Business Policy & Strategic Management

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Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness & Globalization: Concepts & Cases, 13e. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.

CHAPTER

4 Business-Level Strategy

LEARNING OBJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to: 4-1 Discuss the relationships between customers and business-level

strategies in terms of who, what, and how. 4-2 Explain the purpose of forming and implementing a business-level

strategy. 4-3 Describe business models and explain their relationship with business-

level strategies. 4-4 Explain the differences among five types of business-level strategies. 4-5 Use the five forces of competition model to explain how firms can earn

above-average returns when using each business-level strategy. 4-6 Discuss the risks associated with using each of the business-level

strategies.

Chapter Introduction (slide 1 of 3)

• By selecting and implementing one or more strategies, firms seek to: • Gain strategic competitiveness • Earn above-average returns

• Strategies: • Are purposeful • Develop before firms engage rivals in marketplace competitions • Demonstrate a shared understanding of the firm’s vision and mission

• A strategy that is consistent with the conditions and realities of a firm’s external and internal environments marshals, integrates, and allocates available resources, capabilities, and competencies to align them properly with opportunities in the external environment.

• When effective, a strategy rationalizes the firm’s vision and mission along with the actions taken to achieve them.

Chapter Introduction (slide 2 of 3)

• A business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in a specific product market. • A business-level strategy is:

• Something that every firm must develop and implement • The core strategy—the strategy that the firm forms to

describe how it intends to compete against rivals on a day-to- day basis in its chosen product market

Chapter Introduction (slide 3 of 3)

• Customers are the foundation of successful business-level strategies. • 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 • How those will needs will be satisfied

4-1 Customers: Their Relationship with Business-Level Strategies

• Strategic competitiveness results only when the firm satisfies a group of customers by using its competitive advantages as the basis for competing in individual product markets. • A key reason firms must satisfy customers with their business-

level strategy is that returns earned from relationships with customers are the lifeblood of all organizations.

• The most successful companies try to find new ways to: • Satisfy current customers • Meet the needs of new customers

4-1a Effectively Managing Relationships with Customers

• Firms strengthen their relationships with customers by delivering superior value to them. • Delivering superior value often results in increased

customer satisfaction. • In turn, customer satisfaction has a positive relationship with

profitability because satisfied customers are more likely to be repeat customers.

4-1b Reach, Richness, and Affiliation

• The reach dimension of relationships with customers revolves around the firm’s access and connection to customers.

• Richness concerns the depth and detail of the two-way flow of information between the firm and customers.

• Affiliation is concerned with facilitating useful interactions with customers.

4-1c Who: Determining the Customers to Serve

• A firm decides who the target customer is by dividing customers into groups based on differences in customers’ needs. • Market segmentation is the process of dividing

customers into groups based on their needs. • Market segmentation is used to cluster customers with

similar needs into individual and identifiable groups. • Firms can use almost any identifiable human or

organizational characteristic to subdivide a market into segments that differ from one another on a given characteristic.

Table 4.1 Basis for Customer Segmentation (slide 1 of 2)

Consumer Markets 1. Demographic factors (age, income, sex, etc.) 2. Socioeconomic factors (social class, stage in the family life cycle) 3. Geographic factors (cultural, regional, and national differences) 4. Psychological factors (lifestyle, personality traits) 5. Consumption patterns (heavy, moderate, and light users) 6. Perceptual factors (benefit segmentation, perceptual mapping)

Table 4.1 Basis for Customer Segmentation (slide 2 of 2)

Industrial Markets 1. End-use segments (identified by Standard Industrial Classification [SIC]

code) 2. Product segments (based on technological differences or production

economics) 3. Geographic segments (defined by boundaries between countries or by

regional differences within them) 4. Common buying factor segments (cut across product market and geographic

segments) 5. Customer size segments Source: Based on information in S. C. Jain, 2009, Marketing Planning and Strategy, Mason, OH: South-Western Cengage Custom Publishing.

4-1d What: Determining Which Customer Needs to Satisfy

• Having close interactions with current and potential customers helps a firm identify the targeted customer group’s current and future needs that its products can satisfy. • In a general sense, needs (what) are related to a product’s

benefits and features. • Successful firms:

• Learn how to deliver to customers what they want, when they want it

• Recognize that consumer needs change • Firms that fail to do this may lose their customers to competitors

whose products provide more value.

