a strategic analysis of an organisation in the Transport industry.

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MGT30005 Strategic Planning in Dynamic Environment

Business-Level Strategies

CRICOS 00111D TOID 3059

Introduction

• This session will address the following

issues:

– What are business-level strategies?

– Different types of business-level strategy?

– What business-level strategies can a

company use to exploit its competitive

advantage?

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Opening Case: IKEA

Business strategies describe the choices that businesses

make in order to compete within its chosen market. Think for

a minute about what has made the Swedish furniture

company IKEA so successful. It is truly one of the world's

great business success stories, becoming a dominant player

due to its innovative use of flat pack furniture.

What strategic choices has it made,

based on the environment within which

it operates and its internal capabilities,

in order to compete?

Is it more about price, or product

differentiation, or is it because the

company focuses on a particular

domain?

Definition

Business-level strategy is an integrated and

coordinated set of commitments and actions

designed to gain a competitive advantage by

exploiting core competencies in specific, individual

product markets.

• Every firm must form and use a business-level strategy

for each one of its businesses

• Business-level strategy choices matter because long-

term performance is linked to a firm’s strategies

• In essence, it constitutes how a firm will compete

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The purpose of a business-level strategy

Business-level strategies are intended to create differences in the firm’s

position relative to that of its rivals.

To be successful in a chosen strategy, the firm must integrate its

primary and support activities to provide the unique value it intends to

deliver.

Match external opportunities and threats with internal strengths (i.e. its

core competencies).

Positioning

Perform Activities Differently

Perform Different Activities

OR

BUSINESS-LEVEL STRATEGY

• A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy to identify what industry the firm will compete in.

ONE BUSINESS- LEVEL STRATEGY

• A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity.

SEVERAL BUSINESS- LEVEL STRATEGIES

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CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES

KEY ISSUES in

BUSINESS- LEVEL

STRATEGY

Who will be served?

What needs will be satisfied?

How will those needs be satisfied?

FIVE BUSINESS- LEVEL

STRATEGIES

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COST LEADERSHIP STRATEGY

• An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers.

• Products: – are relatively standardised – have features acceptable to many customers – offer the lowest competitive price.

The sources of cost advantage

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Using the value chain to analyse costs

strategy

• A value chain analysis of a company’s cost position comprises the

following stages:

– Disaggregate the company into separate activities

– Establish the relative importance of different activities in the total

cost of the product

– Compare costs by activity

– Identify cost drivers

– Identify linkages: how costs in one activity influence costs in

another

– Identify opportunities for reducing costs

– Which activities should be undertaken within the company and

which activities should be outsourced.

EXAMPLES OF VALUE-

CREATING ACTIVITIES

ASSOCIATED WITH THE COST

LEADERSHIP STRATEGY

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Risks of cost leadership

Although strategy analysis has traditionally

emphasised cost advantage as the primary basis for

competitive advantage, the cost leadership strategy

offers a less secure basis for competitive advantage

than does differentiation.

• Obsolescence – Processes used to produce and distribute goods and services may become obsolete because of competitors’ innovations.

• Cost reductions – Too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation.

• Imitation – Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy.

COST LEADERSHIP STRATEGY: COMPETITORS

Threat of new entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of

buyers

Threat of substitute products

RIVALRY WITH

EXISTING

COMPETITORS

Due to the cost leader’s

advantageous position:

• rivals hesitate to compete on

basis of price

• a lack of price competition

leads to greater profits

• rivalry may be based on

factors such as size,

resources, location, market

dependence and prior

competitive interactions.

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COST LEADERSHIP STRATEGY: BUYERS & SUPPLIERS

• The cost leadership strategy can

mitigate buyers’ power by driving

prices far below competitors,

causing them to exit and shifting

power away from buyers back to

the firm.

• Powerful customers can force a

cost leader to reduce its prices, but

not below the level where the next-

most-efficient industry competitor

can earn average returns.

BARGAINING POWER OF

BUYERS BARGAINING POWER OF SUPPLIERS

The cost leadership strategy can

mitigate suppliers’ power by:

• being able to absorb cost

increases due to low-cost position

• being able to make very large

purchases, reducing the chance

of the supplier using power

• outsourcing to reduce costs may

also require relationship-building,

particularly to a foreign supplier.

COST LEADERSHIP STRATEGY: NEW ENTRANTS & SUBSTITUTE

Barriers to potential entrants

include:

• their need to enter on a large

scale in order to be cost

competitive

• the time it takes to move up

the learning curve

• the cost leader’s efficiency

through continuous efforts to

reduce costs enhances profit

margins.

THREAT OF POTENTIAL

ENTRANTS

PRODUCT

SUBSTITUTES

The cost leader is well

positioned to:

• make investments to be the

first to create substitutes

• buy patents developed by

potential substitutes

• lower prices in order to

maintain value position

• be more flexible than its

differentiated competitors.

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Quiz

Cost drivers are:

a. Factors that increase the costs a firm

experiences

b. Factors that determine a firm's cost

position

c. Factors that is neutral for a firm's costs

d. Factors that explain costs in an industry

DIFFERENTIATION STRATEGY

Definition: An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them

• Focus is on non-standardised products.

• Its an appropriate strategy when customers value differentiated features more than they value low cost.

• Firms must still be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay.

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DIFFERENTIATION STRATEGY: DISTINCTIVE ACTIONS

• Firms seek to be different from competitors on as

many dimensions as possible.

