Ch 4: Business-Level Strategy

1. Ch 4: Business-Level Strategy Junichi Yamanoi Chuo University Special Lecture (Strategy, Policy, and Planning) 6/14/12

2. What IS the 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.

3. Sector, Industry, and Market • Example 1 • Example 2 • Sector:Media / entertainment • Industry: Video rental • Market: Mass commercial • Companies: Blockbuster, Hollywood Video, etc. • Sector:Media / entertainment • Industry: Filmed entertainment • Market: Short-term rental • Companies: Blockbuster, Hollywood Video, etc.

4. Business-Level Strategy: Southwest

5. Three Dimensions of Firms’ Relationships with Customers • Firms must manage all aspects of their relationship with customers. • Reach: firm’s access and connection to customers (e.g., Amazon vs. Barnes & Noble). • Richness: depth and detail of two-way flow of information between the firm and customers (e.g., Amazon’s review system). • Affiliation: facilitation of useful interactions with customers (e.g., Amazon’s recommendation system).

6. Three Important Decisions of Business-Level Strategy: Who Will Be Served? • Market segmentation: Dividing customers into groups based on their needs. • 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 2. Product segments 3. Geographic segments 4. Common buying factor segments 5. Customer size segments

7. Three Important Decisions of Business-Level Strategy: What Do Customers Need? • 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. • Value can be delivered by providing low cost or differentiated features. • Low cost with acceptable features versus differentiated features with acceptable cost.

8. Three Important Decisions of Business-Level Strategy: How Are the Customer Needs Satisfied? • 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.

9. Five Generic Business-Level Strategies

10. Generic Strategies • Cost Leadership Strategy -Providing goods/services at the LOWEST cost. • Differentiation Strategy -Providing goods/services in DIFFERENT ways from rivals. • Focus Strategies -Focused Cost Leadership Strategy -Focused Differentiation Strategy • Integrated Cost Leadership/Differentiation Strategy

11. Cost Leadership Strategy • Integrated set of actions taken to produce goods/services with features that are acceptable to customers at the lowest cost, relative to that of competitors: • Relatively standardized products. • Features acceptable to many customers. • Lowest competitive price. • Achieving lowest overall activity costs to compete on price (value) of standardized products offered to the broadest market segment (“typical customer”).

12. Cost Leadership Strategy • Which firms are adopting this strategy? • Automobiles? - • General Merchandisers? - • Hotels? -

13. Cost Leadership Strategy: Value Chain

14. Cost Leadership Strategy: Five Forces New Entrants • 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 curve. Suppliers • Can mitigate suppliers’ power by being able to: • Absorb cost increases due to low cost position. • Make very large purchases, reducing chance of supplier using power.

15. Cost Leadership Strategy:Suppliers of Wal-Mart

16. Cost Leadership Strategy: Five Forces Buyers • Can mitigate buyers’ power by: • Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm. 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.

17. Cost Leadership Strategy: Five Forces Competitors • Due to cost leader’s advantageous position: • Rivals hesitate to compete on basis of price. • Lack of price competition leads to greater profits.

18. Cost Leadership Strategy: Risks • Processes used to produce and distribute a good or service may become obsolete due to competitors’ innovations. • Focus on cost reductions may occur at the expense of customers’ perceptions of differentiation. • Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy.

19. Differentiation Strategy • Integrated set of actions taken to produce goods or services that customers perceive as being unique/different in ways that are important to them. • Non-standardized products. • Customers value differentiated features more than they value low cost. • Price charged for differentiated product must exceed cost of differentiation. • Focus is on innovation related to product features and uniqueness rather than on lowest competitive price. • Differentiate products/services on many dimensions.

20. Differentiation Strategy • Which firms are adopting this strategy? • Automobiles? - • General merchandisers? - • Hotels? -

21. Differentiation Strategy • Sustaining success with differentiation requires ongoing upgrades and innovations without cost increases. • Companies using a differentiation strategy must maintain a competitive parity on cost. • Sources of Differentiation Strategy -Superior quality, more responsive customer service, rapid product innovation, advanced technological features, engineering design…. -Social connections, emotional attachment….

22. Differentiation Strategy: Value Chain

23. Differentiation Strategy: Five Forces New Entrants • 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. Suppliers • Can mitigate suppliers’ power by: • Absorbing price increases due to higher margins. • Passing along higher supplier prices because buyers are loyal to differentiated brand.

24. Differentiation Strategy: Five Forces Buyers • Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases. Substitutes • Well positioned relative to substitutes because: • Brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands. Competitors • Defends against competitors because brand loyalty to differentiated product offsets price competition.

25. Differentiation Strategy: 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.

26. Focus Strategies • Focus Strategy • An action plan to produce goods or services to serve the needs of a specific market segment. • Focused Cost Leadership Strategy • An action plan to produce goods or services for a narrow market segment at the lowest cost. • Focused Differentiation Strategy • An action plan to produce goods or services that a narrow group of customers perceive as being unique in ways that are important to them.

27. Focus Strategies: Benefits • Large firms may overlook small niches. • Flying under the radar screen of incumbents. • Firms may lack the resources needed to compete in the broader market. • Firms are 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.

28. Focus Strategies: Risks • A competitor may learn how to “outfocus” the focusing firm. • A company serving the broad target market may decide that the target market being served by the focusing firm is attractive. • The needs of the narrow target customer may change and become very similar to those of the broad market.

29. Integrated Cost Leadership/Differentiation Strategy • Integrated Cost Leadership/Differentiation Strategy • An action plan to produce goods or services with strong emphasis on both differentiation and low cost. • Products have differentiated features (but not as many as offered by firms using the differentiation strategy) • Products are also produced at a low cost (but not at a cost as low as those of the firm using the cost leadership strategy). • The risk of using the integrated cost leadership/ differentiation strategy is becoming “stuck in the middle.”

30. Group Work • Let’s analyze Google’s business-level strategy. • What is Google’s main business? Which companies areGoogle’s competitors? • What is Google’sgeneric strategy? How does it work relative to the competitors?

31. Take-Home Messages • Five generic strategies: Cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation strategies. • Each strategy has benefits and risks. • The effectiveness of the strategy depends on the firm’s core competencies and environment.

32. Sample Questions for Writing Assignments • Choose a firm. What is the generic strategy of the firm? Considering the firm’s performance relative to its competitors, do you think that the generic strategy is effective? Why or why not? Please mention the firm’s core competencies in your answer. • Choose two firms in the same industry. Identify their generic strategies. Are their generic strategies same or different? Which firm’s performance is better? Can you explain the difference in firm performance based on their generic strategies?