Agenda

• Strategy Formulation
• Business-level Strategy

• H.W. for Monday: Video Case Analysis - Business strategy at Bugatti

• Identify and characterize the competitive strategy in use at Bugatti
• Identify KSFs in the super car segment of the auto manufacturing industry
• Determine, in detail, the sources of advantage (use the VRIO framework) in
use at Bugatti and whether they are oriented to cost leadership or
differentiation
• Determine the competitive scope in use at Bugatti. In the event that you
identify a narrow approach to segmenting identify the dimensions by which
Bugatti segments its market and who it targets.
• Given what you have identified does it appear that Bugatti enjoys a
sustainable competitive advantage? If so, why? Or, why not?
• In your response, be sure to identify barriers to imitation, market location, and
market timing tactics to the extent necessary.
 The Difference Between Corporate, Business, and
Functional Strategy Formulation

Corporate
Level
Strategic Consistency

Business Business Business

Unit 1 Unit 2 ……... Unit n
(Business (Business (Business
Strategy 1) Strategy 2) Strategy n)

Mktg. Acct. HR ……... ……... ... Mktg. Acct. HR

 Emirates: The Difference Between Corporate,
Business, and Functional Strategy Formulation
Emirates
Group
(102,4-Bn AED)
Strategic Consistency

Emirates Dnata
Airlines Air Services
(92.3-Bn AED; 87.3%) (13.07-Bn AED; 12.7%)

Mktg. Ops HR ……... ……... ... Mktg. Ops HR

Formulating Business Strategy to
Create Competitive Advantage (Economic Logic)
Standard Price
product at premium
lower price from unique
product
Differentiation
Cost Advantage
Advantage
Strategy formulation occurs at two different levels of the organization. At the corporate level, the home office makes decisions about
which industries the firm should compete in, how resources should be allocated between businesses, and how to bring about synergy
between units in order to facilitate an enterprise-wide sharing of resources and core competencies. This is the essence of corporate
strategy, which we will cover after the break.

At the business-level, managers make decisions about how to compete in a specific product market. However, before strategy
formulation begins, managers are inclined to revisit their firm’s mission and objectives in order to ensure that any strategies that are
to be developed will be aligned with the purpose of the organization. That is, prior to answering the question “how do we compete?”
managers must remember why the firm exists in the first place.

Right, CORPORATE-LEVEL strategy is about how firms share resources and core competencies across business units!!! This is an
important point to remember.
The cost leadership strategy offers is one in which firms offer standard products with features or characteristics that are merely ACCEPTABLE in terms of quality-at the
lowest competitive prices: generic drugs; discount travel, etc.

Ideally, the focus is on driving costs down as much as possible without jeopardizing the minimum acceptable quality of the value proposition. Because of its lower
cost structure, the cost leader is able to charge a lower price for its products than competitors and still make a satisfactory profit. Low cost leaders are typically
volume providers who compete and win by gaining market share.

Examples include WalMart, Kia Motors, Ryan Air and ValuJet.

There is a surplus here, and it is called either producers' surplus or economic rent.1 Producers' surplus exists when actual price exceeds the minimum price sellers
will accept. Producers' surplus can appear as profit, but usually it takes a different form
Sources of Sustainable Competitive Advantage:
Cost Leadership

Consumer
Surplus
Selling Price
Producer’s
Focus on reducing cost…
Profit Total Value Created

while maintaining
Cost
quality!
Cost Leadership and Five Forces
Threat of
Can mitigate Supplier Power New Can frighten off New Entrants
by: Entrants due to the need to:
• Better able to absorb • Must enter at scale in order
cost (inputs) increases to be cost competitive
• Economies in purchasing • Must move down the learning
curve – takes time
• Can use limit pricing to make
entry unattractive

Rivalry
Bargaining Bargaining
Competitors avoid
Power of Power of
price wars with cost
Suppliers Buyers
leaders

Well positioned relative to Can mitigate Buyer Power by:

substitutes: • Predatory pricing may lead to
• Can lower prices to maintain competitor exit; create
relative value proposition monopoly position
• Can use limit pricing to make
entry unattractive Threat of
Substitutes
Strategic Cost Analysis
IDENTIFY VALUE CHAIN
• Separate critical activities which:
• Represent significant percentage of
operating cost
• Benchmark – how performed by
competitors in different (better) ways?

IDENTIFY VALUE
CHAIN

So, when is a cost leadership strategy attractive?

