Chapter 4

Business-level Strategies

Diane M. Sullivan, Ph.D. 2013

Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 CengageSections modified from Gentner (2009)

The Strategic Management Process

Insert figure 1.1 graphic After collecting

information about the internal and external environment, firms can select their business-level strategy

Business-level Strategy Definition: integrated and coordinated set of commitments and

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

In selecting a business-level strategy, a firm must determine Who are the customer groups to be served

What needs those customers have that the firm seeks to satisfy

How those needs can be satisfied (e.g., can the firm use core competencies to satisfy customer needs)

Five Business-level Strategies

Cost Leadership Strategy Definition: An integrated set of actions designed to produce or

deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers

Using a cost leadership strategy, a firm Produces no-frills, standardized products for typical customers Focuses on efficiency so costs are lower than competitors’ costs Generally offers lower cost products with competitive levels of

differentiation

Examples: Big Lots Inc., Wal-Mart

Primary Activities

Su

pp

ort

Act

ivit

ies

MARG

IN

MARGIN

Cost Effective MIS Systems

Relatively Few Management Layers to

Reduce Overhead

Simplified Planning Practices to Reduce

Planning Costs

Consistent Policies to Reduce Turnover Costs

Effective Training Programs to Improve Worker

Efficiency and Effectiveness

Highly Efficient Systems to Link

Suppliers’ Products with the Firm’s Production

Processes

Timing of Asset Purchases

Efficient Plant Scale to Minimize

Manufacturing Costs

Selection of Low Cost Transport

Carriers

Delivery Schedule that Reduces

Costs

National Scale Advertising

Small, Highly Trained Sales

Force

Effective Product Installations to

Reduce Frequency and Severity

of Recalls

Easy-to-Use Manufacturing Technologies

Investments in Technology in order to Reduce Costs Associated with

Manufacturing Processes

Systems and Procedures to find the Lowest Cost Producers to Purchase

Raw Materials

Frequent Evaluation Processes to Monitor Suppliers’ Performances

Located in Close Proximity with

Suppliers

Policy Choice of Plant Technology

Organizational Learning

Efficient Order Sizes

Interrelationships with Sister Units

Value Creating Activities Common to a Cost Leadership Business-Level Strategy

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

strategy include Cost reduction processes become obsolete due to competitor

innovations

Cost reduction processes come at the expense of necessary levels of differentiation

The strategy is imitated too easily

Differentiation Strategy Definition: 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 in ways that are important to them

Firms using differentiation strategy Provide products with different, valued features sold at a premium price

Hinges on customers valuing differentiated features more than they value low price

Firms should differentiate offerings on as many dimensions as possible

The less similarity to competitors’ products, the more buffered a firm is from competition

Examples: Tiffany Jewelry, Apple, Lexus, Beautifulpeople.com?

MARG

IN

MARGIN

A companywide emphasis on producing high quality products

Highly Developed Information Systems to better understand

customers’ purchasing preferences

Compensation programs intended to encourage worker

creativity and productivity

Extensive use of subjective rather than objective

performance measures

Superior handling of

incoming raw materials to

minimize damage and improve the

quality of the final product

Rapid responses to customers

unique manufacturing specifications

Consistent manufacturing of

attractive products

Accurate and responsive order

processing procedures

Complete field stocking of

replacement parts

Strong capability in

basic research

Investments in technologies that will allow the firm to consistently produce

highly differentiated products

Systems and procedures used to find the highest quality raw materials

Purchase of highest quality replacement parts

Rapid and timely product deliveries

to customers

Superior personnel training

Coordination among R&D, product development and

marketing

Extensive personal

relationships with buyers

Strong Coordin-ation among

functions in R&D, Marketing and

Product Development

Premium Pricing

Primary Activities

Su

pp

ort

Act

ivit

ies

Value Creating Activities Common to a Differentiation Business-Level Strategy

Risks of Differentiation Strategy Risks

Customers decide that differences between differentiated and cost leader’s product not worth a higher price

Competitors offer similar products at a lower cost

Too high a price premium

Counterfeiters offer a cheap “knockoff” of a differentiated good or service (e.g., easily imitated)

Too much differentiation

Focus Strategies Definition: The focus strategy is an integrated set of actions taken to produce

goods or services that serve the needs of a particular competitive segment

Firms choose a focus strategy to serve the needs of a specific customer segment or industry segment Examples

A particular buyer group (such as youths or senior citizens)

A different segment of a product line (such as products for professional painters or the do-it-yourself group), or

A different geographic market (such as East or West in the U.S).

