Competitive or Business Level Strategy Management Analysis Summer 2001

Competitive/Business Level Strategy All the actions a strategic business unit (SBU) takes to Attract and keep customers Fulfill customers’ expectations (needs) Withstand competitive pressures Strengthen competitive position Actions to strengthen the company’s resource base and competitive capabilities

Competitive Strategy Actions to respond to changing industry conditions Shifting customer preferences New government regulations Globalization of competition Exchange rate instability Entry or exit of new competitors

Competitive Strategy Efforts to change the product or service offered to customers Broaden or narrow the product line Improve product design Alter product quality Alter performance features Modify customer service Uncover new opportunities in the consumption chain to serve customers

Competitive Strategy Efforts to change Form strategic alliances Geographic coverage (scope) Level of vertical integration Industry position Form strategic alliances Collaborate with rivals

Competitive Strategy Actions to capitalize on new opportunities New technologies Product innovation New trade agreements that open up foreign markets

Competitive Strategy Moves that signal how the company manages various value creating activities Research and Development Manufacturing Marketing Finance Other key activities

Securing Competitive Advantage Utilizing resources/capabilities in a way that is Valuable Rare Costly to imitate Nonsubstitutable Boosts performance

Securing Competitive Advantage Develop product that becomes industry standard Manufacture the best-made product on the market Deliver superior customer service Achieve lower costs than rivals Have a more convenient geographic location

Securing Competitive Advantage Develop proprietary technology Incorporate product features and styling that meet customer needs better than rivals Bring new products to market faster than rivals Have greater technological expertise than rivals

Securing Competitive Advantage Develop unique competencies in customized mass production techniques Do a better job of managing supply-chain than competitors Build a better known brand name and reputation than rivals

Securing Competitive Advantage Provide buyers more value than rivals Combination of good quality, good service, acceptable price Investing aggressively in creating sustainable competitive advantage is a company’s SINGLE MOST DEPENDABLE contributor to above-average profitability

Securing Competitive Advantage Five Basic Competitive Strategies Low cost leadership Broad differentiation Best cost provider Focused, market niche strategy based on low cost Focused, market niche strategy based on differentiation

Low Cost Leadership Strategic Objective Establish a sustainable cost (not price) advantage over rivals Provide products/services that include features that buyers consider ESSENTIAL, but do it at a lower cost relative to competitors Can use cost advantage to underprice rivals Or earn higher profit margins

Achieving Low Cost Leadership Firm’s CUMULATIVE costs along the value chain must be lower than competitors Identify and control cost drivers

Notes on Competitive/Business Level Strategy Examples of Value-Creating Activities Associated with the Cost Leadership Strategy Cost effective Relatively few Simplified management managerial layers in order planning practices information systems to reduce overhead costs to reduce planning costs Firm Infrastructure Human Resource Management Consistent policies to Intense and effective training programs to improve reduce turnover costs worker efficiency and effectiveness Technology Development Easy-to-use manufacturing Investments in technologies in order to reduce costs associated technologies with a firm’s manufacturing processes MARGIN Systems and procedures to Frequent evaluation processes to monitor suppliers’ performance find the lowest cost (with acceptable quality) products to purchase as raw materials Procurement Highly efficient systems to link suppliers’ products with the firm’s production processes. Use of economies of scale to reduce production costs. Construction of efficient-scale production facilities. A delivery schedule that reduces costs. Selection of low-cost transportation carriers. A small. highly trained sales force. Products priced so as to generate significant sales volume. Efficient and proper product installation in order to reduce the frequency and severity of recalls. MARGIN Inbound Logistics Operations Outbound Logistics Marketing and Sales Service BUS 550 Management Analysis

Control Cost Drivers Economies or diseconomies of scale Learning and experience curve effects Cost of key resource inputs Union vs nonunion labor Bargaining power with suppliers Locational variables

Control Cost Drivers Linkages with other activities in the company or industry value chain Sharing opportunities with other organizational or business units within the enterprise Benefits of vertical integration versus outsourcing

Control Cost Drivers Timing considerations Capacity utilization First mover advantages and disadvantages Capacity utilization Strategic choices and operating decisions Revamp the value chain

