Hi guys, welcome back to Module 4 of Entrepreneurial Strategic Management. In this module we're going to continue trying to understand this important question of business or organizational success, business or organizational performance. We're trying to understand what it is that a company needs, or the factors related to a company's success. Why do some fail? Why do some seem to survive and even make a profit? And we saw in previous modules that there are a couple of different frameworks that are very popular in trying to explain that success. And we talked all about core competencies, for example, in module three, which is a way that companies can internally leverage, or exploit, unique resources and unique abilities or capabilities, despite the industry environment that there in, and develop a sustainable competitive advantage and win in the marketplace. Michael Porter has been influential in all of the models or frameworks we've look at. And he's developed another model that is very important in understanding strategy and what you ought to do if you're developing your own start-up or running a small business, or even if you're a manager in an already existing business. And he has an approach that he calls business level strategies, they're also sometimes called Generic strategies, Porter's generic strategies. If you're going to do a search you might look that up, Porter's generic strategies or Porter's business strategies. And I want to take a couple of minutes and try to explain what he means by business strategies because you might say, well, everything we've been talking about is business strategy. Really what you have to do to understand what this framework is going to be discussing and trying to explain is to add an additional word after business. And we probably could phrase it business unit strategies or business level strategies, and if you imagine a corporation that has multiple business units, or divisions, that perhaps are related or even unrelated, that's going to help you get closer to understanding what we mean by business level strategy. So if you look at this image of a corporation with several divisions, they might have a toy division. They might have a clothing division. They might have, in some countries, where you live, something completely unrelated. They might have a tool or hardware division, or a media division. Some highly diversified firms like General Electric have multiple divisions like this, and so each one of those is a business unit. Not all companies have multiple business units. For example I have mentioned the United States based pizza chain, Papa Johns, several times. And Papa John's really just has one division. It is a pizza company, and doesn't divide its strategies, or its businesses, up into additional units. Now it may have an international division for its stores outside the United States, or regional divisions, but in terms of products, it's really the pizza and the related food that Papa John's is focused on. It's a one business unit company. So, some companies have multiple business units, others just have one. And so that's really what Michael Porter is getting at when we talk about business unit or business level strategies, or these generic strategies for business units. He's imagining or describing a corporation, as you see with a headquarters, these multiple divisions. And there might be a corporate strategy or a headquarters or overall company strategy, but each business unit may have a different strategy, depending on the market segment that it operates in, depending on competitors, etc. So looking at this additional image we have here of Porter's generic strategies, or Porter's business level strategies, we see that what Porter is going to say is that if you take any market, any sector or any industry you can find, usually, demand from customers in two basic ways. You find interest in two basic type of product segments and he argues that this is pretty much across the entire industry or industry wide as it says here. And what companies need to do is pick one of these strategies, and you can only succeed in Porter's argument if you pick one or the other. If you don't, you could get stuck in the middle here, and you're not good at either, and it's difficult for you to succeed as a company in that particular product market. And so the two strategies that he argues, that companies can consider and that exist in any industry or any sector, are differentiation, or providing something unique about the product or service that customers are willing to pay extra for. Or, seeking or trying to be an overall cost leader and developing a low cost position. And Porter's argument is that choosing one of these strategies really commits you to a particular path. And it's very difficult to choose both again and if you try, you'll find it very difficult. And you'll find it probably the case that you're not succeeding as well as you'd like. Very difficult to try to do both. So I'm going to give you a lot of examples here or a lot of details to try to explain these approaches. Think for a couple of seconds about different product markets that exist. You might imagine, for example, the car or automobile industry. You might imagine the pizza industry which I've discussed. And if you're in a country where pizza's not as common, I hope that you can follow the examples or cases that we use. You might think of the hotel lodging accommodations industry and the demand in that sector. And you could do the same thing with really any product market. And what you want to do to try and understand these different strategies is to think about which companies in that sector, or which products, are seeking to differentiate themselves. And which are focusing on being a cost leader. And so, I'm going to give you, again, several examples. Let's do the United States pizza industry. If you're not familiar with these chains, you might look them up to try to understand a little bit better the example. And if not, you can also wait for the next example and see if it makes a little more sense to you. In the United States and across the country, there are four major national pizza companies. There is PIzza Hut, which is also international. There is Domino's, which is also international. Many of you probably seen that in your country. There is Papa John's, which I've mentioned, which is the newest of the four. And there's a company called Little Caesars, which also is international. So those are the big four. And if you start to imagine or if you go to the websites of these companies and look at their strategies, you can pretty quickly see that they do fall along the lines that Porter lays out. For example, Pizza Hut is very well known for spending a lot of money on advertising, and in that advertising they emphasize what's unique about their pizza. They're always coming out with something for example. They, for example, sometimes put cheese in the crust of the pizza. Sometimes they make pizzas in different shapes. They might make a pizza that's in a New York style, they call it the New Yorker. They might add some new toppings. And so what Pizza Hut is doing with that simple analysis is they're trying to meet the demand of customers who want and value that uniqueness. They don't want just the simple average pizza, they want something different, they want cheese in the crust, or they want new toppings. Papa John's, you can go their website, go in the language that you speak if they have a version of their site in that language. And you'll see that their main focus in product market competition is their ingredients. In fact, they have a famous slogan which is better ingredients, better pizza. What they're trying to do in the minds of the customers, is convince you that their pizza is differentiated, is unique, because of better ingredients, better qualitr, better tasting, fresher, perhaps also unique ingredients. In fact, several years ago, you can look this up as well, there was a famous lawsuit between Pizza Hut and Papa John's, where Pizza Hut sued Papa John's for claiming that they had better ingredients and said, how can you know that you have better ingredients? Pizza Hut lost, and Papa John's continues to emphasize that. So that's two of the major companies in the pizza industry. Let's talk about Little Caesar's. Little Caesar's has been in existence since the late 1970s and they've had a pretty consistent strategy ever since then. In the United States you won't see very much advertising, for example, of their product. And one reason for that is that they are attempting to achieve a low cost position and advertising can be quite expensive. Their approach is to provide an acceptable quality pizza. It's not necessarily the pizza with the most amazing uniqueness compared to its competitors. It's a good basic quality pizza at a very affordable price. In fact in the United States right now, they're selling a pizza that's already made for approximately $5, depending on where you live. And so what they've done is plant it in the mind of the consumer without even spending very much on advertising, that they're the low-cost leader. And again, they've done that since their inception. In fact, when they first started in late 1970s, their approach was two pizzas for the price of one. And so what do they do, internally, to pass those lower costs on to you in the form of a price? Because it's not as easy just to say the pizza is $5, what if you're losing money? You've gotta do something internally to keep costs down. And so what Porter's model is attempting to teach you is to understand, if you're going to try to undertake a cost leader strategy, what the cost drivers are in your industry, and what is a cost driver? Well, it could be labor. In the United States, labor is quite expensive compared to a lot of countries. So is it a very labor intensive process to make the pizza? Are the ingredients themselves very expensive? In the case of pizza it is true that some companies buy fresher ingredients, some buy ingredients that might not be of the same quality. Perhaps in a can, not as fresh. Perhaps they buy in volume from fewer suppliers to bring the costs down. And so a cost leader is not just charging low prices. They're constantly and consistently focused on how to internally keep costs down.
