BUSINESS LEVEL STRATEGY

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BUSINESS LEVEL STRATEGY COMPETITIVE ADVANTAGE

• Reading Requirements
• 1. Text Chapters 5

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Definition of Competitive Advantage

• The essence of strategy lies in creating
  tomorrows competitive advantages faster than
  competitors mimic the ones you possess today. -
  Gary Hamel and C.K. Prahalad
• exists when a
  firms strategy gives it an edge in
• Defending against competitive forces and
• Securing customers
• such that the firm earns (or has the potential
  to earn) a persistently higher rate of profit.

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Gaining of Competitive Advantage

• COMPETITIVE ADVANTAGE comes with the offering of
  SUPERIOR VALUE through
• Offering buyers a good product at a lower price
• Offering a better product/service buyers think is
  worth a premium price

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The ability to identify and respond to
opportunity lies in the core management
capability called Entrepreneurship.
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Achieving Imitation and Protection Against It
Does the rival have a competitive advantage?
Can the firm replicate this advantage?
Can the firm identify the specific
characteristics of the advantage?
Can the firm obtain the needed resources?
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Strategic Decisions at Multiple Levels

• Corporate Strategy
• Moves to achieve diversification
• Actions to boost performance of individual
  businesses
• Capturing synergy among business units (2 2 5
  effects) !
• Establishing investment priorities and steering
  corporate resources into the most attractive
  business units
• Business Strategy
• Forming responses to changes in industry and
  competitive conditions, buyer needs and
  preferences, economy, regulations, etc.
• Crafting competitive moves leading to sustainable
  competitive advantage
• Building competitively valuable competencies and
  capabilities
• Uniting strategic initiatives of functional areas
• Addressing strategic issues facing the company
• Functional Strategy
• Game plan for a strategically-relevant function,
  activity, or business process
• Details how key activities will be managed
• Provide support for business strategy
• Specify how functional objectives are to be
  achieved
• Operation Strategy
• Concern narrower strategies for managing
  grassroots activities and strategically-relevant
  operating units
• Add detail to business and functional strategies
  but of lesser scope

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Levels of Strategy-MakingA Single-Business
Company

Business Strategy

Functional Strategies

Operating Strategies
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Business Strategies for Creating and Sustaining
Competitive Advantage

• Consists of business approaches to
• Attract customers, fulfilling their expectations
• Withstand competitive pressures
• Strengthen market position
• Includes offensive and defensive moves to
• Counter actions of key rivals
• Shift resources to improve long-term market
  position
• Respond to prevailing market conditions
• Narrower in scope than corporate strategy

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The Decision Logic of Strategy Formulation
Establishment of mission, vision, values,
objectives -- the Directional Strategies
May be Corporate or Business Strategic Decisions
Identification, evaluation, and selection of --
the Adaptive Strategies
Identification, evaluation, and selection of --
the Market Entry Strategies
Identification, evaluation, and selection of --
the Positioning Strategies
Implementation through development of -- the
Functional Operational Strategies
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The BCG Portfolio Matrix
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Adaptive Stabilization Strategies

• When past strategies have been viewed as
  appropriate and few changes are required
• Enhancement - when organization just needs to do
  things better takes forms of TQM programs,
  speeding delivery, adding flexibility to service
  design
• Status Quo - maintenance of services at the
  current levels, defending against competitors

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Market Entry Strategies

• Carry out the expansion and stabilization
  strategies through
• Purchase Strategies
• Acquisition purchase of new product, unit or
  organization
• Licensing lease technology, product or service
• Venture Capital Investment try out investment
  option
• Cooperation Strategies
• Mergers two organizations come together as one
• Strategic Alliance long-term agreement to work
  together
• Joint Venture combined resources to work on
  common issue of interest
• Developmental Strategies
• Internal Development uses existing resources or
  structures
• Internal Ventures establishes new entity for
  developmental purposes

May be Corporate Decision if in Different Market
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Positioning Strategies

