Core Competency Strategy Business Level Strategy Transparency 4
Core Competency Strategy Business Level Strategy Transparency 4 -1 The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets.
Generic Business Level Strategies Source of Competitive Advantage Breadth of Competitive Scope Broad Target Market Narrow Target Market Transparency 4 -2 Cost Uniqueness Cost Leadership Differentiation Focused Low Cost Focused Differentiation
Cost Leadership Business Level Strategy Requirements Relatively standardized products Constant effort to reduce costs through: Features acceptable to many customers Lowest competitive price * Monitoring costs of activities provided by outsiders * Simplification of processes Transparency 4 -3 * Building efficient scale facilities * Tight control of production costs and overhead * Minimizing costs of sales, R&D and service * “State of the Art” manufacturing facilities
Value Creating Activities common to a Cost Leadership Business Level Strategy Effective Training Programs to Improve Worker Efficiency and Effectiveness Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchas. Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Small, Highly Trained Sales Force Located in Close Proximity with Suppliers Policy Choice of Efficient Order Plant Technology Sizes National Scale Advertising Organizational Learning Transparency 4 -4 Interrelationships with Sister Units Primary Activities R Effective Product Installations to Reduce Frequency and Severity Products Priced to of Recalls Generate Sales Volume G IN IN Efficient Plant Delivery Schedule Scale to Minimize that Reduces Manufacturing Costs Selection of Low Timing of Asset Cost Transport Purchases Carriers A G Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes M R Consistent Policies to Reduce Turnover Costs Relatively Few Management Layers to Reduce Overhead A Simplified Planning Practices to Reduce Planning Costs M Support Activities Cost Effective MIS Systems
How to obtain a Cost Advantage 1 Determine and Control Cost Drivers 2 Reconfigure the Value Chain as needed Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales Transparency 4 -5 New raw material Forward integration Backward integration Change location relative to suppliers or buyers
Example of Reconfiguring the Value Chain Old Way: Ranch Cattle Ship “on the Hoof” to Rail Center (Chicago) Slaughter into sides of beef “Boxed Cuts” at Markets Iowa Beef Packers New Way: Locate large automated plants near ranches Process into “Boxed Cuts” at plants Ship cuts already “Boxed” to Markets Save on shipping and cattle weight loss Utilize cheaper non-union rural labor Transparency 4 -6
Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can mitigate Supplier Power by: * Low cost position makes them better able to absorb cost increases * More likely to make very large purchases which reduces chance of supplier power Bargaining Power of Suppliers Threat of New Entrants Rivalry Among Competing Firms in Industry Well positioned relative to Substitutes in order to: * Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value. Transparency position 4 -7 Can frighten off New Entrants due to the need to: * Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry Bargaining Power of Buyers Can mitigate Buyer Power by: Threat of Substitute Products Driving prices far below competitors which may cause exit and shift power back to firm
Differentiation Business Level Strategy Requirements Value provided by unique features and value characteristics Command premium price * High customer service * Superior quality Prestige or exclusivity Rapid innovation Transparency 4 -8 * * * Constant effort to differentiate products through: 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
Value Creating Activities common to a Differentiation Business Level Strategy A companywide emphasis on producing high quality products Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Coordination among R&D, product development and marketing Investments in technologies that will allow the firm to consistently produce highly differentiated products Transparency 4 -9 A R Strong capability in basic research G IN Purchase of highest quality replacement parts Rapid responses to customers unique manufacturing specifications Extensive Rapid and timely personal product deliveries relationships to customers with buyers Primary Activities Premium Pricing G Accurate and responsive order processing procedures IN Strong Coordin- Complete field ation among stocking of functions in R&D, replacement parts Marketing and Product Development Consistent manufacturing of attractive products R Superior handling of incoming raw materials to minimize damage and improve the quality of the final product M A Systems and procedures used to find the highest quality raw materials Superior personnel training M Support Activities Highly Developed Information Systems to better understand customers’ purchasing preferences
Create Value with Differentiation by: 1 Lowering Buyers’ Costs 2 Raising Buyers’ Performance 3 Sustainability is created through: Creating barriers by perceptions of uniqueness Creating switching costs through differentiation Transparency 4 -10
Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can mitigate Supplier Power by: * Absorbing price increases due to higher margins * Passing on higher supplier prices because buyers are brand loyal Bargaining Power of Buyers Well positioned relative to Substitutes because: * Brand loyalty tends to reduce new product trial and brand switching Transparency 4 -11 Threat of New Entrants Rivalry Among Competing Firms in Industry Threat of Substitute Products Can fend off New Entrants because: * New products must surpass proven products Or be equal to performance at lower prices Brand loyalty overcomes much price competition * Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases
Focused Business Level Strategies involve the same basic approach as Broad Market Strategies However. . . Opportunities may exist because: * Large firms may overlook small niches * Firm may lack resources to compete industrywide * May be able to serve a narrow market segment more effectively than industrywide competitors * Focus can allow you to direct resources to certain value chain activities to build competitive advantage Transparency 4 -12
Generic Business Level Strategies Source of Competitive Advantage Cost Breadth of Competitive Scope Broad Target Market Narrow Target Market Transparency 4 -13 Uniqueness Cost Differen. Leadership tiation Integrated Low Cost/ Differentiation Focused Differen. Low Cost tiation
Integrated Low Cost/Differentiation Strategy Firms using an Integrated Strategy may: Adapt more quickly Learn new skills and technologies May utilize Flexible Manufacturing Systems to create differentiated products at low costs Leverage core competencies through Information Networks across multiple business units May utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs Transparency 4 -14
Integrated Low Cost/Differentiation Strategy Southwest Airlines Low Cost Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes No meals 15 minute turnaround time No reserved seats No travel agent reservations Transparency 4 -15 Differentiation Focus on customer satisfaction High level of employee dedication New flight services for business travelers (Phones and faxes)
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