Business Level Strategy Chapter 5 Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker Jeff Stambaugh Dillard College of Business/Rm 257A

Today’s Objectives Built by Stambaugh/2009 ■ Understand business level strategy ■ Understand the generic business level strategies ■ Uses ■ Risks ■ Understand how the internet and industry life cycle affect the above The purpose of business is to create and keep a customer … Drucker

Understanding the Customer Built by Stambaugh/2009 ■ How many of you consider yourself brand conscious? ■ What are some of the brands you are loyal to? ■ Why? ■ How many of you consider yourself very price conscious? ■ Are you loyal to any companies based on your price consciousness? The purpose of business is to create and keep a customer … Drucker

The Beginning of a Strategy Built by Stambaugh/2009 ■ Who are our customers? ■ What needs are we going to meet? ■ How will we meet them? what is our competitive advantage ■ And how will be do the above better than any of our current or future competitors … what is our competitive advantage? The purpose of business is to create and keep a customer … Drucker

Fundamental Questions Built by Stambaugh/2009 ■ How am we going to create value for our customer (or less noble—how are we going to motivate them to buy our product / service?): ■ By being the cheapest? ■ By offering the most desirable features / services? ■ By serving a niche market? ■ By melding low cost and some unique features? ■ And how do my competitive advantages play into this? Business-level strategy: decisions that describes how firm will compete in its chosen industry / market segment The purpose of business is to create and keep a customer … Drucker

Generic Strategies Built by Stambaugh/2009 ■ Cost Leadership ■ Differentiation ■ Focus The purpose of business is to create and keep a customer … Drucker

Overall Cost Leadership Built by Stambaugh/2009 ■ Comparable (decent) product that you can produce cheaper than competitors by …. ■ Scale-efficient operations ■ Cost reductions from experience ■ Overall cost control ■ Avoid marginal accounts ■ Squeeze value chain ■ Lower costs + same price to consumer = higher profits (or increased volume = higher profits) The purpose of business is to create and keep a customer … Drucker

Overall Cost Leadership Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker Efficiency is key concept

Benefits / Risks of Cost Leadership Built by Stambaugh/2009 ■ Strong “position” in Porter’s Five Forces (p. 161) ■ Volume and price sensitivity are assets ■ What’s hard to imitate about this? ■ All cost, no customer? The purpose of business is to create and keep a customer … Drucker

Differentiation Built by Stambaugh/2009 ■ Bases for differentiation ■ Prestige ■ Product features ■ Service Competitive advantage comes when people pay more for it than it costs you to provide it The purpose of business is to create and keep a customer … Drucker

Differentiation Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker Unique Value is key concept

Benefits / Risks of Differentiation Built by Stambaugh/2009 ■ Customer loyalty creates ■ Barriers to entry ■ Switching costs ■ Higher margins = more flex ■ What if customer doesn’t perceive the product as special ■ “Wrong differentiation” --- features ■ Price too high ■ Easily imitated The purpose of business is to create and keep a customer … Drucker

Starbucks’ sales growth has been slipping of late. What do you think is the problem 1.Other places have improved their coffee and its much cheaper 2.Starbucks prices are just too high 3.Starbucks doesn’t seem special any more 4.Starbucks offers stuff I don’t want

Focus Strategies Built by Stambaugh/2009 ■ Geographic ■ Demographic ■ Income scale (both high and low) ■ Unique product requirements ■ Risks ■ Competitor may “out-focus” you ■ Your niche evaporates ■ You over-focus The purpose of business is to create and keep a customer … Drucker

Combination Strategy (Integrated Cost and Differentiation) Built by Stambaugh/2009 ■ Efficiently provide unique value (hit the mid- spectrum) ■ Tougher to imitate ■ Mass customization ■ Pick your point in the profit pool (the rule) ■ E-linking value chains The purpose of business is to create and keep a customer … Drucker

