CHAPTER 6:BusinessLevel Strategy

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CHAPTER 6Business-Level Strategy

• Teaching Objectives
• 1. Familiarize students with the main ways to
  compete in a business or industry.
• 2. Discuss Porters generic strategies cost
  leadership, differentiation, and focus-and the
  opposite, being stuck in the middle.
• 3. Familiarize students with the advantages and
  disadvantages of these strategies, and discuss
  the ways in which the company can achieve these
  strategies.
• 4. Examine the various investment strategies
  available to companies to complement their
  generic competitive strategies and maximize their
  profitability.

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Business Level Strategy

• Introduction After analyzing the source of
  environmental opportunities and threats and
  company strengths and weaknesses in the last two
  chapters, we are now in a position to examine the
  issue of how a company can compete effectively in
  an industry. We focus on various strategies a
  company can adopt at the business level to
  maximize its competitive advantage and
  profitability. In order to do so, we need to
  consider how a companys business-level strategy
  derives from the definition of its business.
• Foundations of Business-Level Strategy the
  business definition is the result of three
  decisions. First, customer needs, or what is
  being satisfied. Second is customer groups, or
  who is being satisfied. Third is distinctive
  competencies, or how customer needs are to be
  satisfied.

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Business Level Strategy

• Customer Needs and Product Differentiation
  Customer needs are any needs that can be
  satisfied through the characteristics of a
  product or service. Product differentiation is
  the process of creating a competitive advantage
  by designing product characteristics to satisfy
  customer needs. All companies must differentiate
  their products to satisfy some customer needs,
  but some companies do this to a much greater
  degree. For example, some companies aim to
  satisfy customer needs by offering a low-priced
  product they do not engage in much product
  differentiation (Examples?). Other companies
  seek to create something unique about their
  products to satisfy needs in ways in which other
  companies cannot.

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Business Level Strategy

• Uniqueness may relate to the following
• 1. Physical characteristics of the product, such
  as quality or reliability
• Ex John Deere, nothing runs like a deer or
  Harley-Davidson, nothing rides like a Harley.
• 2. Appeal to a psychological need of customer,
  such as status or prestige
• Ex Mercedes Lexus BMW
• 3. The number of models in companys product
  range
• 4. The development of a distinctive competency,
  such as service

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Business Level Strategy

• Customer Groups and Market Segmentation The
  second aspect of business definition concerns
  market segmentation, the way the company groups
  its customers according to important differences
  in customer needs or preferences to gain a
  competitive advantage. In genera, there are
  three strategies the company can adopt. First,
  not recognize that there are different segments
  and simply serve the average customer. Second,
  segment the market into different groups and
  develop a product to suit each group. Third,
  serve only one or a few market segments. A
  company may want to make more complex
  product/market choices. It may want to produce a
  different product tailored to each market segment
  because this increases the demand for the
  companys products by attracting different kinds
  of customers.

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Business Level Strategies

• Distinctive Competencies The third issue in
  choosing a business-level strategy is to decide
  what type of distinctive competency to pursue to
  satisfy customer needs and groups in order to
  gain a competitive advantage. Some companies use
  their production technology to develop a
  manufacturing distinctive competency, others
  strive for a technological distinctive
  competency, and still others seek to establish a
  sales and marketing competency. The issue at the
  business level is that the company must decide
  how to organize and combine its distinctive
  competencies to gain a competitive advantage. A
  product/market/distinctive competency perspective
  provides a framework for understanding the
  foundations of business-level strategy. Now we
  can consider how different competitive strategies
  are the result of making different
  product/market/distinctive-competency decisions.

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II. Choosing a Generic Competitive Strategy at
the Business Level

• The purpose of pursuing a business-level strategy
  is to give the company a competitive advantage
  that will allow it to outperform its competitors
  and earn above-average returns. There are three
  basic strategies a company can adopt cost
  leadership, differentiation, and focus.
• Cost-Leadership Strategy A companys goal in
  pursuing cost leadership is to out-perform
  competitors by producing goods and services at a
  lower cost. This strategy has two advantages.
  First, when all companies in the industry charge
  the same price for their products, the cost
  leader makes higher profits because its costs are
  lower. Second if price wars develop and
  competition increases, then high-cost companies
  will be driven out of the industry before the
  cost leader.

