1. PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION
CHAPTER 4: BUSINESS-LEVEL STRATEGY

2. THE STRATEGIC MANAGEMENT PROCESS

3. KNOWLEDGE OBJECTIVES ● Define business-level strategy.
● Discuss the relationship between customers and business-level strategies in terms of who, what, and how.
● Explain the differences among business-level strategies.
● Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy.
● Describe the risks of using each of the business-level strategies.

4. OPENING CASE
MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS
■ With the 2008 global financial crisis and competitors, e.g., McDonald’s gaining market share, consumers were less willing to pay the high prices for premium coffee, leading to a reduction in store sales for the first time in Starbucks’ history. ■ Starbucks appeared to be unable to control the quality of the “experience” and began losing its differentiation advantage.

5. OPENING CASE
MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS (cont’d)
■ CEO Howard Schultz closed 900 poorly performing stores in the United States and refocused on innovation. ■ By 2011, with its 40th anniversary, a new logo, innovation such as VIA and customers paying for their purchases with their iPhones, environmental consciousness, employee health insurance, and a global focus on emerging markets such as China and India, Starbucks was once again differentiating itself.

6. BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY
IMPORTANT DEFINITION
BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY
■ An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
■ It is the core strategy
■ Every firm must form and use a business-level strategy for each one of its businesses
■ Business-level strategy choices matter because long-term performance is linked to a firm’s strategies

7. BUSINESS-LEVEL STRATEGY
A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy identifying what or which industry the firm will compete in
ONE
BUSINESS-
LEVEL
STRATEGY
A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity
SEVERAL BUSINESS-LEVEL STRATEGIES

8. CORE COMPETENCIES AND STRATEGY
Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals
Strategy
An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage
Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets
Business-level Strategy

9. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES
Who will be served?
KEY ISSUES in BUSINESS-
LEVEL
STRATEGY
What needs will be satisfied?
How will those needs be satisfied?

10. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES
EFFECTIVE
GLOBAL
COMPETITORS
Adept at identifying
customer needs across
cultures and geography
Quickly and successfully
adapt products/services
to meet those needs

11. BUSINESS-LEVEL STRATEGIES
FIVE COMPETITIVE FORCES
GENERIC:
Applicable
to any
organization in
any
industry
VALUE CHAIN
ACTIVITIES
RISKS for each Strategy
Effective STRUCTURE
for each Strategy

12. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES
SATISFYING CUSTOMERS IS THE FOUNDATION OF SUCCESSFUL BUSINESS STRATEGIES
Managing relationships with customers
Reach, richness, affiliation
Who will be served
What needs will be satisfied
How those needs will be satisfied

13. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES
REACH
Access and Connection
to Customers
EFFECTIVELY
MANAGING
RELATIONSHIPS
WITH
CUSTOMERS
RICHNESS
Depth and Detail of Two-Way Flow
of Information Between
the Firm and Customer
AFFILIATION
Facilitating Useful Interactions
With Customers

14. WHO: DETERMINING THE CUSTOMERS TO SERVE
MARKET SEGMENTATION A process used to cluster people with similar needs into individual and identifiable groups
Consumer
Markets
Industrial
Markets

15. MARKET SEGMENTATION: CONSUMER MARKETS
DEMOGRAPHIC FACTORS
(age, income, sex, etc.)
2. SOCIOECONOMIC FACTORS
(social class, stage in the family life cycle)
3. GEOGRAPHIC FACTORS
(cultural, regional, and national differences)
4. PSYCHOLOGICAL FACTORS
(lifestyle, personality traits)
5. CONSUMPTION PATTERNS
(heavy, moderate, and light users)
6. PERCEPTUAL FACTORS
(benefit segmentation, perceptual mapping)

16. MARKET SEGMENTATION: INDUSTRIAL MARKETS
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

17. WHAT: DETERMINING WHICH CUSTOMER NEEDS TO SATISFY
■ Customer needs are related to a product’s benefits and features
■ Customer needs are neither right nor wrong, good nor bad
■ Customer needs represent desires in terms of features and performance capabilities
■ Successful firms learn how to deliver to customers what they want, when they want it
Customers are the lifeblood of a firm

18. HOW: DETERMINING CORE COMPETENCIES NECESSARY TO SATISFY CUSTOMER NEEDS
■ Firms use core competencies to implement value creating strategies that satisfy customers’ needs
■ Value means goods or services that provide either low cost with acceptable features or highly differentiated features with acceptable costs
■ Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