• Business Level Issues
• These are market oriented and best articulate the
  competitive advantage within the market
• May be market-wide (or broad-based) or directed
  at a particular segment (or niche-focused)
• Based largely on Generic Business Strategies
• Low-Cost Leadership Strategy
• Broad Differentiation Strategies
• Best-Cost Provider Strategies
• Focused Low-Cost Strategies
• Focused Differentiation Strategies

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A Low-Cost Leadership Strategy

• Open up a sustainable cost advantage over rivals,
  using lower-cost edge as a basis either to
• Under-price rivals and reap market share gains
  OR
• Earn higher profit margin selling at going price
• Make achievement of low-cost relative to rivals
  the THEME of firms business strategy
• Find ways to drive costs out of business
  year-after-year
• Cost conscious corporate culture
• Employee participation in cost-control efforts
• Ongoing efforts to benchmark costs
• Intensive scrutiny of budget requests
• Programs promoting continuous cost improvement

Keys to Success
Characteristics
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Drivers of Cost Advantage

• Product Design
• Design for Automation
• Designs to Economize on Materials
• Input Costs
• Location Advantages
• Ownership of Low-Cost Inputs
• Bargaining Power
• Supplier Cooperation
• Capacity Utilization
• Ratio of Fixed to Variable Costs
• Costs of Installing and Closing Capacity
• Managerial / Organizational Efficiency
• Organizational Slack

• Economies of Scale
• Indivisibilities
• Specialization and Division of Labor
• Economies of Learning
• Increased Dexterity
• Improved Coordination and Organization
• Process Technology and Process Design
• Mechanization and Automation
• Efficient Utilization of Materials
• Increased Precision

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A Low-Cost Strategy Works Best When

• Price competition is vigorous
• Product is standardized or readily available
  from many suppliers
• There are ways to achieve
  differentiation that have value
• Most use product in ways
• Buyers incur switching costs
• Buyers are large and have significant bargaining
  power

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A Low-Cost Strategy Fails When

• Being overly aggressive in cutting price (revenue
  erosion of lower price is not offset by gains in
  sales volume--profits go down, not up)
• Low cost methods are easily imitated by rivals
• Becoming too fixated on reducing costs and
  ignoring
• Buyer interest in additional features
• Declining buyer sensitivity to price
• Changes in how the product is used
• Technological breakthroughs open up cost
  reductions for rivals

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A Differentiation Strategy
Objective

• Incorporate differentiating features that cause
  buyers to prefer firms product or service over
  the brands of rivals
• Find ways to differentiate that CREATE VALUE for
  buyers and that are NOT EASILY MATCHED or
  CHEAPLY COPIED by rivals
• Not spending more to achieve differentiation than
  the price premium that can be charged
• Uniqueness is achieved in ways that
• Buyers perceive as valuable
• Rivals find hard to match or copy
• Can be incorporated at a cost well below the
  price premium that buyers will pay

Keys to Success
Characteristics
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Examples of Differentiation Themes

• Unique taste -- Dr. Pepper
• Special features Ease of Use -- America Online
• Superior service -- FedEx, Ritz-Carlton
• Spare parts availability -- Caterpillar
• More for your money -- Wal-Mart??
• (Is this Differentiation / Low-Cost /
  Best-Cost??)
• Engineering design and performance -- Mercedes
• Prestige -- Rolex
• Quality manufacture -- Honda , Toyota
• Technological leadership -- 3M Corporation, Intel
• Top-of-the-line image -- Ralph Lauren, Chanel

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A Differentiation Strategy Works Best When

• There are ways to differentiate a
  product that have value and please customers
• Buyer needs and uses are .
• . are following a similar type
  of differentiation approach
• Technological change is fast-paced and
  competition is focused on evolving product
  features

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A Differentiation Strategy Fails When

• 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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A Focus / Niche Strategy

• Involves concentrated attention on a narrow piece
  of the total market
• Serve niche buyers better than rivals
• Choose a market niche where buyers have
  distinctive preferences, special requirements, or
  unique needs
• Develop unique capabilities to serve needs of
  target buyer segment
• Achieve LOWER COSTS than rivals in serving the
  segment-- A low-cost strategy
• Offer niche buyers SOMETHING DIFFERENT from
  rivals-- A differentiation strategy

