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>> Today we bring together our previous sessions understandings and learnings, to try to understand this question of,

how do we establish valuable competitive positioning? So let me begin with the story of Hyundai. Hyundai in the automobile manufacturing business is an interesting player in that they entered, especially in the US market, as a low cost player, trying to establish a viable position with small. Energy efficient vehicles. Over time, they have expanded their repertoire and have moved now into higher end products. Positioning themselves differently in the market than they were, say 10, 20 years ago. So this gets back to our question that we raised the very first day. The strategist challenge. How do we create and sustain value? How do we identify valuable competitive positions? How can we help a company like Hyundai understand where is the best position for them in a competitive. Market. To help us understand this we're going to evoke something called the generic competitive positions that were proposed by our good friend Michael Porter of 5 forces fame. These of course as the name suggests just generic positions. And we'll talk about how there is more complexity in how we think about positioning then these just 4 positions. But they are a very useful way to help shape our thinking about the opportunity sets available to firms within industry. Let me start by considering the two axis that define our little two by two here. On one axis we have the source of competitive advantage, on the other we have the competitive scope within the industry. So let me start with competitive advantage. This is something we talked about in last session in terms of capabilities here. And the idea again is there's two general sources of advantage that a firm might have. They might be either low cost, or they might be differentiated,have a demand advantage where customers have a higher willingness to pay. So imagine the following just graphically

we have an industry here where there's an industry average player who is charging $6 for their product and it costs them 5 to manufacture. They make a profit of $1. And just for arguments sake let's argue that this is the marginal producer in the industry. Basically the person who just barely covers. Their opportunity costs of being within that industry. So they're doing alright but not great within the industry. We then might have a low cost firm also selling their product for six dollars and customers willing to pay for that, but their cost structure is lower so they get a profit margin of two dollars, versus 1 in the marginal player case. On the other side we have a differentiated player. Now this player may very well have a higher cost structure than our marginal player, let's say a $6 cost, but because customers are willing to pay more for their product, let's say $8, they have a higher profit margin as well, similar to our low-cost firm, at least in this example. The second axis we want to consider is competitive scope. Now for today's purposes, we're going to use hte term compettitve scope to refer to which, the extent to which a firm targets muptiple product market segments within one industry. In our next session, we're actually going to talk about competitve scope across industries. But for today's purposes, we're thinking about how does a firm position itself In one single industry. Well recognize that industries may be segmented into many different individual product markets. The easiest is probably to think about geographic markets. Do we compete in Europe? Or Asia? Or the US? Do we compete even more locally, perhaps on a regional basis? Or maybe even a community basis? Here in Charlottesville, Virginia, perhaps you have a store, and it's competing in that Charlottesville market. Clearly markets could also be characterized by different types of product lines.

There are different types of customers who have different types of preferences, and those might be a way to segment the market as well. In the automobile industry it's interesting to think about high-end players like Porsche and the luxury sports car business. And then of course we have players who are aiming for more of a mass market smaller part of the market as well. So these two dimensions here: source of competitive advantage whether is cost or differentiation or sometimes called uniqueness, and the competitive scope within the industry whether is narrow or broad defines the following two by two and suggests four. Generic competitive positions. For those who have a broad competitive scope, trying to sell to a wide part of the market and are looking for a cost advantage we can refer to that as a cost leadership position. For those of you looking for uniqueness but to a broad segment of the market we can call it a differentiation position. Then, we have our narrow positions. We have focused low cost players who are targeting a specific segment of the market with a low cost strategy. And then, we have those targeting a specific segment of the market with a unique new strategy, which we refer to often as a niche strategy within the industry. So let me talk about each in turn. So cost leadership, once again, keeping your costs lower than the competitors to generate these rents. Vis a vis the marginal producer that we talked about before. Players in this type of position tend to offer standardized products that are broadly acceptable, and they do so often at the lowest price. A classic example of this would be Henry Ford and his Model T. Henry Ford was once famously asked, you know, 'Could I get, what colors could I get my Model T in?' And he responded, 'You can get it in any color you want, as long as it's black.' And the idea here was he created one standardized p- Product, the Model T, that was broadly acceptable to the market and ended up being the low cost player and, in essence, low price player as well within that market space. So common examples, we can think of many. Walmart in the retail business, McDonald's