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Generic Competitive Strategy at the Business Level

• Cost Leadership Strategy (Continued) The cost
  leader chooses low product differentiation
  because differentiation is expensive. The cost
  leader also chooses to serve the needs of the
  average customer, avoiding high costs of serving
  different segments. The cost leader develops a
  competency in manufacturing. The cost leaders
  strategy is geared to squeezing out every cent of
  cost savings by making consistent
  product/market/distinctive-competency choices.
• Advantages Maintaining customers is usually
  assured. The cost leader is less effected by
  powerful suppliers than are competitors. The
  cost leader is less effected by buyers ability
  to squeeze down prices. Cost advantage is a
  barrier to entry because other companies are
  unable to enter at a lower cost. The cost leader
  is better able than its competitors to reduce its
  price in order to compete.

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Generic Competitive Strategy at the Business Level

• What are the components of Nissans
  cost-leadership strategy? (Case 6.1 page 173).
  To keep its costs and prices lower than other
  Japanese and U.S. car manufacturers, Nissan
  started its low-cost strategy for its Altima car
  at the design stage. First, its engineers
  designed the Altima to be easy and inexpensive to
  manufacture. Then Nissan limited the number of
  different models that it would produce to keep
  costs low a basic version or a luxury-equipped
  version. Finally, Nissan focused its marketing
  on the amount of quality and luxury in the car,
  given its low price, to present to customers a
  high-quality/low-cost image of the car. The
  results were astonishing as sales exceeded even
  Nissans optimistic projections.

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Generic Competitive Strategy at the Business
Level

• Disadvantages of a Cost-Leadership Approach
  Competitors may find ways of producing the
  product at a lower cost, perhaps because of
  technological developments or because of cost
  savings, such as those foreign competitors can
  sometimes achieve. Competitors may imitate the
  cost leaders methods. And, in a single-minded
  effort to reduce costs, the cost leader may lose
  sight of changes in consumer tastes.
• Differentiation Strategy The objective of
  differentiation is to achieve a competitive
  advantage by creating a product or service that
  is perceived to be unique in some way. The
  differentiated companys ability to achieve this
  goal means that it can charge a premium price for
  its products. On the dimension of product
  differentiation, the differentiator aims for a
  very high level of differentiation and frequently
  produces a wide range of products.

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Generic Competitive Strategy at the Business
Level

• Differentiation Strategy (Continued) Product
  differentiation can be achieved in many ways
  examples include the purity we are asked to
  associate with Ivory Soap, Maytags reputation
  for reliability, and Sonys link with product
  quality. IBM and Federal Express have made their
  names on service so have Neiman Marcus and
  Nordstrom. Finally, BMW and Rolex appeal to
  customers prestige needs. When a company
  pursues differentiation, it seeks to distinguish
  itself along as many dimensions as possible.
  Hence, BMW is not just a prestige car it is also
  fast, reliable, and technologically
  sophisticated. When market segmentation is
  considered the differentiator generally segments
  its market into many niches. If it offers
  products for many market niches, it is pursuing a
  broad differentiation strategy-as GM does by
  offering cars for every market niche.

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Generic Competitive Strategy at the Business Level

• Differentiation Strategy (Continued) On the
  dimension of distinctive competency, which
  function is most important depends on the source
  of the companys differentiation advantage. It
  it seeks a competitive advantage based on
  innovation and developing a technological
  competency, the key function is RD if customer
  responsiveness is its goal, then after-sales
  service, distribution, and customer service
  functions are most critical.
• Advantages Potential competitors are not a
  threat if the company has cultivated brand
  loyalty for its products and customers want the
  companys goods. Powerful suppliers are rarely a
  problem because the companys strategy is geared
  toward the price it can charge rather than toward
  minimizing costs. Powerful buyers are rarely a
  problem because only the company can supply the
  differentiated product.