2 types of focus strategies: Focused cost leadership strategy

Example: IKEA

Focused differentiation strategy Example: Casketfurniture.com, Babies R Us

Risks of Focus Strategies Competitive risks of focus strategies

A competitor is able to focus on an even more narrowly defined market segment

Industry-wide competitors decide to focus on specific customer segments—imitation

The differences are reduced between the needs of a specific market segment and those of the rest of the industry

Integrated Cost Leadership/Differentiation Strategy

Using this strategy, firms Provide relatively low cost products with valued

differentiated features Use primary and support activities to produce differentiated

products at relatively low costs

Risk of this strategy A firm produces products that lack sufficient low cost or

differentiation

14

Southwest Airlines

Integrated Low Cost/Differentiation Strategy

Use a single aircraft model(Boeing 737)

Use secondary airports

Fly short routes

25 minute turnaround time

No meals

No reserved seats

No travel agent reservations

Low Cost

Focus on customer satisfaction

Focus on making the flying experience fun

High level of employee dedication

Differentiation

The Challenge: the integrated strategy is risky

Potential Pitfalls• The firm may become “Stuck-in-the-Middle”

lacking an expertise with either type of generic strategy• When a firm’s products are too expensive to

compete with low cost producer and too undifferentiated to provide the value offered by the differentiated producer

Integrated Low Cost/Differentiation Strategy

Applying Chapters 3 & 4 to CapSim

What capabilities does your strategy require? What are the benefits & limitations of those capabilities? What resources are required to develop those capabilities? Can you obtain an economic payback from developing those capabilities? Timing your Capabilities:

– When will they be required?

– How long to develop?

– How temporal are they? Capabilities & The Competition:

– What capabilities do your competitors have?

– What are they going to have?

– What do they believe they have?

– How will you counter them?

Broad Cost Leader A broad cost leader will attempt to be the low-cost producer in every

segment served Strive for good profit margins on all sales while keeping prices low for price-

sensitive customers.

Firm Profile: – Capacity improvements are unlikely to be undertaken (may run overtime instead)

unless at 200% capacity

– Pursue automation to increase margins in all segments (more automation in slower moving segments versus faster moving segments)

– Low R&D spending, while still keeping pace with the market preferences

– Low labor and material costs

– Prices lower than average

– Spends moderately on promotion and sales

– Investments will be financed primarily via bonds and stock issues as needed

– When cash allows, establish a dividend policy and begin to retire stock

– Focus on Market Share, Profits, ROE and Stock Price

Cost Leader with Low-end Focus

A low-tech focused cost leader will seek to minimize costs through efficiency and expertise.

Products will be concentrated in the Traditional and Low-end segments Firm Profile:

Multiple product lines in low-end segments (Traditional and Low-end) Few or no products in other segments (allow products to migrate) Low R&D spending, while still keeping reasonable pace with the market Low labor and material costs Invests in automation (only after products positioned into their “forever”

segments) will help manage labor costs and make it most efficient to run a second shift (which is preferred to capacity expansions)

Prices will be lower than average Spends moderately on promotion and sales Investments will be financed primarily via bonds and stock issues as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Stock Price, ROE, ROS, and Profits

Cost Leader with Product-life Cycle Focus

A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise

Products will be allowed to age and change in appeal from High End, to Traditional, and eventually Low End buyers (then they are retired)

