Chapter 5 Businesslevel Strategies 1 Learning Objectives To
Chapter 5 Business-level Strategies 1
Learning Objectives To understand: • generic competitive strategies and the way they are executed • the elements of a business model • how competitive dynamics influence industries and the companies they contain • the most common competitive tactics • strategies in an international context and over time 2
Strategic Management Process External and Internal Analysis Strategic Direction Strategy Formulation (corporate and business level) Strategy Implementation and Control Strategic Restructuring 3
Business-Level Strategy Formulation Responsibilities • Direction setting—Mission, vision, ethics, goals • Situation analysis—Compilation and assessment of information • Selection of strategies—Generic strategy (cost leadership, differentiation, best cost, focus) and competitive tactics, including growth strategy • Management of resources—Acquisition and/or development of resources leading to competitive advantage 4
Business-Level Strategies • Generic Strategies - how the firm intends to position itself to create value for its customers in ways that are different from those of competitors • Competitive Tactics - the competitive actions firms take to grow and increase the strength of or protect their competitive positions. 5
Generic Strategies Value propositions associated with generic competitive strategies Differentiation: Offer value to customers by providing them with a preferred product or service Low-cost leadership: Offer value to customers by providing them with a standard product or service produced at lower cost (and typically offered at a lower price) Best cost: A combination of the first two options. Note: these strategies assume that the firm is seeking a broad customer base. If the firm is pursuing a particular market segment it is using a “focus” strategy. 6
Differentiation Create value through some type of uniqueness, such as: • • • Product innovations Superior quality or service Creative advertising Speed and Flexibility Reputation and Brand Name Customers must be willing to pay more for the uniqueness • Added costs vs. incremental price 7
Low-Cost Leadership Common ways to pursue low-cost leadership: • Accurate demand forecasting and high capacity utilization • Economies of scale • Technological advances • Experience effects 8
Typical Experience Curve unit cost total cumulative output 9
Best Cost • Combination of low-cost leadership and differentiation • The reasons it works: ØThe same resources/activities that allow cost reductions may also allow differentiation. (e. g. , automation that lowers costs and improves speed and service) ØProfits from cost reductions may be used to invest in differentiating features, and vice versa 10
Focus • The firm serves the needs of a particular market segment • In combination with one of the other three generic strategies: Øfocus through differentiation Øfocus through low-cost leadership Øfocus through best cost 11
Business Models • Important elements: �Identifying market segments to be targeted �Determining unique sources of value for customers (differentiating features, low cost, or a balance) �Selecting unique features and technologies for products �Determining how to capture value, incl. pricing �Verifying sufficient demand exists • Decisions regarding assets: �Types of assets sold (physical, service, financial, intangible) �Rights given to consumers (complete transfer, distribution, temporary use, fee for matching buyers/sellers) 12
Defining a Business Model Market(s) Market segments targeted: • Broad market • Focus on a particular market segment or segments Assets Value Creation Value Capture Assets sold: • Physical products • Services • Financial assets • Intangible assets Unique sources of value: • Differentiation: unique features and technologies embedded in assets • Low cost: Basic products/services or assets at a low price • Best cost: high value to cost ratio Determination of approach for capturing revenues and profits (financial feasibility) Rights to assets provided: • Complete transfer • Distribution of assets created by others • Rights to use assets for a time • Broker (match buyers & sellers) Determination of demand for products, services, or other assets as defined and at a particular price 13
Competitive Tactics • Internal Growth Strategies �Market penetration �Market development �Product/service development �Vertical integration • External Growth Strategies �Alliances/joint ventures �Acquisitions �Horizontal integration 14
Competitive Tactics • Offensive Tactics �Aggressive Competition �First-Mover Advantages • Defensive Tactics �Threat of Retaliation �Barriers to Imitation • • Collaborative Tactics Political Tactics Avoidance (Blue Ocean) Tactics Strategic Flexibility 15
International Growth Tactics • Exporting • Licensing • Franchising • Joint Venture • Greenfield Venture Note: Moving down the list entails not only greater cost and financial risk, but also greater profit potential and control 16
Approach to International Markets • Multidomestic – custom tailoring products/services for individual international markets • Global – one product/service for the world • Transnational – a hybrid approach 17
The Industry Life Cycle A Growth B Unit Sales Volume Maturity C Introduction Commodity or Decline Time 18
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