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Business-Level Strategy

Business-Level Strategy

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Business-Level Strategy

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  1. Chapter 5 Business-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland ©2004 by South-Western/Thomson Learning

  2. The Strategic Management Process Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Thinking Chapter 3 The External Environment Chapter 4 The Internal Organization Strategic Intent Strategic Mission Strategic Analysis Chapter 5 Business-Level Strategy Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Creating Competitive Advantage Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship

  3. Discussion Questions • What role does the organization’s concern for customers play in shaping its strategy? • What is business level strategy? What are some types of business level strategy? • What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed? Click Here Click Here Click Here Click Here More discussion questions

  4. Discussion Questions (cont.) • How does establishing the cost leadership position deal with the five competitive forces? What are the risks of pursuing cost leadership? • What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed? • How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing differentiation? Click Here Click Here Click Here

  5. Discussion Questions (cont.) • When should a focus strategy be implemented? What are the risks of a focus strategy? • What is the integrated low-cost differentiation strategy? What are the arguments as to why it is increasing in importance? What are the risks associated with the integrated strategy? Click Here Click Here

  6. Discussion Question 1 What role does the organization’s concern for customers play in shaping its strategy?

  7. Managing Relationships With Customers • Customer relationships are strengthened by offering them superior value • help customers to develop a new competitive advantage • enhance the value of existing competitive advantages • Successful companies chart new competitive space in order to serve new customers as they simultaneously try to find new ways to better server existing customers

  8. Managing Relationships With Customers • Establish a competitive advantage along these dimensions: Reach • the firm’s access and connection to customers Richness • the depth and detail of the two-way flow of information between the firm and customers Affiliation • facilitating useful interactions with customers

  9. In selecting a business-level strategy, the firm determines 1. who it will serve 2. what needs those target customers have that it will satisfy 3. how those needs will be satisfied The Central Role of Customers

  10. Basis for Customer Segmentation Consumer Markets Industrial Markets Customers

  11. Dem. Per. Con. Soc. Geo. Psy. Market Segmentation: Consumer Markets Demographic factors Consumer Markets Socioeconomic factors Geographic factors Psychological factors Consumption patterns Perceptual factors

  12. End Size Buy. Pro. Geo. Market Segmentation: Industrial Markets End-use segments Industrial Markets Product segments Geographic segments Common buying factor segments Customer size segments Return to Discussion Questions Click Here

  13. Discussion Question 2 What is business level strategy? What are some types of business level strategy?

  14. Core competencies Strategy Business-level strategy Core Competencies and Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets

  15. Business-Level Strategy 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

  16. Key Issues of Business-Level Strategy • What good or service to offer customers • How to manufacture or create the good or service • How to distribute the good or service in the marketplace

  17. Types of Business-Level Strategies • Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals • To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

  18. Five Generic Strategies Competitive Advantage Cost Uniqueness Cost Leadership Differentiation Broad target Integrated Cost Leadership/ Differentiation Competitive Scope Narrow target Click Here Return to Discussion Questions Focused Cost Leadership Focused Differentiation

  19. Discussion Question 3 What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed?

  20. Cost Leadership Strategy An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers • relatively standardized products • features acceptable to many customers • lowest competitive price

  21. 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

  22. 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

  23. Factors That Drive Costs • Economies of scale • Asset utilization • Capacity utilization pattern • Seasonal, cyclical • Interrelationships • Order processing and distribution • Value chain linkages • Marketing & sales • Logistics & operations • Service • Product features • Performance • Mix & variety of products • Service levels • Small vs. large buyers • Process technology • Wage levels • Product features • Hiring, training, motivation

  24. Questions Leading to Lower Costs 1. How can an activity be performed differently or even eliminated? 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs? Return to Discussion Questions Click Here

  25. Discussion Question 4 How does establishing the cost leadership position deal with the five competitive forces? What are the risks of pursuing cost leadership?

  26. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Cost Leadership Strategy and the Five Forces of Competition • Rivalry Among Competing Firms Can use cost leadership strategy to advantage since: • competitors avoid price wars with cost leaders, creating higher profits for the entire industry

  27. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Cost Leadership Strategy and the Five Forces of Competition • Bargaining Power of Buyers Can mitigate buyers’ power by: • driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm

  28. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Cost Leadership Strategy and the Five Forces of Competition • Bargaining Power of 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

  29. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Cost Leadership Strategy and the Five Forces of Competition • Threat of 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

  30. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Cost Leadership Strategy and the Five Forces of Competition • Threat of Substitute Products 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

  31. Office of the President Centralized Staff Accounting Engineering Operations Marketing Personnel Structure for Cost Leadership Strategy • Operations is main function • Process engineering is emphasized over R&D • Large centralized staff • Formalized procedures • Structure is mechanical, job roles highly structured

  32. Return to Discussion Questions Click Here Risks of Cost Leadership Strategy • Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors’ innovations • Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers’ perceptions of “competitive levels of differentiation • Competitors may learn how to successfully imitate the cost leader’s strategy

  33. Discussion Question 5 What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed?

  34. Differentiation Strategy An 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 • price for product can exceed what the firm’s target customers are willing to pay • nonstandardized products • customers value differentiated features more than they value low cost

  35. Differentiation Strategy • Value provided by unique features and value characteristics • Command premium price • High customer service • Superior quality • Prestige or exclusivity • Rapid innovation

  36. Differentiation Strategy Differentiation actions required by this strategy: • developing new systems and processes • shaping perceptions through advertising • quality focus • capability in R&D • maximize human resource contributions through low turnover and high motivation

  37. 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

  38. Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information Extensive personal relationships with buyers and suppliers Factors That Drive Differentiation

  39. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Differentiation Strategy and the Five Forces of Competition • Rivalry Among Competing Firms Can defend against competition because: • brand loyalty to differentiated product offsets price competition Return to Discussion Questions Click Here

  40. Discussion Question 6 How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing differentiation?

  41. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Differentiation Strategy and the Five Forces of Competition • Bargaining Power of Buyers Can mitigate buyer power because: • well differentiated products reduce customer sensitivity to price increases

  42. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Differentiation Strategy and the Five Forces of Competition • Bargaining Power of 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

  43. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Differentiation Strategy and the Five Forces of Competition • Threat of New Entrants Can defend against new entrants because: • new products must surpass proven products or, • new products must be at least equal to performance of proven products, but offered at lower prices

  44. Five Forces of Competition Rivalry Among Competing Firms Threat of Substitute Products Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Differentiation Strategy and the Five Forces of Competition • Threat of Substitute Products Well positioned relative to substitutes because: • brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands

  45. President and Limited Staff Marketing R&D Operations Human Resources New Product R&D Finance Marketing Structure for Differentiation Strategy • Marketing is the main function for tracking new product ideas • New product R&D is emphasized • Most functions are decentralized • Formalization is limited to foster change and promote new ideas • Overall structure is organic; job roles are less structured

  46. Major Risks of Differentiation Strategy • Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large • Means of differentiation may cease to provide value for which customers are willing to pay

  47. Major Risks of Differentiation Strategy • Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products • Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products Return to Discussion Questions Click Here

  48. Discussion Question 7 When should a focus strategy be implemented? What are the risks of a focus strategy?

  49. Focused Business-Level Strategies A focus strategy must exploit a narrow target’s differences from the balance of the industry by: • isolating a particular buyer group • isolating a unique segment of a product line • concentrating on a particular geographic market • finding their “niche”

  50. Factors That May Drive Focused Strategies • Large firms may overlook small niches • Firm may lack resources to compete in the broader market • May be able to serve a narrow market segment more effectively than can larger industry-wide competitors • Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage