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Business-Level Strategy

Business-level strategy: anintegrated and coordinated setof commitments and actions thefirm uses to gain a competitive

advantage by exploiting corecompetencies in specific productmarkets

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Core Competencies andStrategy

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-level

strategystrategy

StrategyStrategy

CoreCore

competenciescompetencies

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Strategy

Fundamental constraints

Scope

What good or service to offer, to whichcustomers

Value chain

How and where to create the good orservice

How to distribute the good or service in themarketplace(s)

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Recall our valuecreation model

Costs representspecific investment

choices thatgenerate value

Costs representspecific investment

choices that

generate value

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Consumer MarketsDemographic

ConsumerMarkets

Socioeconomic

Geographic

Psychological

Consumption patterns

Perceptual factors

Dem.

Soc.

Geo.Psy.

Con.

Per.

Broad or narrow scope?Broad or narrow scope?

Implications for configuration ofImplications for configuration of

value chain??

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Business Markets

IndustrialMarkets

End-use

Product segments

Geog segments

Common buying factors

Customer size segments

End

Pro.

Geo.

Buy.

Size

Broad or narrow scope?Broad or narrow scope?

Implications for configuration ofImplications for configuration of

value chain??

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Source of competitiveadvantage - Value chains

Strategies create differences between the firms

position and its rivals

Sources of differences? - perform activitiesdifferently; perform different activities

Two value-adding configurations (Porter, 1985)

Low costDifferentiated

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Comparing Scope and Sourceof Advantage

Competitive Advantage

Compe

tit i

veS

co

pe

Cost Uniqueness

Bro

ad

targe

t

Narrow

targe

t

Cost Leader Differentiator

FocusedCost

FocusedDifferentiator

IntegratedCost

Leader/Differentiator

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Cost Leadership Strategy

An integrated set of actions designed toproduce or deliver goods or services at the

lowest costrelative to competitorswith features that are acceptable tocustomers

relatively standardized products

features acceptable to many customers

lowest competitive price

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Cost Leadership Strategy

Cost saving actions required by this strategy:

building efficient facilities

tightly controlling production costs andoverhead

minimizing costs of sales, R&D and service

building efficient manufacturing facilities

monitoring costs of activities provided byoutsiders

simplifying production processes

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Discretionary decisionsq Product features,

performanceq Mix & variety of

productsq Service levelsq Small vs. large buyersq Process technology

q Wage levelsq Product featuresq Hiring, training,

motivation

Cost Drivers

Major Cost Driversq Economies of scaleq Learning/Spilloversq

Capacity utilizationq Integrationq Vertical Linkagesq Timingq Locationq Political/regulatoryq Interrelationships

(corporate)

Implications?Implications?

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Questions Leading to

Lower Costs1. How can an activity be performeddifferently, eliminated, externalized?

2. How can linked value activities beregrouped or reordered?

3. How can upstream/downstreamcollaboration lower costs?

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Implementation Pitfalls

Exclusive focus on Mfg

Misunderstand drivers (ABC useful)

Failure to recognize/exploit linkages(e.g., across the board cost reductions)

Contradictions (e.g., gain mkt share

through ES but allow product clutter; crosssubsidies)

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Cost Leadership andthe Five Forces

Rivalry - competitors avoid price wars with costleaders

Buyers shift demand to you, increase marketpower

Suppliers increased market power, absorbcost increases (low cost position)

Entrants entry barriers (scale, learning)

Substitutes reinvest econ profit to maintainadvantage

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Major Risks of CostLeadership Strategy

There can only be one cost leader

Technological change can eliminatecost advantage

Spillovers lead to imitation

Efficiency focus may create blindspots re: customer preferences

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Differentiation Strategy

An integrated set of actions designed by afirm to produce or deliver goods or

services that customers perceive asadding value

price may exceed what the firms targetcustomers are willing to pay

Non-commodity products

customers value differentiated featuresmore than they value low cost

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Some Differentiation Themes

Unique taste Dr. Pepper

Multiple features

Microsoft Windows and Office Wide selection and one-stop shopping

Home Depot and Amazon.com

Reliable, superior service

FedEx, Ritz-Carlton Spare parts availability

Caterpillar

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Themes

Prestige Rolex

Quality manufacturing, few defects

Honda, Toyota Technological leadership

3M Corporation, Intel

Top-of-the-line image

Ralph Lauren, Kiton

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Differentiation Strategy

Add downstream value

lower buyer cost

raise buyer performance

Cost Add value to buyers value: reduce

downstream processing time, search time,transaction costs, defect rates, direct costs,learning curves, labor, space, installation,etc. (e.g., CRM software)

