Chapter 4: Business-Level Strategy

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Chapter 4 Business-Level Strategy

• Overview
• Defining business-level strategy
• Risks of business-level strategies
• Differences in business-level strategies
• 5-Forces
• Relationship between customers and strategy

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The Strategic Management Process
3
Introduction

• Strategy Increasingly important to a firms
  success and concerned with making choices among
  two or more alternatives. Choices dictated by
• External environment (O and T)
• Internal resources, capabilities and core
  competencies (S and W)
• Business level-strategy Integrated and
  coordinated set of commitments and actions the
  firm uses to gain a competitive advantage by
  exploiting core competencies in specific product
  markets/industry
• How we intend to compete in a specific industry

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Business-Level 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
• How value chain activities will be performed to
  create unique value
• No strategy better than others
• Contingent on internal and external environment

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Business-Level Strategies

• Two types of competitive advantage firms must
  choose between
• Cost (Are our costs LOWER than rivals costs?)
• Uniqueness (Are we DIFFERENT than rivals? How?)
• Two types of competitive scope firms must
  choose between
• Broad target
• Narrow target
• These combine to yield 5 different generic
  business level strategies
• Can potentially be used by any organization
  competing in any industry

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Five Business-Level Strategies
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Types of Business-Level Strategies

• Cost Leadership Strategy
• Competitive advantage THE low-cost leader and
  operates with margins greater than competitors
• Competitive scope Broad
• Integrated set of actions designed to produce or
  deliver goods or services with features that are
  acceptable to customers at the lowest cost,
  relative to competitors
• No-frills, standardized or commodity-like product
• Must have competitive levels of quality, service,
  and other features and lowest overall costs
• Continuously reduce costs of value chain
  activities

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Examples of Value-Creating Activities Associated
with the Cost Leadership Strategy
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Types of Business-Level Strategies

• Cost Leadership Strategy
• In relationship to the 5 Forces
• Existing Rivalry
• Rivals hesitate to compete on the basis of price
• Bargaining Power of Buyers (Customers)
• Powerful buyers can force cost leader to reduce
  prices up to a point
• Bargaining Power of Suppliers
• Cost leaders can absorb suppliers price increases
  
• Potential Entrants
• Efficiency can serve as a barrier to entry
• Product Substitutes
• Can reduce prices when faced with substitutes
• Thus built in defense against all 5 forces

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Types of Business-Level Strategies

• Cost Leadership Strategy
• Competitive Risks
• Innovations by competitors can quickly eliminate
  cost advantage
• Too much focus on cost reduction versus
  competitive levels of differentiation
• Competitors may learn how to successfully imitate
  a cost leaders strategy

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Types of Business-Level Strategies

• Differentiation
• Competitive advantage Differentiation/uniqueness
  
• Competitive scope Broad
• Integrated set of actions designed by a firm to
  produce or deliver goods or services at an
  acceptable cost that customers perceive as being
  different/unique in ways that are important to
  them
• Targeted customers perceive product value
• Customized products differentiating on as many
  features as possible
• Can differentiate in many ways and in many value
  chain areas

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Examples of Value-Creating Activities Associated
with the Differentiation Strategy
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Types of Business-Level Strategies

• Differentiation
• In relationship to the 5 Forces
• Existing Rivalry
• Customers are loyal purchasers of differentiated
  products
• Bargaining Power of Buyers (Customers)
• Uniqueness and loyalty reduces customers
  sensitivity to price increases
• Bargaining Power of Suppliers
• Provide high quality components, driving up
  firms costs
• Cost may be passed on to customer
• Potential Entrants
• Substantial barriers (see above) and would
  require significant resource investment
• Product Substitutes
• Customer loyalty effectively positions firm
  against product substitutes

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Types of Business-Level Strategies

• Differentiation
• Risks
• Can charge too high of a price premium
• Differentiation theme no longer valuable to
  customers
• Over-differentiating
• Customer experience shows differentiation not
  worth the cost
• Counterfeiting

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Types of Business-Level Strategies

• Focus strategies
• In general, the firms core competencies used to
  serve the need of a particular industry segment
  or niche to the exclusion of others.
• May lack resources to compete in the broader
  market
• May be able to more effectively serve a narrow
  market segment than larger industry-wide
  competitors
• Firms may direct resources to certain value chain
  activities to build competitive advantage
• Large firms may overlook small niches

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Types of Business-Level Strategies

• Focus strategy examples
• Buyer groups
• Youths/senior citizens
• Product line segments
• Professional painter groups
• Geographic markets
• West vs. East coast
• Definition An integrated set of actions taken to
  produce goods or services that serve the needs of
  a particular competitive segment

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Types of Business-Level Strategies

• Focused Cost Leadership
• Competitive advantage Low-cost
• Competitive scope Narrow industry segment
• Motel 6, Kia
• Focused Differentiation
• Competitive advantage Differentiation
• Competitive scope Narrow industry segment
• Ritz-Carlton, Apple, Rolls Royce

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Types of Business-Level Strategies

• Focus strategies
• Risks
• Same basic risks as broad cost leadership or
  broad differentiation plus
• A competitor may be able to focus on a more
  narrowly defined competitive segment and
  "outfocus the focuser
• A company competing on an industry-wide basis may
  decide that the market segment served by the
  focus strategy firm is attractive and worthy of
  competitive pursuit
• Customer needs within a narrow competitive
  segment may become more similar to those of
  industry-wide customers as a whole

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Types of Business-Level Strategies

• Integrated Cost Leadership/Differentiation
• Efficiently produce products with differentiated
  attributes
• Efficiency Sources of low cost
• Differentiation Source of unique value
• Involves engaging in primary and support
  activities that allow a firm to simultaneously
  pursue low cost and differentiation
• Low price with somewhat highly differentiated
  features
• More value for the money
• Often called best-cost strategy
• Example Toyota

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Types of Business-Level Strategies

• Integrated Cost Leadership/Differentiation
• Risks of Integrated Strategies
• Harder to implement than other strategies
• Must simultaneously reduce costs while increasing
  differentiation
• Can get stuck in the middle resulting in no
  advantages and poor performance

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Other Business-Level Strategies

• Strategic Alliances and Partnerships
• Mergers and Acquisitions
• Vertical Integration
• Outsourcing
• Offensive and Defensive Strategies
• Web Site Strategies
• First-Mover Advantages and Disadvantages
• Business Model
• Functional-Area Strategies

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Customers and their Relationship with
Business-Level Strategies

• Strategic competitiveness results when firm can
  satisfy customers by using its competitive
  advantages
• Five components in customer relationships
• Effectively managing relationships w/ customers
• Deliver superior value and build customer loyalty
• Reach, richness and affiliation
• Access and connection to customers, depth and
  detail of information, and facilitating
  interactions with customers
• Who Determining the customers to serve
• What Determining which customer needs to
  satisfy
• How Determining core competencies necessary to
  satisfy customer needs