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Strategic Management

MGT 450

Business - Level StrategyChapter 4

Chapter 2

The External Environment

Chapter 3

The Internal Organization

Vision Mission

Chapter 4

Business-Level Strategy

Chapter 5

Competitive Rivalry and Dynamics

Chapter 6

Corporate-Level Strategy

Chapter 7

Merger and Acquisition

Strategy

Chapter 8

International Strategy

Chapter 9

Cooperative Strategy

Strategy formulation

Strategic Competitiveness

Above-Average Returns

Chapter 10

Corporate Governance

Chapter 11

Organizational Structure and

Controls

Chapter 12

Strategic Leadership

Chapter 13

Strategic Entrepreneurship

Strategy implementation

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The Strategic Management Process

A-S-P model

Chapter 4: Business-Level Strategy

Five content areas

1. Defining business-level strategy

2. Relationship between customers and business level strategy in terms of who,

what, and how

3. Differences among business-level strategies

4. Use the 5-Forces of competition model to explain how above average return

can be earned through each business –level strategy.

5. Risks of business-level strategies.

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

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.

Introduction

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

Satisfying customers is the foundation of successful business strategies 1. Managing relationships with customers

2. Reach, richness, affiliation

3. Who will be served

4. What needs will be satisfied

5. How those needs will be satisfied

In terms of customers, when selecting a business- level strategy the firm determines:

1) WHO will be served

2) WHAT needs those target customers have that it will satisfy

3) HOW those needs will be satisfied

Introduction

Customers: Their Relationship with Business-Level Strategies

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

1. Effectively managing relationships w/ customers • Deliver superior value increased customer satisfaction

• Strong interactive relationships is foundation

Ex: Amazon anticipates its customers needs using the information it has, and tries to serve them.

2. Reach, richness and affiliation ( 3 dimensions) • 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

Five components in customer relationships

Customers: Their Relationship with Business-Level Strategies

3. WHO: Determining the customers to serve Market segmentation

• Dividing customers into groups based on differences in needs

Ex: Hill’s Pet Nutrition, A Division of Colgate-Palmolive

• Process used to cluster people with similar needs into individual and identifiable groups

Five components in customer relationships

Customers: Their Relationship with Business-Level Strategies

Common Characteristics on which customers’ needs vary are illustrated in Table 4.1

- Standard industrial Classification

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

• Use core competencies (How) to implement value creating strategies and thereby satisfy customer needs.

Five components in customer relationships

Customers: Their Relationship with 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

Activity map exemplifies a firm’s Activities:

• How they are integrated

• Activity Fit is key to the sustainability of competitive

Advantage.

Purpose of Business-Level Strategies

limited passengers service (no meals, no seat assignment and no baggage

transfers) form a cluster for a strategic theme.

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.

Purpose of Business-Level Strategies

Purpose of Business-Level (BL) Strategies (con’t)

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 BL strategies

The 5 business level strategies we examine are called generic because they can be used in any organization competing in any industry.

Types of Business-Level Strategies I. COST LEADERSHIP

Competitive advantage

• The low-cost leader

• 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

• No-frill, standardized goods

• Continuously reduce costs of value chain activities

Low-cost position is a valuable defense against rivals

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

Types of Business-Level Strategies (Cont’d) I. COST LEADERSHIP

Cost leaders carefully examine all support activities to find additional potential cost reductions.

Highly efficient systems to link suppliers’ products with the firm’s production processes

Use of economies of scale to reduce production costs

Construction of efficient-scale production facilities

A delivery schedule that reduces costs

Selection of low- cost transportation carriers

A small, highly trained sales force

Products priced so as to generate significant sales volume

Efficient and proper product Installations in order to reduce the frequency and severity of recalls

Systems and procedures to find the lowest-cost (with acceptable quality) products to purchase as raw materials

Frequent evaluation processes to monitor suppliers’ performances

Easy-to-use manufacturing technologies

Investments in technologies in order to reduce costs associated with a firm’s manufacturing processes

Consistent policies to reduce turnover costs

Cost-effective management information systems

Intense and effective training programs to improve worker efficiency and effectiveness

Simplified planning practices to reduce planning costs

Relatively few managerial layers in order to reduce overhead costs

Inbound logistics Operations Outbound logistics Marketing and Sales

Service

Infrastructure

HRM

Technology Development

Procurement

Types of Business-Level Strategies (Cont’d) I. COST LEADERSHIP

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

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

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

Ex: Apple’s iPod

Types of Business-Level Strategies (Cont’d) II. Differentiation

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

Types of Business-Level Strategies (Cont’d) II. Differentiation

Superior handling of incoming raw materials so as to minimize damage and to improve the quality of the final product

Consistent manufacturing of attractive products

Rapid responses to customers’ unique manufacturing specifications

Accurate and responsive order- processing procedures

Rapid and timely product deliveries to customers

Extensive granting of credit buying arrangements for customers

Extensive personal relationships with buyers and suppliers

Extensive buyer train- ing to assure high- quality product installations

Complete field stocking of repla- cement parts

Systems and procedures used to find the highest-quality raw materials

Purchase of highest-quality replacement parts

Strong capability in basic research

Investments in technologies that will allow the firm to produce highly differentiated products

Compensation programs intended to encourage worker creativity and productivity

Highly developed information systems to better understand customers’ purchasing preferences

Somewhat extensive use of subjective rather than objective performance measures

A company-wide emphasis on the importance of producing high-quality products

Inbound logistics Operations Outbound logistics Marketing and Sales

Service

Infrastructure

HRM

Technology Development

Procurement

Superior personal training

Types of

: • Rivalry against 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

• P • Substantial barriers (see above) and would require significant resource investment

• Product Substitutes • Customer loyalty effectively positions firm against product substitutes

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

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

Types of Business-Level Strategies III. FOCUS LEADERSHIP

Focus strategy examples Buyer groups

• Youths/senior citizens

Product line segments • Professional painter groups

Geographic markets • West vs. East coast

Types of Business-Level Strategies III. FOCUS LEADERSHIP

3. Focused Cost Leadership • Competitive advantage: Low-cost • Competitive scope: Narrow industry segment

4. 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

Types of Business-Level Strategies III. FOCUS LEADERSHIP

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

Types of Business-Level Strategies (Cont’d)

5. Integrated CL/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

Types of Business-Level Strategies (Cont’d)

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

• Goal: eliminate ‘low cost vs. product variety, tradeoff inherent in traditional manufacturing technologies

• 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

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

Summary

• Business-level strategy is an integrated set of actions to gain competitive advantage using cost leadership, differentiation, focused cost leadership, focused differentiation or integrated cost leadership/differentiation

• Customer segmentation allows firms to identify unique customer needs to serve through business-level strategies.

• Cost leadership strategy involves low cost products with competitive levels of differentiation and involves competitive risks

• Differentiation strategy involves products with different and valued features at a premium price, risks include changes of customer valuation of the differentiated product or competitive substitutes

• Focus strategies serve the needs of a narrow competitive segment

• Integrated strategies provide both low cost products and differentiated valued features.