1. Business-Level Strategy
Business-level strategy: 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

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

3. Strategy Fundamental constraints Scope Value chain
What good or service to offer, to which customers
Value chain
How and where to create the good or service
How to distribute the good or service in the marketplace(s)

4. Recall our value creation model
Costs represent specific investment choices that generate value

5. Broad or narrow scope? Consumer Markets Consumer Markets
Demographic
Consumer
Markets
Per.
Dem.
Socioeconomic
Con.
Soc.
Geographic
Psychological
Psy.
Geo.
Consumption patterns
Perceptual factors
Implications for configuration of value chain??

6. Broad or narrow scope? Business Markets Industrial Markets
End-use
Industrial
Markets
Size
End
Product segments
Geog segments
Buy.
Pro.
Geo.
Common buying factors
Customer size segments
Implications for configuration of value chain??

7. Source of competitive advantage - Value chains
Strategies create differences between the firm’s position and its rivals
Sources of differences? - perform activities differently; perform different activities
Two value-adding configurations (Porter, 1985)
Low cost
Differentiated

8. Comparing Scope and Source of Advantage
Competitive Advantage
Cost
Uniqueness
Cost Leader
Differentiator
Broad target
Integrated Cost
Leader/
Differentiator
Competitive Scope
Narrow target
Focused Cost
Focused Differentiator

9. Cost Leadership Strategy
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
relatively standardized products
features acceptable to many customers
lowest competitive price

10. Cost Leadership Strategy
Cost saving actions required by this strategy:
building efficient 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

11. Cost Drivers Implications? Major Cost Drivers Economies of scale
Learning/Spillovers
Capacity utilization
Integration
Vertical Linkages
Timing
Location
Political/regulatory
Interrelationships (corporate)
Discretionary decisions
Product features, performance
Mix & variety of products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product features
Hiring, training, motivation
ES: (a) Indivisibilities - Inputs are lumpy or non-rival in consumption their costs can be spread over a larger level of output resulting in lower unit costs. Such inputs include R&D and advertising. (b) Specialization - When scale increases, opportunities for specialization become available. (c) Lower input costs – e.g., volume discounts, lower transaction costs, reduced inventories and other similar cost efficiencies resulting from large scale of operations. (d) Automation - scale makes more efficient methods possible, e.g., production and distribution . (e) Learning - available in production and distribution processes involving high degrees of tacit knowledge.
DS: increased costs from increased scale, e.g., (a) Complexity - costs of coordination may increase more than proportionately or effectiveness may decrease. (b) Marketing and distribution - as scale increases, marketing and distributing goods in increasingly diverse and geographically dispersed markets may be necessary
Learning – high rate of spillover = industry advantage; low rate = firm advantage
Integration – implicit or explicit evaluation of make vs. buy decisions.
Linkages – interactions among activities ↑costa → ↓costb (invest in UPS scheduling/routing)
Timing – first mover advantage from lower brand diff. costs; late mover advantage from avoiding high mkt/prod dev costs
Implications?

12. Value-Chain example: Cost Leader

13. Questions Leading to Lower Costs
1. How can an activity be performed differently, eliminated, externalized?
2. How can linked value activities be regrouped or reordered?
3. How can upstream/downstream collaboration lower costs?

14. Implementation Pitfalls
Exclusive focus on Mfg
Misunderstand drivers (ABC useful)
Failure to recognize/exploit linkages (e.g., across the board cost reductions)
Contradictions – (e.g., gain mkt share through ES but allow product clutter; cross subsidies)

15. Cost Leadership and the Five Forces
Rivalry - competitors avoid price wars with cost leaders
Buyers – shift demand to you, increase market power
Suppliers – increased market power, absorb cost increases (low cost position)
Entrants – entry barriers (scale, learning)
Substitutes – reinvest econ profit to maintain advantage

16. Major Risks of Cost Leadership Strategy
There can only be one cost leader
Technological change can eliminate cost advantage
Spillovers lead to imitation
Efficiency focus may create blind spots re: customer preferences

17. Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services that customers perceive as adding value
price may exceed what the firm’s target customers are willing to pay
Non-commodity products
customers value differentiated features more than they value low cost

18. Some Differentiation Themes
Unique taste
Dr. Pepper
Multiple features
Microsoft Windows and Office
Wide selection and one-stop shopping
Home Depot and Amazon.com
Reliable, superior service
FedEx, Ritz-Carlton
Spare parts availability
Caterpillar

19. Themes Prestige Quality manufacturing, few defects
Rolex
Quality manufacturing, few defects
Honda, Toyota
Technological leadership
3M Corporation, Intel
Top-of-the-line image
Ralph Lauren, Kiton

20. Differentiation Strategy
Add downstream value
lower buyer cost
raise buyer performance
Cost
Add value to buyer’s value: reduce downstream processing time, search time, transaction costs, defect rates, direct costs, learning curves, labor, space, installation, etc. (e.g., CRM software)

21. Factors That Drive Differentiation
Value: Increase performance of buyer’s value chain (or consumer perception)
Unique features, performance
Downstream channels (e.g., Catepillar dealer network)
New technologies
Quality of inputs
Skill or know-how
Information

22. Differentiation Strategy
Some differentiation actions required by this strategy:
develop new “systems” and processes
signal and shape buyer perceptions
quality focus
capability in R&D
Implication - maximize human capital contributions

23. Value-Chain example: Differentiation

24. Differentiation and the Five Forces
Rivalry - brand loyalty to differentiated products reduces price competition
Buyers – differentiated products less price elastic
Suppliers – absorb price increases (higher margins), pass along higher prices (buyer loyalty)
Entrants – must surpass proven products or be equivalent at lower price
Substitutes – diff raises switching costs

25. Pitfalls of Differentiation Strategies
Differentiating on characteristics not valued by buyers (e.g., HP)
Over-differentiating
Price premium is too high
Failing to signal value
Focusing on product instead of entire value chain

26. Focused Business-Level Strategies
A focus strategy must exploit a narrow target’s differences from the balance of the industry by:
isolating a particular buyer group
isolating a unique segment of a product line
concentrating on a particular geographic market
finding their “niche”

27. Factors Driving Focus Strategies
Large firms overlook small niches
Firm may lack resources to compete in the broader market
May be able to serve a narrow market segment more effectively than can larger industry-wide competitors
Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage

28. Major Risks of Focused Strategies
Firm may be “outfocused” by competitors
Large competitor may set its sights on your niche market
Preferences of niche market may change to match those of broad market

29. Advantages of Integrated Strategy
A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:
adapt quickly to environmental changes
learn new skills and technologies more quickly
effectively leverage its core competencies while competing against its rivals

30. Benefits of Integrated Strategy
Successful firms using this strategy have above-average returns
Firm offers two types of values to customers
some differentiated features (but less than a true differentiated firm)
relatively low cost (but now as low as the cost leader’s price)

31. Major Risks of Integrated Strategy
An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)
The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy

32. Vertical Power (buyer/seller)
Summary: Industry and Firm Effects on Profit
Patents
Brands
Retaliatory
capability
Barriers to Entry
Industry
Attractiveness
Rivalry
Substitutability
Rate of Profit
in Excess of the
Competitive Level
Firm size
Financial resources
Vertical Power (buyer/seller)
Process technology
Plant size
Low-cost inputs
Cost
Advantage
Competitive
Advantage
Brands
Product technology
Marketing
capabilities
Differentiation
Advantage