Strategic Choices to Control Costs Increase/decrease the number of products or varieties offered Add/Cut services provided to buyers Incorporate more/fewer performance and quality features into the product Pay higher/lower wages and benefits

Strategic Choices to Control Costs Increase/decrease the number of distribution channels Lengthen/shorten delivery times to customers Put more/less emphasis on incentive compensation to motivate employees Raise/lower specifications for purchased materials

Revamping the Value Chain Simplify the product design Offer a basic, no-frills product or service Shift to a simpler, less capital intensive, more streamlined or flexible technological process

Revamping the Value Chain Find ways to bypass the use of high-cost raw materials or component parts Use direct-to-end user sales and marketing approaches that cut out the often large costs and margins of wholesalers and retailers

Revamping the Value Chain Relocate facilities closer to suppliers, customers, or both to reduce inbound and outbound logistics costs Drop the “something for everyone” approach and focus on a limited product/service to meet a special need

Revamping the Value Chain Re-engineer core business processes to consolidate work steps and cut out low value-added activities

Revamping the Value Chain Use electronic communication technologies to Eliminate paperwork Reduce printing and copying costs Speed communications via e-mail Curtail travel costs via teleconferencing Distribute information Establish relationships with customers

When Will Low Cost Work? Price competition is vigorous Buyers are price sensitive Industry’s product/service is standardized, readily available, commodity-like Few ways to achieve product differentiation

When Will Low Cost Work? Buyers use the product in the same way Low switching costs Buyers are large and have significant power to negotiate for lower prices

Pitfalls of Low Cost Leadership Getting carried away with overly aggressive price-cutting and eating away profitability Cutting costs in ways that are easily imitated or not sustainable means that any cost advantage will be short-lived Over-fixation on cost reduction

Pitfalls of Low Cost Leadership Over-fixation on cost reduction can cause company to miss important changes in customer needs Technological breakthroughs may make the low cost leader’s cost advantage become obsolete Heavy investment might lock firm into using present technology/strategy

Differentiation Strategic Objective Add features to products/services that customers value and for which they are willing to pay a premium price Try to find ways to make your products/services stand out when compared to competitors’ products/ services Increase unit sales Gain buyer loyalty to brand

Differentiation Try to differentiate in ways that add value for the customer AND provide a competitive advantage Valuable Rare Costly to imitate Nonsubstitutable Boost financial performance

Differentiation Challenges Identifying features that add value for customers Selecting the right price premium Cover costs of differentiating Don’t alienate customers Changing buyer needs Substitutes

Notes on Competitive/Business Level Strategy Examples of Value-Creating Activities Associated with the Differentiation Strategy Highly developed information A company-wide emphasis on the systems to better understand importance of producing high-quality customers’ purchasing preferences. products. Firm Infrastructure Compensation programs intended Somewhat extensive use of subjective to encourage worker creativity and rather than objective performance measures. productivity. Superior personnel training. Human Resource Management Technology Development Strong capability in basic research. Investments in technologies that will allow the firm to produce highly differentiated products. MARGIN Systems and procedures used to Purchase of highest quality replacement parts. find the highest quality raw materials. Procurement Superior handling of incoming raw materials so as to minimize damage and improve the quality of the final product. Consistent manufacturing of attractive products. Rapid responses to customers’ unique manufacturing specifications. Accurate and responsive order-processing procedures. Rapid and timely product deliveries to customers. Extensive granting of credit buying arrangements for customers. Extensive personal relationships with buyers and suppliers. Extensive buyer training to assure high-quality product installations. Complete field stocking of replacement parts. MARGIN Inbound Logistics Operations Outbound Logistics Marketing and Sales Service BUS 550 Management Analysis

Best Cost Producer Strategic Objective Match the features provided by other differentiators, but do so with lower internal costs Provide a product that has greater quality and better features than the low cost leader’s product AND a better price than products offered by other differentiators

Best Cost Producer Challenges Finding appropriate ways to add value to products/services Drive out cost disadvantages Charge appropriate price premium Changing customer needs Substitutes Entry of lower cost differentiators