Competing For Advantage

1. Competing For Advantage Part III – Creating Competitive Advantage Chapter 5 – Business-Level Strategy

2. The Strategic Management Process

3. Business-Level Strategy • Key Terms • Business-Level Strategy – integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets –

4. Types of Business-Level Strategy

5. Features of the Five Business-Level Strategies • Generic, can be used across industries • Two distinct types of competitive advantage: • Low Cost • Differentiation • Choice of scope: • Broad • Narrow (niche) • Effectiveness depends upon external environment and internal resources and capabilities

6. Serving Customers • Key Terms • Market Segmentation – process of clustering people with similar needs into individual and identifiable groups to determine which customer segments to target

7. Decisions About Serving Customers • Who (which customers) will be served – Market segmentation • What customer needs will be satisfied – Low cost vs. differentiation • How those needs will be satisfied – Core competencies

8. Strategy and Structure • Key Terms • Organizational Structure – specifies the firm's formal reporting relationships, procedures, controls, and authority and decision-making processes

9. Strategy and Structure • Key Terms (cont.) • Simple Structure – owner-manager makes all major decisions and monitors all activities, while staff acts as extension of manager's supervisory authority • Functional Structure – CEO and a limited corporate staff make all decisions, with functional line managers in dominant organizational areas • Multidivisional Structure – operating divisions each represent a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategies to division managers

10. Cost Leadership Strategy • Key Terms • Cost Leadership Strategy – integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

11. Cost Leadership Strategy – Implementation • No-frill, standardized goods • Continuously reduce costs of value chain activities

12. Value-Creating Activities Associated with Cost Leadership Strategy

13. Cost Leadership Strategy and the Five Forces of Competition • Low-cost position is a valuable defense against rivals • Powerful customers can demand reduced prices • Costs leaders are in a position to absorb supplier price increases and relationship demands, and to force suppliers to hold down their prices • Continuously improving levels of efficiency and cost reduction can be difficult to replicate and serve as significant entry barriers to potential competitors • Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers

14. Strategy and Organizational Structure • Specialization • Centralization • Formalization

15. Cost Leadership Strategy and the Functional Structure

16. Cost Leadership Strategy and the Functional Structure • Simple reporting relationships • Few decision-making and authority layers • Centralized corporate staff • Strong operational focus on process improvements • Low-cost culture • Centralized staff decision-making authority • Jobs specialization • Highly formalized rules and procedures

17. Risks of Cost Leadership Strategy • Processes can become obsolete • Focus on cost reductions can come at the expense of understanding customer perceptions and needs • Strategy could be imitated, requiring the firm to increase the value offered to retain customers

18. Differentiation Strategy • Key Terms • Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

19. Differentiation Strategy – Implementation • Target customers – perceived product value • Customized products – differentiating on as many features as possible

20. Unusual features Responsive customer service Rapid product innovations Technological leadership Perceived prestige and status Different tastes Engineering design Performance Differentiation Strategy – Implementation (cont.)

21. Value-Creating Activities Associated with the Differentiation Strategy

22. Differentiation Strategy and the Five Forces of Competition • Customer loyalty provides the most valuable defense against rivals • Uniqueness products reduce customer sensitivity to raised prices • High margins (for differentiated products) insulate from supplier influence • Customer loyalty and product uniqueness serve as significant entry barriers • Firms with customers loyal to their products are positioned effectively against product substitutes

23. Differentiation Strategy and the Functional Structure

24. Differentiation Strategy and the Functional Structure • Complex and flexible reporting relationships • Cross-functional product development teams • Strong focus on marketing and product R&D • Development-oriented culture • Decentralized decision making • Broad job descriptions • Informal rules and procedures

25. Risks of Differentiation Strategy • Price differential for the differentiated product may be perceived as too large • Firm's means of differentiation may cease to provide value for which customers are willing to pay (successful rival imitation) • Experience can narrow customers' perceptions of the value of a product's differentiated features • Counterfeit goods might appear in the marketplace