4-1e How: Determining Core Competencies Necessary to Satisfy Customer Needs

• A firm must determine how to use its core competencies in order to implement value- creating strategies and develop products that can satisfy its target customers’ needs. • Core competencies are resources and capabilities

that serve as a source of competitive advantage for the firm over its rivals.

• Customers’ expectations can be met and exceeded across time by only those firms with the capacity to:

• Improve consistently • Innovate • Upgrade their competencies

4-2 The Purpose of a Business-Level Strategy

• The purpose of a business-level strategy is to create differences between the firm’s position and those of its competitors. • To position itself differently from competitors, a firm

must decide if it intends to perform activities differently or if it will perform different activities.

• Thus, the firm’s business-level strategy is a deliberate choice about how it will perform the value chain’s primary and support activities to create unique value.

4-3 Business Models and their Relationship with Business-Level Strategies (slide 1 of 3)

• Business models are part of a comprehensive business- level strategy. • A business model describes what a firm does to create, deliver,

and capture value for its stakeholders. • A business model influences the implementation of strategy,

especially in terms of the interdependent processes the firm uses during implementation.

• Developing and integrating a business model and a business- level strategy increases the likelihood of company success.

• In essence, a business model is a framework for how the firm will use processes to create, deliver, and capture value, while a business-level strategy is the path the firm will follow to gain a competitive advantage by exploiting its core competencies in a specific product market.

4-3 Business Models and their Relationship with Business-Level Strategies (slide 2 of 3)

• There are many types of business models, including: • The franchise model

• A firm licenses its trademark and the processes it follows to create and deliver a product to franchisees.

• Example: McDonald’s

• The freemium model • The firm provides a basic product to customers for free and

earns revenues and profits by selling a premium version of the service.

• Example: Dropbox

4-3 Business Models and their Relationship with Business-Level Strategies (slide 3 of 3)

• The advertising model • For a fee, a firm provides advertisers with high-quality access

to its target customers. • Example: Google

• The subscription model • A firm offers a product to customers on a regular basis such

as once-per-month, once-per-year, or upon demand. • Example: Netflix

• The peer-to-peer model • A business matches those wanting a particular service with

those providing that service. • Example: Airbnb

4-4 Types of Business-Level Strategies (slide 1 of 2)

• Firms choose between five business-level strategies to establish and defend their desired strategic position against competitors: 1. Cost leadership 2. Differentiation 3. Focused cost leadership 4. Focused differentiation 5. Integrated cost leadership/differentiation

• Each business-level strategy can help the firm establish and exploit a competitive advantage (either lowest cost or distinctiveness) as the basis for how it will create value for customers within a particular competitive scope (broad market or narrow market).

Figure 4.1 Five Business-Level Strategies

4-4 Types of Business-Level Strategies (slide 2 of 2)

• None of the five business-level strategies is inherently or universally superior to the others.

• The effectiveness of each strategy is contingent on the: • Opportunities and threats in a firm’s external environment • Strengths and weaknesses derived from its resource portfolio

• Thus, it is critical for the firm to select a business-level strategy that represents an effective match between the opportunities and threats in its external environment and the strengths of its internal organization based on its core competencies.

4-4a Cost Leadership Strategy (slide 1 of 5)

• The cost leadership strategy is an integrated set of actions taken to produce products with features that are acceptable to customers at the lowest cost, relative to that of competitors.

• Firms using the cost leadership strategy commonly sell standardized goods or services, but with competitive levels of differentiation, to the industry’s most typical customers.

• Process innovations (newly designed production and distribution methods and techniques that allow the firm to operate more efficiently) are critical to a firm’s efforts to use the cost leadership strategy successfully.

Figure 4.2 Examples of Value-Creating Activities

Associated with the Cost Leadership Strategy

4-4a Cost Leadership Strategy (slide 2 of 5)

• Firms that effectively use the cost leadership strategy can earn above- average returns despite the presence of strong competitive forces.

Rivalry with Existing Competitors • Because of the cost leader’s advantageous position, rivals hesitate

to compete on the price variable. • Factors that influence the degree of rivalry that firms encounter

when implementing the cost leadership strategy include: • Organizational size • Resources possessed by rivals • A firm’s dependence on a particular market • Location • Prior competitive interactions between firms • A firm’s reach, richness, and affiliation with customers

4-4a Cost Leadership Strategy (slide 3 of 5)

Bargaining Power of Buyers (Customers) • Although customers can force a cost leader to reduce its prices,

prices will not be reduced below the level at which the cost leader’s next-most-efficient industry competitor can earn average returns. • A competitor that does not earn average returns would be forced to exit

the market, leaving the cost leader with less competition and an even stronger bargaining position.

