              (a) But that‟s expensive
          (2) Weak – take market concentration – specialize in something (i.e., go to
     ii) Shakeout – strong – share-increasing strategy
          (1) Weak
              (a) Market concentration
              (b) Harvest
              (c) Liquidate
     iii) Maturity –
          (1) Hold and maintain – keep trying to get better
          (2) “Profit strategy”
     iv) Decline
          (1) Market concentration consolidate choices (differentiators)
          (2) Harvest/asset reduction (cost leaders)
                      America OnLine
 Stuck in the middle   Generic Strategies - any firm can adopt     Strategies & stages
 Holiday Inns                                                      Embryonic – share-building
                       Cost leadership                             Stage & competitive position interact
 Below – Motel 6           Operations, purchasing is key           Growth – Achieve strong position for
  Holiday - Hampton                                                      coming shakeout (growth strategy)
 Above – Hilton        Differentiation                                If weak – market concentration strategy
  Holiday - Crowne         Key: functions that customers                    (specialize)
                                       care about                  Shakeout- Strong – share-increasing
                           Market segmentation                              strategy (take share)
                                                                      Weak – market concentration
                       Focus - on a segment (group of customers)            or harvest/liquidate
                                                                   Maturity – Hold & maintain
   Strategic groups                                                           “Profit strategy”
                                                                   Decline – market concentration

         graph here,
         then erase

year                                           Maturity






                      Generic strategies – strategies (business models) anyone can adopt
Stuck in the middle   Cost Leadership                        Differentiation                 (Focus)
Holiday Inns
                                                                           Focused            Focused
Below – Motel 6                                                          cost leadership   differentiation
 Holiday - Hampton
Above – Hilton                Both cost leadership and differentiation
 Holiday - Crowne


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