•When a firm enjoys significant economies of scale and learning

DIAGNOSE COST cost advantages! QUESTION: What do I mean by learning cost
advantages?
DRIVERS • Show MES on the board
•When the industry’s product is seen as a commodity (LTL motor
freight, air travel)

•Consumer demand is elastic (small increase in price corresponds to

DEVELOP SUSTAINABLE significant decline in demand)

COMPETITIVE ADVANTAGE When consumers are unwilling to pay premium prices for product
offerings (a ceiling on the market price), a firm is likely to be very
well served if it can achieve some or all elements of this cost
leadership position.
Strategic Cost Analysis
DIAGNOSE COST DRIVERS
• Structural
IDENTIFY VALUE
CHAIN • Economies of scale?
• Economies of scope?
• Process technology
DIAGNOSE COST • Executional
DRIVERS
• Work force commitment
• Product configuration (can
it be standardized
DEVELOP SUSTAINABLE further?)
COMPETITIVE ADVANTAGE
• Linkages with
buyers/suppliers
• Organizational slack
Strategic Cost Analysis
DEVELOP SUSTAINABLE
COMPETITIVE ADVANTYAGE
IDENTIFY VALUE
CHAIN
• Control cost drivers better than
competitors
• Reduce costs in activity, holding
revenues constant
DIAGNOSE COST
DRIVERS • Increase revenues holding costs
constant
• Reconfigure value chain
DEVELOP SUSTAINABLE • Exploit ‘Centers of Gravity’
COMPETITIVE ADVANTAGE
• Outsource (cost-related)
weaknesses
 Value Chain in Cost Analysis: Auto
Manufacturer

PURCHASING COMPONENT INVENTORY OF SERVICE &

SUPPLIES OF MANUFACTURE ASSEMBLY FINISHED GOODS DEALER
COMPONENTS SUPPORT

• Increase order • Produce at • Degree of •Avoid oversupply •Limit the need for
sizes M.E.S. automation warrantied repairs
•Locate close to • Location of (increase) and recalls
suppliers plants close to • Level of wages
assembly/the (decrease)
customer?
Sources of Advantage: Uniqueness
(Differentiation)

Focus on increasing value by

making the product
unique…
Consumer
Surplus
Selling Price
Producer’s
while maintaining cost
Profit Total Value Created
proximity

Cost
Differentiation and Five Forces
Can mitigate Supplier Power
by:
• Absorbing price increases
(inputs) due to higher margin
• Passing on higher supplier
prices because buyers are
brand loyal
Rivalry
Bargaining
Power of
Suppliers
Well positioned relative to
substitutes:
• Brand loyalty tends to reduce
new product trial and
switching
Threat of
New Can frighten off New Entrants
Entrants due to the need to:
• New products must overcome
switching costs (brand loyalty)
• Or be equal at lower prices
Bargaining
High switching Power of
costs reduce rivalry Buyers
Can mitigate Buyer Power by:
• Well-differentiated products
reduce customer sensitivity
to price increases
Threat of
Substitutes
Value Chain in Differentiation
• Identify drivers of uniqueness in each activity
• Select most promising differentiation variables
• Locate links between value chain of firm and customer
• Differentiation strategies are aimed at the broad mass market and
involve the creation of a product or service that is perceived
throughout its industry as unique. The company charges a premium
for its product, which is generally supported by design or brand
characteristics, the use of advanced technology, or customer service.

• In order for the firm to attain superior returns with a differentiation

strategy, the price of the product must exceed the higher costs
associated with differentiation. These firms concentrate on
innovation and developing features that customers value rather than
on maintaining the lowest competitive price.
 Value-Chain for
Differentiators

Firm Infrastructure (Celebrity CEO reinforces company brand)

Human Resource Management (Training, quality, orientation)
Tech. Dev. (Develop unique & proprietary prod. technology)
Procurement (secure high quality inputs)
(high quality inputs)

Outbound Logistics
Inbound Logistics

Marketing & Sales

(Courteous, fast,
(defect-free mfg)

leverage brand)
(fast delivery)

