CB4303

STRATEGIC MANAGEMENT

Week 5
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 Case : Core Competencies & Value Chain Activities
– Starbucks

Questions:

1. Please describe the Core Competencies of Starbucks

1. Explain the Value Chain Activities of Starbucks. What

exactly is each activity responsible for?

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 Case : Core Competencies & Value Chain Activities
– Starbucks

1. Please describe the Core Competencies of Starbucks

➢ Primary Core Competency: Quality of the Product
➢ Secondary Core Competencies:
▪ Ability to provide Quality Service
▪ Marketing & Sales  Branding  “What is Coffee?”
▪ Strategic Partnership  Global Expansion Capability

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The Value Chain Activities of Starbucks

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 Primary activities Create Value directly
Primary Activities Activities associated with
Transporting the finest quality coffee beans (the green or unroasted beans)
Supply Chain
from the farms in Latin America, Africa, and Asia. These are transported to
Management
storage sites, after which the beans are roasted and packaged.
Production process of coffee in the shops. Starbucks operates in more than 84
Operation markets, either in the form of direct company-owned stores or licensed stores. It
has more than 36,000 stores globally.
Very little or no presence of intermediaries in product selling for Starbucks. The
Distribution majority of the products are sold in stores; however, storage and distribution to
retail locations are important.
Starbucks invests more in superior quality products and a high level of customer
Marketing & Sales
service than in aggressive marketing. <Loyalty Program>
Building customer loyalty through its in-store customer service. A signature retail
objective of Starbucks has always been to provide customers with a unique
After Sales Service 5
Starbucks Experience. A substantial amount of value is created when baristas
make drinks for customers.
 The Value Chain Activities of Starbucks – Support Activities
Support Activities Activities associated with
Departments: Management, Finance, Legal, etc. keeping the
Infrastructure company’s stores operational.
Strategic Partnership with Franchisees
Taking care of its workforce ensuring a low turnover of employees, which
indicates great human resource management. Offering training
Human Resources
programs conducted for employees in a setting of a work culture, which
keeps its staff motivated and efficient
Use of technology, not only for coffee-related processes (to ensure
consistency in taste and quality along with cost savings) but to connect
to its customers through customer oriented platform interacting with
Technology
customer.  Reward Program.
Development
Innovative customer centric-program such as Apple’s iBeacon system,
wherein customers can order a drink through the Starbucks phone app
and get a notification of its readiness when they walk into the store.
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Starbucks handles all of the procurement for its own coffee beans,
Procurement
ensuring quality standard
 Recap what have been discussed in Week 4

1. Define Primary Activities and Support Activities in Value Chain

2. What is RBV?
3. Please list some examples of Tangible Resources.
4. What type of resources would lead to a company’s competitive
advantage?
5. What does it mean by Core Competency?
6. Explain SWOT Analysis.

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Group List

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 WEEK 5
BUSINESS LEVEL STRATEGY - 1

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 Learning Outcomes – Week 5:
1. Define business-level strategy and describe how it determines a firm’s strategic
position.
2. Examine the relationship between value drivers and differentiation strategy.
3. Examine the relationship between cost drivers and cost-leadership strategy.
4. Assess the benefits and risks of differentiation and cost-leadership strategies vis-vis
the five forces that shape competition.
5. Evaluate value and cost drivers that may allow a firm to pursue a blue ocean
strategy.
6. Assess the risks of a blue ocean strategy and explain why it is difficult to succeed at
value innovation.

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 What Is Business Level Strategy?
➢ A strategy designed for firm or a division of the firm that competes
within a single business/product market.
➢ To overcome the five forces and achieve competitive advantage
➢ Goal-directed actions: It is about “How should we compete?”
❑ Who: which customer segments?
❑ What: customer needs will we satisfy?
❑ Why: do we want to satisfy them?
❑ How: will we satisfy our customers’ needs?
➢ The 3 Generic Strategies:
❑ Cost Leadership
❑ Differentiation 11
❑ Blue Ocean
 Successful Business Strategy
➢ A successful strategy:
• Leverages the firm’s internal strengths.
• Mitigates internal firm weaknesses.
• Exploits external opportunities.
• Avoids external threats.
➢ There is no single correct business strategy for a specific industry
➢ Choose a strategy that:
• Provides a strong position maximizing economic value creation.
• Is effectively implemented.
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 Business Strategy => Competitive Advantage

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Strategic Positioning  Trade Off: Value Creation Vs Profit Margin

Strategic Position and Competitive Scope:

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 Differentiation Strategy
➢ Unique Value (to Customer) in industry
❑ Prestige or brand image, Quality, Technology, Innovation,
Features, Customer service, Dealer network, Complement….
➢ Differentiation requires:
❑ Cost Parity relative to competitors (BUT may increase cost)
❑ Integration of multiple points along the value chain such as
▪ Superior material handling operations to minimize damage
▪ Low defect rates to improve quality
▪ Accurate and responsive order processing
▪ Personal relationships with key customers
▪ Rapid response to customer service requests
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❑ Differentiation along several different dimensions at once
Differentiation Strategy >> Competitive Advantage

