MGT450 3
An.
MGT450_-Chapter4.pptx1
CHAPTER
4
BUSINESS-LEVEL STRATEGY
Introduction
Strategy – increasingly important to a firm’s success and concerned with making choices among two or more alternatives. Choices dictated by
External environment
Internal resources, capabilities and core competencies
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Introduction
Business level-strategy – integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
Generic strategy – a strategy that can be used by any organization competing in any industry
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Introduction
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A firm must use a Business Level Strategy
It is not necessary to use all the corporate level strategies, acquisition, restructuring, international…
From the dry cleaner to the multinational corporation – a firm must choose at least one business-level strategy
The business level strategy is the core strategy - the strategy that the firm forms to describe how it intends to compete in the product market
Introduction
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In terms of customers, when selecting a business-level strategy the firm determines:
who will be served,
what needs those target customers have that it will satisfy, and
how those needs will be satisfied
Customers: Their Relationship with Business-Level Strategies
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Strategic competitiveness results when firm can satisfy customers by using its competitive advantages
Returns earned are the lifeblood of firm
Most successful companies satisfy current customers and/or meet needs of new customers
Customers: Their Relationship with Business-Level Strategies
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Five components in customer relationships
1. Effectively managing relationships with customers (ex: Amazon)
Deliver superior value
Strong interactive relationships is foundation
2. Reach, richness and affiliation
Access and connection to customers
Depth and detail of two-way flow of information between firm and customer
Facilitating useful interactions with customers – viewing the world from the customer’s eyes
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Customers: Their Relationship with Business-Level Strategies
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Five components in customer relationships
3. Who: Determining the customers to serve
Market segmentation
Dividing customers into groups based on differences in needs
Cluster people with similar needs into individual and identifiable groups
For example, consumer and industrial markets
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Customers: Their Relationship with Business-Level Strategies
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Five components of customer relationships
4. What: Determining which customer needs to satisfy
What = Needs
Related to a product’s benefits and features
Must anticipate and be prepared: (i.e., High-quality? Low price?)
Translate into features and performance capabilities of products
5. How: Determining core competencies necessary to satisfy customer needs
Core competencies: resources and capabilities that serve as source of competitive advantage for firm over its rivals
How = core competencies
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Customers: Their Relationship with Business-Level Strategies
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“All organizations must use their capabilities and core competencies (the How?) to satisfy the needs (the What?) of the target group of customers (the Who?) the firm has chosen to serve”
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Purpose of Business-Level Strategies
Purpose: To create differences between position of a firm and its competitors
Firm must make a deliberate choice to
Perform activities differently
Perform different activities
Southwest Airlines principles of strategy
Six areas of strategic intent:
limited passenger service
frequent, reliable departures
lean, highly productive ground and gate crews
high aircraft utilization with few aircraft models
very low ticket prices
short-haul, point-to-point routes between mid-sized cities and secondary airports
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Types of Business-Level Strategies
Two types of competitive advantage firms must choose between
Cost (Are we LOWER than others?)
Uniqueness (Are we DIFFERENT? How?)
Two types of ‘competitive scope’ firms must choose between
Broad target
Narrow target
These combine to yield 5 different business-level strategies
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Competitive
Scope
Competitive Advantage
Cost
Uniqueness
Broad
Target
Narrow
Target
Cost Leadership
Differentiation
Focused Cost Leadership
Focused Differentiation
Integrated Cost Leadership/ Differentiation
Types of Business-Level Strategies
Cost Leadership
Competitive advantage:
The low-cost leader and operates with margins greater than competitors
Competitive scope: Broad
Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors
Standardized goods
Continuously reduce costs of value chain activities
Inbound/outbound logistics account for significant cost
Low-cost position is a valuable defense against rivals
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Types of Business-Level Strategies
Cost leaders are in a position to
Absorb supplier price increases and relationship demands
Force suppliers to hold down their prices
Continuously improving levels of efficiency and cost reduction
Can be difficult to replicate and
Serve as significant entry barriers to potential competitors
Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers
Examples: TK Maxx, Big Lots Inc., Wal-Mart
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Types of Business-Level Strategies
Cost Leadership in relation to the 5 Forces:
Rivalry against existing competitors – Rivals hesitate to compete on the basis of price (in particular against a company which is well established and able to produce its private-label products)
Bargaining Power of Buyers (Customers) – Customers do not want to force a leader to lower the price much as this will force other competitors to exit the market leaving the leader almost alone controlling selling price
Bargaining Power of Suppliers – As long as the company can keep effective margins greater than those of competitors, it can absorb suppliers’ price increase – big players like Wal-Mart may have a power over its suppliers
Potential Entrants – They need to be able to operate at average return levels till they are able to get into a cost leader position
Product Substitutes – The company needs to be willing to offer more features to the product/service, or reduce prices more – while still being able to operate profitably
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Types of Business-Level Strategies
Competitive risks of the cost leadership strategy
There is a limit to cost reduction
Focus on cost may cause the firm to overlook important customer preferences
Imitation
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Types of Business-Level Strategies
Differentiation
Competitive advantage: Differentiation
Competitive scope: Broad
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
Target customers perceive product value
Customized products – differentiating on as many features as possible
Examples: Apple’s iPod, Nivea deodorants, iPhone SE???
