BUS 189 – Jan 11, 2011

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Improve SJSU
: Mkt Penetration
: How would they use Mkt Development?
: built other campuses as extensions ← getting into new mkt w/same product
: start offering new classes/majors ← e.g. now you can major in entrepreneurship
: Horizontal Integration
: if we were a biz and univ having financial problems as it were, maybe shed campuses
down
: backward vertical integration—univ printing some textbooks
If could demonstrate and could apply them, get 5 pts per strategy

Operating Environment = CCCLS

77 points possible; High Score: 72

Pass/Fail point = 50%
65+ = A 6
58+ = B 2
51+ = C 14
39+ = D 9
<39 DNP 1

77 points possible b/c #27 does not have right answer

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3 options next wk

(1) STATUS QUO

Mon we have holiday
Tue we do Ch09
Wed/Thu = Case Presentations
Fri = Final

(2)
Tue: Ch09
Wed: Final
Thu/Fri = Presentations

(3)
Fri of this wk do Ch09
Tue of next wk to do Exam
Wed of next wk – entire 3 hrs for final touch on presentations
Thu/Fri: presentations
[maybe no Wed off and just do Wed/Thu presentations? No]

CHEAT SHEET for 2nd Exam

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Presentation of Ch09 on Tue as planned
Final on Wed
Thu/Fri are Case Study Presentations
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3 essays from Write Experience?
1st essay is due Fri (Jan 14)
2nd essay is due Tue (Jan 18)
3rd essay due last day of class, Fri (1/21)
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PRESENTATIONS 1/20 + 1/21
8:30, 9:30, 10:30 each day

1/20 1/21
8:30 Boeing Blockbuster

9:30 Apple *3M*

10:30 Matshushita Amazon

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CH05

BUSINESS LEVEL STRATEGY AND COMPETITIVE POSITIONING

“All men can see these tactics whereby I conquer but what none can see is the strategy out of
which victory evolves.” ~ Sun Tzu (military leader)
Art of War inspired Napoleon

BUSINESS LEVEL STRATEGY

* The plan of action that managers adopt to use resources and distinctive competencies to gain a
competitive advantage

FIGURE 5.1

Focused, low-cost leader

: Southwest airlines ← advertise low-cost
: only fly to certain mkt's ← not necessarily low to the masses
 : stick to that niche, mkt ← low cost to a certain segment
Cost-leadership strategy
: Wal-Mart
: caters to the masses
: everyday low pricing
Differentiation strategy
: Toyota
: not necessarily a low-cost vehicle where purchase price is concerned
: differentiation strategy is on qlty and reliability
: when we think of it, a vehicle 200 000 mi. life
: will be willing to pay a bit more b/c differentiated themselves b/c qlty carmaker
focused differentiation strategy
: Porsche
: makes exotic race vehicles or SUVs
: niche segment that wants fast or high-end vehicles
: that's what they produce for their customers
: not competing w/Toyota or Ford
: consumer that wants a race car; status symbol to it

WHAT? WHO? HOW?

* Basis of choosing a business level strategy by determining how well a company can compete
* What customer need will be satisfied?
* Who is to be satisfied?
* How will the need be satisfied?

FIGURE 5.2
When competitors want to come into our industry, how do we keep them out?
Philosophies in Ch05
: product proliferation – almost to diversify the products you have
: not making a car and then going out to make a blender
: know your clientele
: e.g. in 70s, 80s, GM and a lot of US auto makers, made gas-guzzling cars
: roomy cars, big cars
: didn't see the trend may change
: niche not being fulfilled by GM or any other American car MFR
: Japanese automakers found this ← started this niche
: GM didn't have product proliferation to “maybe we should start bldg
small cars” ← small, compact vehicle
: gave opportunity to competitors for that niche
: price cutting
: initially start off w/high prices; short-term profits
: going to start cutting prices to capture mkt share
: maintaining excess capacity
: exactly what it sounds like—industry or co.'s will make excess capacity,
inc prod'n; how does this deter someone from going into your industry?
: if you enter into my industry, I'll have excess capacity to enter price war
: keep that capacity, so you can cut prices, they won't make a profit (won't
be able to cover costs)

CUSTOMER NEEDS
* Desires, wants, or cravings that can be satisfied by means of the characteristics of a product or
service
e.g. Porsche

PRODUCT DIFFERENTIATION
* The process of creating a comp adv by designing goods or services to satisfy customer needs
* The greater the differentiation, the more money a customer will pay for the product
: Porsche, Toyota

FIGURE 5.3 FOUR NONPRICE COMPETITIVE STRATEGIES

working at Apple vs HP ← mkt penetration

product proliferation = diversification ← diff name for same strategy

: starting a campus in Dubai that offered a degree we don't offer here at SJSU
: a no. of univ's are doing
: vocational ctr / trade ctr (if prod is new and mkt is also new)
: new mkts can be geographic, focused on customers (economic)
: in order for a new product, doesn't necessarily mean not offered by other ppl, but just
not by us
: online classes to get a degree
Verizon, by the end of this mo., intends to offer the iPhone
: for them, it's a new service – good product development service

GE: TV networking is not new, but new for them

: 1st light bulbs, then medical, then TV, then pharm, etc

New Bldg's?
Mkt development: new mkt to that co.
: SW is flying for the 1st time into Atlanta (by virtue of their acquisition of TransAir)
: new mkt for SW ← growth thru mkt development
: opening new mkt, but existing service
: mkt development strategy
so not new to the Universe, but new to the Co.

CUSTOMER GROUPS
* Market Segmentation
* The way a company decides to group customers
: demographic/biz or non-biz individuals
: segment by individuals (Cadillac doesn't compete w/Chevrolet)
: Phone co., for e.g. Blackberry
: biz-minded individuals; access; work at all times
: Torch—not so hi-tech, for non-biz individuals
: NexTel = direct connect (instead of walkie-talkies)
• It is based on important differences in their needs or preferences

ALTERNATIVES TO MKT SEGMENTATION

Who wants what when
*Concentrate on serving only one segment
: NexTel has a direct connect w/touch tone phone ← serving only one segment
: ppl that use direct connect but feature touch tone

DISTINCTIVE COMPETENCIES
* Decide which distinctive competencies to pursue to satisfy customers
* Decide how to organize and combine distinctive competencies to gain a competitive advantage
: gain adv on particular prod; make accessible to customers
: what you do on SW of SWOT Analysis

BUSINESS LEVEL STRATEGY

Cost Leadership
: co.'s try to produce product at lowest cost
Differentiation

FOCUS: focus on certain grp/segment ← focus on them more and provide good service to that
segment

COST-LEADERSHIP
: McDonald's : dollar menu, dollar McChicken
e.g. McDonald's sold 10 McChickens at $1 each
BK sells 5 at $2 ← however, attract more customers (Mickey-D's)

Adv/Disadv
(low price gets rid of the substitute product) ← advantage

Aneurin Bevan (elected as Helath Minister in 1945, England)

“We know what happens to people who stay in the middle of the road. They get run over.”
: biz world
: compete on cost or differentiation, or higher quality product, but not in the middle
 : keep scanning the environment
: got to move w/the traffic ← scan environment and look for opportunity to move
co. ahead
: e.g. Blockbuster went bankrupt; 1997 Netflix came on ← BB lost mkt
share
: if they had scanned environment, would not have gone bankrupt

DIFFERENTIATION STRATEGY
differentiated co. can chg premium pri¢e
: Think about way Amazon introduces Kindle
: 1st of its kind, was $600
: then cut to $300
: now it's $200
when they had a monopoly :
: now there are other products on mkt can compete w/it, take adv of 1 st mover position
and presumably lower costs, lower barriers b/c price is much lower
: Amazon realized this product was a success; R&D spend enormous amt of $$ to
develop prod; then management allocates resources “how can we make this prod
cheaper?”
: now we've taken care of ONE segment of pop'n, but let's go after ppl who
actually read, but can't afford $400 product
: still haven't lost mkt share
: Kindle a threat or troubled entity to publishers
: lot of publishers enter and give access to e-books to students (etc)
: in the long run, making more $$
: make more $13.99 at electronic version than $28 for printed
: save costs from printing
When Netflix came along ← storage fees for discs (etc) BB

