1. Chapter 4 – Business-Level Strategy

2. Knowledge Objectives
Studying this chapter should provide you with the strategic management knowledge needed to:
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.

3. The Strategic Management Process
Strategy Implementation
Chapter 10 Corporate Governance
Chapter 11 Organizational Structure and Controls
Chapter 13 Strategic Entrepreneurship

4. Agenda Introduction to Business-Level Strategy
Customers: Who, what, how?
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies

5. 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
Business-level Strategy
Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

6. Agenda Introduction to Business-Level Strategy
Customers: Who, what, how?
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies

7. Customers: Who, what, how?
Satisfied customers are the foundation of any successful business-level strategy
Who will be served by the strategy?
What needs do those target customers have that the strategy will satisfy?
How will those needs be satisfied by the strategy?

8. Determining the Customers to Serve
Customer Needs – Who?
Determining the Customers to Serve
Customers
Consumer
Markets
Industrial
Markets
Market Segmentation
Cluster people with similar needs into individual and identifiable groups

9. Basis for Customer Segmentation
Consumer Markets
Demographic factors (age, income, gender, etc.)
Socioeconomic factors (social class, stage in the family life cycle)
Geographic factors (cultural, regional, and national differences)
Psychological factors (lifestyle, personality traits)
Consumption patterns (heavy, moderate, and light users)
Perceptual factors (benefit segmentation, perceptual mapping)
Sources: Adapted from Jain, S. C. (2000). “Marketing planning and strategy”, Cincinnati: South-Western: 120.

10. Basis for Customer Segmentation
Industrial Markets
End-use segments (identified by SIC code)
Product segments (based on technological differences or production economics)
Geographic segments (defined by boundaries between countries or by regional differences within them)
Common buying factor segments (cut across product market and geographic segments)
Customer size segments
Sources: Adapted from Jain, S. C. (2000). “Marketing planning and strategy”, Cincinnati: South-Western: 120.

11. Customer Needs – What? Customer Needs to Satisfy
Customer needs are related to a product’s benefits and features
Customer needs represent desires in terms of features and performance capabilities
Customer needs are neither right nor wrong, good nor bad

12. Customer Needs – How?
Determining the Core Competencies Necessary to Satisfy Customer Needs
Firms use core competencies to implement value creating strategies that satisfy customers’ needs
Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

13. Types of Competitive Advantage
Achieving lower overall costs than rivals
Performing activities differently (cheaper process)
Possessing the capability to differentiate the firm’s product or service and command a premium price
Performing different activities

14. Two Targets of Competitive Scope
Broad Scope
The firm competes in many customer segments
Narrow Scope
The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others

15. Five Business-Level Strategies
Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

16. Agenda Introduction to Business-Level Strategy
Customers: Who, what, how?
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies

17. 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
Relatively standardized products (“no-frills”)
Features acceptable to many customers
Lowest competitive price

18. How to Obtain a Cost Advantage
Determine and control
Reconfigure, if needed
Cost Drivers
Value Chain
Alter production process
New raw material
Change in automation
Forward integration
New distribution channel
Backward integration
New advertising media
Change location relative to suppliers or buyers
Direct sales in place of indirect sales

19. Cost Leadership Strategy – cont’d
Cost saving actions required by this strategy:
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

20. Examples of Value-Creating Activities Associated with the Cost Leadership Strategy
Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

21. Cost Leadership Strategy – cont’d
Experience Curve

22. Value-Creating Activities for Cost Leadership
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

23. How to Create Value with a Cost Leadership Strategy?
… assess the cost leader’s position against the Five Forces!

24. Cost Leadership & Value Creation
The Threat of Potential Entrants
Cost leaders can frighten off new entrants due to:
Their need to enter on a large scale in order to be cost competitive
The time it takes to move down the learning/cost curve

25. Cost Leadership & Value Creation
Bargaining Power of Suppliers
Cost leaders can mitigate suppliers’ power by:
Higher margins enable cost leader to absorb suppliers’ price increases
Being able to make very large purchases, reducing chance of supplier using power

