BusinessLevel Strategy

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Business-Level Strategy

• Business-level strategy an integrated and
  coordinated set of commitments and actions the
  firm uses to gain a competitive advantage by
  exploiting core competencies in specific product
  markets

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Core Competencies and Strategy
The resources and capabilities that have been
determined to be a source of competitive
advantage for a firm over its rivals
An integrated and coordinated set of actions
taken to exploit core competencies and gain a
competitive advantage
Actions taken to provide value to customers and
gain a competitive advantage by exploiting core
competencies in specific, individual product
markets
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Key Issues of Business-Level Strategy

• What good or service to offer, to which customers
• How and where to create the good or service
• How to distribute the good or service in the
  marketplace(s)

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Customers

• Firms strategy depends upon
• 1. who it will serve
• 2. what needs those target customers have that it
  will satisfy
• how those needs will be satisfied

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Recall our value creation model
Costs represent specific investment choices that
generate value
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Managing Relationships With Customers

• Transactions with customers can become
  relationships based on offering them superior
  value, e.g.,
• help customers develop their own competitive
  advantage (B2B)
• E.g., differentiate, focus, cost, competency
• Satisfy/exceed needs (B2C)

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Consumer Markets
Demographic factors
Consumer Markets
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
Broad or narrow scope?
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Business Markets
End-use segments
Industrial Markets
Product segments
Geog segments
Common buying factors
Customer size segments
Broad or narrow scope?
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Types of Business-Level Strategies

• Business-level strategies are intended to create
  differences between the firms position relative
  to those of its rivals
• Firm must decide whether it will perform
  activities differently or perform different
  activities (compared to rivals)
• Two basic strategies to create value and attain
  competitive advantage according to Porter
• Low cost
• Differentiation

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Five Generic Strategies
Competitive Advantage
Cost
Uniqueness
Cost Leader
Differentiator
Broad target
Integrated Cost Leader/ Differentiator
Competitive Scope
Narrow target
Focused Cost
Focused Differentiator
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Cost Leadership Strategy

• An integrated set of actions designed to produce
  or deliver goods or services at the lowest cost
  relative to competitors with features that are
  acceptable to customers
• relatively standardized products
• features acceptable to many customers
• lowest competitive price

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Cost Leadership Strategy

• Cost saving actions required by this strategy
• building efficient scale facilities
• tightly controlling production costs and overhead
• minimizing costs of sales, RD and service
• building efficient manufacturing facilities
• monitoring costs of activities provided by
  outsiders
• simplifying production processes

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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

• New advertising media

• Change location relative to suppliers or buyers

• Direct sales in place of indirect sales

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Factors That Drive Costs

• Product features
• Performance
• Mix variety of products
• Service levels
• Small vs. large buyers
• Process technology
• Wage levels
• Product features
• Hiring, training, motivation

• Economies of scale
• Asset utilization
• Capacity utilization pattern
• Seasonal, cyclical
• Interrelationships
• Order processing
• and distribution
• Value chain linkages
• Advertising sales
• Logistics operations

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Value-Chain example Cost Leader
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Questions Leading to Lower Costs

• 1. How can an activity be performed differently
  or even eliminated?
• 2. How can a group of linked value activities be
  regrouped or reordered?
• 3. How might collaboration with other firms lower
  or eliminate costs?

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Cost Leadership and the Five Forces

• Rivalry Among Competing Firms
• Can use cost leadership strategy to advantage
  since
• competitors avoid price wars with cost leaders,
  creating higher profits for the entire industry

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Cost Leadership and the Five Forces

• Bargaining Power of Buyers
• Can mitigate buyers power by
• driving prices far below competitors, causing
  them to exit and shifting power with buyers back
  to the firm (increasing concentration)

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Cost Leadership Strategy and the Five Forces

• Bargaining Power of Suppliers
• Can mitigate suppliers power by
• being able to absorb cost increases due to low
  cost position
• being able to make very large purchases, reducing
  chance of supplier using power

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Cost Leadership Strategy and the Five Forces

• Threat of New Entrants
• Can frighten off new entrants due to
• their need to enter on a large scale in order to
  be cost competitive
• the time it takes to move down the learning curve

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Cost Leadership Strategy and the Five Forces

• Threat of Substitute Products
• Cost leader is well positioned to
• make investments to be first to create
  substitutes
• buy patents developed by potential substitutes
• lower prices in order to maintain value position

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Major Risks of Cost Leadership Strategy

• There can only be one cost leader
• Dramatic technological change could take away
  your cost advantage
• Competitors may learn how to imitate value chain
• Focus on efficiency could cause cost leader to
  overlook changes in customer preferences