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Types of Business-Level Strategies
Differentiation in relation to the 5 Forces:
Rivalry against existing competitors
Customers are loyal purchasers of differentiated products
i.e., Bose (electrical products-Headset)
Bargaining Power of Buyers (Customers)
Inverse relationship between loyalty/product: As loyalty increases, price sensitivity decreases
i.e., Callaway golf clubs
Bargaining Power of Suppliers
Provide high quality components, driving up firm’s costs
Cost may be passed on to customer
Potential Entrants
Substantial barriers (see above) and would require significant resource investment
Product Substitutes
Customer loyalty effectively positions firm against product substitutes
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Types of Business-Level Strategies
Competitive risks of the differentiation strategy
Customers determine that the cost of differentiation is too great
The means of differentiation may cease to provide value for which customers are willing to pay
Experience can narrow customers’ perceptions of the value of a product’s differentiated features
Counterfeiting/copying
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Types of Business-Level Strategies
There are two “Focus” strategies
In general, the firms’ core competencies used to serve the need of a particular industry segment or niche to the exclusion of others.
May lack resources to compete in the broader market
May be able to more effectively serve a narrow market segment than larger industry-wide competitors
Firms may direct resources to certain value chain activities to build competitive advantage
Large firms may overlook small niches
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Types of Business-Level Strategies
Focus strategy examples
Buyer groups
Youths/senior citizens
Product line segments
Professional painter groups
Geographic markets
West vs. East coast
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Types of Business-Level Strategies
Focused Cost Leadership
Competitive advantage: Low-cost
Competitive scope: Narrow industry segment
Focused Differentiation
Competitive advantage: Differentiation
Competitive scope: Narrow industry segment
i.e., in the outdoor recreation business a firm that caters to fly fishing is following a focused differentiation strategy (as opposed to discount stores that carry general fishing gear)
High quality equipment
Knowledgeable personnel
Guided tours
Fly tying classes
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Types of Business-Level Strategies
Risks of using “Focus” strategies
A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser
A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit
Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole
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Types of Business-Level Strategies
Integrated Cost Leadership/Differentiation
Efficiently produce products with differentiated attributes
Efficiency: Sources of low cost
Differentiation: Source of unique value
Can adapt to new technology and rapid changes in external environment
Simultaneously concentrate on TWO sources of competitive advantage: cost and differentiation – consequently…
…must be competent in many of the primary and support activities
Three sources of flexibility useful for this strategy
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Types of Business-Level Strategies
Three flexible sources include
Flexible manufacturing systems (FMS)
Computer controlled process used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention
Information networks
Using technology to link suppliers, distributors and customers
Total Quality Management (TQM) systems
Emphasizes firm’s total commitment to the customer and continuous improvement of every process through data-driven, problem-solving approaches based on empowering employees
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Types of Business-Level Strategies
Competitive Risks of Integrated Strategies
Although becoming more popular the RISK is getting ‘stuck in the middle’
Cost structure is not low enough for attractive pricing of products and products not sufficiently differentiated to create value for target customer – therefore, fail to successfully implement either low cost or differentiation strategy
Result: Don’t earn above-average returns
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