Chapter 4: Business-Level Strategy

1. Chapter 4: Business-Level Strategy • Overview: • Defining business-level strategy • Risks of business-level strategies • Differences in business-level strategies • 5-Forces • Relationship between customers and strategy

2. Introduction • Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives. • Choices dictated by • External environment (O and T) • Internal resources, capabilities and core competencies (S and W) • 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/industry • How we intend to compete in a specific industry

3. Business-Level Strategies • Purpose: To create differences between position of a firm and its competitors • Firm must make a deliberate choice to • Perform activities differently • Perform different activities • Impacts how value chain activities will be performed to create unique value • No strategy better than others • Contingent on internal and external environment

4. Business-Level Strategies • Two types of competitive advantage firms must choose between • Cost (Are our costs LOWER than rivals costs?) • Uniqueness (Are we DIFFERENT than rivals?) • Two types of ‘competitive scope’ firms must choose between • Broad target • Narrow target • These combine to yield 5 different generic business level strategies • Can potentially be used by any organization competing in any industry

5. Five Business-Level Strategies

6. Types of Business-Level Strategies • Cost Leadership Strategy • Competitive advantage: THE low-cost leader and operates with margins greater than competitors • Competitive scope: Broad • 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 • No-frills, standardized or commodity-like product • Must have competitive levels of quality, service, and other features and lowest overall costs • Continuously reduce the costs / increase the efficiency of value chain activities

7. Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

8. Types of Business-Level Strategies • Cost Leadership Strategy • In relationship to the 5 Forces: • Existing Rivalry • Rivals hesitate to compete on the basis of price • Bargaining Power of Buyers (Customers) • Powerful buyers can force cost leader to reduce prices up to a point • Bargaining Power of Suppliers • Cost leaders can absorb suppliers price increases • Potential Entrants • Efficiency can serve as a barrier to entry • Product Substitutes • Can reduce prices when faced with substitutes • Thus built in defense against all 5 forces

9. Types of Business-Level Strategies • Cost Leadership Strategy • Competitive Risks • Innovations by competitors can quickly eliminate cost advantage • Too much focus on cost reduction versus competitive levels of differentiation • Competitors may learn how to successfully imitate a cost leader’s strategy

10. Types of Business-Level Strategies • Differentiation • Competitive advantage: Differentiation/uniqueness • Competitive scope: Broad • 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/unique in ways that are important to them • Targeted customers perceive product value • Customized products – differentiating on as many features as possible • Can differentiate in many ways and in many value chain areas

11. Examples of Value-Creating Activities Associated with the Differentiation Strategy

12. Types of Business-Level Strategies • Differentiation • In relationship to the 5 Forces: • Existing Rivalry • Customers are loyal purchasers of differentiated products • Bargaining Power of Buyers (Customers) • Uniqueness and loyalty reduces customer’s sensitivity to price increases • Bargaining Power of Suppliers • Provide high quality components, driving up firm’s costs • Cost may be passed on to customer • Potential Entrants • Substantial barriers (see above) and would require significant resource investment • Product Substitutes • Customer loyalty effectively positions firm against product substitutes

13. Types of Business-Level Strategies • Differentiation • Risks • Can charge too high of a price premium • Differentiation theme no longer valuable to customers • Over-differentiating • Customer experience shows differentiation not worth the cost • Counterfeiting

14. Types of Business-Level Strategies • Focus strategies • Competitive advantage: Cost Leadership or Differentiation • Competitive scope: Narrow • An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment • Attractive when: • Firm lacks resources to compete in the broader market • Firm may be able to more effectively serve a narrow market segment than larger industry-wide competitors • Niche is attractive • Large firms may overlook small niches

15. Types of Business-Level Strategies • Focus strategy examples • Buyer groups • Youths/senior citizens • Product line segments • Professional painter groups • Geographic markets • West vs. East coast

16. Types of Business-Level Strategies • Focused Cost Leadership • Competitive advantage: Low-cost • Competitive scope: Narrow industry segment • Motel 6, Kia • Focused Differentiation • Competitive advantage: Differentiation • Competitive scope: Narrow industry segment • Ritz-Carlton, Apple, Rolls Royce

17. Types of Business-Level Strategies • Focus strategies • Risks • Same basic risks as broad cost leadership or broad differentiation plus: • 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 • Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

18. Types of Business-Level Strategies • Integrated Cost Leadership/Differentiation • Efficiently produce products with differentiated attributes • Efficiency: Sources of low cost • Differentiation: Source of unique value • Involves engaging in primary and support activities that allow a firm to simultaneously pursue low cost and differentiation • Low price with somewhat highly differentiated features • More value for the money • Often called best-cost strategy • Examples: Toyota, Target

19. Types of Business-Level Strategies • Integrated Cost Leadership/Differentiation • Risks of Integrated Strategies • Harder to implement than other strategies • Must simultaneously reduce costs while increasing differentiation • Can get ‘stuck in the middle’ resulting in no advantages and poor performance

20. Other Business-Level Strategies • Strategic Alliances and Partnerships (Chapter 9) • Mergers and Acquisitions (Chapter 7) • Vertical Integration (Chapter 6) • Outsourcing (Chapter 3) • Offensive and Defensive Strategies (Chapter 5) • First-Mover Advantages and Disadvantages (Chapter 5)

21. Customers and their Relationship with Business-Level Strategies • Strategic competitiveness results when firm can satisfy customers by using its competitive advantages • Five components in customer relationships • Effectively managing relationships w/ customers • Deliver superior value and build customer loyalty • Reach, richness and affiliation • Access and connection to customers, depth and detail of information, and facilitating interactions with customers • Who: Determining the customers to serve • What: Determining which customer needs to satisfy • How: Determining core competencies necessary to satisfy customer needs