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Differentiation Strategy

• An 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 in ways that are important to them
• price for product can exceed what the firms
  target customers are willing to pay
• nonstandardized products
• customers value differentiated features more than
  they value low cost

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Differentiation Strategy

• Value provided by unique features and value
  characteristics
• Command premium price
• High customer service
• Superior quality
• Prestige or exclusivity
• Rapid innovation

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Types of Differentiation Themes

• Unique taste
• Dr. Pepper
• Multiple features
• Microsoft Windows and Office
• Wide selection and one-stop shopping
• Home Depot and Amazon.com
• Superior service
• FedEx, Ritz-Carlton
• Spare parts availability
• Caterpillar

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Types of Differentiation Themes

• More for your money
• McDonalds, Wal-Mart
• Prestige
• Rolex
• Quality manufacture
• Honda, Toyota
• Technological leadership
• 3M Corporation, Intel
• Top-of-the-line image
• Ralph Lauren, Chanel

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Differentiation Strategy

• Differentiation actions required by this
  strategy
• developing new systems and processes
• shaping perceptions through advertising
• quality focus
• capability in RD
• maximize human resource contributions through low
  turnover and high motivation

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

• Lower buyers costs

• Raise performance of product or service

• Create sustainability through

customer perceptions of uniqueness
customer reluctance to switch to non-unique
product
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Factors That Drive Differentiation

• Unique product features
• Unique product performance
• Exceptional services
• New technologies
• Quality of inputs
• Exceptional skill or experience
• Detailed information

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Value-Chain example Differentiation
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Differentiation Strategy and the Five Forces

• Rivalry Among Competing Firms
• Can defend against competition because
• brand loyalty to differentiated product offsets
  price competition

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Differentiation Strategy and the Five Forces

• Bargaining Power of Buyers
• Can mitigate buyer power because
• well differentiated products reduce customer
  sensitivity to price increases

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Differentiation Strategy and the Five Forces

• Bargaining Power of Suppliers
• Can mitigate suppliers power by
• absorbing price increases due to higher margins
• passing along higher supplier prices because
  buyers are loyal to differentiated brand

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Differentiation Strategy and the Five Forces

• Threat of New Entrants
• Can defend against new entrants because
• new products must surpass proven products or,
• new products must be at least equal to
  performance of proven products, but offered at
  lower prices

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Differentiation Strategy and the Five Forces

• Threat of Substitute Products
• Well positioned relative to substitutes because
• brand loyalty to a differentiated product tends
  to reduce customers testing of new products or
  switching brands

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Pitfalls of Differentiation Strategies

• 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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Focused Business-Level Strategies

• A focus strategy must exploit a narrow targets
  differences from the balance of the industry by
• isolating a particular buyer group
• isolating a unique segment of a product line
• concentrating on a particular geographic market
• finding their niche

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Factors That May Drive Focused Strategies

• Large firms may overlook small niches
• Firm may lack resources to compete in the broader
  market
• May be able to serve a narrow market segment more
  effectively than can larger industry-wide
  competitors
• Focus may allow the firm to direct resources to
  certain value chain activities to build
  competitive advantage

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Major Risks of Focused Strategies

• Firm may be outfocused by competitors
• Large competitor may set its sights on your niche
  market
• Preferences of niche market may change to match
  those of broad market

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Advantages of Integrated Strategy

• A firm that successfully uses an integrated cost
  leadership/differentiation strategy should be in
  a better position to
• adapt quickly to environmental changes
• learn new skills and technologies more quickly
• effectively leverage its core competencies while
  competing against its rivals

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Benefits of Integrated Strategy

• Successful firms using this strategy have
  above-average returns
• Firm offers two types of values to customers
• some differentiated features (but less than a
  true differentiated firm)
• relatively low cost (but now as low as the cost
  leaders price)

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Major Risks of Integrated Strategy

• An integrated cost/differentiation business level
  strategy often involves compromises (neither the
  lowest cost nor the most differentiated firm)
• The firm may become stuck in the middle lacking
  the strong commitment and expertise that
  accompanies firms following either a cost
  leadership or a differentiated strategy

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Summary Industry and Firm Effects on Profit
Patents Brands Retaliatory capability
Barriers to Entry
Industry Attractiveness
Rivalry
Substitutability
Rate of Profit in Excess of the Competitive Level
Firm size Financial resources
Vertical Power (buyer/seller)
Process technology Plant size Low-cost inputs
Cost Advantage
Competitive Advantage
Brands Product technology Marketing
capabilities
Differentiation Advantage