Chapter 4 Businesslevel Strategies Diane M Sullivan Ph

The Strategic Management Process p After collecting information about the internal and external environment, firms can select their business-level strategy Insert figure 1. 1 graphic

Business-level Strategy p Definition: integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets p In selecting a business-level strategy, a firm must determine n Who are the customer groups to be served n What needs those customers have that the firm seeks to satisfy n How those needs can be satisfied (e. g. , can the firm use core competencies to satisfy customer needs)

Five Business-level Strategies

Cost Leadership Strategy p Definition: 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 p Using a cost leadership strategy, a firm p n Produces no-frills, standardized products for typical customers n Focuses on efficiency so costs are lower than competitors’ costs n Generally offers lower cost products with competitive levels of differentiation Examples: Big Lots Inc. , Wal-Mart

Value Creating Activities Common to a Cost Leadership Business-Level Strategy Simplified Planning Practices to Reduce Planning Costs G IN Frequent Evaluation Processes to Monitor Suppliers’ Performances Policy Choice of Plant Technology Efficient Order Sizes Organizational Learning Interrelationships with Sister Units Primary Activities Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls IN Efficient Plant Delivery Schedule Scale to Minimize that Reduces Highly Efficient Manufacturing Costs Systems to Link Costs Suppliers’ Selection of Low Products with the Timing of Asset Cost Transport Firm’s Production Purchases Carriers Processes Located in Close Proximity with Suppliers R Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes G Systems and Procedures to find the Lowest Cost Producers to Purchase Raw Materials A R Easy-to-Use Manufacturing Technologies M Effective Training Programs to Improve Worker Efficiency and Effectiveness National Scale Advertising A Consistent Policies to Reduce Turnover Costs Relatively Few Management Layers to Reduce Overhead M Support Activities Cost Effective MIS Systems

Risks of Cost Leadership Strategy p Competitive risks associated with the cost leadership strategy include n Cost reduction processes become obsolete due to competitor innovations n Cost reduction processes come at the expense of necessary levels of differentiation n The strategy is imitated too easily

Differentiation Strategy p Definition: 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 p Firms using differentiation strategy n Provide products with different, valued features sold at a premium price p p Hinges on customers valuing differentiated features more than they value low price n Firms should differentiate offerings on as many dimensions as possible n The less similarity to competitors’ products, the more buffered a firm is from competition Examples: Tiffany Jewelry, Apple, Lexus

Value Creating Activities Common to a Differentiation Business-Level Strategy A companywide emphasis on producing high quality products Compensation programs Extensive use of subjective intended to encourage worker rather than objective creativity and productivity performance measures Investments in technologies that will allow the firm to consistently produce highly differentiated products Rapid responses to customers unique manufacturing specifications Strong capability in basic research R G IN Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Primary Activities Extensive personal relationships with buyers Premium Pricing Complete field stocking of replacement parts IN Accurate and responsive order processing procedures Strong Coordination among functions in R&D, Marketing and Product Development G Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products A R Systems and procedures used to find the highest quality raw materials M A Coordination among R&D, product development and marketing Superior personnel training M Support Activities Highly Developed Information Systems to better understand customers’ purchasing preferences

Risks of Differentiation Strategy p Risks n Customers decide that differences between differentiated and cost leader’s product not worth a higher price n Competitors offer similar products at a lower cost n Too high a price premium n Counterfeiters offer a cheap “knockoff” of a differentiated good or service (e. g. , easily imitated) n Too much differentiation

Focus Strategies p Definition: The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment p Firms choose a focus strategy to serve the needs of a specific customer segment or industry segment n p Examples p A particular buyer group (such as youths or senior citizens) p A different segment of a product line (such as products for professional painters or the do-it-yourself group), or p A different geographic market (such as East or West in the U. S). 2 types of focus strategies: n Focused cost leadership strategy p n Example: IKEA Focused differentiation strategy p Example: Babies R Us

Risks of Focus Strategies p Competitive risks of focus strategies n A competitor is able to focus on an even more narrowly defined market segment n Industry-wide competitors decide to focus on specific customer segments—imitation n The differences are reduced between the needs of a specific market segment and those of the rest of the industry

Integrated Cost Leadership/Differentiation Strategy p Using this strategy, firms n n p Provide relatively low cost products with valued differentiated features Use primary and support activities to produce differentiated products at relatively low costs Risk of this strategy n A firm produces products that lack sufficient low cost or differentiation

Integrated Low Cost/Differentiation Strategy Southwest Airlines Low Cost Use a single aircraft model (Boeing 737) Use secondary airports Differentiation Focus on customer satisfaction Fly short routes High level of employee dedication No meals 25 minute turnaround time No reserved seats Focus on making the flying experience fun No travel agent reservations 14

Integrated Low Cost/Differentiation Strategy The Challenge: the integrated strategy is risky Potential Pitfalls • The firm may become “Stuck-in-the-Middle” lacking an expertise with either type of generic strategy • When a firm’s products are too expensive to compete with low cost producer and too undifferentiated to provide the value offered by the differentiated producer

Applying Chapters 3 & 4 to Cap. Sim l What capabilities does your strategy require? l What are the benefits & limitations of those capabilities? l What resources are required to develop those capabilities? l Can you obtain an economic payback from developing those capabilities? l Timing your Capabilities: – When will they be required? – How long to develop? – How temporal are they? l Capabilities & The Competition: – What capabilities do your competitors have? – What are they going to have? – What do they believe they have? – How will you counter them?

