Chapter 4

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Chapter 4: Business-Level Strategy

Overview: Defining business-level strategy Risks of business-level strategies Differences in business-level strategies 5-Forces Relationship between customers and strategy

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The Strategic Management Process

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Introduction

Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives. Choices dictated by External environment (O and T) Internal resources, capabilities and core competencies (S and

W) Business level-strategy: Integrated and coordinated set of

commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets/industry

How we intend to compete in a specific industry

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Business-Level Strategies

Purpose: To create differences between position of a firm and its competitors

Firm must make a deliberate choice to Perform activities differently Perform different activities

How activities will be performed to create value No strategy better than others Contingent on internal and external environment

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Business-Level Strategies

Two types of competitive advantage firms must choose between Cost (Are we LOWER than others?) Uniqueness (Are we DIFFERENT? How?)

Two types of ‘competitive scope’ firms must choose between Broad target Narrow target

These combine to yield 5 different generic business level strategies Can be used by any organization competing in any

industry

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Five Business-Level Strategies

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Types of Business-Level Strategies

Cost Leadership Strategy Competitive advantage: THE low-cost leader and

operates with margins greater than competitors Competitive scope: Broad

Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

No-frills, standardized or commodity-like product

Must have competitive levels of quality, service, and other features

Continuously reduce costs of value chain activities

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Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

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Cost Leadership Strategy In relationship to the 5 Forces:

Existing Rivalry Rivals hesitate to compete on the basis of price

Bargaining Power of Buyers (Customers) Powerful buyers can force cost leader to reduce prices up to a point

Bargaining Power of Suppliers Cost leaders can absorb suppliers price increases

Potential Entrants Efficiency can serve as a barrier to entry

Product Substitutes Can reduce prices when faced with substitutes

Built in defense against all 5 forces

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Cost Leadership Strategy Risks

Innovations by competitors can quickly eliminate cost advantage

Too much focus on cost reduction versus competitive levels of differentiation

Competitors may learn how to successfully imitate a cost leader’s strategy

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Differentiation Competitive advantage: Differentiation/uniqueness Competitive scope: Broad Integrated set of actions designed by a firm to produce or deliver

goods or services at an acceptable cost that customers perceive as being different/unique in ways that are important to them

Targeted customers perceive product value

Customized products – differentiating on as many features as possible

Can differentiate in many value chain areas

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Examples of Value-Creating Activities Associated with the Differentiation Strategy

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Differentiation In relationship to the 5 Forces:

Existing Rivalry Customers are loyal purchasers of differentiated products

Bargaining Power of Buyers (Customers) Uniqueness and loyalty reduces customer’s sensitivity to price

increases Bargaining Power of Suppliers

Provide high quality components, driving up firm’s costs Cost may be passed on to customer

Potential Entrants Substantial barriers (see above) and would require significant resource

investment Product Substitutes

Customer loyalty effectively positions firm against product substitutes

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Differentiation Risks

Can charge too high of a price premium Differentiation theme no longer valuable to customers Over-differentiating

Customer experience shows differentiation not worth the cost

Counterfeiting

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Focus strategies In general, the firms’ core competencies used to serve

the need of a particular industry segment or niche to the exclusion of others.

May lack resources to compete in the broader market May be able to more effectively serve a narrow

market segment than larger industry-wide competitors Firms may direct resources to certain value chain

activities to build competitive advantage Large firms may overlook small niches

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Focus strategy examples Buyer groups

Youths/senior citizens

Product line segments Professional painter groups

Geographic markets West vs. East coast

Definition: An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment

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Focused Cost Leadership Competitive advantage: Low-cost Competitive scope: Narrow industry segment

Motel 6

Focused Differentiation Competitive advantage: Differentiation Competitive scope: Narrow industry segment

Ritz-Carlton

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Focus strategies Risks

Same basic risks as broad cost leadership or broad differentiation plus:

A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser

A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit

Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

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Integrated Cost Leadership/Differentiation Efficiently produce products with differentiated attributes

Efficiency: Sources of low cost Differentiation: Source of unique value

Can adapt to new technology and rapid changes in external environment

Simultaneously concentrate on TWO sources of competitive advantage: cost and differentiation – consequently…

…must be competent in many of the primary and support activities

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Integrated Cost Leadership/Differentiation Risks of Integrated Strategies

Harder to implement than other strategies

Must simultaneously reduce costs while increasing differentiation

Can get ‘stuck in the middle’ resulting in no advantages and poor performance

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Customers: Their Relationship with Business-Level Strategies

Strategic competitiveness results when firm can satisfy customers by using its competitive advantages

Five components in customer relationships Effectively managing relationships w/ customers

Deliver superior value and build customer loyalty

Reach, richness and affiliation Access and connection to customers, depth and detail of

information, and facilitating interactions with customers

Who: Determining the customers to serve What: Determining which customer needs to satisfy How: Determining core competencies necessary to

satisfy customer needs

Chapter 4

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Transcript of Chapter 4