19. Target Group of Customers
HOW ● WHAT ● WHO
WHO:
Target Group of Customers
WHAT:
Satisfy Customer
Needs

20. BUSINESS-LEVEL STRATEGY BUSINESS-LEVEL STRATEGIES
PURPOSE
BUSINESS-LEVEL STRATEGIES
are intended to create differences between the firm’s position relative to those of its rivals
To position itself, the firm must decide whether it intends to:
● Perform activities differently, or
● Perform different activities as compared to its rivals

21. BUSINESS-LEVEL STRATEGY BUSINESS-LEVEL STRATEGY
PURPOSE
BUSINESS-LEVEL STRATEGY
is a deliberate choice about how the firm will perform the value chain activities to create unique value
Southwest’s Competitive Advantages (rivals unable to imitate):
● Tight integration among activities
● Cost leadership strategy
● Unique culture and customer service

22. BUSINESS-LEVEL STRATEGY
PURPOSE
FIGURE 4.1
Southwest Airlines Activity System

23. SOURCES OF COMPETITIVE ADVANTAGE
■ Achieving LOWER OVERALL COSTS than rivals
■ Performing activities differently (reducing process costs)
■ Providing a low cost product that customers deem as ACCEPTABLE
■ Possessing the capability TO DIFFERENTIATE the firm’s product or service and command a premium price
■ Performing MORE HIGHLY VALUED activities

24. FIVE GENERIC BUSINESS-LEVEL STRATEGIES
FIGURE 4.2
Five Business Level Strategies

25. TARGET MARKETS BROAD NARROW
Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis; competing in many customer segments
NARROW
A narrow market segment means that the firm intends to serve the needs of a narrow customer group; tailoring its strategy to serving them at the exclusion of others

26. BUSINESS-LEVEL STRATEGY EFFECTIVENESS
■ None of the five business-level strategies is inherently or universally superior to the others
■ The effectiveness of each strategy is contingent upon:
● External opportunities/threats
● Internal strengths/weaknesses
■ KEY: A successful business-level strategy must match external opportunities/threats with internal strengths, i.e., its core competencies

27. COST LEADERSHIP STRATEGY
An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers
■ Relatively standardized products
■ Features acceptable to many customers
■ Lowest competitive price

28. COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES
■ Value chain analysis identifies the parts of a firm’s operations that create value and those that do not
■ A competitive advantage in logistics creates more value for a cost leadership strategy than for a differentiation strategy
 Inbound logistics [materials handling, warehousing, and inventory control]
 Outbound logistics [collecting, storing, and distribution]

29. COST LEADERSHIP STRATEGY:
COST SAVING ACTIONS
■ Employing process innovations that facilitate efficient production and distribution methods
■ Building efficient scale facilities
■ Tightly controlling production costs and overhead
■ Minimizing costs of sales, R&D, and service
■ Building efficient manufacturing facilities
■ Monitoring costs of activities provided by outsiders
■ Simplifying production processes

30. COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES
FIGURE 4.3
Examples of Value-Creating Activities Associated with the Cost-Leadership Strategy

31. VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP
RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE
Cost-effective MIS
Few management layers
Simplified planning
Consistent policies
Effecting training
Easy-to-use manufacturing technologies
Investments in technologies
Finding low cost raw materials
Monitor suppliers’ performances
Link suppliers’ products to production processes
Economies of scale
Efficient-scale facilities
Effective delivery schedules
Low-cost transportation
Highly trained sales force
Proper pricing

32. VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP
RECONFIGURE THE VALUE CHAIN FOR A COST ADVANTAGE
Alter production process
New raw material
Change in automation
Forward integration
New distribution channel
Backward integration
Change location relative to suppliers or buyers
New advertising media
Direct sales in place of indirect sales

33. COST LEADERSHIP STRATEGY: STRATEGIC FOCUS
WALMART, DOLLAR STORES, AND AMAZON: WHO IS BUYING WHOSE LUNCH?
■ Walmart deviated from its cost-leadership strategy designed to take market share away from Target by introducing organic foods, remodeling some stores, and reducing the variety of products offered, thereby increasing prices on some goods.
■ Recognizing its mistake, Walmart has re-focused on low costs and prices, increased its product diversity, and is opening 40 new express stores.
■ Will Walmart will be able to recapture its cost leadership position in the market after giving it up to rivals?