Bargaining Power of Suppliers • A cost leader generally operates with margins greater than the

margins earned by its competitors, thus making it possible for the cost leader to absorb its suppliers’ price increases.

• To reduce costs, some firms may outsource an entire function to a single or a small number of suppliers.

4-4a Cost Leadership Strategy (slide 4 of 5)

Potential Entrants • Over time, the efficiency of a cost leader enhances its profit margins,

which in turn creates an entry barrier to potential competitors. • New entrants must be willing to accept less than average returns until

they gain the experience required to approach the cost leader’s efficiency.

Product Substitutes • When faced with product substitutes, the cost leader has more

flexibility than do its competitors. • To retain customers, it often can reduce its product’s price.

4-4a Cost Leadership Strategy (slide 5 of 5)

Competitive Risks of the Cost Leadership Strategy • Competitive risks associated with the cost

leadership strategy include: • A loss of competitive advantage to newer

technologies • A failure to detect changes in customers’ needs • The ability to imitate the cost leader’s competitive

advantage through competitors’ own distinct strategic actions

4-4b Differentiation Strategy (slide 1 of 6)

• The differentiation strategy is an integrated set of actions taken to produce products (at an acceptable cost) that customers perceive as being different in ways that are important to them.

• While cost leaders serve a typical customer in an industry, differentiators target customers for whom the firm creates value because of the manner in which its products differ from those produced and marketed by competitors.

• Product innovation (a new product or service development that solves the customer’s problem and benefits both the customer and the company) is critical to the successful use of the differentiation strategy.

4-4b Differentiation Strategy (slide 2 of 6)

• Through the differentiation strategy, the firm produces distinctive products for customers who value differentiated features more than low cost. • Because a differentiated product satisfies customers’ unique

needs, firms following the differentiation strategy are able to charge premium prices.

• The ability to sell a product at a price that substantially exceeds the cost of creating its differentiated features allows the firm to outperform rivals and earn above-average returns.

• To maintain success by implementing the differentiation strategy, the firm must: • Consistently upgrade differentiated features that customers value • Create new valuable features without significant cost increases

4-4b Differentiation Strategy (slide 3 of 6)

• Firms using the differentiation strategy seek to differentiate their products from competitors’ products on as many dimensions as possible. • The less similarity to competitors’ offerings, the more

buffered a firm is from competition with its rivals. • Firms use the value chain to determine if they

are able to link the activities required to create value by using the differentiation strategy. • Companies without the skills needed to link these

activities cannot expect to use the differentiation strategy successfully.

Figure 4.3 Examples of Value-Creating Activities

Associated with the Differentiation Strategy

4-4b Differentiation Strategy (slide 4 of 6)

• There are ways that firms using the differentiation strategy can successfully position themselves in terms of the five forces of competition to earn above-average returns.

Rivalry with Existing Competitors • Customers of products differentiated in ways that are meaningful to

them tend to be loyal and less sensitive to price increases. • The relationship between brand loyalty and price sensitivity insulates a

firm from competitive rivalry.

Bargaining Power of Buyers (Customers) • Purchasers of differentiated products accept price increases as long

as they continue to perceive the products satisfy their distinctive needs at an acceptable cost.

4-4b Differentiation Strategy (slide 5 of 6)

Bargaining Power of Suppliers • Higher costs from suppliers can be:

• Absorbed by high margins earned by the firm • Passed on to customers through price increases

Potential Entrants • Substantial barriers to potential entrants are created by:

• Customer loyalty • The need to overcome the uniqueness of a differentiated product

Product Substitutes • Companies selling brand-name products to loyal customers face a

lower probability of customers switching to substitute products.

