Building Competitive Advantage thru BUSINESS-LEVEL STRATEGY Business 189 Spring 2010 Dr. Mark Fruin

WHAT IS BUS-LEVEL STRATEGY? FIRM-SPECIFIC PLAN OF ACTION FOR GAINING COMPETITIVE ADVANTAGE IN A MARKET OR INDUSTRY (TAKE BUSINESS FROM RIVALS) IMPLEMENT B-L STRATEGIES THAT MAKE FULL USE OF FUNCTIONAL LEVEL STRATEGIES INDUSTRIES = PRODUCT/MARKET SEGMENTS BASED ON –PRODUCT DIFFERENCES –CUSTOMER GROUPS OR MARKET SEGMENTS –LOCATION (SEGMENTS OFTEN DIFFER BY LOCATION) –HAVING DISTINCTIVE COMPETENCES FOLLOWING PORTER, COST LEADERSHIP OR DIFFERENTIATION ADVANTAGES/THESE ARE PRODUCT-LEVEL STRAT

BL & FL STRATEGIES DISTINGUISH BETWEEN BUSINESS LEVEL & FUNCTIONAL LEVEL STRATEGIES –IS ONE MORE APPROPRIATE AT CERTAIN TIMES & STAGES? –CAN BOTH BE PURSUED SIMULTANEOUSLY? –IS THE COMPETITION BETWEEN TOYOTA & GM (AND NOW VW & FIAT) TO BE THE LARGEST AUTO MAKER IN THE WORLD, A BL OR FL COMPETITON?

COMPETITIVE POSITIONING TO BE IN A POSITION OF COMPETITIVE ADVANTAGE, A FIRM MUST MAKE CHOICES PURSUE COST LEADERSHIP OR DIFFERENTIATION? –WHAT PRODUCT FEATURES? –WHAT CUSTOMER CHARACTERISTICS OR CUSTOMER GROUPINGS –WHERE (WHEN & HOW) –WILL PRODUCT BE COMPETITIVELY POSITIONED ACCORDING TO (WHAT IT TAKES TO SUCCEED WITH ONE IS SO DIFFERENT FROM THE OTHER) COST LEADERSHIP? DIFFERENTIATION?

SEGMENTATION STRATEGIES FIGURE 5.2 (SEE FIGURE 5.1 AS WELL) 3 MAIN APPROACHES –NO MARKET SEGMENTATION - THE MARKET TAKEN AS AN UNDIFFERENTIATED WHOLE –HIGH MARKET SEGMENTATION - LOTS OF DIFFERENT PRODUCT/MARKET SEGMENTS LOTS OF DIFF PRODUCTS FOR LOTS OF DIFF MKTS –FOCUSED MARKET SEGMENTATION - A FEW SEGMENTS ARE SELECTIVELY TARGETED LOTS OF OTHERS ARE IGNORED (FOR NOW)

SEGMENTATION AND THE BUSINESS MODEL CHAPTER TALKS A LOT ABOUT BUSINESS MODELS RATHER THAN STRATEGIES WHAT’S THE DIFFERENCE AGAIN? BM IS HOW ARE WE GOING TO MAKE MONEY STRATEGY IS HOW ARE WE GOING TO IMPLEMENT/EFFECT/PUT INTO PLACE BM BUSINESS MODELS ARE EASY TO IMAGINE AND OFTEN HARD TO EFFECT

WAL-MART’S BUSINESS MODEL WAL-MART’S BUSINESS MODEL ON P , FIGURE 5.3 BALLOONS ARE ACTIVITIES/CAPABILITIES THAT DISTINGUISH W-M’S BUSINESS MODEL AND PROD/MKT SEGMENTATION –WHICH BALLOONS HAVE THE MOST LINKS –WHY? WHAT DOES MORE LINKS MEAN? HOW ARE W-M’S CAPABILITIES IMPLEMENTED/PUT INTO PLAY??? –FUNCTIONAL LEVEL STRATEGIES –GENERIC COMPETITIVE STRATEGIES

FIGURES 5.5, 5.6 & 5.8 ILLUSTRATE WHAT WE HAVE JUST SAID BUSINESS-LEVEL STRATEGIES REQUIRE –TARGET SEGMENTS (MAKE CHOICES) –CARRY OUT FUNCTIONAL LEVEL STRATEGIES (STRATEGY STACK IN ACTION) MAKE CHOICES –DEVELOP (MOBILIZE) ACTIVITIES/CAPABILITIES THAT IMPLEMENT TARGETED SEGMENTS MAKE CHOICES –EXCEL IN ONE OR ANOTHER GENERIC COMPETITIVE STRATEGY (MAKE CHOICES) AND BE EXCELLENT IN AT LEAST ONE FUNCTIONAL LEVEL STRATEGY AND PROBABLY MORE THAN ONE

