Business-Level Strategy 1

The Strategic Management Process Strategy Formulation Strategic Intent External Environment Internal Environment Strategic Mission The Strategic Management Process Strategic Outcomes Actions Strategic Inputs Strategy Formulation Strategy Implementation Corporate Governance Structure & Control Business-level Strategy Competitive Dynamics Corporate-Level Strategy International Strategy Strategic Competitiveness Above Average Returns Feedback 10

Sustainable Competitive Advantage Business Level Strategy External Environment Sustainable Competitive Advantage Internal Environment Business Level Strategy 4

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Core Competency 5

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Core Competency An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Strategy 6

Business Level Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Core Competency An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Business Level Strategy 7

Basis for Customer Segmentation Consumer Markets 1. Demographic factors (age, income, sex, etc.) 2. Socioeconomic factors (social class, stage in the family life cycle) 3. Geographic factors (culture, region or country differences) 4. Psychological factors (lifestyle, personality traits) 5. Consumption patterns (heavy, moderate, and light users) 6. Perceptual factors (benefit segmentation, perceptual mapping) 7. Brand loyalty patterns 107

Basis for Customer Segmentation Industrial Markets 1. End use segments (identified by SIC code) 2. Product segments (based on technological differences or production economics) 3. Geographic segments (defined by boundaries between countries or by regional differences within them) 4. Common buying factor segments (cut across product/market and geographic segments) 5. Customer size segments 107

Generic Business Level Strategies Cost Uniqueness Source of Competitive Advantage Breadth of Competitive Scope Broad Target Market Narrow Cost Leadership Focused Differen- tiation Cost Leadership Differen- Focused Low Cost 8

Cost Leadership Business Level Strategy Key Criteria: Relatively standardized products Features acceptable to many customers Lowest competitive price 14

Cost Leadership Business Level Strategy Requirements: Constant effort to reduce costs through: Building efficient scale facilities State of the art manufacturing facilities Simplification of processes Minimizing costs of sales, R&D and service Monitoring costs of activities provided by outsiders Tight control of production costs and overhead 20

How to Obtain a Cost Advantage 1. Determine and Control Cost Drivers 2. Reconfigure the Value Chain as needed Alter production process Change in automation New distribution channel Direct sales in place of indirect sales New advertising media New raw material Backward integration Forward integration Change location relative to suppliers or buyers 36

Reconfiguring the Value Chain of Iowa Beef Packers (IBP) Ranch Cattle Ship “on the Hoof” to Rail Center (Chicago) Slaughter into sides of beef “Boxed Cuts” at Markets Old Way: New Way Way: Locate large automated plants near ranches Process into “Boxed Cuts” at plants Ship cuts already “Boxed” to Markets Save on shipping and cattle weight loss Utilize cheaper non-union rural labor 40

Choices That Drive Costs Economies of scale Asset utilization Capacity utilization pattern Value chain linkages Interrelationships - Advertising & Sales - Logistics & Operations - Seasonal, cyclical - Order processing and distribution Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Hiring, training, motivation 41

Three Key Questions 1. How can an activity be performed differently or even eliminated? 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs? Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors 44

Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive 45

Major Risks of Cost Leadership Business Level Strategy Dramatic technological change could take away your cost advantage Competitors may learn how to imitate Value Chain Focus on efficiency could cause Cost Leader to overlook changes in customer preferences 51

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Breadth of Competitive Scope Narrow Target Market 52

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Narrow Target Market 53

Differentiation Business Level Strategy Key Criteria: Value provided by unique features and value characteristics Command premium price Superior quality Rapid innovation Prestige or exclusivity High customer service 59

Differentiation Business Level Strategy Requirements: Constant effort to differentiate products through: Developing new systems and processes Quality focus Maximize Human Resource contributions through low turnover and high motivation Capability in R&D Shaping perceptions through advertising 59

Differentiation Business Level Strategy Effectiveness with Differentiation grows out of Value Chain activities Examples: Heineken beer Raw materials Caterpillar tractors Service buyers’ needs quickly anywhere in the world Intel microprocessors Technological superiority Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship 76

Create Value with Differentiation by: Lowering Buyers’ Costs Raising Buyers’ Performance Creating Sustainability through: Creating barriers by perceptions of uniqueness Creating switching costs through differentiation 79

Drivers of Differentiation Unique product features Unique product performance Exceptional services Quality of inputs New technologies Exceptional skill or experience Detailed information Examples: 80

Effective Differentiators can remain profitable even when the Five Forces appear unattractive 81

Major Risks of a Differentiation Business Level Strategy Customers may decide that the cost of “uniqueness” is too great The means of uniqueness may no longer be valued by customers Competitors may learn how to imitate Value Chain 87

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Narrow Target Market 88

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market 89

Focused Business-Level Strategies A focus strategy must exploit a narrow pocket that is different from the balance of the industry by: isolating a particular buyer group isolating a unique segment of a product line concentrating on a particular geographic market finding their “niche” Focused Differentiators may thrive by selecting a small market that is underserved by large players  Example: Custom manufacturers of parts for Harley-Davidson motorcycles  Snap-on High quality mechanics’ tools

Focused Business Level Strategies Factors That May Drive Focused Strategies. Large firms may overlook small niches Firm may lack resources to compete industry-wide May be able to serve a narrow market segment more effectively than industrywide competitors Focus can allow you to direct resources to certain value chain activities to build competitive advantage 94

Major Risks Involved With a Focused Differentiation Business Level Strategy Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market 100

Generic Business Level Strategies Breadth of Competitive Scope Source of Competitive Advantage Cost Uniqueness Integrated Low Cost/ Differentiation Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market 102

Integrated Low Cost/Differentiation Strategy Firms using an Integrated Strategy may: Utilize Flexible Manufacturing Systems to create differentiated products at low costs Adapt more quickly Learn new skills and technologies Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs 103

Benefits of Integrated Strategy Successful firms using this strategy have above-average returns Firm offers two types of values to customers some differentiated features (but less than a true differentiated firm) relatively low cost (but now as low as the cost leader’s price)

Integrated Low Cost/Differentiation Strategy Major Risks Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become “Stuck in the Middle” lacking a strong commitment to or expertise with either type of generic strategy 104

Integrated Low Cost/Differentiation Strategy Southwest Airlines Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes 15 minute turnaround time No meals No reserved seats No travel agent reservations Low Cost Focus on customer satisfaction New flight services for business travelers (phones and faxes) High level of employee dedication Differentiation 107