Risks of Combination Strategy Built by Stambaugh/2009 ■ You are nothing to everyone ■ Stuck in the Middle ■ Can’t execute (cost reductions aren’t there or can’t build loyalty) Combination strategy is usually the most difficult to execute because it is a balancing act The purpose of business is to create and keep a customer … Drucker

How Well Do They Work? Built by Stambaugh/2009 Performance Competitive Advantage Return on investment (%) Sales Growth (%) Gain in Market Share (%) Sample Size Differentiation and Cost Differentiation Cost Differentiation Focus Cost Focus Stuck in the Middle The purpose of business is to create and keep a customer … Drucker

What hath the internet wrought? Built by Stambaugh/2009 ■ Made it easier to cut costs (bidding, paperless, more automated services) ■ Made niche markets more viable (mass customization) ■ Customers have more info Consensus: sustainable competitive advantages harder to come by in internet era The purpose of business is to create and keep a customer … Drucker

Blue Oceans Built by Stambaugh/2009 ■ Move into new (uncontested) market space by: ■ Create / Capture New Demand ■ Defy the cost-value tradeoffs (low cost-high value) ■ By ■ Eliminating “value-less” TFG factors ■ Raising some factors, lowering others (Reverse positioning) ■ Creating new, valued factors ■ Attracting new customers to the industry (Breakaway positioning) The purpose of business is to create and keep a customer … Drucker Lower price /higher value to tap into untouched mass market

What would it take to get you to buy a (or another) video game console? 1.Own one – better graphics 2.Own one – better games 3.Own one – more connections to internet / high tech features 4.Don’t own one – lower price 5.Don’t own one – easier to operate 6.Don’t own one – less cosmic games

Industry Life Cycle Built by Stambaugh/2009 The purpose of business is to create and keep a customer … Drucker

Life Cycle Strategies Built by Stambaugh/2009 Generic strategies DifferentiationDifferentiationDiff /Cost Cost LdrLdr Market growth rate LowVery largeLow to Negative moderate Number of segments Very fewSomeManyFew Intensity of competition LowIncreasing Very intense Changing Emphasis on product design Very highHighLow toLow moderate Stage IntroductionGrowthMaturity Decline Factor The purpose of business is to create and keep a customer … Drucker

Life Cycle Strategies Built by Stambaugh/2009 Emphasis on process design LowLow toHighLow moderate Major functional area(s) of concern Research andSales andProductionGeneral Developmentmarketingmanagement and finance Overall objective IncreaseCreateDefendConsolidate, market shareconsumermarket sharemaintain, awarenessdemandand extendharvest, or product lifeexit cycles Stage Factor IntroductionGrowthMaturityDecline The purpose of business is to create and keep a customer … Drucker

You are a senior manager at Nokia (cell phone) and have just been given an additional $100M to fight back against the iPhone. Where do you spend the money (pick only one) 1.Increase advertising 2.Cut price on our product that is closest to iPhone 3.Spend on R&D to make our product cooler than iPhone 4.Invest in production equipment to cut our manufacturing costs

Critique Built by Stambaugh/2009 ■ Life Cycle is not inevitable ■ Sustaining and disrupting innovations ■ Mature stage strategies ■ Maintaining ■ Harvesting ■ Exiting ■ Consolidation ■ Turnaround strategies ■ Prune assets (cash), products (get back to basics), costs (put it on a diet) The purpose of business is to create and keep a customer … Drucker

Summary Built by Stambaugh/2009 ■ Step One is to figure out how you want to add value for the customer ■ Generic strategies + Combination + Blue Ocean ■ Beware the Cycle ■ Compete “smartly” The purpose of business is to create and keep a customer … Drucker

Next Class Built by Stambaugh/2009 ■ Test! ■ Essay “question pool” online/WebCT (pick 3 of 4) ■ One essay question based on news article ■ Just bring enough paper to write your answers (blue books not required) The purpose of business is to create and keep a customer … Drucker