GENERIC STRATEGIES COST LEADERSHIP (VALUE PROPOSITION STRATEGY) –BROAD –NARROW DIFFERENTIATION (PRICE PREMIUM STRATEGY) –BROAD –NARROW (FOCUS DIFFERENTIATION)

CUSTOMER GROUPS & MARKET SEGMENTATION HOW MUCH ARE CUSTOMERS WILLING TO PAY VERSUS WHICH CUSTOMERS ARE BEING SERVED? THREE ALTERNATIVE STRATEGIES –FOCUS ON “AVERAGE” CUSTOMER –SEGMENT (DIVIDE) MARKET INTO MANY DIFFERENT CONSTITUENCIES/CLUSTERS –CONCENTRATE ON “NICHES” ONLY WHY DO THIS?

WILL COME UP LATER ON IN TEXT BUT I’LL BRING IT UP NOW YOU CAN BE TOO EARLY OR TOO LATE WHAT KIND OF CUSTOMERS LIKELY TO FIRST ENTER MARKETS –INNOVATORS (1%) –EARLY ADOPTERS (5%) –EARLY MAJORITY (24%) –LATE MAJORITY (45%) –LAGGARDS (24%)

CAN A FIRM OFFER TOO MANY PRODUCTS? HOW MANY PRODUCTS ARE THE “RIGHT” NUMBER OF PRODUCTS? INDUSTRY CYCLE EFFECTS MACROECONOMIC EFFECTS SIGNALS & SIGNS OF TOO FEW OR TOO MANY PRODUCTS? –HOW MANY MODELS DO BOEING AND AIRBUS OFFER? TOO MANY/TOO FEW & WHY? –RECENTLY GM REDUCED # OF MODELS OFFERED A GOOD MOVE OR NOT & WHY?

ADVANTAGES & DISADVANTAGES OF C.L. ADVANTAGES –USING 5 FORCES MODEL: COST LEADER HAS MORE POWER RELATIVE TO SUPPLIERS MORE POWER RELATIVE TO BUYERS BETTER ABLE TO DETER ENTRY OF NEW COMPETITORS & BATTLE SUBSTITUTE PRODUCTS (BY LOWERING PRICES) DISADVANTAGES –MORE LIKELY STUCK IN PARTICULAR TECH/SEGMNT WHY? –MORE LIKELY TO BE IMITATED WHY? –MORE LIKELY STUCK IN C.L. STRATEGY (AND POSSIBLY LOSE SIGHT OF CHANGING CUST. TASTES) DISTRUPTIVE/DISCONTINUOUS INNOVATION (C. CHRISTENSEN)

ADVANTAGES & DISADVAN- TAGES OF DIFFERENTIATION ADVANTAGES –DIFFERENTIATORS TRY TO DIFFERENTIATE IN MANY DIFFERENT WAYS –HARD TO IMITATE (IF DONE WELL) –BRAND LOYALTY HIGH IF CONVINCE BUYERS OF “UNIQUENESS,” “UNUSUALNESS,” & “SPECIALNESS” DISADVANTAGES –DIFFERENTIATION IS EXPENSIVE –MANY DIFFERENTIATION FACTORS ARE EASILY IMITATED –FOR HOW LONG CAN “UNIQUENESS” BE SUSTAINED/PROTECTED

FOCUSED DIFFERENTIATION FD MEANS CONCENTRATING ON –A PARTICULAR AREA (GEOGRAPHICALLY) –A PARTICULAR CUSTOMER (WELL EDUCATED, PART. HOUSEHOLD INCOME, ETC. –PARTICULAR MARKET SEGMENT, SUCH AS DESIGNER CLOTHES, FAST CARS, SMALL FOOTPRINT APPLIANCES, ETC.

