Chapter 4 – Business-Level Strategy 1

The Strategic Management Process Strategy Implementation Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Agenda Introduction to Business-Level Strategy Customers: Who, what, how? Cost Leadership Strategies Differentiation Strategies Focus Strategies

Core Competencies and Strategy Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage Business-level Strategy Providing value to customers and gaining competitive advantage by exploiting core competencies in specific product markets

Agenda Introduction to Business-Level Strategy Customers: Who, what, how? Cost Leadership Strategies Differentiation Strategies Focus Strategies

Customers: Who, What, How Who will be served? Key Issues in Business-level Strategy What needs will be satisfied? How will those needs be satisfied? 6

Determining the Customers to Serve Customer Needs – Who? Determining the Customers to Serve All Customers Consumer Markets Industrial Markets Market Segmentation Cluster people with similar needs into individual and identifiable groups 7

Customer Needs – What? Customer Needs to Satisfy Customer needs are related to a product’s benefits and features Customer needs represent desires in terms of features and performance capabilities Customer needs are neither right nor wrong, good nor bad

Customer Needs – How? Determining the Core Competencies Necessary to Satisfy Customer Needs Firms use core competencies to implement value creating strategies that satisfy customers’ needs Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

Purpose of Business-Level (BL) 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 Activity map exemplifies a firm’s Activities How they are integrated Southwest Airline’s activity map: Note the primary (N=6) and secondary nodes/activities and the ‘connectedness’ or fit Fit is key to the sustainability of competitive advantage 10

Southwest Airlines’ Activity System 11

Five Business-Level Strategies Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

Purpose of Business-Level (BL) Strategies (con’t) 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 BL strategies 13

Agenda Introduction to Business-Level Strategy Customers: Who, what, how? Cost Leadership Strategies Differentiation Strategies Focus Strategies

Cost Leadership Strategy An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors Relatively standardized products (“no-frills”) Features acceptable to many customers Lowest competitive price

How to Obtain a Cost Advantage Determine and control Reconfigure, if needed Cost Drivers Value Chain Alter production process New raw material Change in automation Forward integration New distribution channel Backward integration New advertising media Change location relative to suppliers or buyers Direct sales in place of indirect sales

Examples of Value-Creating Activities Associated with the Cost Leadership Strategy Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

Value-Creating Activities for Cost Leadership Cost-effective MIS Few management layers Simplified planning Consistent policies Effecting training Easy-to-use manufacturing technologies Investments in technologies Finding low cost raw materials Monitor suppliers’ performances Link suppliers’ products to production processes Economies of scale Efficient-scale facilities Effective delivery schedules Low-cost transportation Highly trained sales force Proper pricing

How to Create Value with a Cost Leadership Strategy? … assess the cost leader’s position against the Five Forces!

Cost Leadership: Competitive Risks Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations Too focused on cost reductions may occur at expense of customers’ perceptions of “competitive levels of differentiation” (i.e. value) Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

Agenda Introduction to Business-Level Strategy Customers: Who, what, how? Cost Leadership Strategies Differentiation Strategies Focus Strategies

Differentiation Strategy An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them Nonstandardized products Attracting customers who value differentiated features more than they value low cost

How to Obtain a Differentiation Advantage Control if needed Reconfigure to maximize Cost Drivers Value Chain Raise performance of product or service Create sustainability through: Customer perceptions of uniqueness Customer reluctance to switch to non-unique product/service

Examples of Value-Creating Activities Associated with the Differentiation Strategy Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

Value-Creating Activities and Differentiation Highly developed MIS Emphasis on quality Worker compensation for creativity/productivity Use of subjective performance measures Basic research capability Technology High quality raw materials Delivery of products High quality replacement parts Superior handling of incoming raw materials Attractive products Rapid response to customer specifications Order-processing procedures Customer credit Personal relationships

How to Create Value with a Differentiation Strategy? … assess the differentiator's position against the Five Forces!

Differentiation: Competitive Risks The price differential between the differentiator’s product and the cost leader’s product becomes too large Differentiation ceases to provide value for which customers are willing to pay Experience narrows customers’ perceptions of the value of differentiated features Counterfeit goods replicate differentiated features of the firm’s products

Exercise For each of the listed products, describe at least two ways they are differentiated: Ben & Jerry’s ice cream Hummer H3 Apple MacBook Air Hannah Montana Taco Bell Which, if any of these bases for product differentiation are likely to be sources of sustainable competitive advantage, and why?

Agenda Introduction to Business-Level Strategy Customers: Who, what, how? Cost Leadership Strategies Differentiation Strategies Focus Strategies

Focus Strategies An integrated set of actions taken to produce goods or services that address the needs of a particular competitive segment Particular buyer group (e.g., youths or senior citizens Different segment of a product line (e.g., professional craftsmen versus do-it-yourselfers) Different geographic markets (e.g., East Coast vs. West Coast)

Factors Driving Focused Strategies Large firms may overlook small niches A firm is able to serve a narrow market segment more effectively than can its larger, industry-wide competitors A firm may lack the resources needed to compete in the broader market Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

Focus Strategies: Competitive Risks A focusing firm may be “outfocused” by its competitors A large competitor may set its sights on a firm’s niche market Customer preferences in niche market may change to more closely resemble those of the broader market