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Factors That Drive

DifferentiationValue: Increase performance of buyers

value chain (or consumer perception)

Unique features, performance Downstream channels (e.g., Catepillar dealer

network)

New technologies

Quality of inputs

Skill or know-how

Information

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Differentiation Strategy

Some differentiation actions required bythis strategy:

develop new systems and processes

signal and shape buyer perceptions

quality focus

capability in R&D

Implication - maximize humancapital contributions

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Facilities thatpromote firmimage

Superior MISTo integratevalue-creating activities toimprove quality

Widely respectedCEO enhancesfirm reputation

Widely respectedCEO enhancesfirm reputation

Provide training andincentives to ensure a strongcustomer service orientation

Programs to attract talentedengineers and scientists

Excellent applicationsengineering support

Superior material handlingand sorting technology

Use of most prestigious outletsPurchase of high -qualitycomponents to enhanceproduct image

Superiormaterialhandlingoperationsto minimizedamage

Quicktransfer ofinputs tomanufactur -ing process

Flexibilityand speed inrespondingto changesin manu-facturingspecs

Low defectrates toimprovequality

Accurate andresponsiveorderprocessing

Effectiveproduct

replenish-ment toreducecustomersinventory

Creativeandinnovativeadvertisingprograms

Fostering

of personalrelation-ship withkeycustomers

Rapid responseto customerservicerequests

Completeinventory of

replacementparts andsupplies

Firminfrastructure

Human resourcemanagement

Technologydevelopment

Procurement

Firminfrastructure

Human resourcemanagement

Technologydevelopment

Procurement

Inboundlogistics

Operations Outboundlogistics

Marketingand sales

ServiceInboundlogistics

Operations Outboundlogistics

Marketingand sales

Service

Value-Chain example:

Differentiation

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Differentiation and theFive Forces

Rivalry - brand loyalty to differentiated productsreduces price competition

Buyers differentiated products less price elastic

Suppliers absorb price increases (highermargins), pass along higher prices (buyer loyalty)

Entrants must surpass proven products or beequivalent at lower price

Substitutes diff raises switching costs

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Pitfalls of DifferentiationStrategies

Differentiating on characteristics notvalued by buyers (e.g., HP)

Over-differentiating

Price premium is too high Failing to signal value

Focusing on product instead of entirevalue chain

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Focused Business-Level

StrategiesA focus strategy must exploit a narrowtargets differences from the balance ofthe industry by:

isolating a particular buyer group

isolating a unique segment of aproduct line

concentrating on a particulargeographic market

finding their niche

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Factors DrivingFocus Strategies

Large firms overlook small niches

Firm may lack resources to compete in

the broader market May be able to serve a narrow market

segment more effectively than canlarger industry-wide competitors

Focus may allow the firm to directresources to certain value chainactivities to build competitive advantage

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Major Risks of Focused

Strategies Firm may be outfocused by

competitors

Large competitor may set its sights onyour niche market

Preferences of niche market maychange to match those of broad market

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Advantages of Integrated

StrategyA firm that successfully uses an integratedcost leadership/differentiation strategy shouldbe in a better position to:

adapt quickly to environmental changes

learn new skills and technologies morequickly

effectively leverage its core competencieswhile competing against its rivals

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Benefits of Integrated

Strategy Successful firms using this strategy

have above-average returns

Firm offers two types of values tocustomers

some differentiated features (but lessthan a true differentiated firm)

relatively low cost (but now as low asthe cost leaders price)

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Major Risks of Integrated

Strategy An integrated cost/differentiation

business level strategy often involves

compromises (neither the lowest costnor the most differentiated firm)

The firm may become stuck in themiddle lacking the strong commitment

and expertise that accompanies firmsfollowing either a cost leadership or adifferentiated strategy

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Rate of Profit

in Excess of the

Competitive Level

Industry

Attractiveness

Competitive

Advantage

Differentiation

Advantage

Cost

Advantage

Vertical Power

(buyer/seller)

Rivalry

Barriers to Entry

Brands

Product technology

Marketing

capabilities

Process technology

Plant size

Low-cost inputs

Firm size

Financial resources

Substitutability

Patents

Brands

Retaliatory

capability

Summary: Industry and FirmSummary: Industry and Firm

Effects on ProfitEffects on Profit

Summary: Industry and FirmSummary: Industry and Firm

Effects on ProfitEffects on Profit