Business Level Strategy: Creating and Sustaining Competitive Advantages

Business Level Strategy: Creating and Sustaining Competitive Advantageschapter 5

Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Sustaining a Competitive AdvantageConsiderThe viability of a firms success is driven by both the internal operations of the firm and the desires and preferences of the market. Firms that succeed have the appropriate resources and cost structure to meet the needs of the environment.They also have a strategy5-2How firms compete with each other and how they attain and sustain competitive advantages go to the heart of strategic management. In short, the key issue becomes: why do some firms outperform others and enjoy such advantages over time? This subject, business level strategy, is the focus of this chapter.2Sustaining a Competitive AdvantageBusiness-level strategies require a choice:How to overcome the five forces and achieve competitive advantage?Suggestion - use Porters three generic strategies:Overall cost leadershipDifferentiationFocus5-3Business-level strategy = a strategy designed for firm or a division of the firm that competes within a single business. Generic strategies = an analysis of business strategy into basic types based on breadth of target market (industrywide versus narrow market segment) and type of competitive advantage (low-cost versus uniqueness).3The Nature of Competitive positioningA company must find the best way to position itself against its rival and it is only possible through by using business- level strategy.#-4Business Level StrategyThe plan of action that managers adopt to use resources and distinctive competencies to gain a competitive advantage5What? Who? How?Basis of choosing a business level strategy by determining how well a company can competeWhat customer need will be satisfied?Who is to be satisfied?How will the need be satisfied?

6Customer needs and Product DifferentiationDesires, wants, or cravings that can be satisfied by means of the characteristics of a product or service The process of creating a competitive advantage by designing goods or services to satisfy customers needs.The greater the differentiation, the more money a customer will pay for the product 7Customer GroupsMarket SegmentationThe way a company decides to group customersIt is based on important differences in their needs or preferences8Alternatives to Market SegmentationChoose not to recognize different needs; just aim to serve the average customer.Separate markets and create a product to suit each group.Concentrate on serving only one segment.9Distinctive CompetenciesDecide which distinctive competencies to pursue to satisfy customersDecide how to organize and combine distinctive competencies to gain a competitive advantage10Choosing a Business Level StrategyCopyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.#-12

Business-Level StrategyThree basic competitive approaches:Cost Leadership- To outperform competitors by doing everything it can to produce goods or services at the lowest possible cost.Differentiation- The differentiated product has the ability to satisfy a customers need in a way that competitors cannot.Focus- Directed toward serving the needs of a limited customer group or segment.13Cost-Leadership StrategyGoal: Outperform competitors by doing everything at a lower costCost leader chooses low level of differentiationPositions the product to appeal to the average customer14Cost-Leadership StrategyAdvantages:Charge lower price than competitors but make the same level of profitWithstand competition based on priceDisadvantages:Easy to lose sight of changes in customers tasteCompetitors will try to beat the cost leader at its own game15Differentiation StrategyGoal: To achieve a competitive advantage by creating a product that customers perceive as unique in some important wayA differentiated company can charge a premium price 16Differentiation StrategyAdvantages:Customers develop brand loyalty for a productDifferentiation creates barriers to entry for other companies

Disadvantages:Difficult to maintain uniqueness in the customers eyeThreat of substitute products17Cost Leadership and DifferentiationFlexible manufacturing strategies make the choice between these two strategies less clear-cutThe new flexible manufacturing technologies makes diversification inexpensive for firms, allowing firms to obtain benefits of both strategies18Focus StrategyGoal: To serve the needs of a limited customer group or segmentConcentrate on serving a: Geographic areaType of customerSegment of the product line19Focus StrategyAdvantages:Customer loyalty lessens the threat of substitutesPower over buyers because they cannot get the same product elsewhere Disadvantages:Suppliers have power over focused firms, making the firms vulnerable to changesVulnerable to attack, therefore must define its niche constantly20#-21

Stuck in the MiddleThe fate of a company whose strategy fails because it has made product in a way that doesn't lead to a sustained competitive Advantage.Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.#-23