GENERIC STRATEGIES REQUIRE CAREFUL ATTENTION TO PRODUCT/TECH/MARKET CHOICES –LOOKING FOR THE SWEET SPOTS CAN PROTECT FIRMS FROM 5 FORCES RIVALRIES - WHY? REQUIRE CONTINUOUS UPGRADING OF INVESMENT CHOICES - WHY? CREATE STRATEGIC GROUPINGS (OF FIRMS FOLLOWING SAME STRATEGIES)

STRATEGIC GROUPS WITHIN MOST INDUSTRIES, STRATEGIC GROUP EMERGE A STRATEGIC GROUP IS DEFINED BY COMPANIES PURSUING THE SAME GENERIC STRATEGY MOBILITY BARRIERS INHIBIT THE MOVEMENT OF COMPANIES FROM ONE STRATEGIC GROUP TO ANOTHER

COMPETITIVE ADVANTAGE & INVESTMENT STRATEGY WHAT TYPE OF INVESTMENTS MUST FIRMS MAKE TO SUSTAIN COMPETITIVE ADVANTAGE? OBVIOUS –HUMAN RESOURCES, IT INVESTMENTS –FUNCTIONAL-LEVEL STRATEGIES –PURSUIT OF FINANCIAL ADVANTAGE –GLOBALIZATION & OUTSOURCING NOT SO OBVIOUS? –INTANGIBLE RESOURCES –TACIT CAPABILITIES –SOCIAL PROCESSES –HIGHER LEVEL HR INVESTMENTS

BUSINESS LEVEL INVESTMENT STRATEGIES COMPETITIVE POSITION BASED ON –MARKET SHARE –STRENGTH OF DISTINCTIVE COMPETENCIES (PRODUCT) LIFE CYCLE EFFECTS –EMBRYONIC, GROWTH, MATURE, DECLINE INDUSTRY CYCLE EFFECTS –EMBRYONIC, GROWTH, MATURE, DECLINE

INDUSTRIES NOT GOVERNED BY 5 FORCES & POSSIBLY LIFE-CYCLE EFFECTS? WHERE THERE ARE NO ECONOMIES OF SCALE AND SCOPE WHERE NO INDUSTRY CONCENTRATION –CONCENTRATION RATIOS IN MATURE INDUSTRIES SO-CALLED FRAGMENTED “INDUSTRIES” –HAIRCUT, DRY CLEAN, NAIL SALON, SALOON, POSSIBLY OTHER CONVENIENCE & SERVICE- ORIENTED BUSINESSES

GROWTH CYCLES (CONFUSION?) EMBRYONIC MAY INCLUDE EMBRYONIC AND EARLY EMERGING GROWTH MAY INCLUDE PLAIN OLD GROWTH (SOMETIMES CALLED EMERGING) AND SHAKEOUT GROWTH MATURE MAY INCLUDE PRODUCT DIFFERENTIATION & PROLIFERATION DECLINE ALSO INCLUDES CONSOLIDATION, CONCENTRATION & HARVEST (INCLUDE CASH COW STRAT) ALSO, ANDY GROVE’S “CROSSING THE CHASM”

INVESTMENT STRATEGY TYPES (MATCHED TO LIFE CYLE MODEL) TYPICAL STRATEGIES PURSUED AT DIFFERENT STAGES OF ILC –GROWTH SHARE BUILDING GROWTH SHARE INCREASING –MATURE HOLD-AND-MAINTAIN PROFIT MARKET CONCENTRATION –DECLINING ASSET REDUCTION HARVEST TURNAROUND LIQUIDATE DIVESTITURE

QUESTIONS IN WHAT WAYS ARE FL & BL STRATS RELATED? –# OF MODELS –PRODUCT DEVELOPMENT LEAD TIMES –DEGREE OF VERTICAL INTEGRATION & OUTSOURCING –OTHER?? WHY DOES EACH GENERIC STRATEGY REQUIRE DIFFERENT SETS OF PRODUCT/MARKET/ DISTINCTIVE COMPETENCY CHOICES? –EXAMPLES OF FIRM PAIRS MAKING DIFFERENT CHOICES; ARE THEY IN SAME STRATEGIC GROUP? HONDA VS. TOYOTA FORD VS GM HOW SHOULD INVESTMENT CHOICES VARY IF YOU ARE IN STRONG OR WEAK COMPETITIVE POSITION WHEN PURSUING C.L. & DIFF STRATS

STUDY GROUP QUESTIONS WHICH FIRM (OF THE PAIR) PERFORMS BEST IN TERMS OF FUNCTIONAL-LEVEL STRATEGIES? –FL STRATEGIES INDIVIDUALLY & TOGETHER DO THE TWO FIRMS BELONG TO THE SAME STRATEGIC GROUP IN THE INDUSTRY? DO BOTH FIRMS PURSUE THE SAME BL STRATEGIES? (TARGET THE SAME CUSTOMERS WITH SIMILAR PRODUCTS?) WHICH FIRM IS MORE PROFITABLE & WHY? –ARE FL OR BL STRATEGIES MORE IMPORTANT? USE “DUPONT” ROI FORMULA, pp