Business-Level Strategy

1. Business-Level Strategy

2. 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

3. 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

4. Five Generic Strategies Competitive Advantage Cost Uniqueness Cost Leadership Differentiation Broad target Integrated Cost Leadership/ Differentiation Competitive Scope Narrow target Focused Cost Leadership Focused Differentiation

5. 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

6. 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

7. 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?

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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”

26. 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

27. Major Risks of Focused Strategies • Firm may be “outfocused” by competitors • Large competitor may set its sights on your niche market • Preferences of niche market may change to match those of broad market

28. Advantages of Integrated 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

29. Benefits of Integrated Strategy • Successful firms using this strategy have above-average returns • Firm offers two types of values to customers • some differentiated features (but less than a true differentiated firm) • relatively low cost (but now as low as the cost leader’s price)

30. Major Risks of Integrated Strategy • An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) • The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy