Chapter 4 Business-level Strategies Diane M. Sullivan, Ph.D Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections modified from Gentner (2009)

The Strategic Management Process Insert figure 1.1 graphic  After collecting information about the internal and external environment, firms can select their business-level strategy

Business-level Strategy  Definition: integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets  In selecting a business-level strategy, a firm must determine Who are the customer groups to be served What needs those customers have that the firm seeks to satisfy How those needs can be satisfied (e.g., can the firm use core competencies to satisfy customer needs)

Five Business-level Strategies

Cost Leadership Strategy  Definition: An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers  Using a cost leadership strategy, a firm Produces no-frills, standardized products for typical customers Focuses on efficiency so costs are lower than competitors’ costs Generally offers lower cost products with competitive levels of differentiation  Examples: Greyhound Bus, Big Lots Inc., Wal-Mart

Primary Activities Support Activities MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Producers to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units Value Creating Activities Common to a Cost Leadership Business-Level Strategy

Risks of Cost Leadership Strategy  Competitive risks associated with the cost leadership strategy include Too much focus on one or a few value-chain activities All rivals share a common input or raw material The strategy is imitated too easily

Differentiation Strategy  Definition: integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them  Firms using differentiation strategy Provide products with different, valued features sold at a premium price  Hinges on customers valuing differentiated features more than they value low price Firms should differentiate offerings on as many dimensions as possible The less similarity to competitors’ products, the more buffered a firm is from competition  Examples: Tiffany Jewelry, Apple, Lexus, Beautifulpeople.com?

MARGIN A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin- ation among functions in R&D, Marketing and Product Development Premium Pricing Primary Activities Support Activities Value Creating Activities Common to a Differentiation Business-Level Strategy

Risks of Differentiation Strategy  Risks Customers decide that differences between differentiated and cost leader’s product not worth a higher price Competitors offer similar products at a lower cost Too high a price premium Counterfeiters offer a cheap “knockoff” of a differentiated good or service (e.g., easily imitated) Too much differentiation

Focus Strategies  Definition: The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment  Firms choose a focus strategy to serve the needs of a specific customer segment or industry segment Examples  A particular buyer group (such as youths or senior citizens)  A different segment of a product line (such as products for professional painters or the do-it-yourself group), or  A different geographic market (such as East or West in the U.S).  2 types of focus strategies: Focused cost leadership strategy  Example: IKEA Focused differentiation strategy  Example: Casketfurniture.com, Babies R Us

Risks of Focus Strategies  Competitive risks of focus strategies A competitor is able to focus on an even more narrowly defined market segment Industry-wide competitors decide to focus on specific customer segments The differences are reduced between the needs of a specific market segment and those of the rest of the industry

Integrated Cost Leadership/Differentiation Strategy  Using this strategy, firms Provide relatively low cost products with valued differentiated features Use primary and support activities to produce differentiated products at relatively low costs  Risk of this strategy A firm produces products that lack sufficient low cost or differentiation

14 Southwest Airlines Integrated Low Cost/Differentiation Strategy Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes 25 minute turnaround time No meals No reserved seats No travel agent reservations Low Cost Focus on customer satisfaction Focus on making the flying experience fun High level of employee dedication Differentiation

The Challenge: the integrated strategy is risky Potential Pitfalls The firm may become “Stuck-in-the-Middle” lacking an expertise with either type of generic strategy When a firm’s products are too expensive to compete with low cost producer and too undifferentiated to provide the value offered by the differentiated producer Integrated Low Cost/Differentiation Strategy

Applying Chapters 3 & 4 to CapSim What capabilities does your strategy require? What are the benefits & limitations of those capabilities? What resources are required to develop those capabilities? Can you obtain an economic payback from developing those capabilities? Timing your Capabilities: –When will they be required? –How long to develop? –How temporal are they? Capabilities & The Competition: –What capabilities do your competitors have? –What are they going to have? –What do they believe they have? –How will you counter them?

Broad Cost Leader A broad cost leader will attempt to be the low-cost producer in every segment served Strive for good profit margins on all sales while keeping prices low for price- sensitive customers. Firm Profile: –Capacity improvements are unlikely to be undertaken (may run overtime instead) unless at 200% capacity –Pursue automation to increase margins in all segments (more automation in slower moving segments versus faster moving segments) –Low R&D spending, while still keeping pace with the market preferences –Low labor and material costs –Prices lower than average –Spends moderately on promotion and sales –Investments will be financed primarily via bonds and stock issues as needed –When cash allows, establish a dividend policy and begin to retire stock –Focus on Market Share, Profits, ROE and Stock Price

Cost Leader with Low-end Focus A low-tech focused cost leader will seek to minimize costs through efficiency and expertise. Products will be concentrated in the Traditional and Low-end segments Firm Profile: Multiple product lines in low-end segments (Traditional and Low-end) Few or no products in other segments (allow products to migrate) Low R&D spending, while still keeping reasonable pace with the market Low labor and material costs Invests in automation (only after products positioned into their “forever” segments) will help manage labor costs and make it most efficient to run a second shift (which is preferred to capacity expansions) Prices will be lower than average Spends moderately on promotion and sales Investments will be financed primarily via bonds and stock issues as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Stock Price, ROE, ROS, and Profits

Cost Leader with Product-life Cycle Focus A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise Products will be allowed to age and change in appeal from High End, to Traditional, and eventually Low End buyers (then they are retired) Firm Profile: Minimum presence in “specialty” segments (Size & Performance) Low R&D spending (very little repositioning & new product every 2 years in high-end segment) Low material costs Low labor costs Invests in automation early in the product’s life-cycle Prices are lower than average Spends moderately on promotion and sales Investments financed through bonds and stock offerings as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Stock Price, ROE, ROS and Profits

Broad Differentiator A broad differentiator will seek to create maximum awareness and brand equity in every segment It wants to be well known as a maker of high quality/highly desirable products Firm Profile: High R&D spending to keep products fresh and at pace with market Maintains presence in all market segments Capacity will be expanded as higher demand is generated, avoiding overtime Modest investments in automation after products well positioned but never at expense of repositioning Spends heavily on advertising and sales to create maximum awareness and accessibility Prices are above average Investments are financed via stock issues and cash from operations as well as bonds as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Market Share, Profits, ROA and Stock Price

Differentiator with High-end Focus A high-tech differentiator seeks to be known as the top producer of the best performing state-of-the-art products in the High-end, Performance and Size segments Firm Profile: Multiple product lines in high-tech segments (High-end, Performance, & Size) achieved via harvesting Traditional and Low-end products and new products High promotion & sales investments to create maximum awareness & accessibility High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market Capacity will be expanded as higher demand is generated, avoiding overtime Price is above average Modest investments in automation after products well positioned but never at expense of repositioning Investments are financed via stock issues and cash from operations and bonds as needed When cash allows, establish a dividend policy and begin to retire stock Focus on ROA, Asset Turnover, and ROS

Differentiator with Product Life-cycle Focus A product life-cycle focused differentiator seeks to be known as the top producer of the best performing state-of-the-art products in High-end, Traditional & Low-end segments Products will be repositioned into the segments, allowed to drift into the appropriate segments and/or newly created into the segments Firm Profile: Minimum presence in Size & Performance segments (reposition them to Traditional) High promotion and sales investments to create maximum awareness and accessibility High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market Price is above average Capacity will be expanded as higher demand is generated, avoiding overtime Modest investments in automation after products well positioned but never at expense of repositioning Investments are financed via stock issues and cash from operations as well as bonds as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Stock Price, ROS, Asset Turnover, and ROA

Integrated Strategy A broad cost leader will attempt to be the low-cost producer in every segment of the market. It will have good profit margins on all sales while keeping prices low for price-sensitive customers. Firm Profile: –More likely to reposition products than introduce new ones to the market –Capacity improvements are unlikely to be undertaken (may run overtime instead) –Automation may be pursued to increase margins –Investments will be financed with debt and/or stock issues –Tends to spend less on promotion and sales –Focus on Market Share, Profits, and Stock Price A broad differentiator will seek to create maximum awareness and brand equity. It wants to be well known as a maker of high quality/highly desirable products. Firm Profile: –High R&D spending to keep products fresh –Maintains a presence in all market segments –Spends heavily on advertising and sales to create maximum awareness and accessibility –Prices tend to be higher –Focus on Market Share, Profits, and Stock Price ACHIEVES BOTH

CapSim Business-level Strategies: Investments & Tradeoffs SegmentsR&D & MarketingAutomation & Capacity Cost Approaches Broad Cost LeaderT, L, H, P, S Cost Leader with low-tech focus T and/or L with > 1 product in each segment Cost leader with product life-cycle focus H  T  L Differentiation Approaches Broad DifferentiatorT, L, H, P, S Differentiator with high- tech focus H, P, and/or S with > 1 product in segment(s) Differentiator with product life-cycle focus H  T  L Integrated Approaches Successful integrated? ? ? ? ? Stuck-in-the-middle? ? ? ? ? Below Avg. Invest Above Avg. Invest