Chapter 5 BusinessLevel Strategy Robert E Hoskisson Michael

The Strategic Management Process Strategic Thinking Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Analysis Chapter 3 The External Environment Chapter 4 The Internal Organization Strategic Intent Strategic Mission Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship 2

Discussion Questions Click Here 1. Click Here 2. Click Here 3. Click Here What role does the organization’s concern for customers play in shaping its strategy? What is business level strategy? What are some types of business level strategy? What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed? More discussion questions 3

Discussion Questions (cont. ) Click Here 4. Click Here 5. Click Here 6. How does establishing the cost leadership position deal with the five competitive forces? What are the risks of pursuing cost leadership? What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed? How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing 4 differentiation?

Discussion Questions (cont. ) Click Here When should a focus strategy be implemented? What are the risks of a focus strategy? 8. What is the integrated low-cost differentiation strategy? What are the arguments as to why it is increasing in importance? What are the risks associated with the integrated strategy? 7. 5

Discussion Question 1 What role does the organization’s concern for customers play in shaping its strategy? 6

Managing Relationships With Customers l Customer relationships are strengthened by offering them superior value – help customers to develop a new competitive advantage – enhance the value of existing competitive advantages l Successful companies chart new competitive space in order to serve new customers as they simultaneously try to find new ways to better server existing customers 7

Managing Relationships With Customers Establish a competitive advantage along these dimensions: Reach l – the firm’s access and connection to customers Richness – the depth and detail of the two-way flow of information between the firm and customers Affiliation – facilitating useful interactions with customers 8

The Central Role of Customers In selecting a business-level strategy, the firm determines 1. who it will serve 2. what needs those target customers have that it will satisfy 3. how those needs will be satisfied 9

Basis for Customer Segmentation Consumer Markets Customers Industrial Markets 10

Market Segmentation: Consumer Markets Demographic factors Per. Dem. Consumer Con. Soc. Markets Psy. Geo. Socioeconomic factors Geographic factors Psychological factors Consumption patterns Perceptual factors 11

Market Segmentation: Industrial Markets End-use segments Product segments Geographic segments Common buying factor segments Customer size segments Click Here Return to Discussion Questions End Size Industrial Buy. Markets Pro. Geo. 12

Discussion Question 2 What is business level strategy? What are some types of business level strategy? 13

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 14

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 15

Key Issues of Business-Level Strategy What good or service to offer customers l How to manufacture or create the good or service l How to distribute the good or service in the marketplace l 16

Types of Business-Level Strategies Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals l To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals l 17

Five Generic Strategies Return to Discussion Questions Broad target Cost Uniqueness Cost Leadership Differentiation Integrated Cost Leadership/ Differentiation Narrow target Click Here Competitive Scope Competitive Advantage Focused Cost Leadership Focused Differentiation 18

Discussion Question 3 What type of customers are necessary to pursue a cost leadership strategy? How is a cost leadership strategy developed? 19

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 20

Cost Leadership Strategy Cost saving actions required by this strategy: – building efficient scale 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 21

How to Obtain a Cost Advantage Determine and control Cost Drivers • Alter production process • Change in automation • New distribution channel • New advertising media • Direct sales in place of indirect sales Reconfigure, if needed Value Chain • New raw material • Forward integration • Backward integration • Change location relative to suppliers or buyers 22

Factors That Drive Costs Economies of scale Asset utilization Capacity utilization pattern • Seasonal, cyclical l Interrelationships l Order processing and distribution l Value chain linkages • Marketing & sales • Logistics & operations • Service l l l Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation 23

Questions Leading to Lower Costs 1. How can an activity be performed differently or even eliminated? 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs? Click Here Return to Discussion Questions 24

Discussion Question 4 How does establishing the cost leadership position deal with the five competitive forces? What are the risks of pursuing cost leadership? 25

Cost Leadership Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Rivalry Among Competing Firms Can use cost leadership strategy to advantage since: l competitors avoid price wars with cost leaders, creating higher profits for the entire industry 26

Cost Leadership Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Bargaining Power of Buyers Can mitigate buyers’ power by: l driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm 27

Cost Leadership Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: l being able to absorb cost increases due to low cost position l being able to make very large purchases, reducing chance of supplier using power 28

Cost Leadership Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Threat of New Entrants Can frighten off new entrants due to: l their need to enter on a large scale in order to be cost competitive l the time it takes to move down the learning curve 29

