Business-level strategy

1
Business-level strategy

• Creating and sustaining competitive advantage

2
Business-level strategy who, what, and how

• Who are our customers?
• What unfulfilled needs to they have?
• How can we use our capabilities to satisfy those
  needs in ways that are valuable, rare, difficult
  to imitate, and non-substitutable?

3
Why do some firms outperform others and enjoy
this advantage over time?

• Resource-based capabilities that are
• Valuable
• Rare
• Difficult to imitate
• Non-substitutable

4
Specific avenues for creating and sustaining
competitive advantage

• Business definition and positioning
• Answering the who question Precisely defining
  and pursuing your target market
• Answering the what question Precisely defining
  the needs of the customers in that market

5
Answering the who and what questions

• Harley-Davidson clear market definition and
  needs of those in that market
• Distinctive business definition wild one image
• Trademarked the term hog
• Attempted to trademark Harley sound

6
Answering the who and what questions

• Unintended consequences of one firms response
• Coors
• National distribution diluted its image
• Distinction as regional brewer, available only in
  the West, disappeared

7
Answering the how question

• How shall we compete? Or
• On what basis shall we compete?
• Overall cost-leadership (low-cost leader) or
  differentiator
• Broad market appeal or focused (niche)

8
The key questions of business level strategy
formulation

• Who are our customers?
• What are their needs?
• How can we use our capabilities to satisfy those
  needs?

9
What is business level strategy?

• Creating and sustaining competitive advantage in
  individual, specific product market or business
• Setting the firm apart in specific product market
  or business
• Strategy as positioning
• Strategy as positioning (part of eclectic
  definition of strategys five Ps)

10
What is business level strategy?

• Can be described using generic business-level
  strategies
• Well-rounded generalized strategies built around
  several strengths
• Overall cost leadership, differentiation, and
  focus

11
Types of generic business level strategies

• Overall cost leadership creating low-cost
  position relative to firms peers
• Differentiation offering products and services
  that are unique and valued
• Focus targeting narrow product lines, buyer
  segments, or geographic markets (niche)

12
Three generic strategies

• Source Dess et al., 2008, p. 157

13
Overall cost leadership

• Lowest cost producer relative to competitors
  while maintaining product features that customers
  value
• Typically a no-frills product or service to broad
  market using standardization to derive greatest
  benefits from economies of scale and experience

14
Overall cost leadership

• Continuous drive to lower costs through capital
  investment, control of production costs and
  overhead as well as costs of sales, service, and
  R D
• Parity on differentiation with overall cost
  leadership including features acceptable to
  customers

15
Overall cost leaders

• Wal-Mart
• Others? What other overall cost leaders can you
  identify?

16
Sources of low cost leadership

• Experience curve
• Reduction in variable costs due to firms
  cumulative experience
• Economies of scale
• Reduction in average (per unit) total cost from
  spreading total costs over larger number of units

17
Experience curve

• Decline in unit costs resulting from learning
• Production innovations
• Increasing demand (if demand is price elastic) by
  cutting price ahead of the experience curve
• If first to market, may produce sustained
  competitive advantage

18
Experience curve and pricing
Source Dess et al., 2008, p. 157
19
Experience curve and economies of scale key
difference

• Graphs show similar shape, but relationships
  driving that shape differ
• Experience curve results from cumulative learning
• Economies of scale (size) result from high volume
  production/mass production

20
Cost leadership and the five competitive forces

• How the cost leadership strategy allows a firm to
  counteract competitive forces

21
Cost leadership and the five competitive forces

• Rivalry with existing competitors
• Existing rivals hesitate to compete on price
• May not survive a price war
• Bargaining power of suppliers
• Can more easily absorb price increases from
  suppliers due to low-cost structure
• May force suppliers to hold down prices due to
  volume purchasing

22
Cost leadership and the five competitive forces

• Bargaining power of buyers
• Forcing prices too low may force cost leader out
  of industry
• Increases power of next-most-efficient
  competitor, which has higher cost
• i.e., not in buyers best interests to force
  prices too low eliminating firms competitors and
  creating monopolistic conditions

23
Cost leadership and the five competitive forces

• Threat of substitutes
• Advantageous cost position may insulate from
  substitutes, which generally are also low cost
  and lower priced
• Threat of new entrants
• Economies of scale and established supply chain
  relationships can be effective entry barriers

24
Competitive risks of low cost strategy

• Vulnerable to intense price competition
• Imitation
• Obsolescence of equipment, processes
• Over emphasis on costs may result in overlooking
  customer needs
• Low price may cement customer expectations making
  subsequent price increases difficult

25
Differentiation strategy

• Continuous development of and investment in
  features that differentiate products in ways that
  customers value (without ignoring costs)
• Nearly infinite ways of differentiating (unusual
  features, service, innovations, prestige, design,
  etc.)

26
Differentiation strategy

• To be successful, customers must
• 1) perceive the differences and
• 2) be willing to pay for them (perceive value in
  the differences)
• Customers who perceive value in these differences
  tend be relatively price insensitive

27
Differentiators

• Lexus relentless pursuit of perfection
• Louis Vuitton
• Polo Ralph Lauren
• Others? What other differentiators can you
  identify?