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 Differentiation Strategy >> Competitive Position ↑
5 Forces How it works = Customer Loyalty

Protection against rivalry since brand loyalty lowers customer

Rivalry √
sensitivity to price and raises customer switching costs
New Creates higher entry barriers due to customer loyalty (Value to
√
Entrant Customer)
Establishes customer loyalty and hence less threat from substitutes
Substitute √
(Value to Customer)
Reduces buyer power because buyers lack suitable alternatives
Buyer √
(Emphasis Value => Less Price Sensitive)
Provides higher margins that enable the firm to deal with supplier
Supplier power PLUS Suppliers would also probably desire to be associated with √
prestige brands, thus lessening their incentives to driven up prices 17
 Pitfalls of Differentiation Strategy

➢ Uniqueness that is not valuable to Customer

➢ Too much differentiation (Marginal Utility is lower than cost to
provide such Value, + Justification?)
➢ Too high a price premium
➢ Differentiation that is easily imitated
➢ Dilution of brand identification through product line extensions
➢ Perceptions of differentiation may vary between buyers and sellers
(Branded product or Commodity?)
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 Cost Leadership Strategy
❑ Cost minimization in all activities in the firm’s value chain
e.g. R&D, service, sales force, & advertising
❑ Drivers That Keep Costs Low:
▪ Cost of input factors: Raw materials, capital, labor, and IT services.
▪ Economies of scale: Decreases in cost per unit as output increases.
▪ Learning-curve effects: Less time to produce output
▪ Experience-curve effects: Improvements to technology and
production processes.
❑ This strategy also requires competitive parity
▪ “On par” with competitors with respect to low-cost,
differentiation, or other strategic product characteristics
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▪ Can translate cost advantages directly into higher profits
Cost Leadership Strategy > Competitive Advantage

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 Pitfalls of Cost Leadership Strategy

➢ Too much focus on one or a few value chain activities

➢ Increase in the cost of the inputs (e.g. factor of production) on which
the advantage is based
➢ The strategy is imitated too easily
➢ A lack of parity on differentiation
➢ Reduced flexibility as significant investments in plant and equipment,
distribution systems, and large, economically scaled operations may
be required for low cost operation
➢ Obsolescence of the basis of a cost advantage
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 Focus Strategy – Differentiation & Cost Leadership
➢ FOCUS at a narrow competitive scope within an industry.
❑ Tailors its strategy to serve a target (niche) segment
❑ Aim to achieve competitive advantages by dedicating itself to
these segments exclusively
➢ A focus strategy has two variants:
❑ Cost focus
▪ Creates a cost advantage in its target segment
▪ Exploits differences in cost behaviour
❑ Differentiation focus
▪ Differentiates itself in its target market
▪ Exploits the special needs of buyers 22
 Focus Strategy >> Competitive Positioning
5 Forces How it works = Focus: (Value + Cost)
Provide defences against each competitive force
Rivalry because of higher margins or more specialized √
products or services.
New Creates higher entry barriers due to cost leadership or
√
Entrant differentiation or both
Substitute Focused niches are less vulnerable to substitutes √
Reduces buyer power because the firm provides
Buyer √
specialized products or services
Can provide higher margins that enable the firm to 23
Supplier √
deal with supplier power
 Integrating Low-Cost & Differentiation Strategy
➢ Difficult for competitors to imitate strategy
➢ Goal: To provide unique value in an efficient manner
➢ It can be in several forms:
❑ Automated & flexible manufacturing systems => ability to
manufacture unique products in small quantities at low cost
❑ Data analytics => offer customize product & services, managing
resources efficiently
❑ Explore the profit pool concept creates a competitive advantage
(understanding profitability by segment, product, channel & etc.)
❑ Using information technology, firms integrate activities throughout 24
the extended value chain(together with suppliers & customers)
 Integrating Low-Cost & Differentiation Strategy
5 Forces How it works = Value + Cost
It creates an enviable position. Competitors need to have
Rivalry the financial and physical resources to compete head-to- √
head
Creates higher entry barriers due to both cost leadership &
New Entrant √
differentiation

Substitute An overall value proposition reduces threat from substitutes √

Low pricing and wide selection can reduce the power of
Buyer buyers because there are relatively few competitors that √
can provide a comparable cost/value proposition
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The organization’s larger size can provide enormous
Supplier √
bargaining power over suppliers.
 Pitfalls of the Integrating Strategies

➢ Firms that fail to attain both overall low-cost &

differentiation strategies may end up with neither and
become “stuck in the middle”
➢ Firms can also underestimate the challenges & expenses
associated with coordinating value-creating activities in the
extended value chain
➢ Firms can also miscalculate sources of revenue and profit
pools in the firm’s industry
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 What Is Blue Ocean Strategy?
➢ Red oceans are the known market space of existing industries.
➢ Blue oceans represent:
❑ Untapped market space.
❑ Creation of additional demand.
❑ Opportunities for highly profitable growth.
➢ It combines both differentiation and cost-leadership activities.
➢ That is: A firm offers a differentiated product/service at low cost.
➢ Uses value innovation to reconcile trade-offs.
➢ Examples: Cirque du Soleil; Uber; …….
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Blue Ocean Strategy Vs Red Ocean Strategy