DIFFERENTIATION STRATEGY
Adv/Disadv
Virgin America
: main competitor is JetBlue ← also offer cable TV on flight
: they provide an environment (purple light in cabin); doesn't feel like a flight
: build customer loyalty
: when fly from now on, look at Virgin website before anybody else
: if anybody else is to imitate them, will have to do research to do the same
: disadv: maintain uniqueness in customer's eyes

COST LEADERSHIP AND DIFFERENTIATION

: most profitable product ← what you'd like to have
: co.'s that adopt this strategy, they do it thru technological advancements (flexible MFG
technologies) ← Chrysler at one pt., built >20 models; implemented 3 platforms; able to save in
those costs
: not only able to save, but differentiated co.
: at one time, Chrysler's profit per vehicle was highest of 3; then Mercedes-Benz comes
along and messes that up

FOCUS STRATEGY
: serve needs of limited customer grp
: can concentrate on geographic area
: co. can implement focus strategy
: the rich, the young, or the adventurous and focus on that alone
: Porsche ← initially only built sports car, 2-doors
: not till recently till came up with Cayenne (SUV) that competes with BMW's X5
and Range Rover
: co. that implements Focus strategy just initially test the mkt, and when
successful, go into other mkt share
: Panera, 4-door sedan; compete with BMW 7 series
can be focused, low-cost strategy as well

Adv/Disadv
: loyalty
: pwr over buyers – can dictate price
-
b/c they don't have economies of scale b/c not producing high volumes; suppliers have more
pwr over these firms

STRATEGY IN FRAGMENTED OR GROWING INDUSTRIES

to understand this strategy, it's important we understand what fragmented and consolidated
: small co.'s v 1 or 2 powerhouses
: if you have a single store, you don't have any buyer pwr
getting something custom-MF'd for you at cheaper price, difficult
: get CHAINS
big co.'s that can actually MFR specialty products (will be able to negotiate on price)
: Franchising
: int'lly – may not be the same but do their best
horizontal mergers : buy out competitor ← consolidate mkt
: e.g. Safeway buying out a few 7-11's that may be competitors/threats on a corner/street
they want to move into
using the internet: eBay

STRATEGY IN A MATURE INDUSTRY

When an industry is mature? What does it mean?
: it's saturated; flat growth (not many ppl coming into mkt; some leaving, but not too much)
: important to maintain comp adv but still be able to reap profit
competitors are trying to take away mkt share; Target and KOHL's
: always be dynamic; bring something else new; open an hr earlier, close an hr later
holiday season midnight openings
* Interdependent companies adopt strategies to:
* Manage rivalry
* deter entry

IS THE INDUSTRY VIABLE FOR NEW ENTRY?

: what most co.'s do when planning on going into an industry they are exploring
: before go and get $$, see if it's viable, feasible to do it
: use SWOT Analysis
: identify and be realistic about ourselves, our co., resources we have
How can we use each strength? Identify each one, but how to make it better?
Stop weaknesses? Explore our capabilities
Exploit Opportunities? How can we be the best and attack this industry that we want to get into
and be the best at what we do?
How can we defend against each threat?
: out of whole SWOT analysis, “most important” (selon Rene)
: sustained comp adv

FIGURE 5.4 Factors that determine the intensity of competition in declining industries

How fast is product leaving mkt? How soon are they getting tired of product? How soon come
up w/revision or new model? ← intensifies competition
-
Height of exit barriers
-
level of fixed costs
: how much does it cost us to run this co.? How much is labor?
-
Is this product a commodity? What type of product is it?
e.g. Salt ← anywhere, any brand and still does main fn
competition is based entirely on co$t ← commodities are not differentiated from one another
: almost entirely based on price (which makes it more intense)

Declining Industry – profit rates tend to fall (competition intensifies)