34. COST LEADERSHIP STRATEGY: COMPETITORS
Due to cost leader’s advantageous position:
Rivals hesitate to compete on basis of price
Lack of price competition leads to greater profits
Rivalry may be based on factors such as size, resources, location, market dependence, and prior competitive interactions
RIVALRY WITH EXISTING COMPETITORS
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

35. COST LEADERSHIP STRATEGY: BUYERS (CUSTOMERS)
Can mitigate buyers’ power by:
Driving prices far below competitors, causing them to exit, thus shifting power away from buyers back to the firm
Powerful customers can force a cost leader to reduce its prices, but not below the level where the next-most-efficient industry competitor can earn average returns
BARGAINING POWER OF BUYERS
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

36. COST LEADERSHIP STRATEGY: SUPPLIERS BARGAINING POWER OF SUPPLIERS
Can mitigate suppliers’ power by:
Being able to absorb cost increases due to low cost position
Being able to make very large purchases, reducing chance of supplier using power
Outsourcing, to reduce costs may also require relationship-building (Guanxi), particularly to a foreign supplier
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

37. COST LEADERSHIP STRATEGY: THREAT OF POTENTIAL ENTRANTS
NEW ENTRANTS
Barriers to potential entrants:
Their need to enter on a large scale in order to be cost competitive
The time it takes to move up the learning curve
Efficiency of cost leaders through continuous efforts to reduce costs enhances profit margins and serves as a significant entry barrier
THREAT OF POTENTIAL ENTRANTS
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

38. COST LEADERSHIP STRATEGY: SUBSTITUTES
Cost leader is well positioned to:
Make investments to be first to create substitutes
Buy patents developed by potential substitutes
Lower prices in order to maintain value position
Be more flexible than its differentiated competitors
PRODUCT SUBSTITUTES
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

39. COST LEADERSHIP STRATEGY:
RISKS
COMPETITIVE RISKS
OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations
COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation
IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

40. DIFFERENTIATION STRATEGY
An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them
■ Focus is on non-standardized products
■ Appropriate when customers value differentiated features more than they value low cost
■ Firms must still be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay

41. DIFFERENTIATION STRATEGY:
DISTINCTIVE ACTIONS
Firms seek to be different from competitors on as many dimensions as possible
Differentiation approaches
■ Unusual features
■ Responsive customer service
■ Rapid product innovations
■ Technological leadership
■ Perceived prestige and status
■ Different tastes
■ Engineering design and performance

42. DIFFERENTIATION STRATEGY: VALUE CHAIN ACTIVITIES
FIGURE 4.4
Examples of Value-Creating Activities Associated with the Differentiation Strategy

43. VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION
RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS
Highly developed MIS
Emphasis on quality
Worker compensation for creativity/productivity
Use of subjective performance measures
Basic research capability
Technology
High quality raw materials
Delivery of products
High quality replacement parts
Superior handling of incoming raw materials
Attractive products
Rapid response to customer specifications
Order-processing procedures
Customer credit
Personal relationships

44. VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION
RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS
Whereas cost leadership targets a specific industry, differentiation creates value by distinguishing products/services
A firm must consistently upgrade differentiated features that customers value and/or create new valuable features (innovate) without significant cost increases
Create sustainability through:
Customer perceptions of distinctiveness
Customer reluctance to switch to non-distinctive products

45. DIFFERENTIATION STRATEGY: COMPETITORS
RIVALRY WITH EXISTING COMPETITORS
The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry
Reputation can also sustain the competitive advantage of firms following a differentiation strategy
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

46. DIFFERENTIATION STRATEGY: BUYERS (CUSTOMERS)
BARGAINING POWER OF BUYERS
Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases
Customers are willing to accept a price increase when a product satisfies their perceived unique needs, as long as they do not think that an acceptable product alternative exists
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

47. DIFFERENTIATION STRATEGY: SUPPLIERS BARGAINING POWER OF SUPPLIERS
Can mitigate suppliers’ power by:
Absorbing price increases due to higher margins from high-quality components
Alternatively, considering buyers’ relative insensitivity to price increases and their brand loyalty, firms may pass along higher supplier prices to the buyer
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

48. DIFFERENTIATION STRATEGY: NEW ENTRANTS THREAT OF POTENTIAL ENTRANTS
Substantial barriers to potential entrants:
Customer loyalty and the need to overcome the uniqueness of a differentiated product
New products must surpass proven products
New products must be at least equal to the performance of proven products, but offered at lower prices
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

