Deck 5: Business-Level Strategy and Competitive Positioning

Question 1

Nike, headquartered in Beaverton, Oregon, was founded over 30 years ago by Bill Bowerman, a former University of Oregon track coach, and Phil Knight, an entrepreneur in search of a profitable business opportunity. Bowerman's goal was to dream up a new kind of sneaker tread that would enhance a runner's traction and speed, and he came up with the idea for Nike's "waffle tread" after studying the waffle iron in his home. Bowerman and Knight made their shoe and began by selling it out of the trunks of their car at track meets. From this small beginning Nike has grown into a company that sold over $12 billion worth of shoes in the $35 billion athletic footwear and apparel industries in 2004.
Nike's amazing growth came from its business model, which has always been based on two original functional strategies: to innovate state- of- the- art athletic shoes and then to publicize the qualities of its shoes through dramatic "guerrilla" marketing. Nike's marketing is designed to persuade customers that its shoes are not only superior but also a high fashion statement and a necessary part of a lifestyle based on sporting or athletic interests. A turning point came in 1987 when Nike increased its marketing budget from $8 million to $48 million to persuade customers its shoes were the best. A large part of this advertising budget soon went to pay celebrities like Michael Jordan millions of dollars to wear and champion its products. The company has consistently pursued this strategy and many other sporting stars, such as Tiger Woods and Serena Williams who are part of its charmed circle.
Nike's strategy to emphasize the uniqueness of its product paid off; its market share soared and its revenues hit $9.6 billion in 1998. However, 1998 was also a turning point, for in that year sales began to fall. Nike's $200 Air Jordans no longer sold like they used to, and inventory built up in stores and warehouses. Suddenly it seemed much harder to design new shoes that customers perceived to be significantly better and Nike's stunning growth in sales was actually reducing its profitability- somehow it had lost control of its business strategy. Phil Knight, who had resigned his management position, was forced to resume the helm and lead the company out of its troubles. He recruited a team of talented top managers from leading consumer products companies to help him improve Nike's business model. As a result, Nike has changed its business strategies in some fundamental ways.
In the past, Nike shunned sports like golf, soccer, rollerblading, and so on and focused most of its efforts on making shoes for the track and basketball market to build its market share in this area. However, when its sales started to fall, it realized that using marketing to increase sales in a particular market segment can only grow sales and profits so far; it needed to start to sell more types of shoes to more segments of the athletic shoe market. So Nike took its design and marketing competencies and began to craft new lines of shoes for new market segments. For example, it launched a line of soccer shoes and perfected their design over time, and by 2004 it had won the biggest share of the soccer market from its archrival Adidas.32 In addition, in 2004 it launched its Total 90 III shoes, which are aimed at the millions of casual soccer players throughout the world who want a shoe they can just "play" in. Once more, Nike's dramatic marketing campaigns aim to make their shoes part of the "soccer lifestyle," to persuade customers that traditional sneakers do not work because soccer shoes are sleeker and fi t the foot more snugly.33 To take advantage of its competencies in design and marketing, Nike then decided to enter new market segments by purchasing other footwear companies that offered shoes that extended or complemented its product lines. For example, it bought Converse, the maker of retro- style sneakers; Hurley International, which makes skateboards and Bauer in- line and hockey skates; and Official Starter, a licensor of athletic shoes and apparel whose brands include the low- priced Shaq brand. Allowing Converse to take advantage of Nike's in- house competencies has resulted in dramatic increases in the sales of its sneakers, and Converse has made an important contribution to Nike's profitability.34 Nike had also entered another market segment when it bought Cole Haan, the dress shoemaker, in the 1980s. Now it is searching for other possible acquisitions. It decided to enter the athletic apparel market to use its skills there, and by 2004 sales were over $1 billion. Nike made all these changes to its product line to increase its market share and profitability. Its new focus on developing new and improved products for new market segments is working. Nike's profits have soared from 14% in 2000 to 25% in 2007, it makes over $1 billion profit a year.
What business- level strategies is Nike pursuing?

Answer 1

N's business level strategy is all about overall scope and direction of the industry. N enacts a combination of deliberate and emergent business strategy. Important aspects of N's business level strategy are as below:
• Innovation
N believes that innovation in its products is the company's core competency. Innovation has been quite important in growth story of the company.
• Simplify and go
Life cycles of products of N are very low. Technology and fashion keep on changing. Company believes in quick and skillful decisions. This aspect is a powerful tool in using successfully emergent strategy.
• Diversify
Over the passage of time N has evolved its business strategy. It started with targeting a particular segment. But when its innovative products became weak in appeal, the company targeted other segments of market and diversified its business.
• Inorganic growth
N has been acquiring smaller companies whenever it became possible. So the company has increased its turnover by inorganic growth too.
• Advertisement
N promotes its products by sponsorship with professional teams, celebrity athletes and athletic teams of colleges.

Question 2

Why does each generic business model require a different set of business-level strategies? Give examples of pairs of companies in: (a) the computer industry; (b) the electronics industry; and (c) the fast-food industry that pursue different types of business models.

