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
1

Core Competencies and Strategy

Core competencies 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

Strategy

Business-level strategy

Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets
2

Strategy
Fundamental constraints
Scope
What good or service to offer, to which customers

Value chain
How and where to create the good or service How to distribute the good or service in the marketplace(s)
3

creation model

Recall our value

Costs represent specific investment choices that 4 generate value

Broad or narrow scope?

Consumer Markets
Demographic

Per.

Dem.

Socioeconomic Geographic Psychological

Consumer Con. Soc. Markets

Psy. Geo.

Consumption patterns
Perceptual factors

Implications for configuration of 5 value chain??

Broad or narrow scope? Business Markets

End-use Product segments Geog segments Common buying factors Customer size segments Size

End

Industrial Markets Buy. Pro.

Geo.

Implications for configuration of 6 value chain??

Source of competitive advantage - Value chains

Strategies create differences between the firms position and its rivals Sources of differences? - perform activities differently; perform different activities Two value-adding configurations (Porter, 1985) Low cost Differentiated
7

Comparing Scope and Source of Advantage

Competitive Advantage
Cost Uniqueness
Differentiator

Competitive Scope

Broad target

Cost Leader

Integrated Cost Leader/ Differentiator

Narrow target

Focused Cost

Focused Differentiator
8

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
9

Cost Leadership Strategy

Cost saving actions required by this strategy: building efficient 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
10

Cost Drivers
Major Cost Drivers Economies of scale Learning/Spillovers Capacity utilization Integration Vertical Linkages Timing Location Political/regulatory Interrelationships (corporate)
Discretionary decisions Product features, performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation
11

Implications?

Value-Chain example: Cost Leader

12

Questions Leading to Lower Costs

1. How can an activity be performed differently, eliminated, externalized? 2. How can linked value activities be regrouped or reordered? 3. How can upstream/downstream collaboration lower costs?

13

Implementation Pitfalls
Exclusive focus on Mfg Misunderstand drivers (ABC useful) Failure to recognize/exploit linkages (e.g., across the board cost
reductions)

Contradictions

(e.g., gain mkt share through ES but allow product clutter; cross subsidies)
14

Cost Leadership and the Five Forces

Rivalry - competitors avoid price wars with cost leaders Buyers shift demand to you, increase market power Suppliers increased market power, absorb cost increases (low cost position) Entrants entry barriers (scale, learning) Substitutes reinvest econ profit to maintain advantage
15

Major Risks of Cost Leadership Strategy

There can only be one cost leader Technological change can eliminate cost advantage Spillovers lead to imitation Efficiency focus may create blind spots re: customer preferences

16

Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services that customers perceive as

adding value

price may exceed what the firms target customers are willing to pay Non-commodity products customers value differentiated features more than they value low cost
17

Some Differentiation Themes

Unique taste Multiple features
Dr. Pepper Microsoft Windows and Office

Wide selection and one-stop shopping

Reliable, superior service
Home Depot and Amazon.com FedEx, Ritz-Carlton Caterpillar

Spare parts availability

18

Themes
Prestige Quality manufacturing, few defects
Rolex Honda, Toyota

Technological leadership
Top-of-the-line image
Ralph Lauren, Kiton 3M Corporation, Intel

19

Differentiation Strategy
Add downstream value
lower buyer cost raise buyer performance

Cost
Add value to buyers value: reduce downstream processing time, search time, transaction costs, defect rates, direct costs, learning curves, labor, space, installation, etc. (e.g., CRM software)
20

Factors That Drive Differentiation

Value: Increase performance of buyers value chain (or consumer perception)
Unique features, performance Downstream channels (e.g., Catepillar dealer network) New technologies Quality of inputs Skill or know-how Information
21

Differentiation Strategy
Some differentiation actions required by this strategy: develop new systems and processes signal and shape buyer perceptions quality focus capability in R&D Implication - maximize human capital contributions
22

Value-Chain example: Differentiation

23

Differentiation and the Five Forces

Rivalry - brand loyalty to differentiated products reduces price competition Buyers differentiated products less price elastic Suppliers absorb price increases (higher margins), pass along higher prices (buyer loyalty) Entrants must surpass proven products or be equivalent at lower price Substitutes diff raises switching costs
24

Pitfalls of Differentiation Strategies

Differentiating on characteristics not valued by buyers (e.g., HP) Over-differentiating Price premium is too high Failing to signal value Focusing on product instead of entire value chain

25

Focused Business-Level Strategies

A focus strategy must exploit a narrow targets 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 Driving Focus Strategies

Large firms 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 leaders 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
31

Summary: Industry and Firm Effects on Profit

Barriers to Entry
Patents Brands Retaliatory capability Substitutability

Industry Attractiveness Rate of Profit in Excess of the Competitive Level

Rivalry Vertical Power (buyer/seller) Cost Advantage

Firm size Financial resources

Process technology Plant size Low-cost inputs Brands Product technology Marketing capabilities
32

Competitive Advantage
Differentiation Advantage