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.
BASIC REVISED OUTLINE
Put strategies on board
Get examples of businesses following some of the strategies.
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
Cost leadership and differentiation.
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?
(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.
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.
(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.
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
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
(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
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
(1) Hilton, Marriott, Sheraton
(2) Days Inn, Best, Super 8
(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.
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.
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
(a) Market concentration
iii) Maturity –
(1) Hold and maintain – keep trying to get better
(2) “Profit strategy”
(1) Market concentration consolidate choices (differentiators)
(2) Harvest/asset reduction (cost leaders)
OLD BOARD PLAN
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
NEW BOARD PLAN
Generic strategies – strategies (business models) anyone can adopt
Stuck in the middle Cost Leadership Differentiation (Focus)
Below – Motel 6 cost leadership differentiation
Holiday - Hampton
Above – Hilton Both cost leadership and differentiation
Holiday - Crowne