Cost Leadership Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Threat of Substitute Products Cost leader is well positioned to: l make investments to be first to create substitutes l buy patents developed by potential substitutes l lower prices in order to maintain value position 30

Structure for Cost Leadership Strategy • Operations is main function • Process engineering is Office of the President emphasized over R&D • Large centralized staff • Formalized procedures • Structure is mechanical, job roles highly structured Engineering Centralized Staff Accounting Operations Marketing Personnel 31

Click Here Return to Discussion Questions Risks of Cost Leadership Strategy Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors’ innovations l Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers’ perceptions of “competitive levels of differentiation l Competitors may learn how to successfully imitate the cost leader’s strategy l 32

Discussion Question 5 What type of customers are necessary to pursue a differentiation strategy? How is a differentiation strategy developed? 33

Differentiation Strategy An 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 – price for product can exceed what the firm’s target customers are willing to pay – nonstandardized products – customers value differentiated features more than they value low cost 34

Differentiation Strategy l l l Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation 35

Differentiation Strategy Differentiation actions required by this strategy: – developing new systems and processes – shaping perceptions through advertising – quality focus – capability in R&D – maximize human resource contributions through low turnover and high motivation 36

How to Obtain a Differentiation Advantage Control if needed Reconfigure to maximize Cost Drivers Value Chain • Lower buyers’ costs • Raise performance of product or service • Create sustainability through: customer perceptions of uniqueness customer reluctance to switch to non-unique product 37

Factors That Drive Differentiation l l l l Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information Extensive personal relationships with buyers and suppliers 38

Differentiation Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Click Here Rivalry Among Competing Firms Can defend against competition because: l brand loyalty to differentiated product offsets price competition Return to Discussion Questions 39

Discussion Question 6 How does establishing differentiation help a firm fend off threats from the five forces? What are the risks of pursuing differentiation? 40

Differentiation Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Buyers Can mitigate buyer power because: l well differentiated products reduce customer sensitivity to price increases Bargaining Power of Suppliers 41

Differentiation Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: l absorbing price increases due to higher margins l passing along higher supplier prices because buyers are loyal to differentiated brand 42

Differentiation Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Threat of New Entrants Can defend against new entrants because: l new products must surpass proven products or, l new products must be at least equal to performance of proven products, but offered at lower prices 43

Differentiation Strategy and the Five Forces of Competition R Co ival mp ry eti Am ng on Fi g rm s Barg ainin of B g Power uyer s s of uct t d a re Pro h T ute t sti b Su w f Ne e at o Th r trants En Five Forces of Competition Bargaining Power of Suppliers Threat of Substitute Products Well positioned relative to substitutes because: l brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands 44

Structure for Differentiation Strategy President and Limited Staff R&D New Product R&D Marketing Operations Finance Human Resources • Marketing is the main function for tracking new product ideas • New product R&D is emphasized • Most functions are decentralized • Formalization is limited to foster change and promote new ideas • Overall structure is organic; job roles are less structured 45

Major Risks of Differentiation Strategy Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large l Means of differentiation may cease to provide value for which customers are willing to pay l 46

Major Risks of Differentiation Strategy Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products l Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products l Click Here Return to Discussion Questions 47

Discussion Question 7 When should a focus strategy be implemented? What are the risks of a focus strategy? 48

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” 49

Factors That May Drive Focused Strategies Large firms may overlook small niches l Firm may lack resources to compete in the broader market l May be able to serve a narrow market segment more effectively than can larger industry-wide competitors l Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage l 50

Major Risks of Focused Strategies Firm may be “outfocused” by competitors l Large competitor may set its sights on your niche market l Preferences of niche market may change to match those of broad market l Click Here Return to Discussion Questions 51

Discussion Question 8 What is the integrated low-cost differentiation strategy? What are the arguments as to why it is increasing in importance? What are the risks associated with the integrated strategy? 52

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 53

Benefits of Integrated Strategy Successful firms using this strategy have above-average returns l 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) l 54

Using the Functional Structure l The integrated form of the functional structure – must have decision-making patterns that are partially centralized and partially decentralized – will have semi-specialized jobs and rules and procedures that call for some formal and some informal job behavior l Strategic flexibility is obtained via – flexible manufacturing systems – information networks – total quality management systems 55

Major Risks of Integrated Strategy An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) l 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 l 56