Competing for ADVANTAGE CREATING COMPETITIVE ADVANTAGE 1 The

Competing for ADVANTAGE CREATING COMPETITIVE ADVANTAGE 1

The Strategic Management Process

Business-Level Strategy � Key Terms � Business-level strategy Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

Five Elements of Strategy

Types of Business-Level Strategy

Business-Level Strategy Dimensions � Competitive advantage �Superior � value Competitive scope �Target market

Competitive Advantage Dimension � Low Cost �Efficiency � Differentiation �Distinctiveness � Integration �Combined approach

Competitive Scope Dimension � Broad market �Industry-wide � customer base Narrow market �Niche customer base �Focus strategies

Serving Customers � Who will be served - market segmentation � What customer needs will be satisfied - low cost vs. differentiation � How those needs will be satisfied - core competencies

Who: Determining the Customers to Serve � Key Terms � Market segmentation Process of clustering people with similar needs into individual and identifiable groups to determine which customer segments to target

Basis for Customer Segmentation

Strategy and Structure � Key Terms � Organizational structure Specifies the firm's formal reporting relationships, procedures, controls, and authority and decision-making processes

Strategy and Structure � Key Terms (cont. ) � Simple structure Structure in which the owner-manager makes all major decisions and monitors all activities while the staff serves as an extension of the manager's supervisory authority � Functional structure Structure consisting of a chief executive officer and a limited corporate staff, with functional line managers in dominant organizational areas � Multidivisional structure Structure consisting of operating divisions, each representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategy to division managers

Cost Leadership Strategy � Key Terms � Cost leadership strategy Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

Cost Leadership Strategy – Implementation No-frills, standardized goods � Acceptable qualities and features � Emphasis on production efficiency � Continuously reduce costs of value chain activities �

Value-Creating Activities Associated with the Cost Leadership Strategy

Cost Leadership Strategy and the Five Forces of Competition � � � Low cost position is a valuable defense against rivals. Powerful customers can demand reduced prices. Costs leaders can absorb supplier price increases or force suppliers to hold down their prices. Ever-improving levels of efficiency and cost reduction can be difficult to replicate and serve as a significant entry barrier. Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers.

Using the Functional Organizational Structure to Implement Strategy � Specialization � Centralization � Formalization

Functional Structure for the Cost Leadership Strategy

Functional Structure for the Cost Leadership Strategy �Simple reporting relationships �Few decision-making and authority layers �Centralized corporate staff �Strong operational focus on process improvements �Low-cost culture �Centralized staff decision-making authority �Job specialization �Highly formalized rules and procedures

Competitive Risks of Cost Leadership Strategy �Processes can become obsolete �Focus on cost reductions can be at the expense of understanding customer perceptions and needs �Strategy �Cost can be imitated leaders can cut prices too low

Differentiation Strategy � Key Terms � Differentiation strategy 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

Differentiation Strategy – Implementation � � Target customers who perceive and value differentiated features Customize products, differentiating on as many features as possible

Ways to Differentiate � � Unusual features � Responsive customer service Rapid product innovations Technological leadership � � � Perceived prestige and status Different tastes Engineering design Performance

Value-Creating Activities Associated with the Differentiation Strategy

Differentiation Strategy and the Five Forces of Competition � � � Customer loyalty provides the most valuable defense against rivals. Uniqueness reduces customer sensitivity to higher prices. High margins can absorb high supplier costs or price increases can be passed on to willing customers. Customer loyalty and product uniqueness serve as significant entry barriers. Firms with customers loyal to their products are positioned effectively against product substitutes.

Functional Structure for the Differentiation Strategy

Functional Structure for the Differentiation Strategy � � � � Complex and flexible reporting relationships Cross-functional product development teams Strong focus on marketing and product R&D Development-oriented culture De-centralized decision-making authority Broad job descriptions Informal rules and procedures

Competitive Risks of Differentiation Strategy �Price differential seen as too large �Differentiation no longer provides value for which customers will pay �Narrowing perceptions of the value of differentiated features �Counterfeiting

Focus Strategy � Key Terms � Focus strategy Integrated set of actions designed to produce or deliver goods or services to satisfy the specific needs of a particular competitive segment

Specific Market Segments � Buyer group � Product line segment � Geographic market

Focus Strategy Drivers � � Large firms may overlook or poorly serve small niches. Firms may lack resources to compete in the broader market. Niche firms may be able to better satisfy the specialized needs of a narrow market segment. Focus may allow the firm to direct resources to certain value chain activities that deliver a competitive advantage.

Focus Strategies � Focused Cost Leadership Strategy � Focused Differentiation Strategy

Simple Structure for the Focus Strategy A simple structure is appropriate for focus strategies for firms offering a single product line in a single geographic market.

Functional Structure for the Focus Strategy A functional structure is appropriate for focus strategies for firms that have grown and expanded beyond offering a single product line in a single geographic market.

Competitive Risks of Focus Strategy �Being “outfocused” �Entry of large industry-wide companies into an attractive market segment �Merging of niche customer needs with those of the broader industry

Integrated Cost Leadership/ Differentiation Strategy � Key Terms � Integrated cost leadership/differentiation strategy 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

Integration Strategy Advantages � � � Quick adaptation to environmental changes Quick learning of new skills and technologies Efficient leveraging of core competencies

Integration Strategy Difficulties � � The integration strategy is difficult to implement. Difficulty stems from the need to emphasize and balance different value chain activities and support functions to succeed.

Flexible Structure for the Integration Strategy �Commitment �Flexible �Partial �Less to strategic flexibility decision-making patterns centralization structured jobs �Sensitivity �Modular to balance of objectives structures

Tools for Strategic Flexibility � � � Flexible manufacturing systems Information networks Total quality management (TQM) systems

Flexible Manufacturing Systems � � � Computer controlled Capable of producing multiple products in moderate, flexible quantities with minimal manual intervention Enable quick and easy product adjustments Increase the flexibility of resources needed to produce differentiated products at low costs Allow quick response to changes in customer needs, while retaining low costs and consistent quality

Information Networks � Facilitate efforts to satisfy quality and speed expectations of customers � Include Customer Relationship Management systems � Include Enterprise Resource Planning systems

Total Quality Management Systems � Focus on doing things right through increased efficiency � Incorporate customer definitions of quality � Guide the firm to the root causes of problems � Customized to fit the firm’s resources and the external environmental context

Competitive Risks of Integration Strategy � Failure to establish a leadership position can result in a firm being "stuck in the middle" and unable to create value or earn above-average returns.

ETHICAL QUESTION Can a commitment to ethical conduct on issues such as the environment, product quality, and fulfilling contractual agreements affect a firm’s competitive advantage? If so, how?

ETHICAL QUESTION Is there more incentive for differentiators or cost leaders to pursue stronger ethical conduct?

ETHICAL QUESTION Can an overemphasis on cost leadership or differentiation lead to ethical challenges?

ETHICAL QUESTION Creating brand image is one way a firm can differentiate its good or service. However, many questions are now being raised about the effect brand images have on consumer behavior. For example, considerable concern has arisen about brand images that are managed by tobacco firms and their effect on the smoking habits of teenagers. Should firms be concerned about how they form and use brand images? Why or why not?

ETHICAL QUESTION To what extent should an individual manager be concerned about the accuracy of the claims the company makes about its products in its advertisements?