49. DIFFERENTIATION STRATEGY: SUBSTITUTES
PRODUCT SUBSTITUTES
Well-positioned relative to substitutes because:
Brand loyalty to a differentiated product tends to reduce:
customers’ testing of new products
switching brands
Threat of new entrants
Bargaining power of suppliers
Rivalry among competing firms
Bargaining power of buyers
Threat of substitute products

50. DIFFERENTIATION STRATEGY:
RISKS
COMPETITIVE RISKS
PRICE DIFFERENTIAL: between the differentiator’s and the cost leader’s products becomes too large
VALUE DIMINISHED: Differentiation ceases to provide value for which customers are willing to pay
EXPERIENCE: narrows customers’ perceptions of the value of differentiated features
COUNTERFEIT: goods replicate differentiated features of the firm’s products

51. FOCUSED STRATEGIES
An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment
Target markets include:
■ a Particular buyer group (e.g., youths or senior citizens)
■ Different segment of a product line (e.g., products for professional painters or the do-it-yourself group)
■ Different geographic market (e.g., northern or southern Italy by using a foreign subsidiary)

52. FOCUSED STRATEGIES Types of focused strategies:
■ Focused cost leadership strategy
■ Focused differentiation strategy
To implement a focus strategy, firms must be able to:
Complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns

53. FACTORS THAT DRIVE FOCUSED STRATEGIES
■ Large firms may overlook small niches
■ A firm may lack the resources needed to compete in the broader market
■ A firm is able to serve a narrow market segment more effectively than its larger industry-wide competitors can
■ Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

54. FOCUSED COST LEADERSHIP STRATEGY
A firm focuses on a niche market, adding value by leveraging value chain activities that allow value-creation through the cost leadership strategy
■ Competitive advantage: low-cost
■ Competitive scope: narrow industry segment

55. FOCUSED DIFFERENTIATION STRATEGY
The value chain may be analyzed to determine if a firm is able to link the activities required to create value by using the focused differentiation strategy
■ Competitive advantage: differentiation
■ Competitive scope: narrow industry segment

56. FOCUS STRATEGIES: RISKS
COMPETITIVE RISKS
OUTFOCUSED: a focusing firm may be “outfocused” by its competitors
COMPETITION: a large competitor may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit
CHANGING PREFERENCES: customer preferences in the niche market may change to more closely resemble those of the broader market

57. INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY
Efficiently produce products with differentiated attributes:
EFFICIENCY: SOURCES OF LOW COST
DIFFERENTIATION: SOURCE OF UNIQUE VALUE
■ Readily adapts to external environmental changes
■ Concentrates simultaneously on TWO sources of competitive advantage: cost and differentiation
■ Competence and flexibility required in several value chain activities

58. INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY
Three sources of flexibility useful for this strategy:
■ Flexible manufacturing systems (FMS)
■ Information networks
■ Total quality management (TQM) systems

59. FLEXIBLE MANUFACTURING SYSTEMS
Computer-controlled processes used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention
■ Goal is to eliminate the “low cost versus wide product variety” tradeoff
■ Allows firms to produce large variety of products at relatively low costs

60. INFORMATION NETWORKS
Links companies electronically with their suppliers, distributors, and customers
■ Facilitates efforts to satisfy customer expectations in terms of product quality and delivery speed
■ Improves flow of work among employees in the firm and their counterpart suppliers and distributors
■ Requires customer relationship management (CRM)

61. TOTAL QUALITY MANAGEMENT [TQM] SYSTEMS
Emphasize total commitment to the customer through continuous improvement using:
■ Problem-solving approaches based on employee empowerment
Benefits
■ Increased customer satisfaction
■ Lower costs
■ Reduced time-to-market for innovative products
TQM systems help firms maintain competitive parity, but by itself, rarely will it lead to a competitive advantage

62. “STUCK in the MIDDLE” INTEGRATED COST LEADERSHIP/
DIFFERENTIATION STRATEGY: RISKS
“STUCK in the MIDDLE”
Strategy is gaining in popularity… but is RISKY
Products do not offer sufficient value in terms of either low cost or differentiation

63. INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY: RISKS
“STUCK in the MIDDLE”
Cost structure is not low enough for attractive pricing of products; products not sufficiently differentiated to create value for target customer
RESULT: DO NOT EARN ABOVE-AVERAGE RETURNS