STRATEGY IN DECLINING INDUSTRY

Leadership strategy: When mkt is shrinking, want to take over by taking mkt share off
competitors
Niche strategy: phone industry; one tiny pocket where you can still make profit; let's go there
and make the most out of this little pocket
: e.g. co. that makes vacuum tubes (replaced by transistor 20 yrs ago)
: very small niche (not nearly as big as it used to be); still some co.'s b/c frankly have no
competition; make profit on every item they sell
: vacuum tube is primarily in welding equipment (not price sensitive since only 1
or 2 places to buy it)
: co.'s like that can make a few bucks in a very small niche
Harvest strategy: although industry is declining, if possible, some ways to optimize cash flow in
short period of
: don't invest in biz anymore; no capital to go into biz; no capacity; not maintaining bldg,
 pulling out as much cash as you can in relatively short period of time to liquidate biz;
stop investing in it; no capital going in; everything you're taking out is cash
: to continue running at bare minimum you have
: don't invest but doesn't mean you don't operate
: don't hire anymore ppl
: e.g. when a co. is in decline; maybe you lay off some ppl; what is the minimum amt of
resources that I can continue to produce products for a while; keep key ppl, $$ still
coming in, but eventually after a year or 2 (maybe even 6 mo.'s), run out of mat'ls, don't
want to invest more, then need to sell biz (divestment strategy)
: suck as much profit as you can before industry dies (or w/e reason)
Divestment Strategy: sell off its biz to others; get rid of it (either by selling it off or liquidating)
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Costco's strategy of buying products with well-known brand names in bulk and selling them
with little service in order to minimize the cost of offering them to the mass market is most like
which of the following generic strategies?
a) cost leadership
e.g. of chain strategy (chain vs franchise)

Which of the following is a factor that can render a firm's differentiation position ineffective?
a) All other products in the market are more expensive
b) Competitors are able to imitate the firm's distinctive competencies
c) Other firms spend more on advertising
d) Most firms in the industry focus on reducing price
e) all of the above

Wamco Trucking competed by offering low cost transportation on one single route—Chicago
to Philadelphia. This is an example of
b) focus cost leadership
(b/c say “low cost transportation” rather than just)
most firms we are familiar w/ compete based on differentiation
best e.g. McDonald's ← both differentiated and probably has lowest cost in industry (Taco Bell?)
Most of McDonald's growth in early stages b/c both low cost and focus

The Concorde used to offer high-speed luxury air travel on only a few international routes.
This strategy was most consistent with
(if it isn't low-cost, it has to be differentiation ← only other option; then you decide are they
serving the avg customer and everybody or focused on a niche? geographic/economic, serving
particular mkt in some way)
e) focus differentiation (then they are focused differentiation or focused low-cost)
(should be able to ID generic strategy of any biz)

The Cheesecake Factory offers large portions of high-quality food, and restaurants with a nice
ambiance, located in high-traffic areas. This strategy is most consistent with
c) differentiation (basically serving everybody: “high-traffic areas” not targeting
anybody; no “special locations”)

Focus differentiation is associated with a focus on

e) providing premium product features that appeal to a narrow market segment

Nike spends a lot of money on advertising to create brand image as well as research and
development to create high-technology advances in sneakers. It produces more than 150
variants of its sneakers to penetrate a very wide array of market segments. This strategy is
most consistent with
c) differentiation (b/c “wide array of market segments”)
would also be e.g. of product proliferation? no. used it to replace “diversification”
Nike does not have a diversified product line; everything is footwear

Cost leadership is associated with a focus on

a) reducing costs and penetrating a large market segment

(providing premium products at a low price = low-cost differentiation)

If technology offers a radically new way of achieving great efficiencies in materials

management for mass-market products, this would most likely pose a threat to
a) a cost leader.

