Competitive Strategy

1
Competitive Strategy

• Week 14
• UGBA 106

2
Bases for Competitive Advantage

• Overall Cost Advantage Ability to produce and
  market at costs that are significantly lower than
  competition.
• Overall Marketing Advantage Ability to offer
  superior products which do a better job at
  meeting customer needs than competition. (Porter
  called this Differentiation)
• Porter than introduced a second dimension of
  competitive advantage. Niche strategy. Porter
  called this Focus.

3
Bases For Competitive Advantage
Market-wide
Segment
Cost
Overall cost advantage
Focus, Niche
Marketing
Overall Marketing, Differentiation
Focus, Niche

4
Marketing Advantage

• Unique Product or Service (FedEx)
• Brand Name (Coca-Cola)
• Superior after-sales service support (Xerox
  after-sales support).
• Distribution Advantage (Dell, Calyx)

5
Overall Cost Advantage

• Experience curve Learning by doing.
• Decision Fixed costs of investment vs. lower
  variable costs (Wal-Martinvestments in
  information systems, satellites, electronic
  warehousing)
• Productivity output (sales or production) / input
  the operational measure
• (Toyota productivity per worker, Wal-Mart
  productivity per sq. feet)

6
Niche Strategy

• Focus on a segment. Concentrate your resources
  in the niche (AW Brands and root beer).
• Critical difference between niche strategy and
  the other two, Simultaneously achieve
• Superior product for the niche.
• Establish cost advantage for the niche
• The balance between making the niche profitable
  and attracting competition
• Minnetonka softsoap case

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When to Seek What Advantage?

• Overall Marketing Advantage
• Do you have a new Innovation? Do you have the
  capability to satisfy an unmet need?
• Cost Advantage
• Are you in large and mature markets with stable
  sales? Are you the first mover? Use cost
  leadership to lower price.
• Niche Strategy
• Smaller firms with shallow pockets co-existing
  with Industry giants

8
Southwest Airlines

• Founded in 1967 by Rollin King, Lamar Muse and
  Herbert Kelleher with 560,000 capital.
• Short flight no frills and low prices. Fun
  platform. Operating flights between Dallas
  Houston and San Antonio before 1973.
• Employees ownersits impact
• Profitable since March 1973 (Brainiff price war)
• 1981, Kelleher became CEO and President.

9
Southwest Airlines

• What type of competitive advantage does Southwest
  pursue?
• How does Southwest achieve its competitive
  advantage?

10
Strategies to Soften Competition
11
Competition as a Zero-Sum Game
Dividing the value pie
You
Them
Value Pie
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How do you soften competition?Expand the value
pie!

• Devise actions to strategically changes your
  competitors behavior.
• Makes it in your competitors self-interest to be
  soft.
• Soft competition means a reduction in resources
  that must be invested by firms to compete for a
  consumer.
• Higher prices
• Lower level of product quality.
• Reduced cost of servicing the market (inventory
  cost)
• Creating non-zero sum games.
• Your gain is not necessarily at the expense of
  the competitor.
• Expand the value pie but compete in dividing the
  pie.

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An Example TWA comfort class

• In Jan 1993, TWA chapter 11 reorganization
• 10 mn. in cash
• Bottom in J.D. Power customer satisfaction
  ratings, low employee morale.
• Highest rate of customer defections among majors.
• Very high levels of unutilized capacity.
• Comfort class idea
• Remove 10 to 40 seats from each aircraft to
  improve legroom by 3 inches or more.
• 1 mn. to take out the seats and 9 mn. to
  advertise.

14
TWA comfort class

• In six months moved from the bottom quarter to
  the top quarter in J.D. Power rankings for long
  haul flights and 2 for short haul.
• Filled planes
• More importantly, filled it with more full fare
  business passengers.prices go up.
• By end of 1993, revenues per seat were double the
  industry average.
• What is happening here?

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TWA comfort class

• Comfort class is a clever way to improve quality
  at zero marginal costWhy?
• What is the real cost of taking out a seat?
• With improved quality consumers are willing to
  pay more
• Greater proportion of full-fare business
  passengers who move from business class.

16
TWA comfort class

• What about the effect on competition (American,
  United)?
• TWA makes a superior offering so competitors
  might lose some full-fare passengers.
• But do competitors necessarily lose?
• Should American and United also follow comfort
  class type strategy?
• What does this depend upon?
• What will this do to the intensity of competition
  in the industry?

17
Anatomy of soft competition

• TWA competes for the value pie through the
  superior product offering that is delivered at
  low cost.
• BUT comfort class also strategically expands the
  pie by softening price competition between the
  major airlines.
• Did other airlines follow suit with comfort class
• No!but average price on many routes did go up.
• After some time TWA scaled back comfort classand
  then reinstated it in limited form
• Full lack of appreciation of the strategic effect
  of comfort class.

18
Soft Competition Marketing StrategiesImplementati
on Mechanisms

• Building a reputation.
• Investing in excess plant capacity. Why??
• Tit-for-tat pricing to build reputation.
• Price strategies, (example, Price matching
  guarantees).
• Playing mixed strategies to create strategic
  uncertainty
• Mix your plays and be unpredictable to reduce
  competition.
• Pepsi vs. Coke promotions
• Loyalty programs
• Frequent flyer miles.
• Kodak copiers after-market.
• problem if consumers are savvy you have to
  compete get them to purchase the copier.

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Soft Competition Marketing StrategiesImplementati
on Mechanisms

• Create Shortages
• Can you increase the value of your product?
• Can you increase your bargaining power?
• Nintendo Burn your cards.
• Two books for reading
• Thinking Strategically, Avinash Dixit and Barry
  Nalebuff
• Coopetition, Adam Brandenburger and Barry
  Nalebuff