26. Focus Strategy • Key Terms • Focus Strategy – integrated set of actions designed to produce or deliver goods or services to a narrow target consumer based on specific differences in the market

27. Focus Strategy – Market Segments • Buyer group • Product line segment • Geographic market

28. Focus Strategy – Reasons • Large firms may overlook small niches • Firms may lack resources to compete in the broader market • Firms may be able to serve a narrow market segment more effectively than larger, industry-wide competitors • Firms may direct resources to certain value chain activities to build competitive advantage

29. Focus Strategy – Types • Focused cost leadership strategy • Focused differentiation strategy

30. Value-Creating Activities Associated with the Focus Strategy • Focused cost leadership strategy • Activities required to use the focused cost leadership strategy are identical to those shown in Figure 5.2 (slide 13) • Focused differentiation strategy • Activities required to use the focused differentiation strategy are identical to those shown in Figure 5.4 (slide 22)

31. Focus Strategy and the Five Forces of Competition • Focused cost leadership strategy • Refer to cost leadership Five Forces Analysis (slide 14) • Focused differentiation strategy • Refer to differentiation Five Forces Analysis (slide 23)

32. Differentiation Strategy and the Simple Structure • A firm using a focus strategy may choose a simple organizational structure: • A simple structure is matched with focus strategies when a firm offers a single product line in a single geographic market • Refer to Figure 5.3 (slide 16)

33. Differentiation Strategy and the Simple Structure • A firm using a focus strategy may choose a functional organizational structure: • As a business grows and expands, a functional structure is required • Depending on its focused cost leadership or focused differentiation strategy, the functional structures presented in Figures 5.3 and 5.5 apply • Refer to Figure 5.5 (slide 24)

34. Risks of Differentiation Strategy • A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser • A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit • The needs of customers within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

35. Integrated Cost Leadership/Differentiation Strategy • Key Terms • Integrated Cost Leadership/ Differentiation Strategy – integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them

36. Integrated Strategy – Advantages • Improved speed of adapting to environmental changes • Improved speed of learning new skills and technologies • Improved leverage of core competencies while competing against rivals

37. Integrated Strategy – Implementation Benefits • Evidence suggests a relationship between use of an integrated strategy and achieving above-average returns • Businesses that combine multiple forms of competitive advantage in low-profit-potential industries are shown to outperform businesses that compete with a single form

38. Value-Creating Activities Associated with the Integrated Strategy • Integrating cost leadership and differentiation strategies (which emphasize different primary and support activities) requires a balance when selecting the activities to perform • A flexible organizational structure is required

39. Integrated Strategy and the Flexible Structure • Commitment to strategic flexibility • Flexible decision-making patterns, with partial centralization • Less specialized jobs than in a traditional functional structure—workers are more sensitive to balancing cost and differentiation • Modular structures to produce modular goods create differentiation and simultaneously hold down costs

40. Balancing Mixed Objectives • Flexible manufacturing systems • Information networks • Total Quality Management (TQM) systems

41. Risks of Integrated Strategy • Failure to establish a leadership position can result in a firm being "stuck in the middle," unable to create value, and unable to earn above-average returns

42. Ethical Questions Can a commitment to ethical conduct on issues such as the environment, product quality, and fulfilling contractual agreements affect a firm’s competitive advantage? If so, how?

43. Ethical Questions Is there more incentive for differentiators or for cost leaders to pursue stronger ethical conduct?

44. Ethical Questions Can an overemphasis on cost leadership or differentiation lead to ethical challenges?

45. Ethical Questions A brand image can help differentiate goods or services. However, concerns exist about the effect of brand images on consumer behavior (for example, the effects of brand images managed by tobacco firms on teenage smoking). Should firms be concerned about how they form and use brand images? Why or why not?

46. Ethical Questions To what extent should a manager be concerned about the accuracy of the firm’s claims about its products in its advertisements?