we are making a transition into a new part of the course here the definition of strategy if you recall had three parts analysis decisions and actions and the middle part decisions is really formulated strategic decisions and this part is where we are right now our first uh chapter on that would be on competitive strategy also known as business level strategy since uh it's really at the business unit level that the competitive strategy plays out um and and then followed by uh we'll cover corporate strategy internationalizing strategy and strategic moves as part of the formulated strategic decisions like every other chapter this chapter has a number of learning objectives it's an extremely important thing to take a few moments to go over and make sure that you know what are the objectives that are set out for you in this chapter before you move forward so pause and you know reach slowly so the chapter starts with this um framework uh diagram if you will that offers us the three generic competitive strategies uh farms or business units of firms from a typology standpoint can adopt any of these three generic competitive strategies or some combination thereof the diagram also puts differentiation and overall cost leadership at um as two main you know uh competing uh generic strategies with the focus strategy uh being in the bottom part of the diagram uh which seems to be covering uh a larger space some of some space from differentiation and as well some space from overall cost leadership what's happening here is that differentiation and cost leadership strategies are the two idea you know ideological um the opposing ways of competing and then focus strategy it's not really directly contrasted against differentiation or cost leadership but rather has its own unique characteristics because focus really refers to focusing on a particular segment of the industry rather than the industry as a whole um focus strategy can have a differentiation bent or it can also have a cost leadership band so cost leadership strategy is the name is quite self-explanatory it involves low-cost position relative to a firm's peers um it requires that you manage relationships throughout the entire value chain to cut costs in differentiation the idea is to create products and or services that are unique and valued so much so that customers are willing to pay a premium for the products or services that you are offering focus strategy is not about the production process or the product characteristics but rather the target market the idea is to have narrow product lines to focus on a buyer segment or target a highly targeted geographic market the idea is to attain advantages either through differentiation or cost leadership within that buyer's segment or targeted market if you look at some examples here um it might be a little more careful it might become a little clearer uh note that the examples are at the company level but as i said competitive strategies can and usually do play out at the business unit level as in a company's multiple business units may actually have different competitive strategies these examples on this slide are of example companies because these companies uh through all of their or most of their uh business units do pursue the same cost leadership strategy so toyota is the overall cost leader in the global automotive industry and if you notice they also contrast this with by saying that it's not hyundai and hyundai does have cheaper cars but price leadership does not necessarily indicate cost to leadership that's a big lesson to pick up here um that doesn't mean that price leadership will never be associated with cost leadership often it is for example that example with uh next example of walmart walmart tends to have the cheapest prices among the regular retailers and it is also the overall cost leader in the retail industry and in contrast to for example kmart here among the differentiators you have nordstrom and the retail space you have starbucks in the cafe space you know these companies quite well and their differentiators through extraordinary service or extraordinary product quality customer experience etc um companies that are pursuing a focus strategy uh include uh you know fancy brands like uh the lamborghini uh the performance car maker with extraordinary premium uh targeting the performance car enthusiasts as special niche market there it could also be just you know an essay grocery store like patel brothers that sells groceries mainly to the south asian market and their deep knowledge about the south asian markets needs um enable them to do this a lot better than any of the larger grocery uh companies uh and thereby they're they succeed that way so it's not like focus strategy needs to be a very fancy brand all the time it could be a a very regular brand as well if we compare the different kinds of strategies based on research it seems it seems that the return on investment in differentiation strategy and cost leadership strategy are roughly the same if you notice here if you can successfully pull off both together it's maybe a little bit more but not a whole lot more but if you really try to do both together but failed it's often known as stuck in the middle which is the right far right column you see that your return on investment can really go down a lot and of course you can't really quite compare these with the focus strategy numbers return on investment numbers because focus strategy is a is really for companies that are much smaller um compared to the traditional differentiators or cost leaders and it is expected that those rois would tend to be a little should be a little smaller anyway but if even among them we noticed that the cost based focus strategy seems to have been seems to have a slight extra edge over the differentiation based focus strategy so overall cost leadership involves a tight set of interrelated tactics to cut costs um could include in all sorts of tight cost and overhead controls mechanisms uh could include avoidance of marginal customer accounts so you only focus on mainstream customers cost minimization in all activities in the farm's value chain which will require a thorough examination of the value chain one of the popular um ways to [Music] cut costs is also through the it's by writing down the experience curve um it refers to how businesses learn to avoid mistakes and thereby lower costs as they gain the experience with production processes with experience the unit cost of production decline in most industries as you produce more uh over time we're here we're not really talking about you know producing more at any given point in time but producing the same amount over and over and over again is the focus on experience curve before we move forward another concept that is relevant when comparing cost leadership or differentiation strategy needs to be addressed here it's that it's the concept of competitive parity that when you're pursuing cost leadership if it comes at the expense of you becoming your products becoming you know significantly inferior to other companies products