Chapter 4 BusinessLevel Strategy

1
Chapter 4 Business-Level Strategy
2
The Strategic Management Process

Strategy Implementation
Chapter 10CorporateGovernance
Chapter 11OrganizationalStructure andControls
Chapter 13StrategicEntrepreneurship
3
Agenda

• Introduction to Business-Level Strategy
• Customers Who, what, how?
• Cost Leadership Strategies
• Differentiation Strategies
• Focus Strategies

4
Core Competencies and Strategy
Resources and superior capabilities that are
sources of competitive advantage over a firms
rivals
An integrated and coordinated set of actions
taken to exploit core competencies and gain
competitive advantage
Providing value to customers and gaining
competitive advantage by exploiting core
competencies in specific product markets
5
Agenda

• Introduction to Business-Level Strategy
• Customers Who, what, how?
• Cost Leadership Strategies
• Differentiation Strategies
• Focus Strategies

6
Customers Who, What, How
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Customer Needs Who?
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 products
  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 firms
• Activities
• How they are integrated
• Southwest Airlines activity map Note the
  primary (N6) 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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Purpose of Business-Level (BL) Strategies (cont)

• 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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Five Business-Level Strategies
Source Adapted from Porter, M. E. (1985).
Competitive advantage Creating and sustaining
superior performance, New York, NY Free Press.
14
Agenda

• Introduction to Business-Level Strategy
• Customers Who, what, how?
• Cost Leadership Strategies
• Differentiation Strategies
• Focus Strategies

15
Cost Leadership Strategy

• An 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
Determine and control
Reconfigure, if needed
Cost Drivers
Value Chain

• Alter production process

• New raw material

• Change in automation

• Forward integration

• New distribution channel

• Backward integration

• Change location relative to suppliers or buyers

• New advertising media

• Direct sales in place of indirect sales

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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.
18
Value-Creating Activities for Cost Leadership

• 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

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How to Create Value with a Cost Leadership
Strategy?
assess the cost leaders 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 leaders
  strategy

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Agenda

• Introduction to Business-Level Strategy
• Customers Who, what, how?
• Cost Leadership Strategies
• Differentiation Strategies
• Focus Strategies

22
Differentiation Strategy

• An 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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How to Obtain a Differentiation Advantage
Control if needed
Reconfigure to maximize
Cost Drivers
Value Chain

• Raise performance of product or service

• Create sustainability through

• Customer perceptions of uniqueness

• Customer reluctance to switch to non-unique
  product/service

24
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.
25
Value-Creating Activities and Differentiation

• 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

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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
  differentiators product and the cost leaders
  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 firms products

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Exercise

• For each of the listed products, describe at
  least two ways they are differentiated
  
• Ben Jerrys 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?

29
Agenda

• Introduction to Business-Level Strategy
• Customers Who, what, how?
• Cost Leadership Strategies
• Differentiation Strategies
• Focus Strategies

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Focus Strategies

• An 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 Strategies

• Large 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 Risks

• A focusing firm may be outfocused by its
  competitors
  
• A large competitor may set its sights on a firms
  niche market
  
• Customer preferences in niche market may change
  to more closely resemble those of the broader
  market