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Generic Strategies

Lessons from Crown Cork & Seal and

Matching Dell
There are two major routes to competitive

Low Competitive Different-

Cost Advantage iation
The impact of positioning on firms’ profits

 10-20% of variation in firms’ profits are explained by

industry effects

 30-45%, of variation in firms’ profits are explained by

within-industry “firm” effects
 result of strategic position
 relative cost position
 ability to differentiate and capture value from delivering higher-value
added products (relative to industry competitors)
The interplay between cost and differentiation in
generating competitive advantage

Industry Successful Successful Competitor with

average differentiated low-cost dual advantage
competitor competitor competitor
How to Gain Competitive Advantage in a
Structurally Unattractive Industry

 Find attractive growing segment of the market

 Provide quality of service leading to WTP comparable
or above others in the industry
 Outperform industry on costs
 Interlinked strategies
Dell’s Low-Cost Strategy

Dell Compaq

Dell’s Approach

 Attractive segment:
 Educated business consumers
 Raise (or equalize) WTP:
 Speed of delivery
 Reliability
 After sales service
 Lower costs:
 Direct channel
 Build to order
 Speed of delivery
Crown’s Approach

 Attractive segment:
 Hard to hold
 International
 Raise (or equalize) WTP
 Sale engineers
 Co-location
 Rapid delivery (30 days inventory)
 Lower costs:
 Co-location
 Owner-operator mentality
 “Lean and mean” SGA
Complementary ways to view the creation of
competitive advantage

 Hamel and Prahalad (1990), “Core Competence of the Corp.”

 difficult-to-imitate core competences should be built
 foundation of core products, which in turn support new product development and
 Collis and Montgomery (1995), “Competing on Resources”
 possessing unique, valuable resources, which cannot be procured in
efficient factor markets, is the key to out performance
 can be physical (a low-cost mine), intangible (brands, capabilities, know-how, etc.)
 Porter (1996), “What is Strategy?”
 trade-offs are required
 systems of interlocking, complementary activities which are guided by these
tradeoffs generate sustainable competitive advantage

Note the common emphasis on barriers to imitation!


 Quality – Vertical Differentiation

 Attributes that all consumers agrees upon, such as: (underlined product
indicates the product that everyone prefers at a given price)
 Pentium 4 2.66GHz vs Pentium 4 3.2 GHz

 2004 BMW 330i getting 28 mpg vs 2004 BMW 330i getting 24 mpg

 Anti-biotic that makes you nauseous vs. Anti-biotic with no side effects

 Variety – Horizontal Differentiation

 Attributes that consumers have different preferences about:
 car color
 sweetness of a drink
 country music vs. hip-hop vs. classical
 time of day at which a direct flight from SFO to JFK leaves
 location of a grocery store
Product Differentiation Experiment: Deciding
where to locate in a differentiated market

 Consumers are located on a number line from 1 to 63.

 There is one consumer at each location. (i.e., one consumer
at location 1, one consumer at location 2, …, one consumer at
location 63).

 Every consumer will pay $1 to buy one unit of the

product and will buy it from the nearest store. If there
is a tie, then a consumer buys fractional units from all
the equally distant stores.
 A monopolist operating in this market will earn $63, since all
consumers will pay the monopolist $1
Product Differentiation Experiment (2)

 Costs:
 It costs nothing to supply each consumer
 It costs $20 to set up shop

 Strategy:
 If you decide to set up shop, you get to choose a location on
the number line (1 through 63)
 You must pick an integer (i.e., a counting number 1, 2, 3, … not 3.5)
Product Differentiation Experiment (3)

 The game:
 First person to raise a $20 bill pays me and gets to choose a
 Your entry decision and choice of location is public information
 Second person to raise hand pays me $20 and gets to choose
a location
 etc.

 You can locate anywhere on the number line. There is no

prohibition against co-location
Product Differentiation Experiment (4)

 Examples of strategies and payoffs:

 Two entrants, one locates at #1 and one locates at #63. Both
receive a gross payoff of $31.50, net profit $11.50

 Two entrants, one locates at #1 and one locates at #2.

Company at location #1 gets gross payoff of $1 (net $-19) and
company at location #2 gets gross payoff of $62 (net $42)
Equilibria of the Product Differentiation
 Requirements for an equilibrium
1. All players must make a positive profit
2. No one else in the room can make a positive profit by entering
3. No entrant wishes to move to another position

 Equilibrium #1: Three entrants

 11, 32, 53
 Each player makes $1

 Equilibrium #2: Two entrants

 21, 42
 Each player makes $11.50
 (if constraint 2 is changes to no one else makes a loss, then 20 and
43 are also acceptable positions)
Intuition from the Product Differentiation
 Between two entrants
 Entry is profitable if players are more than 40 units apart

 Between another player and an endpoint

 Moving toward the other player increases market share
 Moving toward the other player makes it more likely that someone
else will enter

 Optimal location is to enter in a way that guarantees that you

make a profit and that no one else can enter profitably
 How about location 21 as a starting point?

 In real games (as opposed to ideal ones) players make mistakes

 Good strategist will take advantage of these mistakes