4-4b Differentiation Strategy (slide 6 of 6)

Competitive Risks of the Differentiation Strategy • Risks associated with the differentiation strategy include:

• A customer group’s decision that a differentiated product’s unique features are no longer worth a premium price

• The inability of a differentiated product to create the type of value for which customers are willing to pay a premium price

• The ability of competitors to provide customers with products that have features similar to those of the differentiated product, but at a lower cost

• Counterfeiting • The failure of a firm to meet customers’ expectations through its

efforts to implement the differentiation strategy

4-4c Focus Strategies (slide 1 of 3)

• The focus strategy is an integrated set of actions taken to produce products that serve the needs of a particular segment of customers. • Market segments firms may choose to serve by

implementing a focus strategy include: • A particular buyer group

• Example: Senior citizens • A different segment of a product line

• Example: Products for professional painters • A different geographic market

• Example: Northern or southern Italy

4-4c Focus Strategies (slide 2 of 3)

• A focus strategy leads to success when the firm: • Serves a segment well whose unique needs are so specialized that

broad-based competitors choose not to serve that segment • Creates value for a segment that exceeds the value created by industry-

wide competitors • Firms can create value for customers in specific and unique market

segments by using the: • Focused cost leadership strategy • Focused differentiation strategy

• The activities required to use both of these strategies and the manner in which both of these strategies allow a firm to deal successfully with the five competitive forces are virtually identical to those of the industry-wide cost leadership and differentiation strategies.

4-4c Focus Strategies (slide 3 of 3)

Competitive Risks of Focus Strategies • The competitive risks of focus strategies include:

• A competitor’s ability to use its core competencies to “out-focus” the focuser by serving an even more narrowly defined market segment

• An industry-wide company’s decision that the market segment served by the firm using a focus strategy is attractive and worthy of competitive pursuit

• A reduction in differences of the needs between customers in a narrow market segment and the industry-wide market over time

4-4d Integrated Cost Leadership/ Differentiation Strategy (slide 1 of 6)

• The integrated cost leadership/differentiation strategy finds a firm engaging simultaneously in primary value chain activities and support functions to achieve a low cost position with some product differentiation.

• When using this strategy, firms seek to produce products at a relatively low cost that have some differentiated features that their customers value.

• Firms that successfully use the integrated cost leadership/differentiation strategy usually adapt quickly to new technologies and rapid changes in their external environments.

4-4d Integrated Cost Leadership/ Differentiation Strategy (slide 2 of 6)

• Developing two sources of competitive advantage (cost and differentiation) increases the number of primary value chain activities and support functions in which the firm becomes competent. • Flexibility is required to learn how to use primary

value chain activities and support functions in ways to produce differentiated products at relatively low costs.

• Three sources of flexibility used to implement the integrated cost leadership/differentiation strategy successfully include:

1. Flexible manufacturing systems 2. Information networks 3. Total quality management systems

4-4d Integrated Cost Leadership/ Differentiation Strategy (slide 3 of 6)

Flexible Manufacturing Systems • A flexible manufacturing system (FMS) is a computer-controlled

process that firms use to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention.

• The goal of an FMS is to eliminate the “low cost versus product variety” trade-off that is inherent in traditional manufacturing technologies.

• An FMS allows a firm to: • Change quickly and easily from making one product to making another • Increase its effectiveness in responding to changes in its customers’

needs, while retaining low-cost advantages and consistent product quality • Reduce the lot size needed to manufacture a product efficiently • Have a greater capacity to serve the unique needs of a narrow

competitive scope

4-4d Integrated Cost Leadership/ Differentiation Strategy (slide 4 of 6)

Information Networks • Information networks link companies with their:

• Suppliers • Distributors • Customers

• Customer relationship management (CRM) is an information- network process that firms use to manage relationships with customers.

• When used effectively, information networks help the firm satisfy customer expectations in terms of: • Product quality • Delivery speed

4-4d Integrated Cost Leadership/ Differentiation Strategy (slide 5 of 6)

Total Quality Management Systems • Total quality management (TQM) involves the implementation of

appropriate tools/techniques to provide products and services to customers with best quality.

• Firms develop and use TQM systems to: • Increase customer satisfaction • Cut costs • Reduce the amount of time required to introduce innovative products to

the marketplace • An effective TQM system helps the firm develop the flexibility

needed to identify opportunities to simultaneously: • Increase its product’s differentiated features • Reduce costs

4-4d Integrated Cost Leadership/ Differentiation Strategy (slide 6 of 6)

Competitive Risks of the Integrated Cost Leadership/Differentiation Strategy • The primary risk of this strategy is that a firm

might produce products that do not offer sufficient value in terms of either low cost or differentiation. • In such cases, the company becomes “stuck in the

middle.” • Firms stuck in the middle:

• Compete at a disadvantage • Are unable to earn more than average returns