Kellogg on Strategy Book Report
Book Review On Kellogg on Strategy – Concepts, Tools, and Frameworks for Practitioners By David Dranove and Sonia Marciano Kellogg on Strategy is the book that provides many tools and templates that are useful for practitioners like MBA students, managers or business executives to conduct strategic analysis and identify and choose the optimal strategic options. This book presents basic strategic concepts and serves as a practical guide to show people how to apply strategies effectively to make the business successful.The main ideas the authors discussed in this book are as follow: * Evaluate the firm’s strategic position * Identify the symptoms of competition * How to cure the cancer of competition * Coping with new entrants * Establish a long-term sustainable competitive advantage. Evaluate the Firm’s Strategic Position A firm must have a superior position in the industry to generate superior profits (15). The main concept in the positioning analysis the authors focused on is the “B Minus C” framework.
B Minus C framework defines that B equals to the benefit or happiness of the products given to the customers in monetary term, and C equals the production costs of the products (32). The amount of value the firm created is B – C (B minus C). A firm must have a higher B – C value than its rivals to outperform them. If a firm can offer higher B – C value than its rival, it will be able to offer more benefits to the customers than the competitors and generate higher profit and obtain more market share. The quantitative assessment of B – C needs be performed to determine a firm’s B – C value.
Cost advantage of the firm can be measured by accounting tools such as activity based costing (ABC). However, intangible benefits of the products, such as perception of quality and branding, are much harder to be quantified. The authors used the method of “Willingness to Pay” to measure the intangible benefits. B part of the B – C can be done by describing the benefits in qualitative terms and asking the consumers how much they are willing to pay for the benefits (86). Conducting survey is one of the methods that can be used to determine consumers’ willingness to pay.Surveys are to be designed to obtain useful results and avoid outliers, which is the observation or response that appears to deviate from the rest of group chosen for the surveys.
A firm needs to define its core competencies; however, core competencies do not always guarantee profits. SWOT analysis can be used to identify a firm’ strengths in qualitative terms; however, it does not provide quantifiable list of core competencies. Value creation is the key to profitability. B Minus C Framework allows the firms to utilize the B – C assessment to determine its position in the industry in quantitative term instead of just qualitative traits.The firms need to know how value is created that will outperform their rivals.
With this framework, the firms can identify the areas they can improve on to create more value. For instance, the surveys could provide feedbacks on why customers value the competitor’s products more or less. The B – C assessment also helps the firms to identify key asset that help the firms to stay competitive but also provide sustain competitive advantages in the long run. Business executives and managers can apply B – C framework to evaluate the position of their business today.However, it may be difficult for the firms to perform the quantitative assessment of the B – C, especially on the value of benefits.
The relevant question is how the firms can really determine what consumers perceived as the real benefits on the products. The results of the surveys could be biased and misleading even if the right target or group was chosen to do the surveys. Every person values the benefits of product differently, but the surveys can provide general ideas of customer’s perception. Firm with limited resources may not be able to perform the surveys to determine consumers’ willingness to pay on the products.For some firms, the SWOT analysis may still be the better tool for them to determine their core competencies and positioning in the industry.
The authors did address a firm’s cost position relative to the industry; however, they did not address if it is essential to estimate the B – C value of its main rivals to better position itself in the industry. It may be difficult to obtain information on the rivals to do the assessment, but it will be beneficial to develop a method to evaluate the B – C value of the main rivals. Identify the Symptoms of CompetitionThe authors made the assumption that firm with most B – C value is usually the one with the highest profit in the industry. The competition will drive the price down and lower the B – C value because competition can spread like a cancer in the industry (100). Price wars are just like cancer, and firms will engage in price wars to obtain market share and try to drive other competitors out of business. The competition may get intensified and threaten the survival of all the firms.
Early detection of competition can help the firms to avoid severe consequences of competition.It is important to diagnose the symptom of competitions and implement actions to reverse them (99). The firms should first identify the competitors at the level of the products, not at the level of the firm (104). The competitions should be different based on the type of products or the segment of the market the firm is competing in. Next, the firms need to identify how the competitors compete, whether in the forms of price or quality of the products.
Once the “Who” and “How” are identified, the firms need to identify the symptoms of the competitions.Evaluating the symptoms would help the firms understand the current status of the symptoms so they can make the right decision to deal with the competitions. The authors emphasized on the importance of identifying the “Who”, the “How”, and especially the “Symptoms” of the competitions. Unlike Porter’s Five Forces, the authors did not address in details on identifying the suppliers and the substitutes in this book. These forces have a significant impact on the competition.
These areas need be identified to obtain a clearer picture of the industry the firms are competing in.Identifying the symptoms of the competitions can help the firms make the right decisions so they do not need to engage in unnecessary price wars. Reducing the price will benefit the customers; however, price wars will hurt the firms and the competitors and decrease their B – C value. On the other hand, the symptoms may not be obvious to identify sometimes, and it may be too late when the firms can identify the symptoms to take preventative or corrective actions. How to Cure the Cancer of Competition The authors have several ideas on how to cure the cancer of competition.
These two ideas are the ones I believe are more important (127): * An ounce of prevention is worth a pound of cure. * People who live in glass houses should not throw stones. An ounce of prevention means the competition can usually be avoided by some preventative actions of the firms. The firms can prevent the price competition by targeting the customers to meet their unique needs or making it difficult for the customers to switch the product or find other alternatives. Building loyalty is one example of making it difficult for the customers to switch products.Many firms have customer programs that provide rewards for customers upon completion of series of transactions.
