1. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Presentation design by Charlie Cook Chapter 4 Business-Level Strategy Part 2 Strategic Actions: Strategy Formulation

2. Studying this chapter should provide you with the strategic management knowledge needed to: Learning Objectives 1.Define business-level strategy. 2.Discuss the relationship between customers and business-level strategies in terms of who, what, and how. 3.Explain the differences among business-level strategies. 4.Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy. 5.Describe the risks of using each of the business-level strategies. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–2

3. Business-Level Strategy (Defined) 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–3

4. Core Competencies and Strategy © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–4 Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets Core Competencies Strategy Business-level Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

5. Customers: Their Relationship with Business-Level Strategies © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–5 Key Issues in Business-level Strategy Who will be served? What needs will be satisfied? How will those needs be satisfied?

6. Effectively Managing Relationships with Customers Firms must manage all aspects of their relationship with customers. –Reach: firm’s access and connection to customers –Richness: depth and detail of two-way flow of information between the firm and the customer –Affiliation: facilitation of useful interactions with customers © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–6

7. Who: Determining the Customers to Serve Market segmentation –A process used to cluster people with similar needs into individual and identifiable groups. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–7 All Customers IndustrialMarkets ConsumerMarkets

8. Consumer Markets –Demographic factors –Socioeconomic factors –Geographic factors –Psychological factors –Consumption patterns –Perceptual factors Industrial Markets –End-use segments –Product segments –Geographic segments –Common buying factor segments –Customer size segments © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–8 Market Segmentation

9. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–9 Table 4.1Basis for Customer Segmentation Consumer Markets 1.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) Industrial Markets 1.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

10. 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–10

11. How: Determining Core Competencies Necessary to Satisfy Customer Needs Firms must decide: –Who to serve, what customer needs to meet, and how to use core competencies to implement value creating strategies that satisfy target 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–11

12. The Purpose of a Business-Level Strategy Business-Level Strategies –Are intended to create differences between the firm’s competitive position and those of its competitors. To position itself, the firm must decide whether it intends to: –Perform activities differently or –Perform different activities as compared to its rivals. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–12

13. Types of Potential Competitive Advantage Achieving lower overall costs than rivals –Performing activities differently (reducing process costs) Possessing the capability to differentiate the firm’s product or service and command a premium price –Performing different (more highly valued) activities. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–13

14. 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–14

15. Types of Business-Level Strategies © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–15 Lowest Cost Distinctiveness Differentiation Cost Leadership Focused Differentiation Focused Cost Leadership Integrated Cost Leadership/ Differentiation BroadTarget NarrowTarget Basis for Customer Value Target Market

16. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–16 Figure 4.1Five Business-Level 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. Product Characteristics –Relatively standardized (commoditized) products –Features broadly acceptable to many customers –Lowest competitive price © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–17

18. Cost Leadership Strategy 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 © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–18

19. How to Obtain a Cost Advantage © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–19 Determine and control Cost Drivers Value Chain Reconfigure Value Chain if needed  Alter production process  Change in automation  New distribution channel  New advertising media  Direct sales in place of indirect sales  New raw material  Forward integration  Backward integration  Change location relative to suppliers or buyers

20. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–20 Figure 4.2Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

21. 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 © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–21 Value-Creating Activities for Cost Leadership

22. 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–22 Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Rivalry with Existing Competitors

23. Cost Leadership Strategy: Buyers Can mitigate buyers’ power by: –Driving prices far below competitors, causing them to exit, thus shifting power with buyers (customers) back to the firm. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–23 Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Buyers

24. Cost Leadership Strategy: 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–24 Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Suppliers

25. Cost Leadership Strategy: New Entrants © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–25 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 industry learning curve. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products The Threat of Potential Entrants

26. Cost Leadership Strategy: Substitutes © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–26 Cost leader is well positioned to: –Lower prices in order to maintain its value position. –Make investments to add features unavailable in substitutes. –Buy intellectual property and patents developed by potential substitutes. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Product Substitutes

27. Cost Leadership Strategy (cont’d) Competitive Risks –Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations. –Too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation. –Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–27

28. 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 nonstandardized products –Appropriate when customers value differentiated features more than they value low cost. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–28

29. How to Obtain a Differentiation Advantage © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–29 Cost Drivers Control Cost Drivers if needed Reconfigure Value Chain to maximize  Lower buyers’ costs  Raise performance of product or service  Create sustainability through:  Customer perceptions of uniqueness  Customer reluctance to switch to non- unique product or service

30. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–30 Figure 4.3Examples of Value-Creating Activities Associated with the Differentiation Strategy

31. 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 © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–31 Value-Creating Activities and Differentiation

32. Differentiation Strategy: Competitors © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–32 Defends against competitors because customer’s brand loyalty to differentiated product offsets price competition. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Rivalry with Existing Competitors

33. Differentiation Strategy: Buyers © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–33 Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Buyers

34. Differentiation Strategy: Suppliers © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–34 Can mitigate suppliers’ power by: –Absorbing price increases due to higher margins. –Passing along higher supplier prices because buyers are loyal to differentiated brand. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Suppliers

35. Differentiation Strategy: New Entrants © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–35 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. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products The Threat of Potential Entrants

36. Differentiation Strategy: Substitutes © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–36 Well positioned relative to substitutes because: –Brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Product Substitutes

37. Competitive Risks of Differentiation 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 the differentiated features of the firm’s products. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–37

38. Focus Strategies An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. –Particular buyer group—youths or senior citizens –Different segment of a product line—professional craftsmen versus do-it-yourselfers –Different geographic markets—East coast versus West coast © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–38

39. Focus Strategies (cont’d) Types of focused strategies –Focused cost leadership strategy –Focused differentiation strategy To implement a focus strategy, firms must be able to: –Complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–39

40. 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 can its larger industry-wide competitors. Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–40

41. Competitive Risks of Focus Strategies 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–41

42. Integrated Cost Leadership/ Differentiation 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–42

43. Integrated Cost Leadership/ Differentiation Strategy (cont’d) Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/ differentiation strategy. –Flexible manufacturing systems (FMS) –Information networks (CRM) –Total quality management (TQM) systems © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–43

44. 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. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–44

45. Information Networks Link companies electronically with their suppliers, distributors, and customers. –Facilitate efforts to satisfy customer expectations in terms of product quality and delivery speed. –Improve flow of work among employees in the firm and their counterparts at suppliers and distributors. –Customer relationship management (CRM) © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–45

46. Total Quality Management (TQM) Systems Emphasize total commitment to the customer through continuous improvement using: –Data-driven, problem-solving approaches –Empowerment of employee groups and teams Benefits –Increased customer satisfaction –Lower input and operating process costs –Reduced time-to-market for innovative products © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–46

47. Risks of an Integrated Cost Leadership/ Differentiation Strategy Often involves compromises –Becoming neither the lowest cost nor the most differentiated firm. Becoming “stuck in the middle” –Lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy. © 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–47