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BUSINESS-LEVEL BUSINESS-LEVEL STRATEGIC ALTERNATIVESSTRATEGIC ALTERNATIVES

Payne

(5)

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RATE OF PROFIT ABOVE THE

COMPETITIVE LEVEL

How do we make

money?

INDUSTRY

ATTRACTIVENESS

Which businesses

should we be in?

COMPETITIVE ADVANTAGE

How should we compete?

CORPORATE STRATEGY

BUSINESS STRATEGY

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The Decision Logic of Strategy Formulation

Establishment of mission, vision, values, objectives-- the Directional Strategies

Establishment of mission, vision, values, objectives-- the Directional Strategies

Identification, evaluation, and selection of-- the Adaptive Strategies

Identification, evaluation, and selection of-- the Adaptive Strategies

Identification, evaluation, and selection of-- the Market Entry Strategies

Identification, evaluation, and selection of-- the Market Entry Strategies

Identification, evaluation, and selection of-- the Positioning Strategies

Identification, evaluation, and selection of-- the Positioning Strategies

Implementation through development of-- the Functional & Operational Strategies

Implementation through development of-- the Functional & Operational Strategies

May be Corporate or

BusinessStrategic Decisions

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Adaptive Strategies

• Delineate how the organization will adapt to changes in the environment or competitive landscape:

Expansion •Diversification•Vertical Integration•Market Development•Product Development•Penetration

Stabilization•Enhancement•Status Quo

Contraction•Divestiture•Liquidation•Harvesting•Retrenchment•Outsourcing

Corporate Strategy Decisions Only

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Remember Ansoff’s Matrix?

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Business-Level Strategy

Business-level strategy:Business-level strategy: an integrated and coordinated set an integrated and coordinated set of commitments and actions the firm uses to gain a of commitments and actions the firm uses to gain a competitive advantagecompetitive advantage by exploiting core competencies in by exploiting core competencies in specific product markets. specific product markets.

Key Issues:Key Issues:• What product/service to offer customers?What product/service to offer customers?• How to manufacture or create the product or service?How to manufacture or create the product or service?• How to distribute the product/service in the marketplace?How to distribute the product/service in the marketplace?

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RBV: Core Competencies and Strategy

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage

Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets

Business-levelBusiness-levelstrategystrategy

StrategyStrategy

CoreCorecompetenciescompetencies

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Competitive Advantage

“The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.” - Gary Hamel and

C.K. Prahalad

• COMPETITIVE ADVANTAGE exists when a firm’s strategy gives it an edge in:

– Defending against competitive forces and– Securing customers

…such that the firm earns (or has the potential to earn) a persistently higher rate of profit.

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• COMPETITIVE ADVANTAGE comes with the offering of SUPERIOR VALUE through:

–Offering buyers a good product at a lower price

–Offering a better product/service buyers think is worth a premium price

Gaining of Competitive Advantage“The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.”

- Gary Hamel and C.K. Prahalad

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Adaptive: Expansion-Market/Product Development & Penetration

• Market Development -- expand geographic service area or by targeting new market segments within the present area.– Building new store near high-growth residential areas

• Product Development -- introduction of new product/services in present markets, through product/service enhancement and line expansion.

• Penetration -- centered on promotional, distribution, and pricing strategies with current products or services.– 1 in 12 wins Coca-Cola or “buy one, get one free” for

Tinactin.

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0.1X

0 .5 X

0 .4X

0 .3X

0

.2X2X

1.5X 1X10X 4X

18%

16%

10%

0

22%

2%

4%

6%

8%

20%

14%

12%

Bu

sin

ess

Gro

wth

Rat

eStars

Cash Cows Dogs

Question Marks

Relative Market Share

The BCG Portfolio Matrix

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Adaptive: Stabilization Strategies

When past strategies have been viewed as appropriate and few changes are required:

• Enhancement - when organization just “needs to do things better;” takes forms of CQI, TQM programs, speeding delivery, adding flexibility to service design

• Status Quo - maintenance of services at the current levels, defending against competitors

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Market Entry Strategies

• Carry out the expansion (and stabilization) strategies through:– Purchase Strategies:

• Acquisition – purchase of new product, unit or organization• Licensing – lease technology, product or service• Venture Capital Investment – “try out” investment option

– Cooperation Strategies: • Mergers – two organizations come together as one• Strategic Alliance – long-term agreement to work together• Joint Venture – combined resources to work on common

issue of interest– Developmental Strategies:

• Internal Development – uses existing resources or structures• Internal Ventures – establishes new entity for developmental

purposes

May be Corporate

Decision if in Different Market

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Positioning Strategies

• Business Level Positioning: – Position the organization vis-à-vis other organizations

within the market– These are market-oriented and best articulate the

competitive advantage within the market– May be market-wide (or broad-based) or directed at a

particular segment (or niche-focused)• Based largely on Generic Business Strategies:

– Low-Cost Leadership Strategy– Broad Differentiation Strategy– Focused Low-Cost Strategy– Focused Differentiation Strategy

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Porter’s Generic Strategies

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A Low-Cost Leadership Strategy

Objective: Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to:

– Under-price rivals and reap market share gains OR– Earn higher profit margin selling at going price

Keys to Success:• Make achievement of low-cost relative to rivals the THEME of

firm’s business strategy• Find ways to drive costs out of business year-after-year

Characteristics• Cost conscious corporate culture• Efficient scale facilities• Tightly controlled production costs and overhead• Minimized costs of sales, R&D and service

• Efficient manufacturing facilities• Simplified production processes• Intensive scrutiny of budget requests

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Drivers of Cost Advantage• Economies of Scale

– Indivisibilities– Specialization and Division of

Labor

• Economies of Learning– Increased Dexterity– Improved Coordination and

Organization

• Process Technology and Process Design– Mechanization and

Automation– Efficient Utilization of

Materials– Increased Precision

• Product Design– Design for Automation– Designs to Economize on

Materials

• Input Costs– Location Advantages– Ownership of Low-Cost Inputs– Bargaining Power– Supplier Cooperation

• Capacity Utilization– Ratio of Fixed to Variable Costs– Costs of Installing and Closing

Capacity

• Managerial / Organizational Efficiency– Organizational Slack

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Common Structure for Cost Leadership

Office of the PresidentOffice of the President

Centralized StaffCentralized Staff

MarketingMarketing PersonnelPersonnel

EngineeringEngineering OperationsOperations AccountingAccounting

• Operations is main functionOperations is main function

• Process engineering is Process engineering is emphasized over R&Demphasized over R&D

• Large centralized staffLarge centralized staff

• Formalized proceduresFormalized procedures

• Structure is mechanical, job Structure is mechanical, job roles highly structuredroles highly structured

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A Differentiation Strategy

• Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals

• Find ways to differentiate that CREATE VALUE for buyers and that are NOT EASILY MATCHED or CHEAPLY COPIED by rivals

• Not spending more to achieve differentiation than the price premium that can be charged

• Uniqueness is achieved in ways that:– Buyers perceive as valuable– Rivals find hard to match or copy– Can be incorporated at a cost well below the price premium

that buyers will pay

Keys to Success

Objective

Characteristics

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Differentiation StrategyDifferentiation actions required: Developing new systems and processes Shaping perceptions through advertising Quality focus Capability in R&D Maximize human resource contributions through

low turnover and high motivation

Unique product featuresUnique product features Unique product performanceUnique product performance Exceptional services Exceptional services New technologiesNew technologies

Quality of inputsQuality of inputs Exceptional skill or experienceExceptional skill or experience Detailed informationDetailed information Extensive personal relationships Extensive personal relationships

with buyers and supplierswith buyers and suppliers

Factors Driving Differentiation:

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OperationsOperations HumanHumanResourcesResources

Common Structure for DifferentiationPresident andPresident andLimited StaffLimited Staff

MarketingMarketing

New ProductNew ProductR&DR&D

• Marketing is the main function for tracking new product ideasMarketing is the main function for tracking new product ideas• New product R&D is emphasizedNew product R&D is emphasized• Most functions are decentralizedMost functions are decentralized• Formalization is limited to foster change and promote new ideasFormalization is limited to foster change and promote new ideas• Overall structure is organic; job roles are less structuredOverall structure is organic; job roles are less structured

R&DR&D

FinanceFinanceMarketingMarketing

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Best Cost Provider/Integrative Strategy

• Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation– Make an upscale product at a lower cost– Give customers more value for the money

• Create superior value by MEETING OR EXCEEDING buyer expectations on product attributes and BEATING their price expectations

• Be the low-cost producer of a product with GOOD-TO-EXCELLENT product attributes, then use cost advantage to UNDERPRICE comparable brands

Keys to Success

Objective

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Major Risk of Integrated Strategy

• An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)

• The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy

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A Focus / Niche Strategy

• Involves concentrated attention on a narrow piece of the total market

• Serve niche buyers better than rivals

• Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs

• Develop unique capabilities to serve needs of target buyer segment

• Achieve LOWER COSTS than rivals in serving the segment-- A low-cost strategy

• Offer niche buyers SOMETHING DIFFERENT from rivals-- A differentiation strategy

Keys to Success

Objective

Two Types

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IKEA