Broad Cost Leader l A broad cost leader will attempt to be the low-cost producer in every segment served l Strive for good profit margins on all sales while keeping prices low for pricesensitive customers. l Firm Profile: – Capacity improvements are unlikely to be undertaken (may run overtime instead) unless at 200% capacity – Pursue automation to increase margins in all segments (more automation in slower moving segments versus faster moving segments) – Low R&D spending, while still keeping pace with the market preferences – Low labor and material costs – Prices lower than average – Spends moderately on promotion and sales – Investments will be financed primarily via bonds and stock issues as needed – When cash allows, establish a dividend policy and begin to retire stock – Focus on Market Share, Profits, ROE and Stock Price

Cost Leader with Low-end Focus l A low-tech focused cost leader will seek to minimize costs through efficiency and expertise. l Products will be concentrated in the Traditional and Low-end segments l Firm Profile: l Multiple product lines in low-end segments (Traditional and Low-end) l Few or no products in other segments (allow products to migrate) l Low R&D spending, while still keeping reasonable pace with the market l Low labor and material costs l Invests in automation (only after products positioned into their “forever” segments) will help manage labor costs and make it most efficient to run a second shift (which is preferred to capacity expansions) l Prices will be lower than average l Spends moderately on promotion and sales l Investments will be financed primarily via bonds and stock issues as needed l When cash allows, establish a dividend policy and begin to retire stock l Focus on Stock Price, ROE, ROS, and Profits

Cost Leader with Product-life Cycle Focus l A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise l Products will be allowed to age and change in appeal from High End, to Traditional, and eventually Low End buyers (then they are retired) l Firm Profile: l Minimum presence in “specialty” segments (Size & Performance) l Low R&D spending (very little repositioning & new product every 2 years in high-end segment) l Low material costs l Low labor costs l Invests in automation early in the product’s life-cycle l Prices are lower than average l Spends moderately on promotion and sales l Investments financed through bonds and stock offerings as needed l When cash allows, establish a dividend policy and begin to retire stock l Focus on Stock Price, ROE, ROS and Profits

Broad Differentiator l A broad differentiator will seek to create maximum awareness and brand equity in every segment l It wants to be well known as a maker of high quality/highly desirable products l Firm Profile: l High R&D spending to keep products fresh and at pace with market l Maintains presence in all market segments l Capacity will be expanded as higher demand is generated, avoiding overtime l Modest investments in automation after products well positioned but never at expense of repositioning l Spends heavily on advertising and sales to create maximum awareness and accessibility l Prices are above average l Investments are financed via stock issues and cash from operations as well as bonds as needed l When cash allows, establish a dividend policy and begin to retire stock l Focus on Market Share, Profits, ROA and Stock Price

Differentiator with High-end Focus l A high-tech differentiator seeks to be known as the top producer of the best performing state-of-the-art products in the High-end, Performance and Size segments l Firm Profile: l Multiple product lines in high-tech segments (High-end, Performance, & Size) achieved via harvesting Traditional and Low-end products and new products l High promotion & sales investments to create maximum awareness & accessibility l High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market l Capacity will be expanded as higher demand is generated, avoiding overtime l Price is above average l Modest investments in automation after products well positioned but never at expense of repositioning l Investments are financed via stock issues and cash from operations and bonds as needed l When cash allows, establish a dividend policy and begin to retire stock l Focus on ROA, Asset Turnover, and ROS

Differentiator with Product Life-cycle Focus l A product life-cycle focused differentiator seeks to be known as the top producer of the best performing state-of-the-art products in High-end, Traditional & Low-end segments l Products will be repositioned into the segments, allowed to drift into the appropriate segments and/or newly created into the segments l Firm Profile: l Minimum presence in Size & Performance segments (reposition them to Traditional) l High promotion and sales investments to create maximum awareness and accessibility l High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market l Price is above average l Capacity will be expanded as higher demand is generated, avoiding overtime l Modest investments in automation after products well positioned but never at expense of repositioning l Investments are financed via stock issues and cash from operations as well as bonds as needed l When cash allows, establish a dividend policy and begin to retire stock l Focus on Stock Price, ROS, Asset Turnover, and ROA

Integrated Strategy A broad cost leader will attempt to be the low-cost producer in every segment of the market. It will have good profit margins on all sales while keeping prices low for price-sensitive customers. l Firm Profile: l – More likely to reposition products than introduce new ones to the market – Capacity improvements are unlikely to be undertaken (may run overtime instead) – Automation may be pursued to increase margins – Investments will be financed with debt and/or stock issues – Tends to spend less on promotion and sales – Focus on Market Share, Profits, and Stock Price A broad differentiator will seek to create maximum awareness and brand equity. It wants to be well known as a maker of high quality/highly desirable products. l Firm Profile: l – High R&D spending to keep products fresh – Maintains a presence in all market segments – Spends heavily on advertising and sales to create maximum awareness and accessibility – Prices tend to be higher – Focus on Market Share, Profits, and Stock Price ACHIEVES BOTH

Cap. Sim Business-level Strategies: Investments & Tradeoffs Segments R&D & Marketing Automation & Capacity Cost Approaches Broad Cost Leader T, L, H, P, S Cost Leader with low-tech focus T and/or L with > 1 product in each segment Cost leader with product life-cycle focus H T L Below Avg. Invest Above Avg. Invest Differentiation Approaches Broad Differentiator T, L, H, P, S Differentiator with hightech focus H, P, and/or S with > 1 product in segment(s) Differentiator with product life-cycle focus H T L Above Avg. Invest Integrated Approaches Successful integrated ? ? ? Stuck-in-the-middle ? ? ? Below Avg. Invest