Objective
Keys to Success
Two Types
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Examples of Focus Strategies

• Netscape
• Software to browse World Wide Web
• Porsche
• Sports cars (What about the SUV?)
• Cannondale
• Mountain bikes (Since expanded to other lines)
• Horizon and Comair - Commuter airlines
• Link major airports with small cities
• Jiffy Lube International
• Maintenance for motor vehicles

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A Focused Strategy Works Best When

• Costly or difficult for multi-segment rivals to
  serve specialized needs of target niche
• No other rivals are concentrating on same segment
• Firms resources do not allow it to go after a
  bigger piece of market
• Industry has many different segments, creating
  more focusing opportunities

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A Focused Strategy Fails When

• Competitors find effective ways to match a
  focusers capabilities in serving niche
• Niche buyers preferences shift towards product
  attributes desired by majority of buyers--the
  niche becomes part of the overall market
• Segment becomes so attractive it becomes crowded
  with rivals, causing segment profits to be
  splintered

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Name That StrategyInstructions For each
Company or Corporation Give the Generic Strategy
it is following (or trying to follow). Be able to
explain a logical rational for your answers.

• University of Texas at Arlington
• Sony
• Sketchers
• Ripleys Donuts
• Krispy Kreme Donuts
• Samuel Adams
• Stroh Brewing Company (maker of Colt 45 Malt
  Liquor, Old Milwaukee, and Schaffer)
• Hyundai
• Amazon.com
• Motel 6
• Olive Garden

• Tommy Hilfiger
• Vail Ski Resort
• Ebay.com
• CiCis Pizza
• Mitsubishi
• Sams Brand Cola
• Home Garden TV Network
• The Edge 102.1 Radio (Alternative Format)
• Hasbro (makers of Nerf)
• Arlington Tattoo Piercing Parlor

Use these choices Low-Cost Leadership (LC),
Broad Differentiation (D), Focused (FC)
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Offensive and Defensive Strategies
Offensive Strategies

• Are undertaken to build new or stronger market
  positions and/or create competitive advantage.
• Can protect competitive advantage, but rarely are
  the basis for creating advantage.

Key Insight The chances for a successful
offensive initiative are improved when it is
based on a companys resource strengths and
strongest competencies and capabilities.
Defensive Strategies
Key Insight When to make a move is as important
as what move to make. Two defenses 1) Block
avenues challengers can take in mounting
offensive attacks, 2 ) Make it clear any
challenge will be met with strong counterattack
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Attacking Competitor Strengths

• Options
• Offer equally good product at a lower price
• Offer a better product at the same price
• Leapfrog into next-generation technologies
• Add appealing new features
• Run comparison ads
• Construct new plant capacity
• Offer a wider product line
• Develop better customer service capabilities

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Attacking Competitor Weaknesses

• Basic Approach
• Concentrate company strengths and resources
  directly against a rivals weaknesses
• Weaknesses to Attack
• Geographic regions where rival is weak
• Segments rival is neglecting
• Go after those customers a rival is least
  equipped to serve
• Rivals with weaker marketing skills
• Introduce new models exploiting gaps in rivals
  product lines

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In-Class Exercise and Discussion

• Scenario Your uncle has always been the black
  sheep of the familyand you find yourself very
  much like him. You will do anything to make a
  buck, morals and ethics not withstanding!! You
  just recently found out that your uncle left you
  (in his final Will Testament, following his
  untimely demise from an accidental shooting)
  some land and a large warehouse in Afghanistan
  used primarily as an opium plantation and heroin
  production plant. Afghanistan, because of the US
  activity in the region, has recently had its
  Taliban control of opium farming lifted leading
  to an upsurge in demand and available farmers.

• What might be the best positioning strategy to
  pursue, given a main product of heroin?
• Why does this scenario and product fit that
  strategy best? Give 3 environmental / industry
  and 3 internal organization conditions which
  support your answer.