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Chapter Five BUSINESS-LEVEL STRATEGY: CREATING AND SUSTAINING COMPETITIVE

STRATEGY

OBJECTIVES

1. Cost Leadership Strategy2. Differentiation Strategy3. Focus Strategy4. Combination Strategy5. Strategy in Industry Life Cycle

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LEVELS OF STRATEGY

Corporate Strategy Actions to boost performance of individual businesses Capturing synergy among business units (2 + 2 = 5 effects) ! Establishing investment priorities (diversification strategy)

Business Strategy Forming responses to changes in industry Crafting competitive moves Uniting strategic initiatives of functional areas

Functional Strategy Game plan for a strategically-relevant function, activity, or business process Provide support for business strategy

Two-Way Influence

Two-Way Influence

Business Strategy

Functional Strategies

Corporate Strategy

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BUSINESS-LEVEL STRATEGY

BusinessStrategy

Strategic Alliances and CollaborativePartnerships

Responses to Changing Conditions

Basic CompetitiveApproach

Moves toSecureCompetitiveAdvantage

Geographic coverage;approach to verticalintegration

ManufacturingStrategy

Marketing Strategy

R & D Strategy

Human Resources Strategy

Finance Strategy

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TYPES OF COMPETITIVE ADVANTAGE

CompetitiveAdvantage

DIFFERENTIATIONAdvantage

COSTAdvantageSimilar product

at lower cost

Price premiumfrom unique product

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THREE GENERIC STRATEGIES

Exhibit 5.1 Three Generic Strategies

Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter.

Competitive Advantage

Uniqueness Perceived by the Customer

Low Cost Position

Str

ateg

ic T

arg

et

Particular Segment Only

Industrywide

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1. COST LEADERSHIP STRATEGY

Objective Open up a sustainable cost advantage over rivals, using

lower-cost edge as a basis either to:

- Under-price rivals and reap market share gains- Earn higher profit margin selling at going price

Characteristics

Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement

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1. COST LEADERSHIP STRATEGYDIRVERS OF COST ADVANTAGE

Economies of Scaleo Specialization and Division

of Labor Economies of Learning

o Increased Dexterityo Improved Coordination

Process Technology and Process Designo Mechanization and

Automationo Efficient Utilization of

Materialso Increased Precision

Product Designo Design for Automationo Designs to Economize on

Materials Input Costs

o Location Advantageso Ownership of Low-Cost Inputso Bargaining Powero Supplier Cooperation

Capacity Utilizationo Ratio of Fixed to Variable

Costs Managerial / Organizational

Efficiency

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1. COST LEADERSHIP STRATEGYVALUE CHAIN ACTIVITIES: Examples

Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership

Shared purchasing operations with other business units

Effective policy guidelines to ensure low cost raw materials (with acceptable quality levels)

Expertise in process engineering to reduce manufacturing costs

Effective use of automated technology to reduce scrappage rates

Effective orientation and training programs to maxi- mize employee productivity

Minimize costs associated with employee turnover through effective policies

Standardized account- ing practices to minimize personnel required

Few management layers to reduce overhead costs

Effective layout of receiving dock operation

Effective use of quality control inspectors to minimize rework on the final product

Effective utilization of delivery fleets

Purchase of media in large blocks

Sales force utilization is maximized by territory management

Thorough service repair guidelines to minimize repeat maintenance calls

Use of single type of repair vehicle to minimize costs

Firm infrastructure

Human resource management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing and sales

Service

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1. COST LEADERSHIP STRATEGY

EXPERIENCE CURVE EFFECTS

Exhibit 5.4 Comparing Experience Curve Effects

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1. COST LEADERSHIP STRATEGY

WORKS BEST WHEN? Price competition is vigorous Product is standardized or readily available from many

suppliers. There are few ways to achieve differentiation that have

value. Most buyers use product in same ways Buyers incur low switching costs. Buyers are large and have significant bargaining power.

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1. COST LEADERSHIP STRATEGY

FAILS WHEN? Being overly aggressive in cutting price (revenue

erosion of lower price is not offset by gains in sales volume--profits go down, not up).

Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring

Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used

Technological breakthroughs open up cost reductions for rivals.

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2. DIFFERENTIATION STRATEGY

Objective Incorporate differentiating features that cause buyers to prefer

firm’s product or service over the brands of rivals.

Keys to Success Find ways to differentiate that create value for buyers Not easily matched or cheaply copied by rivals.

