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Chapter 4 –Business-Level Strategy

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The Strategic Management Process

Chapter 10Corporate

Governance

Chapter 11OrganizationalStructure and

Controls

Chapter 13Strategic

Entrepreneurship

Strategy Implementation

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Agenda1. Introduction to Business-Level Strategy

2. Customers: Who, what, how?

3. Cost Leadership Strategies

4. Differentiation Strategies

5. Focus Strategies

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Core Competencies and Strategy

Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals

Providing value to customers and gaining competitive advantage by exploiting core competencies in specific product markets

Core Competencies

Strategy

Business-level Strategy

An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

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Agenda1. Introduction to Business-Level Strategy

2. Customers: Who, what, how?

3. Cost Leadership Strategies

4. Differentiation Strategies

5. Focus Strategies

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Customers: Who, What, How

Key Issuesin

Business-levelStrategy

Who will be served?

What needs will be satisfied?

How will those needs be satisfied?

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Customer Needs – Who?

All Customers

IndustrialMarkets

ConsumerMarkets

Determining the Customers to Serve

Market Segmentation

Cluster people with similar needs into individual and identifiable

groups

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Customer Needs – What?Customer Needs to Satisfy

Customer needs are related to a product’s benefits and features

Customer needs represent desires in terms of features and performance capabilities

Customer needs are neither right nor wrong, good nor bad

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Customer Needs – How?Determining the Core Competencies Necessary to Satisfy Customer Needs

Firms use core competencies to implement value creating strategies that satisfy customers’ needs

Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

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Purpose of Business-Level (BL) Strategies

Purpose: To create differences between position of a firm and its competitors

Firm must make a deliberate choice to Perform activities differently

Perform different activities

Activity map exemplifies a firm’s Activities

How they are integrated

Southwest Airline’s activity map: Note the primary (N=6) and secondary nodes/activities and the ‘connectedness’ or fit

Fit is key to the sustainability of competitive advantage

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Southwest Airlines’ Activity System

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Five Business-Level Strategies

Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

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Purpose of Business-Level (BL) Strategies (con’t)

Two types of competitive advantage firms must choose between

Cost (Are we LOWER than others?)

Uniqueness (Are we DIFFERENT? How?)

Two types of ‘competitive scope’ firms must choose between

Broad target

Narrow target

These combine to yield 5 different BL strategies

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Agenda1. Introduction to Business-Level Strategy

2. Customers: Who, what, how?

3. Cost Leadership Strategies

4. Differentiation Strategies

5. Focus Strategies

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Cost Leadership StrategyAn integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors

Relatively standardized products (“no-frills”)

Features acceptable to many customers

Lowest competitive price

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How to Obtain a Cost Advantage

Cost Drivers Value Chain

Determine and control

Reconfigure, if needed

Alter production process

Change in automation

New distribution channel

New advertising media Direct sales in place of

indirect sales

New raw material

Forward integration

Backward integration Change location

relative to suppliers or buyers

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Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

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Cost-effective MIS

Few management layers

Simplified planning

Consistent policies

Effecting training

Easy-to-use manufacturing technologies

Investments in technologies

Finding low cost raw materials

Monitor suppliers’ performances

Link suppliers’ products to production processes

Economies of scale

Efficient-scale facilities

Effective delivery schedules

Low-cost transportation

Highly trained sales force

Proper pricing

Value-Creating Activities for Cost Leadership

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How to Create Value with a Cost Leadership Strategy?

… assess the cost leader’s position against the Five Forces!

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Cost Leadership: Competitive Risks•Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations

•Too focused on cost reductions may occur at expense of customers’ perceptions of “competitive levels of differentiation” (i.e. value)

•Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

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Agenda1. Introduction to Business-Level Strategy

2. Customers: Who, what, how?

3. Cost Leadership Strategies

4. Differentiation Strategies

5. Focus Strategies

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Differentiation StrategyAn integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them

Nonstandardized products

Attracting customers who value differentiated features more than they value low cost

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Cost Drivers Value ChainValue Chain

Control if needed

Reconfigure to maximize

Raise performance of product or service Create sustainability through:

Customer perceptions of uniqueness Customer reluctance to switch to non-unique

product/service

How to Obtain a Differentiation Advantage

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Examples of Value-Creating Activities Associated with the Differentiation Strategy

Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

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Highly developed MIS

Emphasis on quality

Worker compensation for creativity/productivity

Use of subjective performance measures

Basic research capability

Technology

High quality raw materials

Delivery of products

High quality replacement parts

Superior handling of incoming raw materials

Attractive products

Rapid response to customer specifications

Order-processing procedures

Customer credit

Personal relationships

Value-Creating Activities and Differentiation

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How to Create Value with a Differentiation Strategy?

… assess the differentiator's position against the Five Forces!

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Differentiation: Competitive Risks

•The price differential between the differentiator’s product and the cost leader’s product becomes too large

•Differentiation ceases to provide value for which customers are willing to pay

•Experience narrows customers’ perceptions of the value of differentiated features

•Counterfeit goods replicate differentiated features of the firm’s products

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ExerciseFor each of the listed products, describe at least two ways they are differentiated:

Ben & Jerry’s ice cream

Hummer H3

Apple MacBook Air

Hannah Montana

Taco Bell

Which, if any of these bases for product differentiation are likely to be sources of sustainable competitive advantage, and why?

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Agenda1. Introduction to Business-Level Strategy

2. Customers: Who, what, how?

3. Cost Leadership Strategies

4. Differentiation Strategies

5. Focus Strategies

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Focus StrategiesAn integrated set of actions taken to produce goods or services that address the needs of a particular competitive segment

Particular buyer group (e.g., youths or senior citizens

Different segment of a product line (e.g., professional craftsmen versus do-it-yourselfers)

Different geographic markets (e.g., East Coast vs. West Coast)

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Factors Driving Focused StrategiesLarge firms may overlook small niches

A firm is able to serve a narrow market segment more effectively than can its larger, industry-wide competitors

A firm may lack the resources needed to compete in the broader market

Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

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Focus Strategies: Competitive RisksA focusing firm may be “outfocused” by its competitors

A large competitor may set its sights on a firm’s niche market

Customer preferences in niche market may change to more closely resemble those of the broader market