BusinessLevel Strategy

1
Chapter 4

• Business-Level Strategy

2
Chapter 2
The Strategic Management Process
External
Environment
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Strategy Formulation
Strategy Implementation
Chapter 4
Chapter 5
Chapter 6
Chapter 10
Chapter 11
Business-Level
Competitive
Corporate-Level
Corporate
Structure
Strategy
Dynamics
Strategy
Governance
Control
Actions
Strategic
Chapter 8
Chapter 7
Chapter 9
Chapter 12
Chapter 13
International
Entrepreneurship Innovation
Cooperative
Acquisitions
Strategic
Strategy
Strategies
Restructuring
Leadership
Strategic
Competitiveness
Above Average
Feedback
Returns
3
Chapter 2
External Environment
Five Forces Analysis
Strategic Intent
SWOT
Strategic Mission
Chapter 3
Internal Environment
Resources, Capabilities and Core Competencies
Formulate Business-level Strategy
4
Core Competencies (CC) are the main source of
sustainable competitive advantage.
Core Competencies
Actions taken to leverage CCs to gain a
sustainable competitive advantage.
Strategy
Strategies to provide value to customers and gain
a sustainable competitive advantage in specific,
individual product markets.
Business Level Strategy
5
Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
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Cost Leadership Strategy

• Key Criteria
• Standard Product
• Compete Based on Price
• Low costs
• High volume
• Low margins

• Achieving Low Costs
• Controlling Cost Drivers
• Reconfiguring Value Chain
• Characteristics of Cost Leader

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Controlling Cost Drivers

• Economies of Scale / Capacity Utilization
• Learning Curve Effects
• Reduce Input Costs (monitor suppliers)
• Economies of Scope
• Consider Vertical Integration Outsourcing
• Process Engineering / Simplification
• Minimize Overhead

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How to obtain a Cost Advantage
1
Control Cost Drivers
2
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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Value Creating Activities common to a Cost
Leadership Business Level Strategy
Support Activities
Primary Activities
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Example of Reconfiguring the Value Chain
Ship on the Hoof to Rail Center (Chicago)
Slaughter into sides of beef
Old Way
Ranch Cattle
Boxed Cuts at Markets
Iowa Beef Packers
Locate large automated plants near ranches
Ship cuts already Boxed to Markets
New Way
New Way
Process into Boxed Cuts at plants
Save on shipping and cattle weight loss
Utilize cheaper non-union rural labor
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Three Reconfiguration Issues
Performing activities differently or eliminating
them
1
Reconfigure value-chain activities
2
Work with buyers, suppliers and alliance partners
to lower or eliminate costs
3
Example Gallo sells wine through grocery stores
rather than liquor stores because they were more
efficient distributors.
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Characteristics of Cost Leader

• Cost-conscious culture
• Employee participation in cost-control efforts
• Continuously benchmarking costs
• Intense scrutiny of budgets
• Programs promoting continuous improvement

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Effective Cost Leaders can remain profitable even
when the Five Forces appear unattractive

• Large capital requirements (new entrants)
• Learning curve advantages (new entrants)
• Cost advantage win price war (rivalry new
  entrants)
• Lowest prices (buyer power rivalry)
• Create substitutes first
• Buy patents of potential substitutes
• Large purchases (supplier power)

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Technological changes
The Major Risks involved with a Cost Leadership
Business Level Strategy
Competitors imitate Value Chain
Focus on efficiency causes Cost Leader to
overlook changes in customer preferences
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Differentiation Business Level Strategy
Key Criteria
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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Differentiation Business Level Strategy
Requirements
Value provided by unique features and value
characteristics
Constant effort to differ-entiate products
through
Developing new systems and processes

Command premium price
High customer service
Shaping perceptions through advertising

Superior quality

Product RD capabilities
Prestige or exclusivity
Maximize Human Resource contributions through low
turnover and high motivation

Rapid innovation
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Value Creating Activities common to a
Differentiation Business Level Strategy
Support Activities
MARGIN
MARGIN
Primary Activities
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Drivers of Differentiation
Some Examples
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
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Differentiation Business Level Strategy
Effectiveness with Differentiation grows out of
Value Chain activities
Examples
Heineken beer
Raw materials
Steinway pianos
Raw materials Workmanship
Mercedes Benz autos
Technology and Workmanship
Intel microprocessors
Technological superiority
Service buyers needs quickly anywhere in the
world
Caterpillar tractors
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Effective Differentiators can remain profitable
even when the Five Forces appear unattractive