Strategies in Consolidating a Fragmented and Growing IndustryCopyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.#-25chainingFranchisingIT and the InternetHorizontal MergerStrategies for consolidating a fragmented IndustryStrategies for consolidating a fragmented Industry6-26STRATEGIES IN FRAGMENTED INDUSTRIESChaining is where companies establish networks of linked merchandise outlets that are interconnected by IT and function as one large company.Chaining allows companies to negotiate large price reductions with suppliers.Companies using chaining can overcome the barrier of high transportation costs by establishing regional distribution centers.Chaining6-27STRATEGIES IN FRAGMENTED INDUSTRIESIn franchising, the parent company grants to its franchisees the right to use the parents name, reputation, and business model in a particular location in return for a franchise fee and often a percentage of the profits (McDonalds, KOA).The franchisees own the business; therefore, they are motivated to make the company-wide business model work effectively, and ensure quality consistent with the customers needs.Franchising6-28A horizontal merger is a merger where companies manufacturing similar kinds of commodities or running similar types of businesses merge.Companies like Macys and Kroger chose a strategy of horizontal merger to consolidate their respective industries.By pursuing horizontal merger, companies are able to obtain economics of scale and secure a national market for their product.Horizontal MergerStrategy in Fragmented or Growing IndustryFocus strategy stands out as the best choice through:Chaining allows cost advantage and amazing buying power to promote competitive advantage. Franchising solves the problem of maintaining control over each location and retaining uniqueness. Horizontal Mergers consolidate an industry to secure a market.Using the Internet consolidates fragmented industries globally.29Strategy in a Mature IndustryIn a mature industry it is crucial to adopt a strategy that will simultaneously preserve competitive advantages while preserving industry profitabilityInterdependent companies adopt strategies to:Manage rivalryDeter entry

306-31STRATEGY IN MATURE INDUSTRIESA mature industry is commonly dominated by a small number of large companies.If a mature company changes its strategies, their actions are likely to stimulate a competitive response from industry rivals. 6-32Deter Entry Means: Discourage to enterTo reduce the threat of entry in a market, existing companies ensure that they are offering a product targeted at every segment of the market.This strategy of filling the niche is known as product proliferation.Product ProliferationSTRATEGIES TO DETER ENTRYPrice CuttingAn entry-deterring strategy is to cut prices every time a new company enters the industry--then raise prices after the entrant has withdrawn.(continued)6-33STRATEGIES TO DETER ENTRYThe established company initially charges a high price for a product and seizes a short-term profit, but then aggressively cuts prices to build market share; thus deterring potential entrants.Maintaining Excess CapacityA third strategy is to maintain the physical capacity to produce more product than customers currently demand. However, this threat to increase output must be a credible option.6-34STRATEGIES TO MANAGE RIVALRYPrice signaling is the process by which companies increase or decrease product prices to convey their intentions to other companies.Price leadership occurs when companies jointly set prices, which is illegal under antitrust laws.Non-price competition:Market penetration is accomplished by heavy advertising to promote a product differentiation.Product development is the creation of new or improved products to replace existing ones.6-35STRATEGIES TO MANAGE RIVALRYNon-price competition also includes:Market development where a company finds a new market segment for its products.Product proliferation generally means that large companies in an industry all have a product in each market segment and compete head-to-head for customers. It allows for stability based on product differentiation rather than on product price.Capacity control refers to preventing the accumulation of costly excess capacity. Technology allows firms to produce the same or more with less spacethus causing excess capacity.STRATEGIES IN DECLINING INDUSTRIESStrategies to adopt to deal with decline:Leadership strategyNiche strategyHarvest strategy Divestment strategy6-37STRATEGIES IN A DECLINING INDUSTRYA leadership strategy aims at growing in a declining industry by picking up the market share of companies that are leaving the industry.A niche strategy focuses on pockets of demand where the demand is stable, or declining less rapidly than the industry as a whole.A harvest strategy requires the company to halt all new investments in capital equipment, etc. A disvestment strategy is selling an underperforming business before the industry enters into a steep decline.