26. Cost Leadership & Value Creation
Bargaining Power of Buyers
Cost leaders can mitigate buyers’ power by:
Driving prices far below competitors, causing them to exit, thus shifting power of buyers back to the cost leader

27. Cost Leadership & Value Creation
Product 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

28. Cost Leadership & Value Creation
Rivalry with Existing Competitors
Due to cost leader’s advantageous position:
Rivals hesitate to compete on basis of price
Lack of price competition leads to greater profits

29. Cost Leadership: Competitive Risks
Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations
Too focused on cost reductions may occur at expense of customers’ perceptions of “competitive levels of differentiation” (i.e. value)
Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

30. Agenda Introduction to Business-Level Strategy
Customers: Who, what, how?
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies

31. 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
Nonstandardized products
Attracting customers who value differentiated features more than they value low cost

32. Exercise
For each of the listed products, describe at least two ways they are differentiated:
Ben & Jerry’s ice cream
Hummer H3
Apple MacBook Air
Hannah Montana
Taco Bell
Which, if any of these bases for product differentiation are likely to be sources of sustainable competitive advantage, and why?

33. How Companies Achieve Differentiation – Framework
Product features
Linkages between functions
Timing
Location
Product mix
Links with other firms
Reputation
Source: Adapted from Porter, M. E. (1980). “Competitive Strategy”, New York, NY: Free Press.

34. Differentiation Strategy – cont’d
But: Differentiation lies in the eye of the customer!
Products may be similar, but customer perception of products is not (e.g., Rolex vs. Casio watch)
Customer perception may create unwanted differentiation

35. How to Obtain a Differentiation Advantage
Control if needed
Reconfigure to maximize
Cost Drivers
Value Chain
Lower buyers’ costs
Raise performance of product or service
Create sustainability through:
Customer perceptions of uniqueness
Customer reluctance to switch to non-unique product/service

36. Value-Creating Activities and Differentiation
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

37. Examples of Value-Creating Activities Associated with the Differentiation Strategy
Source: Adapted from Porter, M. E. (1985). “Competitive advantage: Creating and sustaining superior performance”, New York, NY: Free Press.

38. How to Create Value with a Differentiation Strategy?
… assess the differentiator's position against the Five Forces!

39. Differentiation & Value Creation
The Threat of Potential Entrants
Differentiator can defend against new entrants because:
New products must surpass proven products
New products must be at least equal to performance of proven products, but offered at lower prices

40. Differentiation & Value Creation
Bargaining Power of Suppliers
Differentiator can mitigate suppliers’ power by:
Absorbing price increases due to higher margins
Passing along higher supplier prices because buyers are loyal to differentiated brand

41. Differentiation & Value Creation
Bargaining Power of Buyers
Differentiator can mitigate buyers’ power because:
Well differentiated products reduce buyers’ sensitivity to price increases

42. Differentiation & Value Creation
Product Substitutes
Differentiator well positioned relative to substitutes because:
Brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands

43. Differentiation & Value Creation
Rivalry with Existing Competitors
Differentiator well positioned against competitors because:
Brand loyalty to differentiated product offsets price competition
“Quasi-monopoly”

44. Differentiation: Competitive Risks
The price differential between the differentiator’s product and the cost leader’s product becomes too large
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
Negative externalities!

45. Agenda Introduction to Business-Level Strategy
Customers: Who, what, how?
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies

46. Focus Strategies
An integrated set of actions taken to produce goods or services that address the needs of a particular competitive segment
Particular buyer group (e.g., youths or senior citizens
Different segment of a product line (e.g., professional craftsmen versus do-it-yourselfers)
Different geographic markets (e.g., East Coast vs. West Coast)

47. Factors Driving Focused Strategies
Large firms may overlook small niches
A firm is able to serve a narrow market segment more effectively than can its larger, industry-wide competitors
A firm may lack the resources needed to compete in the broader market
Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

48. Focus Strategies: Competitive Risks
A focusing firm may be “outfocused” by its competitors
A large competitor may set its sights on a firm’s niche market
Customer preferences in niche market may change to more closely resemble those of the broader market