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Generic Competitive Strategy at the Business Level

• Advantages (Continued) Potential entrants would
  be forced to develop a unique product in order to
  compete. This is expensive, especially when
  existing companies enjoy strong brand loyalty.
  The threat of substitute products depends on the
  ability to of competitors to develop products
  that can meet the same customer needs as the
  differentiators products and break brand
  loyalty.
• Disadvantages The first is the companys
  ability to maintain its perceived uniqueness in
  customers eyes. This depends on how quickly
  other companies move to imitate successful
  differentiators. Another threat is that a source
  of uniqueness may be overridden by changes in
  consumer tastes and demands. A company must
  constantly look out for ways to match its unique
  strengths to changing product/market
  opportunities.

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Generic Competitive Strategy at the Business
Level

• Both Cost Leadership and Differentiation New
  production technologies like flexible
  manufacturing techniques, just-in-time inventory
  systems, and robotics have allowed companies to
  take advantage of the benefits of both
  strategies. For example, flexible manufacturing
  systems enable companies to manufacture models of
  a product at little or no extra cost than if they
  produced large batches of standardized products.
  The growth of niche marketing has been made
  possible by these new low-cost production
  techniques. The differentiator can reduce
  marketing costs by reducing the number of models
  in the product range while offering packages of
  options ( for example, car manufacturers offer a
  luxury package, sports package, and economy
  package). Differentiation is still feasible but
  at lower cost than for the pure differentiator.

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Generic Competitive Strategy at the Business Level

• Focus Strategy The third generic strategy, the
  focus strategy, differs from the other two in
  that it is directed at serving the needs of a
  limited customer group or set. It concentrates
  on serving a particular market niche that may be
  defined as geographically (by region or
  locality), by type of customer (very rich or
  young), and by segment of the product line such
  as only very expensive autos or designer clothes.
  A focus strategy can be pursued using either a
  differentiation or a low-cost approach. When a
  company adopts a low-cost approach, it competes
  against the market leader only in those segments
  where it has no cost disadvantage. Focused
  companies can particularly exploit their
  knowledge of a small customer set because they
  are closer to the customer than a broad
  differentiator.

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Generic Competitive Strategy at the Business Level

• Focus Strategy (Continued) The choices
  available to the focused company include high or
  low product differentiation, low market
  segmentation limited to one or a few niches.
• Advantages/Disadvantages The company is
  protected from rivals to the extent it can
  provide a product or service at a price or
  quality others cannot offer. Powerful suppliers
  may be a threat because the company buys in such
  small volumes that it has less bargaining power.
  The ability to satisfy unique customer needs
  gives the company power over its buyers.
  Potential competitors as well as substitute
  products have to overcome the hurdle of consumer
  loyalty.

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Generic Competitive Strategy at the Business Level

• Being Stuck in the Middle Each of the generic
  strategies just discussed requires that the
  company make consistent product/market choices to
  achieve a proper fit. There are many companies
  that have made the wrong choice. They are called
  stuck in the middle because they have been unable
  to obtain a competitive advantage and to earn
  average or above-average returns. Sometimes a
  low-cost company may diversify into new product
  markets where it has less expertise or may invest
  in RD inappropriate to its strategy. Another
  path to failure is that taken by the successful
  focuser that tries to become a broad
  differentiator and ends up stuck in the middle.
  People Express is a good example. Also,
  differentiators can lose their strategy if
  competitors enter the market and chip away at
  their competitive advantage. This has happened
  recently to automakers.

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III. Choosing an Investment Strategy at the
Business Level

• Up to now, we have discussed business-level
  strategy only in terms of making
  product/market/distinctive-competency choices to
  gain a competitive advantage. However, there is
  a second choice to be made at the business level
  the choice of an investment strategy to support
  the competitive strategy. An investment strategy
  refers to the amount and type of resources that
  must be invested to gain a competitive advantage.
  Generic strategies are expensive to maintain and
  develop. Differentiation is most expensive
  because of the need to provide uniqueness. Cost
  leadership is less expensive once the initial
  investment in plant and equipment has been made.
  Focus is least expensive because fewer resources
  are earmarked to serve one market segment rather
  than the whole market. In deciding on an
  investment strategy, the company must evaluate
  the returns from investing in a competitive
  strategy against the cost of developing the
  competitive strategy. The strength of a
  companys competitive position and the stage of
  the industry life are two important
  considerations.

