written case
MGMT 4813 Strategic Management Business Level Strategy
Sharon D. James, PhD, cfa
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Business-Level Strategy
Developing a firm-specific business model that will allow a company to gain competitive advantage by focusing on
Customers’ needs (product attributes vs. cost)
Few or many customer groups (e.g., young adults vs. baby boomers; low-middle income vs. high net worth)
Strategic positioning may be needs-based, variety-based, access-based or all three
Distinctive competencies – Capabilities that enable firms to achieve and sustain consistency between value chain functions and effective business strategies
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Targeting Customer Needs
Customer needs—Desires, wants, or cravings that can be satisfied by providing
Distinctive product attributes
Value for price conscious consumers
May be achieved with any business level strategy
Influence a customer’s willingness to pay for a given product or service
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Targeting Customer Groups
Involves market segmentation—The way a company decides to provide products and services to its core customers
Serve a specific customer group or groups (i.e., middle class consumers, health conscious consumers)
Serve distinctive needs of different customer groups
grocery stores provide products unique to specific ethnic groups
Auto manufacturers provide vehicles for different age groups
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Choosing a Generic Business Strategy
All organizations can pursue a generic business strategy regardless of whether they are manufacturing, service, or nonprofit
Can be pursued in different kinds of industry environments
Results from consistent choices on product, consumer market, and distinctive competencies
May target specific customer needs or segment the market by catering to needs of specific groups
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Generic Business Strategies
Cost Leadership
Product Differentiation
Combination strategy with either cost leadership or product differentiation as the dominant strategy
Stuck-in-the-middle—no strategy!
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Cost Leadership Strategy
Firm has low operating cost structure
Provide a basket of goods and services at lower unit costs than competitors by increasing efficiency
Price alone is not an indication of cost leadership
Functional organizational structure with tight, quantitative cost controls, cost leadership management philosophy
Incentive compensation for cost reduction
Identifiable sources of cost efficiencies in the value chain
Examples: Walmart, TJMaxx
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Cost Leadership Strategy
Advantages
Lower buyer power
Higher bargaining power over suppliers
Ability to reduce price to compete with substitute products
Lower threat of entry – Low costs and prices are a barrier to entry
Temporary benefit – less intense rivalry with higher cost firms
Disadvantages
Long term – More intense rivalry due to imitation and lower competitor cost structures
Cost reductions by competitors may affect demand for commodity products
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Sources of Cost Advantages
More likely to be inimitable & rare
Learning curve economies of scale—increasing returns to scale
Low cost access to raw materials
Technological capabilities – cost reducing technologies; a culture of innovation, manufacturing process technological efficiencies)
Less likely to be inimitable & rare
Manufacturing economies of scale, except when production capacity ~ industry demand, first mover advantages
Technological hardware that is easily traded – i.e., ‘off the shelf’ inventory management technologies
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Product Differentiation Strategy
Create a product that customers perceive as more valuable due to distinct product attributes (e.g., design, features, complexity, customization)
Charge a premium price due to higher actual/ perceived quality, innovation, customer responsiveness
Segment the market into many niches
Marketing and reputation very important
Examples: Target, Dillard’s
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Product Differentiation Strategy
Advantages
Brand loyalty
Lower buyer and supplier power
Higher barriers to entry
Threat of substitutes depends on ability to meet customer needs
Pass cost increases on to customers
Disadvantages
Difficult to sustain long-term distinctiveness due to imitation and limited legal property rights protection
Difficult to maintain premium price
Costs may escalate (and not be passed on to customers) in the pursuit of perceived higher quality
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Sources of Differentiation Advantages
More likely to be inimitable & rare (sustainable advantages)
Location (in industries where this is critical)
Supplier relationships – Where product design is critical
Distribution channels
Reputation
Service & support
Less likely to be inimitable & rare (temporary advantages)
Product features, mix, customization, complexity
Linkages with other firms (i.e., co-branding)
Marketing strategies
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Combined Business Strategy
Difficult to implement but not impossible
One generic business strategy must be dominant focus to gain sustainable competitive advantages
Manufacturing efficiencies (i.e., process innovations) and offshore production reduce costs
Standardizing component parts to achieve economies of scale
JIT inventory can reduce costs and improve quality and reliability – in both manufacturing and service industries
Limiting customer options reduces production and marketing costs
Using the Internet and e-commerce can provide information to customers and reduce costs
Example: Samsung Electronics, Others? Apple?
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How effective is a firm’s business strategy?
Compare business strategy to competitive advantages
Identify sources of competitive advantage in the value chain
Effective business strategies are consistent with competitive advantages in the value chain
Examples:
Firms with a cost leadership strategy should have efficiency advantages in the value chain (i.e., R&D, production, distribution, purchasing, IT, etc.)
Firms with a product differentiation business strategy can also have sources of efficiency, but must have differentiation advantages in the value chain (i.e., R&D, design, marketing, customer service)
Firms with a combination business strategy must have sources of both efficiency and differentiation advantages in the value chain
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