(Cultivate and
Operations

reliable)
Service
How to Compete: Breadth of Competitive
Scope (Arenas)
Specific
Broad Mass
Competitive strategies are designed to facilitate defensible positions within the target
Market
guise of industry competition. The first has to do with the scope of the business
market. Firms can either focus on the broad mass market with products that are
market
not specifically defined for a particular customer segment. Or, they can target a not
particular segment within a market.
clearly
In making this decision regarding competitive scope, managers must ask whether
they should compete head-to-head with major competitors for the biggest but
defined
most sought after share of the market, or whether they should focus on a niche in
which they can satisfy a less sought after, but also profitable segment of the
market.
Targeted
Any determination of the breadth of the company’s chosen market should reflect at a Niche
the firm’s ability to leverage its sources of competitive advantage in order to
serve that market effectively. That is the firm must either possess of be able to selected Market
develop the resources necessary to meet the needs of the targeted market. Of
course, falling short of those needs places the firm at a competitive disadvantage.
niche in
the
An example of a broad market product/business would Coca-cola, McDonald’s,
WalMart. These are generally price competitive products that ANYONE can afford. market
Examples, of niche markets would include BMW automobiles, Nordstrom’s, Ivy
League Institutions, etc.
Competitive Scope: Focus Strategies
• Select narrow target segments with unique needs
• Geographic location
• Customer type (e.g. demography, consumption patterns, psychological, socioeconomic status)
• Product or service features
• Firms create products valued most highly by buyers in target segment
• Configure the organization to serve target segments best
• Sacrifice incremental business in broader markets
• There are two kinds of segmentation, in general:

• Simple market segmentation is the process of dividing a market into relatively homogeneous segments with minimal overlap
that benefit firms when they use distinct marketing approaches.

• Strategic segmentation has a slightly broader focus: on identifying segments within an industry that offer the best prospects for
long-term, sustainable results. An example of strategic segmentation would the McKinsey & Company’s focus on providing
strategy consulting services in turnaround strategies, mergers and acquisitions, corporate entre. large multinationals that can
afford their exclusive services.

• A propitious (advantageous) niche is gained when a firm plays a specific competitive role that is so well suited to the firm’s
internal and external environment that other companies are not likely to challenge or dislodge it. Examples would include
Micorosoft’s dominance in software development, DeBeer’s dominance in diamond mining and distribution, Boeing and Airbus’
dominance and large commercial aircraft manufacturing.

• Another example is the Frank J. Zamboni company, which does what? Who knows what a Zamboni is? The machines that
smooth the ice at skating and hockey rinks. The Zamboni was invented in the late 40s. No one has found a substitute yet. The
Zamboni is so much a part of hockey games that people look forward to watching them at intermission. As long as the Zamboni
company can provide the quality and quantity necessary, it is not worth another company’s time to go after its market.
Generic Business-
Level Strategies

Cost Leadership Differentiation

Cost
Focus Focus
Differentiation
Generic Business-
Level Strategies

Cost Leadership Differentiation

Integrated

Cost
Focus Focus
Differentiation
Five Business-Level
Strategies

Cost Leadership Differentiation

Stuck in
the Middle
Cost
Focus Focus
Differentiation
 Business Level Strategy
Sources of Advantage

Cost Leadership
• Lower labor costs by accessing cheap
labor in South Asia (HR and Ops)
• 30% lower operating costs (F.I. and
Ops)
• “Low” tax rates (F.I.)
• Gov’t subsidies – a ‘free’ terminal and
start-up capital (F.I.)
• Airbus’ largest A380 customer and
Boeing’s largest 777 customer
(Procurement)
• World’s largest airline by passenger
miles (Ops)
Business Level Strategy
Sources of Advantage

Differentiation
• 154 international destinations (F.I. and
Ops.)
• Location! Dubai as a regional hub of
entertainment and shopping at the
crossroads of 4 continents (F.I.)
• Unique product/service features:
showers in 1st class; full bars in business
class; attractive cabin crew; ‘free’
meals; I.C.E. (Ops.)
• World’s largest industrial kitchen (Ops)
• Most valuable brand in the MENA-
status, luxury, efficiency (M&S)
 Business Level Strategy
Sources of Advantage
Cost Leadership
• Lower labor costs by accessing cheap
labor in South Asia (HR and Ops)
• 30% lower operating costs (F.I. and
Ops)
+
• “Low” tax rates (F.I.)
• Gov’t subsidies – a ‘free’ terminal and
start-up capital (F.I.)
• Airbus’ largest A380 customer and
Boeing’s largest 777 customer
(Procurement)
• World’s largest airline by passenger
miles (Ops)
Differentiation
• 154 international destinations (F.I. and
Ops.)
• Location! Dubai as a regional hub of
entertainment and shopping at the
crossroads of 4 continents (F.I.)
• Unique product/service features:
showers in 1st class; full bars in business
class; attractive cabin crew; ‘free’
meals; I.C.E. (Ops.)
• World’s largest industrial kitchen (Ops)
• Most valuable brand in the MENA-
status, luxury, efficiency (M&S)
Business Strategy at Emirates Airlines

• Does Emirates use market segmentation? If so, how?