then you're losing competitive parity similarly when you pursue differentiation if the expense increases are so much so that you are losing some any kind of comparability with products uh other general products in the in the competing space then you're losing competitive parity in the cost side and you don't want to lose your competitive parity in the side that you're not focusing on with your strategy or you're not con you know you're not dedicating to your resources with your strategy because competitive parity on the side that you're not targeting will then give you that extra edge with your strategy be it cost leadership or differentiation so let's look at the experience curve diagram here each of the curvilinear lines is capturing economies of scale so as you are producing more at a given point in time you're writing down the cost curve because of economies of scale per unit manufacturing cost is going down because the fixed costs remains fixed but your production volume is increasing so at any given point of the fixed cost is being divided by a larger number and therefore per unit fixed cost portion is decreasing and that's why you see from 90 cents to 81 672.9 in the top most curvy linear line to capture the experience curve you know that's attributable attribute to uh learning we need to restrict ourselves to the same volume again and again and again over time so let's assume that in four iterative periods we could only produce 1 million units and no more and according to this graph this diagram our costs could go down from 90 cents to 80 cents to 70 cents to 60 cents is the it's it's those dotted vertical lines along which we're going down because we're producing more and more and more we're learning from our experience as to what not to do to save resources of course this is just a diagram to make a point uh normal experience curves is not going to be you know producing such amazing numbers where in through four iterative turns your costs are going to go down at such amazing rates uh the rate at which your costs go down tend to uh decrease quickly so um an overall cost position does help by neutralizing the five threats uh we were exposed to in the fight forces model uh it'll protect a farm against rivalry from competitors uh it'll protect the firm against powerful buyers provide it'll provide more flexibility to cope with demands from powerful suppliers for input cost increases and provides substantial entry barriers from economies of scale and cost advantages and also it'll put the farm in a favorable position with respect to substitute products however there are some pitfalls too much focus on here the word focus we're using as a regular word not the focus strategy kind of focus that's not the word here uh too much attention on one or a few value chain activities um where we can cut costs may actually result in a neglect of other value chain activities uh all rivals share common input or raw material and therefore other it might be rather easy for rivals to imitate uh the focus sorry the cost leadership strategy that's the source of your competitive advantage um and we mentioned the competitive parity issue earlier a lack of parity on differentiation can be a problem because that's not your area of attention and if you lose competitive parity in that area then you become weak and your advantages from cost leadership can largely get neutralized erosion of cost advantages when the pricing information available to customers increases is another issue that can be a problem for cost leaders differentiation strategy uh is a firm's genetic strategy based on creating differences in the firm's product or service offering by creating something that is perceived industry-wide as unique and valued by customers this could be in the form of you know some kind of prestige or brand image some new technologies some kind of innovative aspect of the comp to the product some new features some extraordinary customer service some extraordinary dealer network and convenience it could be a range of things that can give rise to this unique offering or differentiation differentiation will improve competitive position by creating higher entry barriers due to customer loyalty also it will provide higher margins that enable the firm to deal with supplier power it will establish customer loyalty and hence less threat from the substitutes differentiation strategy also has a set of pitfalls uniqueness may be there but they may not be really valuable differentiation may not give rise to true value for the customer there is also a possibility of having too much differentiation more than what customers are at that very moment willing to accept uh it's possible to have it too high of a price premium such that you just simply lose all your or mo a larger chunk of your customers despite having a great product uh differentiation that is cheaply imitated could be a big threat uh it's not really real copying but on the surface copying where you know um the product feature that makes a product really um you know innovative cannot perhaps be copied by or imitated by rivals but they can quite cheaply imitate the look of the product and thereby um convince a large chunk of the buyer group to buy the knockoff if diffusion of brand identification through product line extensions could be a potential pitfall and then also perceptions of differentiation when they vary between buyers and sellers that could also be a problem for differentiation strategy so here's our first question of in this chapter and as you know i ask you to take a moment to answer this in case you were if still wondering the answer choice was b decreased emphasis on competition based on price so that takes us to the last strategy uh last of the the third of the three generic competitive strategies that which is focus strategy focus is based on the choice of a narrow competitive scope within an industry you're not trying to serve the entire customer group all throughout the industry but a very unique part of the industry the farm selects a segment or group of segments uh in marketing we call uh you call them the niche group and the farm tailors its strategy to serve them the farm achieves uh competitive advantages by dedicating itself to these segments exclusively and it really depends on whether your resources the farm's resources or capabilities are uh capable of handling the needs of the niche market focus strategy could have a cost angle or could have could also have a differentiation angle so focus strategy also can improve the competitive position of the company it can create barriers of either cost leadership or differentiation or both uh it can be used to select niches that are least vulnerable to substitutes or where competitors are weakest vis-a-vis the company that's serving the niche as a focuser the pitfalls of focus strategy are quite severe if they happen um for example the erosion of cost advantages within the narrow segment maybe some technology comes in and just wipes out the extraordinary advantages that the focuser had that's a big problem could be that