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
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 Core Competencies and
Strategy
The resources and capabilities that have
Core been determined to be a source of
competencies competitive advantage for a firm over its
rivals

An integrated and coordinated set of

Strategy actions taken to exploit core competencies
and gain a competitive advantage

Actions taken to provide value to customers

Business-level and gain a competitive advantage by
strategy exploiting core competencies in specific,
individual product markets
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 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)

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 Recall our value
creation model

Costs
Costs represent
represent
specific
specific investment
investment
choices
choices that
that
generate
generate value
value
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Broad
Broad or
or narrow
narrow scope?
scope?
Consumer Markets
Demographic

Per. Dem. Socioeconomic

Geographic
Consumer
Con. Soc. Psychological
Markets
Psy. Geo. Consumption patterns

Perceptual factors

Implications
Implications for
for configuration
configuration of
of
value chain??5
Broad
Broad or
or narrow
narrow scope?
scope?
Business Markets
End-use

Product segments Size End

Geog segments Industrial

Common buying factors
MarketsPro.
Buy.

Customer size segments Geo.

Implications
Implications for
for configuration
configuration of
of
value chain??6
 Source of competitive
advantage - Value chains

• Strategies create differences between the firm’s

position and its rivals
• Sources of differences? - perform activities
differently; perform different activities
• Two value-adding configurations (Porter, 1985)
– Low cost
– Differentiated

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Comparing Scope and Source
of Advantage
Competitive Advantage
Cost Uniqueness

Cost Leader Differentiator

Competitive Scope
Broad
target
Integrated
Cost
Leader/
Differentiator
Narrow
target

Focused Focused
Cost Differentiator
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 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

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

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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)

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 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

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 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

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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 firm’s target
customers are willing to pay
– Non-commodity products
– customers value differentiated features
more than they value low cost

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Some Differentiation Themes

• Unique taste
– Dr. Pepper
• Multiple features
– Microsoft Windows and Office
• Wide selection and one-stop shopping
– Home Depot and Amazon.com
• Reliable, superior service
– FedEx, Ritz-Carlton
• Spare parts availability
– Caterpillar

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 Themes
• Prestige
– Rolex
• Quality manufacturing, few defects
– Honda, Toyota
• Technological leadership
– 3M Corporation, Intel
• Top-of-the-line image
– Ralph Lauren, Kiton

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Differentiation Strategy

• Add downstream value

– lower buyer cost
– raise buyer performance
• Cost
– Add value to buyer’s value: reduce
downstream processing time, search time,
transaction costs, defect rates, direct costs,
learning curves, labor, space, installation,
etc. (e.g., CRM software)
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 Factors That Drive
Differentiation
Value: Increase performance of buyer’s
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

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 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

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 Firm Superior MIS —To integrate Facilities that Widely respected
infrastructure value-creating activities to promote firm CEO enhances
improve quality image firm reputation
Programs to attract talented Provide training and
Human resource engineers and scientists incentives to ensure a strong
management customer service orientation
Superior material handling Excellent applications
Technology and sorting technology engineering support
development

Purchase of high -quality Use of most prestigious outlets

Procurement components to enhance
product image

Superior Flexibility Accurate and Creative Rapid response

material and speed in responsive and to customer
handling responding order innovative service
operations to changes processing advertising requests
to minimize in manu- programs
damage facturing Effective Complete
specs product Fostering inventory of
Quick replenish - of personal replacement
transfer of Low defect ment to relation - parts and
inputs to rates to reduce ship with supplies
manufactur - improve customer’s key
ing process quality inventory customers
Value-Chain example:
Differentiation Inbound Operations Outbound Marketing Service 23
logistics logistics and sales
 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

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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

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 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”

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 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
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 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

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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

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 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)

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 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
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 Summary:
Summary: Industry
Industry and
and Firm
Firm
Effects
Effects on
on Profit
Profit
Patents
Brands
Barriers to Entry
Retaliatory
capability
Industry
Attractiveness Rivalry Substitutability

Rate of Profit Firm size

Vertical Power Financial resources
in Excess of the
(buyer/seller)
Competitive Level
Process technology
Cost Plant size
Advantage Low-cost inputs
Competitive
Advantage Brands
Differentiation Product technology
Advantage Marketing
capabilities
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