Chapter 5 Business-level Strategies 1 1

2 2 Learning Objectives To understand: generic competitive strategies and the way they are executed the elements of a business model how competitive dynamics influence industries and the companies they contain the most common competitive tactics strategies in an international context and over time To understand: generic competitive strategies and the way they are executed the elements of a business model how competitive dynamics influence industries and the companies they contain the most common competitive tactics strategies in an international context and over time

3 3 StrategicDirection Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring External and Internal Analysis Strategic Management Process

4 4 Business-Level Strategy Formulation Responsibilities Direction setting—Mission, vision, ethics, goals Situation analysis—Compilation and assessment of information Selection of strategies—Generic strategy (cost leadership, differentiation, best cost, focus) and competitive tactics, including growth strategy Management of resources—Acquisition and/or development of resources leading to competitive advantage Direction setting—Mission, vision, ethics, goals Situation analysis—Compilation and assessment of information Selection of strategies—Generic strategy (cost leadership, differentiation, best cost, focus) and competitive tactics, including growth strategy Management of resources—Acquisition and/or development of resources leading to competitive advantage

5 5 Business-Level Strategies Generic Strategies - how the firm intends to position itself to create value for its customers in ways that are different from those of competitors Competitive Tactics - the competitive actions firms take to grow and increase the strength of or protect their competitive positions. Generic Strategies - how the firm intends to position itself to create value for its customers in ways that are different from those of competitors Competitive Tactics - the competitive actions firms take to grow and increase the strength of or protect their competitive positions.

6 6 Generic Strategies Value propositions associated with generic competitive strategies Differentiation: Offer value to customers by providing them with a preferred product or service Low-cost leadership: Offer value to customers by providing them with a standard product or service produced at lower cost (and typically offered at a lower price) Best cost: A combination of the first two options. Note: these strategies assume that the firm is seeking a broad customer base. If the firm is pursuing a particular market segment it is using a “focus” strategy. Value propositions associated with generic competitive strategies Differentiation: Offer value to customers by providing them with a preferred product or service Low-cost leadership: Offer value to customers by providing them with a standard product or service produced at lower cost (and typically offered at a lower price) Best cost: A combination of the first two options. Note: these strategies assume that the firm is seeking a broad customer base. If the firm is pursuing a particular market segment it is using a “focus” strategy.

7 7 Create value through some type of uniqueness, such as: Product innovations Superior quality or service Creative advertising Speed and Flexibility Reputation and Brand Name Customers must be willing to pay more for the uniqueness Added costs vs. incremental price Create value through some type of uniqueness, such as: Product innovations Superior quality or service Creative advertising Speed and Flexibility Reputation and Brand Name Customers must be willing to pay more for the uniqueness Added costs vs. incremental price Differentiation

8 8 Low-Cost Leadership Common ways to pursue low-cost leadership: Accurate demand forecasting and high capacity utilization Economies of scale Technological advances Experience effects Common ways to pursue low-cost leadership: Accurate demand forecasting and high capacity utilization Economies of scale Technological advances Experience effects

9 9 Typical Experience Curve unit cost unit cost total cumulative output

10 Combination of low-cost leadership and differentiation The reasons it works:  The same resources/activities that allow cost reductions may also allow differentiation. (e.g., automation that lowers costs and improves speed and service)  Profits from cost reductions may be used to invest in differentiating features, and vice versa Combination of low-cost leadership and differentiation The reasons it works:  The same resources/activities that allow cost reductions may also allow differentiation. (e.g., automation that lowers costs and improves speed and service)  Profits from cost reductions may be used to invest in differentiating features, and vice versa Best Cost

11 The firm serves the needs of a particular market segment In combination with one of the other three generic strategies:  focus through differentiation  focus through low-cost leadership  focus through best cost The firm serves the needs of a particular market segment In combination with one of the other three generic strategies:  focus through differentiation  focus through low-cost leadership  focus through best cost Focus

12 Business Models Important elements:Important elements: ›Identifying market segments to be targeted ›Determining unique sources of value for customers (differentiating features, low cost, or a balance) ›Selecting unique features and technologies for products ›Determining how to capture value, incl. pricing ›Verifying sufficient demand exists Decisions regarding assets:Decisions regarding assets: ›Types of assets sold (physical, service, financial, intangible) ›Rights given to consumers (complete transfer, distribution, temporary use, fee for matching buyers/sellers) Important elements:Important elements: ›Identifying market segments to be targeted ›Determining unique sources of value for customers (differentiating features, low cost, or a balance) ›Selecting unique features and technologies for products ›Determining how to capture value, incl. pricing ›Verifying sufficient demand exists Decisions regarding assets:Decisions regarding assets: ›Types of assets sold (physical, service, financial, intangible) ›Rights given to consumers (complete transfer, distribution, temporary use, fee for matching buyers/sellers)

13 Defining a Business Model Market segments targeted: Broad market Focus on a particular market segment or segments Market(s) Assets sold: Physical products Services Financial assets Intangible assets Rights to assets provided: Complete transfer Distribution of assets created by others Rights to use assets for a time Broker (match buyers & sellers) Assets Unique sources of value: Differentiation: unique features and technologies embedded in assets Low cost: Basic products/services or assets at a low price Best cost: high value to cost ratio Value Creation Determination of approach for capturing revenues and profits (financial feasibility) Determination of demand for products, services, or other assets as defined and at a particular price Value Capture

14 Competitive Tactics Internal Growth StrategiesInternal Growth Strategies ›Market penetration ›Market development ›Product/service development ›Vertical integration External Growth StrategiesExternal Growth Strategies ›Alliances/joint ventures ›Acquisitions ›Horizontal integration Internal Growth StrategiesInternal Growth Strategies ›Market penetration ›Market development ›Product/service development ›Vertical integration External Growth StrategiesExternal Growth Strategies ›Alliances/joint ventures ›Acquisitions ›Horizontal integration

15 Competitive Tactics Offensive TacticsOffensive Tactics ›Aggressive Competition ›First-Mover Advantages Defensive TacticsDefensive Tactics ›Threat of Retaliation ›Barriers to Imitation Collaborative TacticsCollaborative Tactics Political TacticsPolitical Tactics Avoidance (Blue Ocean) TacticsAvoidance (Blue Ocean) Tactics Strategic FlexibilityStrategic Flexibility Offensive TacticsOffensive Tactics ›Aggressive Competition ›First-Mover Advantages Defensive TacticsDefensive Tactics ›Threat of Retaliation ›Barriers to Imitation Collaborative TacticsCollaborative Tactics Political TacticsPolitical Tactics Avoidance (Blue Ocean) TacticsAvoidance (Blue Ocean) Tactics Strategic FlexibilityStrategic Flexibility

16 International Growth Tactics Exporting Licensing Franchising Joint Venture Greenfield Venture Exporting Licensing Franchising Joint Venture Greenfield Venture Note: Moving down the list entails not only greater cost and financial risk, but also greater profit potential and control

17 Approach to International Markets Multidomestic – custom tailoring products/services for individual international markets Global – one product/service for the world Transnational – a hybrid approach Multidomestic – custom tailoring products/services for individual international markets Global – one product/service for the world Transnational – a hybrid approach

18 The Industry Life Cycle A A B B C C Introduction Growth Maturity Commodity or Decline Time Unit Sales Volume