• Customer Loyalty (NE, R, S, BP)
• Brand Recognition (NE, R, BP)
• Cost Advantage in Differentiating (NE, R, BP)
• Linkages Interrelationships (NE R)
• Switching costs (NE, R, BP, S)
• Multiple sources of differentiation (NE,R,BP)
• High differentiation reduces price sensitivity
  (BP)
• High margins absorb suppliers price increases
• Or pass on to loyal customers (SP)
• Create Substitutes first or buy patents (S)

NEnew entrants RRivalry SSubstitute Products
BPBuyer Power SPSupplier Power
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Cost of uniqueness is too great
The Major Risks involved with a Differentiation
Business Level Strategy
Competitors imitate Value Chain
Uniqueness no longer valued by customers
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Focused Business Level Strategies
Focused Business Level Strategies involve the
same basic approach as Broad Market Strategies
Opportunities exist because
Large firms overlook small niches

Firm lacks resources to compete industry-wide


Serve narrow market segment more effectively than
industry-wide competitors
Direct resources to certain value chain
activities to build competitive advantage

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Outfocused
The Major Risks involved with a
Focused Differentiation Business Level Strategy
Large competitors enter niche market
Preferences of niche market change to those of
broad market
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Integrated Low Cost/ Differentiation
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
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Integrated Low Cost/Differentiation Strategy
Firms using an Integrated Strategy

• Dual Strategic Emphasis
• Upscale product
• Competitive pricing (best value)

Flexible Manufacturing Systems
Information Networks across multiple business
units
Total Quality Management (TQM)
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Integrated Low Cost/Differentiation Strategy
Integrated Low Cost/ Differentiation business
level strategy involves a Compromise
Risk Stuck in the Middle
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Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Differentiation
Low Cost
Use a single aircraft model (Boeing 737)
Focus on customer satisfaction
Use secondary airports
High level of employee dedication
Fly short routes
No meals
New flight services for business
travelers (Phones and faxes)
15 minute turnaround time
No reserved seats
No travel agent reservations
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Strategizing in DifferentIndustry Conditions
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Features of Emerging Industries

• Nature of the market
• Proprietary technology
• Low entry barriers
• Buyers are first-time users
• Marketing efforts
• Raw materials
• Funding issues

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Strategy Options for Competing in Emerging
Industries

• Race for industry leadership
• Where to focus?
• Quick technological response
• Strategic alliance options
• First-mover advantages

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Strategy Options for Competingin Emerging
Industries (cont.)

• Possible Pursuits
• Advertising emphasis
• Price-sensitive customers
• Preparing for new entrants

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Features of High Velocity Markets

• Technological change
• Product life-cycles
• Customer expectations
• Competitive moves
• New entrants

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Strategy Options for Competingin High
Velocity Markets

• RDs Role
• Quick response
• Strategic partnerships
• Keys to Success

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Characteristics of Industry Maturity

• Slowing demand
• Sophisticated buyers
• Cost and service
• Overcapacity
• Product innovation slows
• Competition increases
• Industry profitability falls
• Mergers and acquisitions rise

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Strategy Options for Competingin a Mature
Industry

• Pruning
• Innovation
• Cost reduction
• Increase sales
• Acquisitions
• Expansion
• Developing capabilities

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Competing in Mature Industries Strategic
Pitfalls and Mistakes

• Stuck in the middle
• Concentrating on short-term profits
• Slow responsiveness
• Excess capacity
• Marketing Pitfall
• Cost reductions

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Stagnant or Declining Industries Standout
Features

• Industry vs. economy
• Market share battle
• Survival issue
• Industry consolidation

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Strategy Options for Competingin Stagnant
or Declining Industries

• Focus strategy
• Differentiate
• Drive costs down
• Outsourcing
• Internal processes
• Production facilities
• Distribution outlets
• Value chain Activities

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Competing in a Stagnant Industries
Strategic Mistakes

• Optimism
• Profitless battles
• Diverting resources

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Competitive Features ofFragmented Industries

• Lack of market share
• Specialization
• Low entry barriers
• Absence of scale economies
• Customized products
• Market characteristics

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Examples of Fragmented Industries

• Book publishing
• Landscaping and plant nurseries
• Auto repair
• Restaurant industry
• Public accounting
• Womens dresses
• Meat packing
• Paperboard boxes
• Hotels and motels
• Furniture

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Competing in a Fragmented Industries
Strategy Options

• Formula facilities
• Low-cost operator
• Backward or forward integration
• Specialize by product
• Specialize by customer
• Limit geographic area