Answer 2

There are three generic competitive strategies suggested by Porter. They are differentiation strategy, focus strategy and low cost strategy. Each strategy is quite different. No single strategy can be applied on the overall market because needs of all customers in an industry are not same. Every business needs to segment market and design its offerings as per the needs of that market. After designing market offerings the company needs to excel in competition. To excel in competition the company needs to have distinct competencies. That is why each generic strategy requires a different set of product, market and distinctive competency.
For example:
a. In computer industry HP and Apple follow different strategies. HP follows low cost strategy while Apple follows differentiation strategy. HP manufactures computers with affordable prices. Apple manufactures computers for people with high incomes. It charges heavy premiums on its products.
b. In auto industry Chevrolet and Mercedes follow different strategies. Chevrolet follows low cost strategy while Mercedes follows differentiation strategy. Chevrolet manufactures cars with affordable prices. Mercedes manufactures cars for people with high incomes. It charges heavy premiums on its products.

Question 3

Nike, headquartered in Beaverton, Oregon, was founded over 30 years ago by Bill Bowerman, a former University of Oregon track coach, and Phil Knight, an entrepreneur in search of a profitable business opportunity. Bowerman's goal was to dream up a new kind of sneaker tread that would enhance a runner's traction and speed, and he came up with the idea for Nike's "waffle tread" after studying the waffle iron in his home. Bowerman and Knight made their shoe and began by selling it out of the trunks of their car at track meets. From this small beginning Nike has grown into a company that sold over $12 billion worth of shoes in the $35 billion athletic footwear and apparel industries in 2004.
Nike's amazing growth came from its business model, which has always been based on two original functional strategies: to innovate state- of- the- art athletic shoes and then to publicize the qualities of its shoes through dramatic "guerrilla" marketing. Nike's marketing is designed to persuade customers that its shoes are not only superior but also a high fashion statement and a necessary part of a lifestyle based on sporting or athletic interests. A turning point came in 1987 when Nike increased its marketing budget from $8 million to $48 million to persuade customers its shoes were the best. A large part of this advertising budget soon went to pay celebrities like Michael Jordan millions of dollars to wear and champion its products. The company has consistently pursued this strategy and many other sporting stars, such as Tiger Woods and Serena Williams who are part of its charmed circle.
Nike's strategy to emphasize the uniqueness of its product paid off; its market share soared and its revenues hit $9.6 billion in 1998. However, 1998 was also a turning point, for in that year sales began to fall. Nike's $200 Air Jordans no longer sold like they used to, and inventory built up in stores and warehouses. Suddenly it seemed much harder to design new shoes that customers perceived to be significantly better and Nike's stunning growth in sales was actually reducing its profitability- somehow it had lost control of its business strategy. Phil Knight, who had resigned his management position, was forced to resume the helm and lead the company out of its troubles. He recruited a team of talented top managers from leading consumer products companies to help him improve Nike's business model. As a result, Nike has changed its business strategies in some fundamental ways.
In the past, Nike shunned sports like golf, soccer, rollerblading, and so on and focused most of its efforts on making shoes for the track and basketball market to build its market share in this area. However, when its sales started to fall, it realized that using marketing to increase sales in a particular market segment can only grow sales and profits so far; it needed to start to sell more types of shoes to more segments of the athletic shoe market. So Nike took its design and marketing competencies and began to craft new lines of shoes for new market segments. For example, it launched a line of soccer shoes and perfected their design over time, and by 2004 it had won the biggest share of the soccer market from its archrival Adidas.32 In addition, in 2004 it launched its Total 90 III shoes, which are aimed at the millions of casual soccer players throughout the world who want a shoe they can just "play" in. Once more, Nike's dramatic marketing campaigns aim to make their shoes part of the "soccer lifestyle," to persuade customers that traditional sneakers do not work because soccer shoes are sleeker and fi t the foot more snugly.33 To take advantage of its competencies in design and marketing, Nike then decided to enter new market segments by purchasing other footwear companies that offered shoes that extended or complemented its product lines. For example, it bought Converse, the maker of retro- style sneakers; Hurley International, which makes skateboards and Bauer in- line and hockey skates; and Official Starter, a licensor of athletic shoes and apparel whose brands include the low- priced Shaq brand. Allowing Converse to take advantage of Nike's in- house competencies has resulted in dramatic increases in the sales of its sneakers, and Converse has made an important contribution to Nike's profitability.34 Nike had also entered another market segment when it bought Cole Haan, the dress shoemaker, in the 1980s. Now it is searching for other possible acquisitions. It decided to enter the athletic apparel market to use its skills there, and by 2004 sales were over $1 billion. Nike made all these changes to its product line to increase its market share and profitability. Its new focus on developing new and improved products for new market segments is working. Nike's profits have soared from 14% in 2000 to 25% in 2007, it makes over $1 billion profit a year.
How have Nike's business- level strategies changed the nature of industry competition?

Answer 3

N's business level strategy has changed nature of competition in the industry in following manner:
• N has shown solid growth in the past years. It has attracted many companies in the market. The competition in the industry is increasing from established as well as from local and upcoming brands. The low entry barriers in the online retailing business have enhanced the level of competition.
• The worldwide demand for athletic footwear is increasing. It is expected to grow in future too as per the market research results.
• Global athletic industry is undergoing continuous changes in terms of consumer preferences and technology. Customer behavior is highly dependent upon factors like strong brand, price, product sponsorship, advertising and changing styles, etc.

Question 4

How can companies pursuing cost leadership and differentiation lose their place on the value frontier? In what ways can companies regain their competitive advantage?

Question 5

Why are industries fragmented? What are the primary ways in which companies can turn a fragmented industry into a consolidated industry?

Question 6

What are the key problems involved in maintaining a competitive advantage in a growing industry environment?

Question 7

Discuss how companies can use: (a) product differentiation, and (b) capacity control to manage rivalry and increase an industry's profitability.