• Differentiation approaches

– Unusual features

– Responsive customer service

• Rapid product innovations

• Technological leadership

• Perceived prestige and status

• Different tastes

• Engineering design and performance

Differentiation: Drivers

The drivers of uniqueness

• product features and product performance

• complementary services (e.g. credit, delivery, repair)

• intensity of marketing activities (e.g. rate of advertising spending)

• technology embodied in design and manufacture

• the quality of purchased inputs

• procedures influencing the conduct of each of the activities (e.g.

rigour of quality control, service procedures, frequency of sales visits

to a customer)

• the skill and experience of employees

• location (e.g. with retail stores)

• the degree of vertical integration (which influences a company’s

ability to control inputs and intermediate processes)

• https://www.youtube.com/watch?v=-sJ6IJZJhUU

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Using the value chain to analyse

differentiation

Fig. 7.3

EXAMPLES OF VALUE-CREATING

ACTIVITIES ASSOCIATED

WITH THE DIFFERENTIATION

STRATEGY

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DIFFERENTIATION STRATEGY: COMPETITORS

• The relationship between

brand loyalty and price

sensitivity insulates a firm

from competitive rivalry.

• Reputation can also sustain

the competitive advantage

of firms following a differentiation strategy.

Threat of new entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of

buyers

Threat of substitute products

RIVALRY WITH

EXISTING

COMPETITORS

DIFFERENTIATION STRATEGY: BUYERS & SUPPLIERS

• The differentiation strategy can

mitigate buyers’ power because

well-differentiated products

reduce customer sensitivity to

price increases.

• Customers are willing to accept

a price increase when a product

satisfies their perceived unique

needs, as long as they do not

think that an acceptable product

alternative exists.

BARGAINING POWER

OF BUYERS

BARGAINING POWER

OF SUPPLIERS

• The differentiation strategy can

mitigate suppliers’ power by

absorbing price increases due to

higher margins from high-quality

components.

• Alternatively, considering

buyers’ relative insensitivity to

price increases and their brand

loyalty, firms may pass along

higher supplier prices to the

buyer.

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DIFFERENTIATION STRATEGY: NEW ENTRANTS & SUBSTITUTE

There are substantial barriers to

potential entrants.

• customer loyalty and the need

to overcome the uniqueness of

a differentiated product

• the need for new products to

surpass proven products

• the need for new products to

be at least equal to the

performance of proven

products, but offered at lower

prices.

THREAT OF POTENTIAL

ENTRANTS PRODUCT

SUBSTITUTES

Products must be well

positioned relative to

substitutes because brand

loyalty to a differentiated

product tends to reduce:

• customers’ testing of new

products

• switching brands.

DIFFERENTIATION STRATEGY: COMPETITIVE RISKS

• The price differential between the differentiator’s and the cost leader’s products becomes too large.

• Value diminished occurs when differentiation ceases to provide value for which customers are willing to

pay.

• Experience narrows customers’ perceptions of the value of differentiated features.

• Counterfeit goods replicate differentiated features

of the firm’s products.

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Quiz

Which one of the following is not a risk associated

with the differentiation strategy?

• A. Price differential for the value becoming too

large

• B. Narrowing of customer perceptions of the

value of product differentiation

• C. Counterfeits

• D. Processes becoming obsolete

FOCUSED STRATEGIES

• Definition: an integrated set of actions taken to

produce goods or services that serve the needs of a

particular competitive segment

• Target markets include:

– a particular buyer group (e.g. youths or senior citizens)

– different segment of a product line (e.g. products for professional painters or the do-it-yourself

group)

– different geographic market (e.g. northern or southern Italy by using a foreign subsidiary).

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FOCUSED STRATEGIES

Types of focused strategies: – Focused cost leadership strategy – Focused differentiation strategy

To implement a focus strategy, firms must be able to:

• complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns.

FACTORS THAT DRIVE FOCUSED STRATEGIES

• Large firms may overlook small niches. • A firm may lack the resources needed to compete

in the broader market. • A firm is able to serve a narrow market segment

more effectively than its larger industry-wide competitors can.

• Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.

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FOCUS STRATEGIES: COMPETITIVE RISKS

• Out-focused – A focusing firm may be out focused by its competitors. Narrow market view; High/low price range

• Competition – A large competitor may decide that the market segment served by the focus strategy

firm is attractive and worthy of competitive

pursuit. Large firms may decide to pursue the niche market

• Changing preferences – Customer preferences in the niche market may change to more closely

resemble those of the broader market. Customer preferences may change; Short term

INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY

• Efficiency: sources of low cost

• Differentiation: source of unique value

• Efficiently produced products with differentiated attributes: – readily adapt to external environmental

changes – concentrate simultaneously on two sources of

competitive advantage: cost and differentiation – requires competence and flexibility in several

value chain activities

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Stuck in the middle

• Strategy is gaining in popularity, but it is risky.

– Products do not offer sufficient value in terms of either low cost or differentiation

– Cost structure is not low enough for attractive pricing of products.

– Products are not sufficiently differentiated to create value for target customer

• As a result, firms do not earn above-average

returns.

INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY: RISKS

Final quiz

Companies that seek competitive advantage

through differentiation but focus on a narrow

geographic or demographic customer segment

pursue which of Porter's generic strategies?

a. Focused differentiation

b. Integrated cost leadership/differentiation

c. Focused cost leadership

d. Focused integration