Business Level Strategy
Competitive Scope
Narrow X Broad

How does Emirates segment its market?

• Long-haul international only (no domestic flights/limited transfers)
• Business destinations? National capitals and financial centers
• Those willing (and able) to pay a premium
• Psychographics - interested in quality service, prestige, luxury
• Demographics - Business travelers, men (primarily ?)
• Demographics (S.E.S.) - Middle and upper income people
• ‘Product/service’ features- Transit customers and those interested in experiencing
Dubai
 Why does the Apple iPhone no
longer enjoy market(share) leadership
in the smart phones industry?

PLM - 25
Competitive Dynamics and the Smartphone…

2000
Blackberry 857

1996
Nokia Communicator

1995
IBM Simon Personal
Communicator
(50,000 units sold)
Apple Revolutionizes the Smartphone…
(Part of) Apple’s Corporate Value-Chain: iPhone

Firm Infrastructure

Human Resource Management

Technological Development

Procurement Marketing & Sales

Outbound Logistics
Inbound Logistics

Operations

Service
Build-up and Erosion of Competitive Advantage
for Apple (and the iPhone)
Returns

Build-up Benefit Erosion

Period Period Period

Strategic Imitation,
move Size of duplication, and
produces Advantage attacks by rivals
competitive Achieved erode advantage
advantage

2007 2008 2010 2011 - Time

Present
Huawei Overtakes Apple in Q2
2018
https://www.counterpointresearch.com/global-smartphone-share/
How?
Nova 3 128
1,189 (Nothing)

Mate 20 Lite (64 GB)

1,520 AED (iPhone 11 2,849 AED)

Mate 30 Pro 128 GB

3,040 AED (iPhone 11 Pro4,219 AED)
 Competitive Tactics: Timing (Move
Order)
FIRST MOVER SECOND MOVER LATE MOVER
• First to manufacture and sell •Responds to 1st mover through • Enters after significant time
a new product imitation has passed
• Exploits mistakes made by 1st • Imitates strategies with
Characteristics
mover (missing segments, significant cost/uniqueness
failing to reduce operating costs) enhancements

• Early reputation as leader • Cheaper: learning costs • No product/market

• Early cost advantage accrue to pioneer
• Less risky: entrepreneurial
Advantages
risk accrues to pioneer
• Exploit previously ignored
markets
development costs
• No entrepreneurial risk
• Opportunity to change the
“rules of the game”

• Market-maker’s burden • Market lockout • Open to forceful retaliation

• Entrepreneurial risk • Overcoming barriers to • Markets may be mature!
imitation may be costly
Disadvantages

• Expertise: Tech., Prod. Dev., • Expertise: Tech., Ops., • Expertise: Ops. (cost or
What activities Marketing, and Money! Marketing uniqueness advantages),
Marketing
are needed?

STRUCTURAL BARRIERS RETALIATION

• Exclusive contracts with suppliers and buyers • Use limit pricing
Defensive • Use branding to raise buyer switching costs • Carry excess capacity
• Secure property rights
Tactics
• Limit outside access to trade secrets
 Who are the 1st, 2nd, and
late movers in this industry?
 Competitive Tactics: Market Location

DESCRIPTION TO SUCCEED? RISKS?

Frontal • Head-on-attack • Need superior resources and • Expensive
Assault perseverance • May serve to awaken a
sleeping giant

Flanking • Attack a weak market
Maneuver
•Encircles the competitor with
Encirclement greater product variety
• Cut markets out from under
Bypass established competitors
• Change the “rules of the
Attack
game”
• Wait to expand out of the
undefended niche or face
retaliation
• Need a variety of strategic
resources and core
competencies to attack
multiple market segments
• Must have significant cost
or differentiation advantages
• Waiting may result in market
lockout
• Diffuse approaches and use
of resources may not be
focused enough to succeed
• Advantages may not be
valued by consumers
• Mature markets may be
difficult to penetrate

• Hit-and-run, instead of • Must be patient enough to • Small assaults don’t deter,

Guerilla head-on, attacks accept small gains and but facilitate retaliation
•Small, intermittent assaults avoid instigating retaliation
Warfare
on different market segments