Strategic Management Concepts and Cases

Strategy at the Business Levels

Core Competenc y Core The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Strateg y An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Business Level Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.

Basis for Customer Segmentation Consumer Markets 1. Demographic factors (age, income, sex, etc.) 2. Socioeconomic factors (social class, stage in the family life cycle) 3.Geographic factors (culture, region or country differences) 4.Psychological factors (lifestyle, personality traits) 5.Consumption patterns (heavy, moderate, and light users) 6.Perceptual factors (benefit segmentation, perceptual mapping) 7.Brand loyalty patterns

Basis for Customer Segmentation Industrial Markets 1. End use segments (identified by SIC code) 2. Product segments (based on technological differences or production economics) 3.Geographic segments (defined by boundaries between countries or by regional differences within them) 4. Common buying factor segments (cut across product/market and geographic segments) 5. Customer size segments

Table 5.1 Basis for customer segmentation

The Purpose of a Business-Level Strategy Southwest Airlines’Activity System The purpose of a business-level strategy is to create differences between the firm’s position and those of its competitors. To position itself differently from competitors, a firm must decide whether it intends to perform activities differently or to perform differentactivities.

Figure 5.1 Southwest Airlines’Activity System

Generic Business Level Strategies CostUniqueness Source of Competitive Advantage Breadth of Competitive Scope BroadTargetMarket NarrowTargetMarket Focused Differen- tiation Focused Differen- tiation Cost Leadership Cost Leadership Differen- tiation Differen- tiation Focused Low Cost CostLeadership

Key Criteria: Cost Leadership Business Level Strategy Relatively standardized products Features acceptable to many customers Lowest competitive price

Requirements: Constant effort to reduce costs through: Building efficient scale facilities State of the art manufacturing facilities Simplification of processes Minimizing costs of sales, R&D and service Monitoring costs of activities provided by outsiders Tight control of production costs and overhead Cost Leadership Business Level Strategy

Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Value Creating Activities Common to a Cost Leadership Business Level Strategy Value Creating Activities Common to a Cost Leadership Business Level Strategy

Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service 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 Products Priced to Generate Sales Volume 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 Products 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 Value Creating Activities Common to a Cost Leadership Business Level Strategy

Key Criteria: Differentiation Business Level Strategy Value provided by unique features and value characteristics Command premium price Superior quality Rapid innovation Prestige or exclusivity High customer service

Differentiation Business Level Strategy Requirements: Constant effort to differentiate products through: Developing new systems and processes Quality focus Maximize Human Resource contributions through low turnover and high motivation Capability in R&D Shaping perceptions through advertising

Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN Value Creating Activities Common to a Differentiation Business Level Strategy

Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service 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

Differentiation Value Chain activities Effectiveness with Differentiation grows out of Value Chain activities Examples: Heineken beer Raw materials Caterpillar tractors Service buyers’ needs quickly anywhere in the world Intel microprocessors Technological superiority Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship Differentiation Business Level Strategy

Creating barriers by perceptions of uniqueness Creating switching costs through differentiation Raising Buyers’ Performance Lowering Buyers’ Costs Creating Sustainability through: Create Value with Differentiation by:

Drivers of Differentiation Unique product features Unique product performance Exceptional services Quality of inputs New technologies Exceptional skill or experience Detailed information Examples:

Customers may decide that the cost of “uniqueness” is too great The means of uniqueness may no longer be valued by customers Competitors may learn how to imitate Value Chain Major Risks of a Differentiation Business Level Strategy Major Risks of a Differentiation Business Level Strategy

Firms using an Integrated Strategy may: Integrated Low Cost/Differentiation Strategy Utilize Flexible Manufacturing Systems to create differentiated products at low costs Adapt more quickly Learn new skills and technologies Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs

Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become lacking a strong commitment to or expertise with either type of generic strategy The risk is that the firm may become “Stuck in the Middle” lacking a strong commitment to or expertise with either type of generic strategy Integrated Low Cost/Differentiation Strategy

Southwest Airlines Integrated Low Cost/Differentiation Strategy Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes 15 minute turnaround time No meals No reserved seats No travel agent reservations Low Cost Focus on customer satisfaction New flight services for business travelers (phones and faxes) New flight services for business travelers (phones and faxes) High level of employee dedication Differentiation