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Choosing an Investment Strategy at the Business
Level

• Strategy at the Embryonic Stage This is the
  stage at which companies are developing a
  distinctive competency, so investment needs are
  very great. Thus the appropriate strategy is a
  share-building strategy. Companies require large
  amounts of capital to develop a competitive
  advantage.
• Growth Strategy At the growth stage, a company
  must consolidate its position and increase its
  market share to survive the coming shakeout.
  Hence the appropriate investment strategy is the
  growth strategy. The company must maintain its
  relative position in a rapidly expanding market,
  so it requires the infusion of large amounts of
  capital. Differentiators engage in massive RD
  efforts, and cost leaders invest in new plants
  and equipment to lower costs. Companies in a
  weak competitive position adopt a market
  concentration strategy to develop a niche because
  they lack the strength to become a full-fledged
  differentiator or low-cost company.

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Choosing an Investment Strategy at the Business
Level

• Shakeout Strategy By the shakeout stage, demand
  is increasing more slowly and competition by
  price or product characteristics is rampant.
  Companies in strong competitive positions need to
  invest in a share-increasing strategy to attract
  customers from companies that are exiting the
  market. For cost leaders, investment in cost
  control is crucial. Differentiators attempt to
  enlarge their share in many market segments,
  offer more products, and become broad
  differentiators - more marketing oriented. The
  companies in a weak position turn to market
  concentration or, if very weak, engage in a
  harvest or liquidation strategy.

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Choosing an Investment Strategy at the Business
Level

• Strategies at the Maturity Stage By the
  maturity stage, a strategic group structure has
  emerged in the industry, companies have learned
  how their competitors will react to their
  competitive moves. Companies are eager to reap
  the rewards of their previous investments in a
  competitive strategy. Also, there is a slowdown
  in market growth reducing investment needs to
  some extent. Companies adopting the
  hold-and-maintain strategy continue to defend
  their market share but stop aggressively pursuing
  new customers. This enables them to give higher
  returns to shareholders. In the profit strategy
  the company attempts to maximize the present
  returns from its previous investments. It
  invests proportionally less in the business and
  thus increases the returns to shareholders. This
  works well only so long as the environment is
  constant and there is no increase in the number
  of competitors. All too often, however, large
  companies rest on their laurels and allow
  competitors to catch them unawares. GM Eastman
  Kodak, and Campbell Soup are examples.

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Choosing an Investment Strategy at the Business
Level

• Decline Strategies The decline stage starts
  when demand for the industrys products begin to
  fall. Companies in strong positions revert to
  market concentration and to asset reduction
  strategies. Even the strong company strives to
  consolidate its market niche. It narrows product
  range and exits marginal niches to redeploy
  resources more efficiently. Examples include
  International Harvester and Woolworth). Such a
  strategy is sometimes called a harvest strategy
  because the company reduces to a minimum the
  assets it employs in the business and forgoes
  future investment in order to milk the resource
  now. The difference between a market
  concentration and a harvest strategy is that
  market concentration implies that the company is
  trying to turn its business around, whereas
  harvesting implies that it will exit the industry
  when it has harvested all the returns it can.

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Choosing an Investment Strategy at the Business
Level

• Decline Strategies (Continued) Turnaround
  strategies may be applied by companies at any
  stage in the life cycle. The question is, Is
  there a viable way to compete in the industry and
  how much will this cost? Sometimes it is
  possible to rescue the companys strategy from
  being stuck in the middle. At other times the
  problems may be due to bad strategy
  implementation, and it may be that resources
  should be invested in a new structure or
  management team. If turnaround is not possible,
  the two remaining options are liquidation and
  divestiture. These involve the company selling
  its assets piecemeal or selling the whole
  business if a buyer can be found.
• Summary Thus, at the business level,
  formulating strategy involves 1) the choice of a
  competitive strategy 2) the choice of an
  investment strategy to match this generic
  strategy and 3) alignment of ones strategy with
  opportunities and threats that arise in the
  industry.