Learning Activity #1
For this exercise, and using the topic material presented in Chapter 6, please identify a trend, void or need that currently exists in the U.S. market that would be conducive to launch a new business concept via either a Blue Ocean or Bricolage strategy. ?Be sure to identify which of these two strategies you have chosen and why.
Learning Activity #2
Using the Business-Level Strategies described in Chapter 5 of this week’s readings (namely, ?cost leadership, differentiation, focused cost leadership, and focused differentiation) identify how a nationally-known company has used this strategy as part of its value proposition.?
Be sure to substantiate your selections with reference-supported commentary.
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.
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.
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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.
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
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customers or would the competitive arrows launched by Walmart and others force Target?s executives to
quiver?
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
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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.
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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).
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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.
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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
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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?
Free Press; Williamson, P. J., & Zeng, M. 2009. Value-for-money strategies for recessionary times. Harvard Business
Review, 87(3), 66?74.
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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.
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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.
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
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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
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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
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?
Street Journal, April 17, 2006.
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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
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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 clich? 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.
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.
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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
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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.
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
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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…