Characteristics

Uniqueness is achieved in ways that:– Buyers perceive as valuable– Rivals find hard to match or copy

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2. DIFFERENTIATION STRATEGYVALUE CHAIN ACTIVITIES : Examples

Facilities that promote firm image

Superior MIS—To integrate value-creating activities to improve quality

Widely respected CEO enhances firm reputation

Provide training and incentives to ensure a strong customer service orientation

Programs to attract talented engineers and scientists

Excellent applications engineering support

Superior material handling and sorting technology

Use of most prestigious outletsPurchase of high-quality components to enhance product image

Superior material handling operations to minimize damage

Quick transfer of inputs to manufactur- ing process

Flexibility and speed in responding to changes in manu-facturing specs

Low defect rates to improve quality

Accurate and responsive order processing

Effective product replenish-ment to reduce customer’s inventory

Creative and innovative advertising programs

Fostering of personal relation-ship with key customers

Rapid response to customer service requests

Complete inventory of replacement parts and supplies

Firm infrastructure

Human resource management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing and sales

ServiceExhibit 5.5 Value-Chain Activities: Examples of Differentiation

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2. DIFFERENTIATION STRATEGY

EXAMPLES OF DIFFERENTIATION

BMW automobiles Brand Image

Nokia cell phones Innovation

Honda Goldwing motorcycles Features

Marantz stereo components Technology

Nordstrom department stores Customer service

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2. DIFFERENTIATION STRATEGY

WORKS BEST WHEN? There are many ways to differentiate a product that have

value and please customers.

Buyer needs and uses are diverse.

Few rivals are following a similar type of differentiation approach.

Technological change is fast-paced and competition is focused on evolving product features.

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2. DIFFERENTIATION STRATEGY

FAILS WHEN? Trying to differentiate on a feature buyers do not

perceive as lowering their cost or enhancing their well-being

Over-differentiating such that product features exceed buyers’ needs

Charging a price premium that buyers perceive is too high

Failing to signal value

Not understanding what buyers want or prefer and differentiating on the “wrong” things

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3. FOCUS STRATEGY Objective

Involves concentrated attention on a narrow piece of the total market Serve niche buyers better than rivals

Keys to Success Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities to serve needs of target buyer segment

Characteristics

Achieve LOWER COSTS than rivals in serving the segment -- A low-cost strategy

Offer niche buyers SOMETHING DIFFERENT from rivals

-- A differentiation strategy

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3. FOCUS STRATEGY

WORKS BEST WHEN?

Costly or difficult for multi-segment rivals to serve specialized needs of target niche.

No other rivals are concentrating on same segment.

Firm’s resources do not allow it to go after a bigger piece of market.

Industry has many different segments, creating more focusing opportunities.

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3. FOCUS STRATEGY

FAILS WHEN? Competitors find effective ways to match a focuser’s

capabilities in serving niche

Niche buyers’ preferences shift towards product attributes desired by majority of buyers--the niche becomes part of the overall market

Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

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4. COMBINATION STRATEGIES

Integrated Low Cost and Differentiation Succeeds at melding various generic strategies

Stuck-in-the-Middle Fails at melding various generic strategies

Unclear basis for differentiation

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4. COMBINATION STRATEGIES

PERFORMANCE OF COMPETITIVE STRATEGIES

Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.

Performance

Competitive Advantage

Return oninvestment (%) 35.5 32.9 30.2 17.0 23.7 17.8

Sales Growth (%) 15.1 13.5 13.5 16.4 17.5 12.2

Gain in MarketShare (%) 5.3 5.3 5.5 6.1 6.3 4.4

Sample Size 123 160 100 141 86 105

Differentiation and Cost Differentiation Cost

Differentiation Focus

Cost Focus

Stuck in the Middle

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5. STRATEGY in INDUSTRY LIFE CYCLE

LIFE CYCLE OF AN INDUSTRY

Introduction Growth Maturity Decline

Adapted from Exhibit 5.8 Stages of the Industry Life Cycle

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5. STRATEGY in INDUSTRY LIFE CYCLESTAGES OF THE INDUSTRY LIFE CYCLE

Generic strategies

Differentiation Differentiation Differentiation Overall costOverall cost leadershipleadership Focus

Market growth rate

Low Very large Low to Negativemoderate

Number of segments

Very few Some Many Few

Intensity of competition

Low Increasing Very intense Changing

Emphasis on product design

Very high High Low to Lowmoderate

StageIntroduction Growth Maturity DeclineFactor