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 Value Innovation  Value ↑ + Cost C ↓

Lower Costs: Increase Customer Benefits:

What factors should be eliminated? What factors should be raised?
What factors should be reduced? Which factors should be created?
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 Applying Blue Ocean Strategy
➢ Analyze Industries
❑ Find a new trend or demand,
❑ Analyze the product and the customers’ painpoints
➢ Define a Problem <Customer>
❑ Not to fight against existing options BUT to solve customer problems.
❑ Not about your rivals mistakes but to make your customers' lives easier.
➢ Follow the ERRC framework
❑ Eliminate. Which factors that the industry should be eliminated
❑ Raise. Which aspects to be elevated significantly over the norms
❑ Reduce. Which factors to mitigated well below the industry's standard
❑ Create. Which factors to be created that never offered in the industry
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➢ Implement …….
 Case Study (Wk5):
Business Level Strategy of Zara

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 Case : Business Level Strategy of Zara

Questions:

1. What is the Business Level Strategy of Zara?

2. Please explain your rationale.

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CHAPTER REVIEW

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 Chapter review – Question 1
Firms seeking to deliver products or services at a lower cost than
competitors are pursuing which strategy?

A. benefit creation
B. process innovation
C. differentiation
D. cost leadership

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 Chapter review – Question 1
Firms seeking to deliver products or services at a lower cost than
competitors are pursuing which strategy?

A. benefit creation
B. process innovation
C. differentiation
D. cost leadership

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 Chapter review – Question 2
In a focused differentiation strategy, a firm seeks to

A. offer low-priced products and services with a narrow focus on a

niche market.
B. create higher customer value than the competitors in different
segments of a mass market.
C. deliver products or services with unique features to a specific, narrow
part of the market.
D. focus on reducing the value gap to differentiate itself from the
competitors.

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 Chapter review – Question 2
In a focused differentiation strategy, a firm seeks to

A. offer low-priced products and services with a narrow focus on a

niche market.
B. create higher customer value than the competitors in different
segments of a mass market.
C. deliver products or services with unique features to a specific, narrow
part of the market.
D. focus on reducing the value gap to differentiate itself from the
competitors.

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 Chapter review – Question 3
If costs are equal, when a firm has a higher value gap than its
competitor, it can be inferred that the firm

A. can charge a premium price for its products and services.

B. has achieved a competitive parity in its chosen industry.
C. has lost its competitive advantage to its competitor.
D. can adopt a cost-leadership strategy.

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 Chapter review – Question 3
If costs are equal, when a firm has a higher value gap than its
competitor, it can be inferred that the firm

A. can charge a premium price for its products and services.

B. has achieved a competitive parity in its chosen industry.
C. has lost its competitive advantage to its competitor.
D. can adopt a cost-leadership strategy.

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 Chapter review – Question 4
There are several cost drivers that can be managed in order to
establish a low-cost leadership advantage. One of the primary cost
drivers is

A. adding unique features that turn standard commodities into

differentiated products.
B. combining experience-based learning and process innovation to
move onto a steeper learning curve.
C. creating personalized customer service in order to minimize price
sensitivity among customers.
D. shifting to small-scale production processes in order to create highly
customized products.

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 Chapter review – Question 4
There are several cost drivers that can be managed in order to
establish a low-cost leadership advantage. One of the primary cost
drivers is

A. adding unique features that turn standard commodities into

differentiated products.
B. combining experience-based learning and process innovation to
move onto a steeper learning curve.
C. creating personalized customer service in order to minimize price
sensitivity among customers.
D. shifting to small-scale production processes in order to create highly
customized products.

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 Chapter review – Question 5
A firm that follows the differentiation strategy is protected from the
threat of new entrants primarily due to its

A. diseconomies of scale.
B. reputation for quality.
C. low pricing.
D. low cost per unit.

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 Chapter review – Question 5
A firm that follows the differentiation strategy is protected from the
threat of new entrants primarily due to its

A. diseconomies of scale.
B. reputation for quality.
C. low pricing.
D. low cost per unit.

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 Chapter review – Question 6
A blue ocean strategy typically allows a firm to

A. provide unique product or service features at a premium price.

B. add product features that raise costs without raising the perceived
value.
C. reduce the value gap created by their products.
D. offer a differentiated product or service at low cost.

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 Chapter review – Question 7
Total Tools is a chain of home improvement stores that sells tools, paint,
and construction products at higher prices than its competitors. Yet,
the chain has a large customer base due to its wide product inventory
and superior customer service. Which of the following generic business
strategies has Total Tools likely adopted in this scenario?

A. a differentiation strategy
B. a cost-leadership strategy
C. a market penetration strategy
D. a growth strategy

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 Chapter review – Question 7
Total Tools is a chain of home improvement stores that sells tools, paint,
and construction products at higher prices than its competitors. Yet,
the chain has a large customer base due to its wide product inventory
and superior customer service. Which of the following generic business
strategies has Total Tools likely adopted in this scenario?

A. a differentiation strategy
B. a cost-leadership strategy
C. a market penetration strategy
D. a growth strategy

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