Business-Level Strategy

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
Core
competencies
The resources and capabilities that have
been determined to be a source of
competitive advantage for a firm over its
rivals
Strategy
An integrated and coordinated set of
actions taken to exploit core competencies
and gain a competitive advantage
Business-level
strategy
Actions taken to provide value to customers
and gain a competitive advantage by
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 represent
specific investment
choices that
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generate value
Broad or narrow scope?
Consumer Markets
Demographic
Per.
Dem.
Consumer
Con.
Soc.
Markets
Psy.
Geo.
Socioeconomic
Geographic
Psychological
Consumption patterns
Perceptual factors
Implications for configuration of
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value chain??
Broad or narrow scope?
Business Markets
End-use
Product segments
Size
End
Common buying factors
Industrial
MarketsPro.
Buy.
Customer size segments
Geo.
Geog segments
Implications for configuration of
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value chain??
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
Broad
target
Narrow
target
Competitive Scope
Cost
Cost Leader
Uniqueness
Differentiator
Integrated
Cost
Leader/
Differentiator
Focused
Cost
Focused
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
 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
Implications?
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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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Value-Chain example:
Differentiation
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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: Industry and Firm
Effects on Profit
Barriers to Entry
Industry
Attractiveness
Rate of Profit
in Excess of the
Competitive Level
Rivalry
Vertical Power
(buyer/seller)
Patents
Brands
Retaliatory
capability
Substitutability
Firm size
Financial resources
Cost
Advantage
Process technology
Plant size
Low-cost inputs
Differentiation
Advantage
Brands
Product technology
Marketing
capabilities
Competitive
Advantage
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