BUSINESS-LEVEL STRATEGY Business 189 Spring 2007 Dr. Mark Fruin

WHAT IS BUSINESS-LEVEL STRATEGY? A FIRM-SPECIFIC PLAN OF ACTION FOR GAINING COMPETITIVE ADVANTAGE IN A MARKET OR INDUSTRY (TAKE BUSINESS AWAY 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, EITHER COST LEADERSHIP OR DIFFERENTIATION ADVANTAGES/THESE ARE PRODUCT STRAT

BL & FL STRATEGIES DISTINGUISH BETWEEN BUSINESS LEVEL & FUNCTIONAL LEVEL STRATEGIES –IS ONE TYPE OF STRATEGY MORE APPROPRIATE AT CERTAIN TIMES & STAGES? –CAN BOTH BE PURSUED SIMULTANEOUSLY? –IS THE COMPETITION BETWEEN GM & TOYOTA 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 WHAT PRODUCT FEATURES? WHAT CUSTOMER CHARACTERISTICS OR CUSTOMER GROUPINGS WHERE (WHEN & HOW) WILL PRODUCT BE COMPETITIVELY POSITIONED ACCORDING TO –COST LEADERSHIP? –DIFFERENTIATION?

SEGMENTATION STRATEGIES FIGURE 5.2 (SEE FIGURE 5.1 AS WELL) –NO MARKET SEGMENTATION - THE MARKET TAKEN AS AN UNDIFFERENTIATED WHOLE –HIGH MARKET SEGMENTATION - LOTS OF DIFFERENT PRODUCT/MARKET SEGMENTS –FOCUSED MARKET SEGMENTATION - A FEW SEGMENTS ARE SELECTIVELY TARGETED

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 BM

WAL-MART’S BUSINESS MODEL WAL-MART’S BUSINESS MODEL ON P. 157, FIGURE 5.3 BALOONS ARE ACTIVITIES/CAPABILITIES THAT DISTINGUISH W-M’S BUSINESS MODEL AND PROD/MKT SEGMENTATION HOW ARE W-M’S CAPABILITIES IMPLEMENTED/PUT INTO PLAY??? –FUNCTIONAL LEVEL STRATEGIES –GENERIC COMPETITIVE STRATEGIES

FIGURES 5.5, 5.6, 5.8, 5.9 & 5.10 ILLUSTRATE WHAT WE HAVE JUST SAID BUSINESS-LEVEL STRATEGIES REQUIRE –TARGET SEGMENTS (MAKE CHOICES) –CARRY OUT FUNCTIONAL LEVEL STRATEGIES (STRATEGY STACK IN ACTION) –DEVELOP ACTIVITIES/CAPABILITIES THAT IMPLEMENT TARGETED SEGMENTS –EXCEL IN ONE OR ANOTHER GENERIC COMPETITIVE STRATEGY (MAKE CHOICES)

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 WHAT CUSTOMERS ARE BEING SERVED? THREE ALTERNATIVE STRATEGIES –FOCUS ON “AVERAGE” CUSTOMER –SEGMENT MARKET INTO MANY DIFFERENT CONSTITUENCIES/CLUSTERS –CONCENTRATE ON “NICHES” ONLY WHY DO THIS?

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?

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) DISCONTINUOUS INNOVATION (CLAY CHRISTENSEN)

BROAD V NARROW COST LEADER BROAD COST LEADERSHIP MEANS TAKING ADVANTAGE OF ECONOMIES OF SCALE & SCOPE ON NATIONAL LEVEL NARROW COST LEADERSHIP MEANS BEING A LEADER LOCALLY OR IN JUST ONE OR ANOTHER PRODUCT FEATURE –LOCAL PIZZA VS. NATIONAL CHAIN –CARBON FIBER VS. STEEL, ALUMINUM & TITANIUM MOUNTAIN BIKING FRAMES

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 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 SIMILAR 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 –FUNCTIONAL-LEVEL STRATEGIES –PURSUIT OF FINANCIAL ADVANTAGE –GLOBALIZATION & OUTSOURCING NOT SO OBVIOUS? –INTANGIBLE RESOURCES –TACIT CAPABILITIES –SOCIAL PROCESSES –HIGHER LEVEL HR INVESTMENTS

QUESTIONS 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? HOW SHOULD DIFFERENTIATION INVESTMENT CHOICES VARY IF YOU ARE IN STRONG OR WEAK COMPETITIVE POSITION?

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?

MORE QUESTIONS? HOW SHOULD HP/COMPAQ ATTACK DELL - WITH FL OR BL STRATEGIES? IN WHAT WAYS ARE FL AND BL STRATEGIES INTERRELATED? –# OF MODELS –PRODUCT DEVELOPMENT LEAD TIMES –DEGREE OF VERTICAL INTEGRATION VS. OUTSOURCING –OTHER??

IN SUM WHAT CUSTOMERS WANT IS CHANGING ALL THE TIME: SEGMENTS ARE DYNAMIC, NOT STATIC TO COMPETE, FIRMS MUST MAKE CHOICES, NOT ONLY ABOUT B-L STRATEGIES BUT ALSO ABOUT F-L STRAT ULTIMATELY, IN MANY CASES, COMPETITIVE SUCCESS IS SHORT-LASTING –WHICH FIRM HAS BEST RESOURCES & CAPABILITIES FOR CUSTOMER NEEDS TODAY