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organization can pursue in pursuit of a market. The most important breakdown is between being a cost leader with a low cost strategy and pursuing a differentiated strategy. A low cost strategy needs to be supported by tactics that allow the company to be the cheapest in its market, because they are trying to win over the customers that are most attracted to low prices. The differentiated company is not seeking to offer the lowest prices but it is seeking instead to justify charging higher prices by offering the customer a unique value proposition.
There are other approaches to strategy as well . For example, there is the customer relationship strategy, where a company differentiates itself by focusing on building strong relationships -- this is basically a tactic within the differentiated strategy, but it works quite strongly in some industries. An investment advisor, for example, is by his or her nature differentiated so the relationship is the most important part of the strategy for building business.
The network effect is when "the value of a product increases as more products are sold," I guess meaning a business that has a strategy that depends on building a large market share. A company like Microsoft has thrived with this strategy -- it really does not matter if Windows is the best operating system or not, because after a certain point 90% of people are using it and it becomes the default option. Business is one simply because everybody else is using it too, which means the software and networking capabilities rely on it.
Once a basic strategy has been identified, there are a number of strategic moves that a company can undertake in order to get closer to its strategic objectives. To enter into new markets, a beachhead is often utilized, gaining entry where opportunity exists and then building out from there into more challenging segments of the same market. Product differentiation is similar in that it seeks to find new ground, but does so not be approaching a weak segment but by developing a new one with an innovative product. It is also possible to enter a market with process innovation -- when you do something better than anybody else you can make a splash -- like when the iPhone was released and completely wiped out the Palm and Blackberry because it was so innovative. When all else fails, you can use mergers and acquisitions to enter a market, or a joint venture, some way of basically buying existing market share.
The product life cycle is a theoretical construct that has introduction, growth, maturity, saturation and decline. There is a strategy for each -- so introduction is growth -- because that makes sense. Also, the product life cycle doesn't hold up in the real world where many products enter maturity/saturation and stay there. Coca-Cola has been there for almost 100 years. So it's a theory that applies where technology changes and the product faces obsolescence, but not all product should be viewed with this lens.
The business life cycle is a similar concept -- introduction, growth, industry leaders, industry runners-up and weak organizations. The strategies are different for each of these as well. Industry runners-up in particular have a difficult time trying to find success while being at competitive disadvantage, in particular as the industry leaders seek to leverage their market strength. Weak organizations have extensive amounts of work to turn themselves around, lest they fail completely.
As noted in Chapter 2, cost leadership and differentiation are two strategies that can be followed. These can be adapted to the mass market, or a niche market. The principle is that a company must choose, that trying to strike a middle ground means that some competitors will undercut you, and others will have better products.
Essay #2. The company I am going to write about is Starbucks. They have a differentiated strategy, and have sought growth in a number of different ways, which makes them a great case study for the subjects of product life cycle, business life cycle, and generic strategy.
First, the generic strategy. Starbucks is a classic example of a differentiated strategy. The company sells what is otherwise a basic commodity -- coffee -- but seeks to differentiate its coffee offering in a number of ways. The first is that Starbucks was always intended to offer a "European" coffee shop experience, in contrast with things like diners and donut shops, which were the places where many Americans would have bought their morning coffee prior to Starbucks. While I can't say that the experience is European, it is clear that Starbucks offered the market something that it never really had before. Starbucks essentially defined the coffeeshop experience in North America, the UK, and in Asia, and now there are many imitators. This first-mover advantage, however, does help to differentiate Starbucks, which is the network effect strategy -- because Starbucks is the biggest, brand recognition is high and consumers respect the fact that they were the first and the innovators.
The differentiated strategy is also supported by products. Starbucks offers multiple types of coffee, focusing on the different roasts, and they also offer a variety of milkshake-like frozen drinks, hot lattes and other innovative products related to coffee. For the most part, Starbucks was the innovator of these beverages as well. Thus, Starbucks not only defines the coffeeshop experience for most customers, it also defines the product lines. For this, Starbucks typically charges a premium.
Starbucks is a great example of the industry life cycle as well. Initially when Howard Schultz took over the company, there was no coffeeshop industry to speak of in North America. Starbucks changed that quickly. The phrase "racing to establish a foothold" is apropos because Starbucks expanded rapidly in order to build its business and leverage the first mover advantage. A good example of its rapid growth strategy during the introduction phase is that its 10th store was in Vancouver. This is meaningful because it highlighted immediately that Starbucks saw its future as a global company -- it didn't wait around to go international, it went there right away before it had established anything outside of Seattle. That aggressive move set the tone for the two decades of rapid global expansion that followed and took the company through the industry growth phase.
Within a decade, Starbucks was the leader of a new, rapidly growing industry for coffee shops. There were numerous competitors, most of them regional, by the 1990s, but Starbucks had been able to grow so quickly that it was the leader. It had consistent products and relied heavily on the Starbucks Experience, its in-store experience. The company had specific designs for the stores, but more than that the company had service standards that it tested as regularly as it tested its coffee. The industry runners-up had mostly built their business as Starbucks knock-offs, and this trend continued. But while Starbucks had used its systems and access to capital to saturate America and begin major international expansion into places like the UK and Japan, most other coffee shops were struggling to break out of the regions where they had been able to build recognition. Thus, industry rivals have either had to accept their status in the industry or find niches. An American company, Coffee Bean & Tea Leaf, has become big in Asia because it found its domestic growth prospects limited, for example. Eventually, however, growth in the industry started to come from new competitors like McDonalds and Dunkin Donuts being more aggressive, seeking to cut into this industry with a low cost offering, the first players to position themselves in this industry with a low cost strategy. For a time this work and it seemed that the industry life cycle was changing, but Starbucks was able to restart growth with some deft strategies.
It is interesting that Starbucks is also a good case study in the product life cycle. Its coffee has not changed much, but the company does make changes when it wants to kick start the business. It cut its Breakfast Blend, to that point its flagship, in favor of Pike Place Roast, and this move was because the Breakfast was in saturation and they needed to find a way to restart the product life cycle of basic coffee. Starbucks will also use product life cycle theory with its food offerings and its iced beverages -- when they enter into decline they are replaced with a new concept. The company has also done this with its coffeeshop experience as well -- it tests new concepts in Seattle to find ways to rejuvenating the experience of Starbucks shops in order to continue with a harvest strategy and avoid having to exit. Starbucks has also tried to replicate its coffee success by getting into both tea and juice as a means of entering businesses at the growth and introduction stages, in order to deliver higher levels of growth for the shareholders.
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