28
Differentiation and competitive forces

• Rivalry with existing competitors
• Relationship between brand loyalty and price
  insensitivity insulates from competition
• Uniqueness of differentiated products insulates
  from competition
• Bargaining power of buyers buyers lack
  comparable alternatives and are therefore less
  price sensitive

29
Differentiation and competitive forces

• Bargaining power of suppliers
• High margins insulate from pricing pressure of
  suppliers
• Increased costs may be passed on to buyers
• Threat of new entrants customer loyalty and
  product uniqueness present entry barriers
• Product substitutes loyalty and unique features
  insulate from effective substitutes

30
Competitive risks

• Customers may consider price differential too
  high
• Value of differentiation may wear off
• Learning by buyers can narrow perceptions of
  product uniqueness
• Counterfeiting especially from foreign
  competition

31
Competitive risks of differentiation

• Too much differentiation
• Stephan Wolfsried of Daimler Chrysler speaking of
  Mercedes-Benz S-Class car functions nobody
  needed and nobody knew how to use (p. 166)

32
Focus strategy

• Narrow competitive scope within industry
• Niche marketing
• Two variants
• Cost focus cost advantage in target market
• Differentiation focus differentiation in target
  market

33
Examples of focusers

• Cost focusers
• Network Appliance
• Ikea
• Differentiation focusers
• Bessemer Trust
• New Balance
• Maserati

34
Focus and competitive forces

• Potentially less rivalry and lower bargaining
  power
• Established market presence increases entry
  barriers
• Often the domain of small business which is often
  better equipped to serve focused markets

35
Competitive risks of focus strategies

• Erosion of cost advantages in target segment
• Vulnerable to imitation from competitors and to
  threat of new entrants
• Over focus (too narrow a focus)
• Being out focused by a competitor (e.g., Big Dog
  and Harley)

36
Combining strategies

• Integrating overall cost leadership and
  differentiation
• Providing unique value efficiently
• Generally more difficult to imitate
• Successful combination of both strategies
  provides two sources of value
• Differentiated attributes
• Lower prices

37
Combining strategies

• Three approaches
• Automated and flexible manufacturing systems can
  lead to mass customization
• Exploiting profit pool by offering complementary
  products
• Extending value along the supply chain (e.g.,
  Wal-Marts supplier links and in-house
  transportation system) 

38
Competitive risks of combining strategies

• Attaining neither strategy and becoming instead
  stuck in the middle
• Challenges of coordinating value-creating
  activities in the extended value chain
• Inaccurate assessment of sources of revenues and
  profit pools in industry

39
Recap

• Business-level strategy competing in specific,
  individual product markets
• Generic strategies
• Overall cost leadership
• Differentiation
• Focus
• Cost focus
• Differentiation focus

40
Industry life cycle

• Industries evolve over time
• Four distinct phases introduction, growth,
  maturity, decline
• Value creating activities may vary with stage of
  life cycle

41
Industry life cycle stages
Source Dess et al., 2008, p. 178
42
Introduction

• Slow growth
• High prices
• Technical know-how in rare supply, source of
  temporary advantage
• May result from one firms innovation (e.g.,
  Apple, Hoover, Xerox)

43
Growth

• First-time use expands rapidly
• Prices begin to fall
• Diffusion of technical know-how increases threat
  of new entrants
• Rapid growth means low competitive pressure

44
Maturity

• Demand driven by replacements not first time
  adoption
• Competition for market share drives down prices
• Firms strive to reduce costs, build brand loyalty
• Industry consolidation (mergers and acquisitions)

45
Decline

• Negative growth (changes in technology, social
  tastes/preferences, demographics, international
  competition)
• Increased rivalry
• Excess capacity, exit barriers lead to price
  competition

46
Industry life cycle stages
Stage
Introduction Growth Maturity Decline
Generic strategies
Differentiation Differentiation
Differentiation Overall cost Overall
cost leadership leadership Focus
Market growth rate
Low Very large Low to Negative moderate
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 Low moderate
47
Industry life cycle stages
Stage
Introduction Growth Maturity Decline
Emphasis on process design
Low Low to High Low moderate
Major functional area(s) of concern
Research and Sales and Production General Developm
ent marketing management and finance
Overall objective
Increase Create Defend Consolidate, market
share consumer market share maintain,
awareness demand and extend harvest, or product
life exit cycles
48
Innovation and sustaining competitive advantage

• Limitations of current discussion
• Suggests that competitive advantage is relatively
  enduring (It is not.)
• Industry life cycle stages are neither gradual
  nor predictable and can repeat themselves

49
Innovation and sustaining competitive advantage

• Innovations can lead to rapid changes in stages
• Sustaining innovations usually by industry
  incumbents that reinforce market position
• Destructive innovations
• Typically come from outside the industry
• Often appeal to customers not currently served by
  industry

50
Summary

• Business-level strategy
• Competing in specific markets
• Use of generic strategies
• Industry life cycle stages impact choice of
  strategies
• Innovations can rapidly destroy competitive
  positions