the focused products and services still are subject to competition from new entrants and from imitation that happens all the time you know just because patel brothers is selling indian grocery or south asian grocery doesn't mean that if you go to a large chain i d'agostino or sea town or key foods it's not like you won't find a few of the uh you know condiments that you could have found in patel brothers also there there will probably be uh you know a few feet in a within an aisle that will be dedicated to such condiments and so yes there will be some competition coming from larger chains focusers can become too focused to satisfy buyer needs so much so that um it might be the effort might not yield enough of a return it's also possible to have combination approaches become whenever we're talking about combination approaches we're talking about combining cost leadership and differentiation um the book introduces us to three types automated and flexible manufacturing systems is one exploiting the profit pool concept for competitive advantage is another and then coordinating the extended value chain by way of information technology is yet another one even the combination approaches to strategy have pitfalls firms that fail to attain both strategies may end up with neither having a good cost leadership or differentiation and can become stuck in the middle underestimating the challenges and expenses associated with coordinating value creating activities in the extended value chain can be a big problem and then miscalculating sources of revenue and profit pools in the firm's industry could also yield significant problems book then introduces us to how internet can help a low-cost leader how internet can help a differentiator and and how internet can help a focused strategy pursuing company so since those are application aspects uh it may be a good good idea to uh read the stories that are shared in in the textbook we're then introduced to the concept of industry life cycle this is relevant because uh in in this chapter because the the different stages that um an industry goes through [Music] have unique characteristics such that in certain stages certain kinds of competitive strategies become more prevalent and more useful so an industry really goes through some we usually look at the strategy literally looks at it as in four broad stages the introduction often known as emerging or embryonic stage then uh not emerging actually uh introduction or the embryonic stage the growth or the emerging stage maturity stage and the declining stage we're not going to go through the whole table but let's look at the first call first row there for generic strategies you'll notice that the introduction phase of the industry life cycle is really where we often will see a lot of differentiation well the same goes for the growth stage of the life cycle it's only at the maturity stage of an industry that other strategies start to become important and relevant overall cost leadership starts to become a very important strategy by this time and then in the declining phase it's overall cost leadership as the mainstay and some focusers may come in and figure out a way to survive in such a space these are massive generalizations so uh you should also think about the possibility that it of other strategies in any of these stages but you know only generally speaking in introduction differentia and growth stages differentiation is more common in maturity both differentiation and cost leadership are common and in declining phase cost leadership and focus are more common than differentiation here's another question and in case you're wondering if you chose answer d you as in david you got the answer correct so what are these different industry stages that we just talked about and we just mentioned introduction stage or the embryonics it's the first stage of the industry life cycle characterized by new products that are not known to customers poorly defined market segments unspecified product features low sales growth rapid technological changes operating losses and a need for financial support so the goal is to develop product and get users to try them which and then to generate exposure so products become standard these are the strategic objectives of farms when the they're in an industry which is in the introduction stage the growth stage is the second stage of the product life cycle and it's characterized by strong increases in sales growing competition developing brand recognition and a need for financing complementary a need for financing complementary value chain activities such as marketing sales customer service and research and development firms that are competing in an industry that's in the growth stage important for them the important goals are brand recognition differentiated products and financial resources to support value chain activities maturity stage or mature stage is the third stage of the product life cycle and it's characterized by slowing demand growth saturated markets direct competition price competition and strategic emphasis on efficient operations it must be noted that that's not generally the case but it's quite possible that an industry is in a mature stage but then the macro economy is picking up in a very short way in which case even in a mature stage industry the slowing demand growth will temporarily not be an issue anyway so for a comp for companies that are in an industry that that industry which is in a mature state um key strategic objectives are reverse positioning and breakaway positioning some examples on on these by the way the reverse and positioning and the breakaway positioning uh decline uh stage is the fourth stage of the product life cycle characterized by falling sales and profits and uh increasing price competition and industry consolidation so for companies that are in an industry which is in the declining stage the idea could be maintaining their businesses could be harvesting existing businesses as they become smaller and the right time comes for a divestiture which and by divesting the company would be exiting from certain businesses that it is in at the moment and then also a possibility of consolidation merging or selling off the entire business to other companies within the industry this chapter ends with a mention of turnaround strategy which is a strategy that reverses the firm's decline in performance and returns it to growth and profitability uh through cutting significant assets significant cost areas and generating slack to invest in growth in businesses that have strong growth prospects but but the important part that i want to mention here is that turnaround strategy is actually a corporate strategy it's about direction of the company it's about decision uh it's a decision about resizing the company and size direction composition these are core issues of corporate strategy not competitive strategy and so this slide being the last slide is really more of a transition to what we'll cover in our next lecture which is corporate strategy this ends the lecture on competitive strategy