Firm Profile: Minimum presence in “specialty” segments (Size & Performance) Low R&D spending (very little repositioning & new product every 2 years in

high-end segment) Low material costs Low labor costs Invests in automation early in the product’s life-cycle Prices are lower than average Spends moderately on promotion and sales Investments financed through bonds and stock offerings as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Stock Price, ROE, ROS and Profits

Broad Differentiator

A broad differentiator will seek to create maximum awareness and brand equity in every segment

It wants to be well known as a maker of high quality/highly desirable products Firm Profile:

High R&D spending to keep products fresh and at pace with market Maintains presence in all market segments Capacity will be expanded as higher demand is generated, avoiding overtime Modest investments in automation after products well positioned but never at expense

of repositioning Spends heavily on advertising and sales to create maximum awareness and accessibility Prices are above average Investments are financed via stock issues and cash from operations as well as bonds as

needed When cash allows, establish a dividend policy and begin to retire stock Focus on Market Share, Profits, ROA and Stock Price

Differentiator with High-end Focus

A high-tech differentiator seeks to be known as the top producer of the best performing state-of-the-art products in the High-end, Performance and Size segments

Firm Profile: Multiple product lines in high-tech segments (High-end, Performance, & Size) achieved

via harvesting Traditional and Low-end products and new products

High promotion & sales investments to create maximum awareness & accessibility

High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market

Capacity will be expanded as higher demand is generated, avoiding overtime

Price is above average

Modest investments in automation after products well positioned but never at expense of repositioning

Investments are financed via stock issues and cash from operations and bonds as needed

When cash allows, establish a dividend policy and begin to retire stock

Focus on ROA, Asset Turnover, and ROS

Differentiator with Product Life-cycle Focus

A product life-cycle focused differentiator seeks to be known as the top producer of the best performing state-of-the-art products in High-end, Traditional & Low-end segments

Products will be repositioned into the segments, allowed to drift into the appropriate segments and/or newly created into the segments

Firm Profile: Minimum presence in Size & Performance segments (reposition them to Traditional) High promotion and sales investments to create maximum awareness and accessibility High R&D expenditures to continually introduce new product lines and keep existing

products fresh and with pace of the market Price is above average Capacity will be expanded as higher demand is generated, avoiding overtime Modest investments in automation after products well positioned but never at expense of

repositioning Investments are financed via stock issues and cash from operations as well as bonds as

needed When cash allows, establish a dividend policy and begin to retire stock

Focus on Stock Price, ROS, Asset Turnover, and ROA

Integrated Strategy

A broad cost leader will attempt to be the low-cost producer in every segment of the market. It will have good profit margins on all sales while keeping prices low for price-sensitive customers.

Firm Profile: – More likely to reposition products than

introduce new ones to the market – Capacity improvements are unlikely to

be undertaken (may run overtime instead)

– Automation may be pursued to increase margins

– Investments will be financed with debt and/or stock issues

– Tends to spend less on promotion and sales

– Focus on Market Share, Profits, and Stock Price

A broad differentiator will seek to create maximum awareness and brand equity. It wants to be well known as a maker of high quality/highly desirable products.

Firm Profile: – High R&D spending to keep

products fresh – Maintains a presence in all market

segments – Spends heavily on advertising and

sales to create maximum awareness and accessibility

– Prices tend to be higher – Focus on Market Share, Profits,

and Stock Price

ACHIEVES BOTH

CapSim Business-level Strategies: Investments & Tradeoffs

Segments R&D & Marketing Automation & Capacity

Cost Approaches

Broad Cost Leader T, L, H, P, S

Cost Leader with low-tech focus

T and/or L with > 1 product in each segment

Cost leader with product life-cycle focus H T L

Differentiation Approaches

Broad Differentiator T, L, H, P, S

Differentiator with high-tech focus

H, P, and/or S with > 1 product in segment(s)

Differentiator with product life-cycle focus H T L

Integrated Approaches

Successful integrated ? ? ? ? ?

Stuck-in-the-middle ? ? ? ? ?

Below Avg. Invest

Below Avg. Invest

Above Avg. Invest

Above Avg. Invest