SIB-429 D: Strategic Management Coordinating Activities: Business-Level Strategy Russell Seidle Monday February 23rd, 2015

Learning Objectives After reviewing your class notes from this session and studying the corresponding chapter, you should be able to: Describe and contrast the two generic business-level strategies and their respective goals from the firm’s perspective Discuss the distinction between value drivers and cost drivers, and identify the relevant generic strategy applicable to each Analyze the benefits and risks of each business-level strategy from the perspective of the Five Forces framework Clarify the potential pitfalls associated with pursuing an integration strategy

Business-Level Strategy Analysis of “the actions managers take in their quest for competitive advantage when competing in a single product market” (Rothaermel, 2013: 140. Emphasis added) Key question: How should we compete? Competitive advantage is realized by either: Performing similar activities differently Performing different activities altogether

Business-Level Strategy Recall from our January 28th class … Corporate executives SBU General Managers Functional managers Source: Rothaermel, 2013: Exhibit 1.3 (p. 10)

Business-Level Strategy Performance determined by value and cost positions as assessed with regard to competitors February 4th class Today’s class February 9th class Source: Rothaermel, 2013: Exhibit 6.1 (p. 141)

Business-Level Strategy Differentiation strategy: “create higher value for customers […] by delivering products or services with unique features while keeping cost at the same or similar levels” (Rothaermel, 2013: 142. Emphasis added) Cost-leadership strategy: “create the same or similar value for customers by delivering products or services at a lower cost” (Rothaermel, 2013: 142. Emphasis added) Additional consideration is scope of the market targeted by the firm

Business-Level Strategy Mass market Targeted niche segment Source: Rothaermel, 2013: Exhibit 6.2 (p. 143)

Differentiation Strategy Competitive focus is on unique product features, customer service, marketing, and promotion Price tends to be de-emphasized Cost control is nevertheless an important consideration Differentiation strategy ‘calculus’: Unique product or service + controlled costs = Greater value at similar price Unique product or service + higher costs = Greater value at higher price A B

Differentiation Strategy B Source: Rothaermel, 2013: Exhibit 6.3 (p. 144)

Differentiation Strategy Importance of value drivers Product features Premium pricing associated with differentiated offerings Customer service Satisfying unmet customer needs Exceeding expectations Customization Tailoring products for specific customers Complements Products that add value when consumed in combination with the main offering

Cost Leadership Strategy Competitive focus is on staking out the lowest-cost position in the industry Product prestige or uniqueness tends to be de-emphasized Acceptable value is nevertheless an important consideration Cost leadership strategy ‘calculus’: Differentiation parity + lower costs = Greater value at lower price Lower consumer value + lower costs = Similar value at lower price A B

Cost Leadership Strategy B Source: Rothaermel, 2013: Exhibit 6.4 (p. 147)

Cost Leadership Strategy Importance of cost drivers Cost of input factors Access to preferentially priced raw materials and other production inputs Economies of scale Decreases in per-unit costs as volumes increase Learning curve Benefits achieved as familiarity is gained with a process Experience curve Economies of scale and learning → Movement to a steeper learning curve

Business-Level Strategy and Five Forces Source: Rothaermel, 2013: Exhibit 6.7 (p. 153)

Business-Level Strategy and Five Forces Key risks for firms pursuing a cost-leadership strategy Competitive disadvantage resulting from need to learn new capabilities in response to a new entrant Shift in competitive focus from price to product attributes Key risks for firms pursuing a differentiation strategy Shift in competitive focus from product attributes to price Tendency to incorporate costly features that do not add to product value for consumers

Integration Strategy Reconciling the trade-offs between differentiation and low cost Complexity inherent in attempting to balance competing requirements of each generic strategy Integration strategy approaches to pricing: Higher price than cost leader → Greater profit margins Lower price than differentiator → Greater market share and sales volume

Integration Strategy Importance of value and cost drivers Quality Durability and reliability of the product offering Economies of scope Savings from producing multiple outputs together as opposed to individually Innovation Means of resolving existing trade-offs Structure, culture, and routines Building of organizational ambidexterity