Amazon vs Borders/Barnes & Nobles

: borders is trying to buy B&N

happened in auto industry: Chrysler bought American Motors

Which of the following is true?

a) A cost leader typically offers a high level of market segmentation
b) differentiators can best reduce costs by lowering customer service
c) differentiators do not have to worry about price
d) a firm must pay close attention to how the other firms in its strategic group
compete
e) none of the above

differentiators don't have to focus on price, but should be aware of it

gas: there is a limit to how much more you will pay for Shell over Rotten Robbie's

When Toyota introduced its Lexus line of luxury automobiles, this put increased pressure on
firms that compete as
d) focus differentiators
focused on economic niche, and differentiated (Competes w/Mercedes, Lincoln, Cadillac,
Jaguar, Infiniti)

If managers devise strategies to differentiate a product by innovation, high quality, and

responsiveness to customers, they are likely choosing a business model based on offering
customers cost savings.
b) false
cost savings is not the same thing as differentiation

Lexus automobiles compete on price, differentiation and value.

a) true
not on price, but w/other competitors in their niche

Market segmentation is the way a company decides to group customers based on their needs
and preferences.
a) true
Product differentiation usually lowers a company's costs.
b) false

A cost-leadership strategy is focused on outperforming competitors by selling goods at a lower

cost than they do.
a) true

Cost leaders tend to be more affected by price increases from suppliers than are higher-priced
competitors
a) true
why is that? Less cost-sensitive (higher-priced competitors) therefore can handle higher prices
from suppliers

All business-level strategy plays out with rivals closely watching one another's strategic
moves.
a) true

: typically multi-divisional, single product, route

: biz lvl is not corp lvl that includes everything—includes one of several of multi-divisions in a co.
: if there is anything you would like to know about your competitors, esp in operating
environment, this is what those strategies are (biz-lvl strategies)

A company pursuing a differentiation business model aims to achieve a competitive

advantage by creating products that the customer perceives as distinct or different.
a) true
(definition)

The focused differentiator usually serves the needs of several segments.

b) false
(focused means serving only one segment)

Which of the following is not an advantage Wal-Mart achieves through its chaining strategy?
a) consolidated buying power that allows it to negotiate price reductions
b) greater market segmentation
c) economies of scale from nationwide, rather than local, advertising
d) economies of scale from sharing managerial skills across the chain
e) All of the above are advantages
: chaining has nothing to do w/it; Wal-Mart doesn't segment mkt
: what about chain in China? Diff seg?

Which of the following is an example of a chaining strategy?

a) Subway grants individual entrepreneurs the right to use its name, reputation, and business
model in a particular location in return for a fee and a percentage of profits
b) Wal-Mart and Midas have linked their merchandising outlets together with
advanced information technology, enabling them to function as one large
business entity
c) Dell purchases components from other firms and assembles them into computers
d) Coors owns its own energy-production facilities
e) Nike has expanded from producing running shoes into sports apparel and other sports
equipment
Which of the following is an example of franchising? (same choices)
a) Subway

The process by which companies increase or decrease product prices to convey their intentions
to other companies and influence how they price their products is referred to as
a) excess capacity
b) price cutting
c) price leadership
d) price signaling
e) nonprice competition

When a company concentrates on expanding market share in its existing product markets, it is
engaging in
c) market penetration strategy

Procter & Gamble produces several different brands of laundry detergent—including Tide,
Cheer, Era, and Gain—to meet the needs of many different market segments. This is referred
to as
c) product proliferation (diversification)

Fragmented industries are typically characterized by high barriers to entry.

b) false
(b/c small and many; fact that there are many entrants means barriers are low)
oligopolies ← very high barriers to entry, why there aren't more players

The chaining strategy is employed when companies establish networks fo merchandising

outlets linked through advanced information technology (IT).
a) true
(only diff from franchising is parent co. handles all chaining cx)

A price-cutting strategy can be used by a company to deter entry by other companies.

a) true

Product development is the creation of new products to replace existing ones.

a) true
may be a new product could be product proliferation/diversification

Divestment is a strategy most often used by firms in growth industries.

b) false

The intensity of competition in declining industries is greater when fixed costs are low.
b) false
lower fixed costs ← barriers to exit are low
don't have a lot of investment; frankly not good for anything else
co.'s can get out and not compete

END
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Quiz beginning of class 2mw
Quizzes ← 10% (Quiz on Ch05)
: participation (4 quizzes from here on out) / combine w/presentation + chap grade