Business-Level Strategy

1. Business-Level Strategy Chapter6

2. Learning Objectives After reading this chapter, you should have a good understanding of: • The central role of competitive advantage in the study of strategic management. • The three generic strategies: overall cost leadership, differentiation, and focus. • How the successful attainment of generic strategies can improve a firm’s relative power vis-à-vis the five forces that determine an industry’s average profitability. • The pitfalls managers must avoid in striving to attain generic strategies. • How firms can effectively combine the generic strategies of overall cost leadership and differentiation. 6-2

3. Types of Competitive Advantage and Sustainability • Three generic strategies • Overall cost leadership • Low-cost-position relative to a firm’s peers • Manage relationships throughout the entire value chain 6-3

4. Types of Competitive Advantage and Sustainability • Differentiation • Create products and/or services that are unique and valued • Non-price attributes for which customers will pay a premium • Focus strategy • Narrow product lines, buyer segments, or targeted geographic markets • Attain advantages either through differentiation or cost leadership 6-4

5. Example • Companies pursuing an overall cost leadership strategy • McDonalds • Wal-Mart • Companies pursuing a differentiation strategy • Harley Davison • Apple • Companies pursuing a focus strategy • Rolex • Lamborghini 6-5

6. Overall Cost Leadership • Integrated tactics • Aggressive construction of efficient-scale facilities • Vigorous pursuit of cost reductions from experience • Tight cost and overhead control • Avoidance of marginal customer accounts • Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising 6-6

7. Overall Cost Leadership • Experience Curve • How business “learns” to lower costs as it gains experience with production processes • With experience, unit costs of production decline as output increases in most industries 6-7

8. Pitfalls of Overall Cost Leadership Strategies • Too much focus on one or a few value-chain activities • Too often managers make big cuts in operating expenses, but don’t question year-to-year spending on capital projects • Should explore all value-chain activities as candidates for cost reductions • All rivals share a common input or raw material • Vulnerable to price increases 6-8

9. Differentiation • Differentiation can take many forms • Prestige or brand image • Technology • Innovation • Features • Customer service • Dealer network 6-9

10. Differentiation • Firms may differentiate along several dimensions at once • Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique • Requires integration with all parts of a firm’s value chain • Important aspect is speed or quick response 6-10

11. Potential Pitfalls of Differentiation Strategies • Uniqueness that is not valuable • Must be unique and possess high customer value • Too much differentiation • Firms may strive for too much quality • Too high a price premium • Customers may desire product, but repelled by price 6-11

12. Potential Pitfalls of Differentiation Strategies • Differentiation that is easily imitated • Dilution of brand identification through product-line extensions • Increase short-term revenues, detrimental in long run • Perceptions of differentiation may vary between buyers and sellers • “Beauty is in the eye of the beholder” 6-12

13. Focus • Focus is based on the choice of a narrow competitive scope within an industry • Firm selects a segment or group of segments (niche) and tailors its strategy to serve them • Firm achieves competitive advantages by dedicating itself to these segments exclusively 6-13

14. Focus • Two variants • Cost focus • Strives to create a cost advantage in its target segment • Differentiation focus • Seeks differentiate in target market • Both rely on providing better service than broad-based competitors who are trying to serve the focuser’s target segment 6-14

15. Pitfalls of Focus Strategies • Erosion of cost advantages within the narrow segment • Focused products and services still subject to competition from new entrants and from imitation • Focusers can become too focused to satisfy buyer needs 6-15

16. Example: Expensive Golf Gear • "For as long as golf has been played, golfers have been trying to buy a better game," says Steve Pike • Designer business with highest-end equipment from manufacturers such as Callaway, TaylorMade, and Titleist • Showing up with top-notch gear is like bringing a platinum-covered bazooka to a knife fight • Consumers think the higher the price, the better the equipment 6-16 www.forbes.com/sport/2005/08/23/callaway-luxurygolf-lifestyle-cx_ns_0823feat_ls.html

17. Combination Strategies: Integrating Overall Low Cost and Differentiation • Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategy • Goal of combination strategy is to provide unique value in an efficient manner 6-17

18. Combination Strategies: Integrating Overall Low Cost and Differentiation • Two types of value to customers • Differentiated attributes • High quality • Brand identification • Reputation • Lower prices 6-18

19. Combination Strategies: Improving Competitive Position vis-à-vis the Five Forces • Obtain advantages of competition from both approaches • High entry barriers • Bargaining power over suppliers • Reduces power of buyers (fewer competitors) • Value position reduces threat from substitute products • Reduces the possibility of head-to-head rivalry 6-19

20. Pitfalls of Combination Strategies • Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” • Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain • Miscalculating sources of revenue and profit pools in the firm’s industry 6-20