in fast food. We discussed in our last session Nucor Steel in the mini mill business, who is the low cost player there. And then even in services, like financial services, we have players like Charles Schwab. Who are going for a cost leadership strategy. What are the approaches that firms take in these positions. Well first they obviously engage in cost cutting to get their cost structure down. Wal-mart is famous for this. In some industries we might have high economies of scale as we've talked about before. Higher economies of scale if you capture that scale drives your costs down and allows you to be a cost leader within the industry. In the beer industry Anheuser-Busch. Benefits from these economies as scale. In some cases, you use low cost inputs or even outsource or offshore, your, your production. Dell comes to mind as a player who's been very aggressive in doing this over the years. In trying to get their cost structure lower and lower. Similarly the cost leaders tend to minimize overhead cost such as R&D advertising. Once again Dell comes to mind as a company who has done this over the years. And then somewhat paradoxically as we talked about with Nucor, sometimes having the state of the art operations And having continuous improvement allows you to be the cost leader. Once again Nucor is an example there. So putting out expenses to have state of the art operations might ultimately allow you to be a cost leader. Second strategy, a differentiation strategy. This is the higher consumer willingness to pay. This is high quality, service, prestige, whatever it might be, but it's the offering of unique features that customers demand. So examples, going back to the retail business, to the extent Walmart's trying to be the cost leader, arguably Target though in the low cost retailer bracket is trying to be a differentiated player in that lower market. In, consumer electronics, and personal

computers. We've talked about Apple in the past. Clearly, a differentiated strategy. You look no further than the price of a Macintosh versus your average PC, to see, this, differentiation strategy at play. Intel as a company in the microprocessor trying to have the highest, most successful processors as a differentiation strategy. Going back to automobiles. Bmw. A wide variety of products, trying to satisfy a broad segment of the market arguably But clearly with a differentiation strategy in mind. And then in financial services we might think about a company like Goldman Sachs, someone who has, a high value differentiation, play, that they epistorically historically used. So what are some of the strategic approaches here? This is where brand often becomes very important. Especially for consumer facing companies. You think about a Nike here, he spends a lot on advertising And to differentiate themselves from their, from their competitors. In more high technology industries, it might mean being the innovative leader, the way you create differentiation is being on cutting edge and offering products and services that are innovative. And unlike the cost leader, you're often investing heavily in human resources, and r & d, and the like as a way to improve your quality of service and prestige and get this higher willingness to pay. Focused Low-Cost, very similar to the cost leadership strategy. The one difference here is you get low-cost by focusing your efforts on a narrow segment of the market.This is the strategy often used by new entrance into a market, esspecially foreign firms in the light, who are[UNKNOWN] trying to establish a foot hold With the industry. We can think about Hyundai approaching that when they first entered the U.S. Market. Kia is another example where a focus low-cost strategy could be a great way to enter a market. There are some generic drug manufacturers as another example, of low-cost but they focus on particular parts of the market, In order to achieve those low cost economies.

So the strategic approaches here is you deter rivalry by dividing the market. You take off one segment of the market here and you capture economies to scale. But maybe in a narrow sense here generic drugs come to mind. Finally we have a niche strategy. So this is now the differentiation strategy but on a smaller scale. We can think of lots of different high end good providers that satisfy niche strategy. Tiffany's is an example in the luxury. Jewelry market. A Porsche in the automobile market. If we go to services, there's any number of boutique consultancies that position themselves as differentiated players within a market. Here the strategic approach is basically to use your expertise and the narrowness of your position to have greater knowledge and expertise that creates this willingness to pay. In the network systems market, Juniper Networks has been one who historically has tried this strategy of a focus. Expertise that they have. And then, of course, there are different ways you can build brand loyalty. And like, through that focus you think about a Porsche or a Tiffany's and how they've successfully done that. So once again, these four competiivie postions, four, two-by-two here creates these four generic positions. Now of course, in reality, the world isn't this simple. And firms are positioning themselves across these different, dimensions here. In fact, you sometimes see firms who are actually pursuing what we may call an integrated strategy. So let me talk a little bit about this. This is best of both worlds. This is the idea of offering differentiated products with low cost. Who, who wouldn't want to do this, right? You think about Toyota, so why is a Toyota is broad market player, they have lower cost structure, but they also have differentiation in terms of their quality in the. [inaudible] We've talked about Southwest Airlines in this context before. Clearly a low cost player, but at the same time they have quality in terms of their reliability of flights and the like that gives them a differentiation advantage. As well.

So some strategic approaches to an integrated strategy, things like total quality move management, lean production techniques that have been pioneered in operations, Toyota being a leader in these, are one way in which you can get quality and low cost. Simultaneously. Similarly R&D and innovation might be a way to both get differentiation, low cost. Especially if you're pioneering in the production based technology, or, or in manufacturing. Speaker:[noise] There is a caution here. Our good friend, once again, Michael Border suggests, you know, you risk getting stuck in the middle here if you pursue and integrated strategy. And there are numerous examples of firms who've tried to be, once again, both differentiaed and low cost at the same time, and have acheived neither, and as a result have not had much competitive success. I think if one looks at General Motors, especially over the last ten, 15 years one could argue that they have been stuck in the middle. At one level, they are a differentiated player in the automobile industry. At the other level, they are competing, in essence, in a low cost part of the market competing against the Toyotas and the like of the world, and. Having it difficult, finding it difficult to compete successfully there.