The customers will lose the benefits they accumulated if they switch to a different product. The idea of “Don’t Throw Stones” is that if the firms cannot avoid the price competition, the firms should not be the first one to throw the stone or initiating the price reduction (127). The misjudgment of other firms’ actions may lead to unnecessary price wars that will lower the B – C values and also the profit in the industry.The authors presented good strategies that firms can adapt to soften the price competition in the industry. Prevention is a good way to avoid the price wars.
The customers are usually the ones end up with the most benefits due to the intense competition. Many companies try to prevent steep competition by building strong brand recognitions or creating customer programs to differentiate their products. We can see a lot of companies applying this idea today, such as rewards program with credit card companies and flyers reward programs with airline companies.These are good ways to target the customers and differentiate from other firms to avoid steep price wars. The benefits or rewards offered by the firms must be comparable if not more than the effort customers have to put in to participate in the program.
Customer loyalty only lasts to certain extent, and customers are smart enough to find the best programs available in the market. This can still lead to intense competitions between the firms. The idea of “Don’t Throw Stones” may not be easy for firms to follow in the industry. The authors think the firm should be open on pricing, communicate market share xpectations, share demand forecasts, and be forgiving so they will not misread or misjudge the actions of competitors (145). This idea may be easier said than to be done. Depending on the industry, the firms may be not open to communicate and share information.
The firms may have difficulty obtaining the right and crucial information to make proper decisions or actions. If there is no open combination between the firms and the competitors, the firms probably have to obtain information from the customers. The information gathered may be not accurate. Misreads and misjudgment will happen and lead to price wars.Coping with New Entrants The firm with higher B-C benefit will be able to outperform its rivals in the short run. One of the biggest obstacles the firms will face to maintain their performance in the long run is the new entrants.
The authors state if the firms cannot block the new entrants, they must find ways to deter the entrants. A few entry barriers authors think the firms can use to deter the new entrants includes but not limit to reputation, limited pricing and predatory pricing. If the firms have built up their reputation in the industry such as the quality or reliability, it may be hard for the entrants to match.If the entrants are not sure about the cost or demand of the products in the industry, the firm may be able to deter entry by lowering the price, or called limited pricing. The firms can also slash the price deeply, or called predatory pricing, to scare off the entrants.
The firms must be careful before engaging in price wars because they may lose more than the entrants because the B – C values have been deeply decreased. Most of the firms will have to face the new entrants in the industry. The authors provided valuable tactics that the firms can apply to cope with the new entrants in the industry.Building reputation or branding is a good way to deter the entrants and maintain the current customers. Many customers rely on the reputation or the brand of the companies for making purchasing decisions. Limited pricing is another good tactic to deter entry by lowering the price so that it will be difficult for the new entrants to compete.
The authors made the assumptions that this tactic may work if the entrants are not sure about the cost or market demand of the products in the industry. I believe the new entrants will conduct the cost and price analysis before entering the market.This tactic may not be as useful for the businesses today. Firms engage in predatory pricing for short-term pain for long-term gain. They must have strong financial strength to sell the product at a very low price.
The firms’ B – C will be decreased tremendously. If the competitors are stronger than expected, the firms may fail and got driven out in the market. I do not think it is rational for the firms to engage in predatory pricing. It is a big risk for the firms to take, and both the firms and the new entrants may be hurt at the end. This tactic will also reduce the industry profit.It is not a win-win situation with everyone.
It may result in the cancer of competition that will be difficult to cure. Sustained Advantage It is tough for a firm to achieve competitive advantage over its rival, and it is much more difficult to sustain the competitive advantage in the long run. Out of the sustained advantages authors discussed in the book, I agree with the authors that “Network Effect” is one of the most powerful sources of sustained advantage. Network effects occur when the consumers value the product more if other consumers also use it (194).Both Ebay and Amazon. Com are good examples of network effects. In addition, if the standard of the product can be established in the industry, which will be hard to replace, the standard-setting with network effects can be very powerful sustainable competitive advantage. Microsoft‘s PC operating system is a typical example for the standard-setting. Many companies use Microsoft computer operating system for their computers.
With the increasing popularity of internet, and it is inevitable that the firms to have to pursue e-commerce business.This is an ongoing and future trend in any industry. More and more firms not only sell their products in the retail stores, but they begin to sell their products online. The firms’ websites allow customers who make purchases to offer feedback on the products. I have begun to see more firms starting to offer this feature on their websites. This feature creates tremendous network effects for the firms because consumers today rely heavily on the past experience of other consumers.
This strategy will be especially good for firms that sell consumer products.This advantage can help the image of the firms in terms of qualify based on consumers’ feedbacks and also help the firms to reduce costs on return goods. However, the network effects may not be a powerful source for sustained advantage now because many firms are now heading in the same direction. It appears to be a must for running the business today. It will be harder for the firms to use this as sustained advantage to differentiate themselves from other competitors in the long run. Conclusion The central idea of this book is the B – C framework.
The authors introduce the strategic concepts and alternatives around this central idea. B minus C framework can be used as an industry position analysis tool for the firms to determine the position in the industry. To outperform the rivals, a firm must have a superior B-C benefit position in the industry. A firm needs to identify the competitors, how the competitors compete in the industry and identify the symptoms of the competitions. By identifying the symptoms of the competition, a firm can implement appropriate actions to deal with the competition.With the new entrants in the industry, the firm will need to find ways to cope or deter new entrants.
Lastly, a firm needs to have sustained competitive advantages to maintain its performance or B – C value in the long run. I believe this book is a very good tool for people to use for strategic analysis and apply the strategies so that the business can succeed. It offers real life examples on how and why firms succeed or fail in the business environment. Many of authors’ strategies can still be applied in the business world today.