Building Competitive Advantage thru BUSINESS-LEVEL STRATEGY

1. Building Competitive Advantage thru BUSINESS-LEVEL STRATEGY Business 189 Spring 2010 Dr. Mark Fruin

2. WHAT IS BUS-LEVEL STRATEGY? • FIRM-SPECIFIC PLAN OF ACTION FOR GAINING COMPETITIVE ADVANTAGE IN A MARKET OR INDUSTRY (TAKE BUSINESS FROM RIVALS) • IMPLEMENT B-L STRATEGIES THAT MAKE FULL USE OF FUNCTIONAL LEVEL STRATEGIES • INDUSTRIES = PRODUCT/MARKET SEGMENTS • BASED ON • PRODUCT DIFFERENCES • CUSTOMER GROUPS OR MARKET SEGMENTS • LOCATION (SEGMENTS OFTEN DIFFER BY LOCATION) • HAVING DISTINCTIVE COMPETENCES • FOLLOWING PORTER, COST LEADERSHIP OR DIFFERENTIATION ADVANTAGES/THESE ARE PRODUCT-LEVEL STRAT

3. BL & FL STRATEGIES • DISTINGUISH BETWEEN BUSINESS LEVEL & FUNCTIONAL LEVEL STRATEGIES • IS ONE MORE APPROPRIATE AT CERTAIN TIMES & STAGES? • CAN BOTH BE PURSUED SIMULTANEOUSLY? • IS THE COMPETITION BETWEEN TOYOTA & GM (AND NOW VW & FIAT) TO BE THE LARGEST AUTO MAKER IN THE WORLD, A BL OR FL COMPETITON?

4. COMPETITIVE POSITIONING • TO BE IN A POSITION OF COMPETITIVE ADVANTAGE, A FIRM MUST MAKE CHOICES • PURSUE COST LEADERSHIP OR DIFFERENTIATION? • WHAT PRODUCT FEATURES? • WHAT CUSTOMER CHARACTERISTICS OR CUSTOMER GROUPINGS • WHERE (WHEN & HOW) • WILL PRODUCT BE COMPETITIVELY POSITIONED ACCORDING TO (WHAT IT TAKES TO SUCCEED WITH ONE IS SO DIFFERENT FROM THE OTHER) • COST LEADERSHIP? • DIFFERENTIATION?

5. SEGMENTATION STRATEGIES • FIGURE 5.2 (SEE FIGURE 5.1 AS WELL) • 3 MAIN APPROACHES • NO MARKET SEGMENTATION - THE MARKET TAKEN AS AN UNDIFFERENTIATED WHOLE • HIGH MARKET SEGMENTATION - LOTS OF DIFFERENT PRODUCT/MARKET SEGMENTS • LOTS OF DIFF PRODUCTS FOR LOTS OF DIFF MKTS • FOCUSED MARKET SEGMENTATION - A FEW SEGMENTS ARE SELECTIVELY TARGETED • LOTS OF OTHERS ARE IGNORED (FOR NOW)

6. SEGMENTATION AND THE BUSINESS MODEL • CHAPTER TALKS A LOT ABOUT BUSINESS MODELS RATHER THAN STRATEGIES • WHAT’S THE DIFFERENCE AGAIN? • BM IS HOW ARE WE GOING TO MAKE MONEY • STRATEGY IS HOW ARE WE GOING TO IMPLEMENT/EFFECT/PUT INTO PLACE BM • BUSINESS MODELS ARE EASY TO IMAGINE AND OFTEN HARD TO EFFECT

7. WAL-MART’S BUSINESS MODEL • WAL-MART’S BUSINESS MODEL ON P. 151-52, FIGURE 5.3 • BALLOONS ARE ACTIVITIES/CAPABILITIES THAT DISTINGUISH W-M’S BUSINESS MODEL AND PROD/MKT SEGMENTATION • WHICH BALLOONS HAVE THE MOST LINKS • WHY? WHAT DOES MORE LINKS MEAN? • HOW ARE W-M’S CAPABILITIES IMPLEMENTED/PUT INTO PLAY??? • FUNCTIONAL LEVEL STRATEGIES • GENERIC COMPETITIVE STRATEGIES

8. FIGURES 5.5, 5.6 & 5.8 • ILLUSTRATE WHAT WE HAVE JUST SAID • BUSINESS-LEVEL STRATEGIES REQUIRE • TARGET SEGMENTS (MAKE CHOICES) • CARRY OUT FUNCTIONAL LEVEL STRATEGIES (STRATEGY STACK IN ACTION) • MAKE CHOICES • DEVELOP (MOBILIZE) ACTIVITIES/CAPABILITIES THAT IMPLEMENT TARGETED SEGMENTS • MAKE CHOICES • EXCEL IN ONE OR ANOTHER GENERIC COMPETITIVE STRATEGY (MAKE CHOICES) • AND BE EXCELLENT IN AT LEAST ONE FUNCTIONAL LEVEL STRATEGY AND PROBABLY MORE THAN ONE

9. GENERIC STRATEGIES • COST LEADERSHIP (VALUE PROPOSITION STRATEGY) • BROAD • NARROW • DIFFERENTIATION (PRICE PREMIUM STRATEGY) • BROAD • NARROW (FOCUS DIFFERENTIATION)

10. CUSTOMER GROUPS & MARKET SEGMENTATION • HOW MUCH ARE CUSTOMERS WILLING TO PAY VERSUS WHICH CUSTOMERS ARE BEING SERVED? • THREE ALTERNATIVE STRATEGIES • FOCUS ON “AVERAGE” CUSTOMER • SEGMENT (DIVIDE) MARKET INTO MANY DIFFERENT CONSTITUENCIES/CLUSTERS • CONCENTRATE ON “NICHES” ONLY • WHY DO THIS?

11. WILL COME UP LATER ON IN TEXT • BUT I’LL BRING IT UP NOW • YOU CAN BE TOO EARLY OR TOO LATE • MODEL @ WHAT KIND OF CUSTOMERS LIKELY TO FIRST ENTER MARKETS • INNOVATORS (1%) • EARLY ADOPTERS (5%) • EARLY MAJORITY (24%) • LATE MAJORITY (45%) • LAGGARDS (24%)

12. CAN A FIRM OFFER TOO MANY PRODUCTS? • HOW MANY PRODUCTS ARE THE “RIGHT” NUMBER OF PRODUCTS? • INDUSTRY CYCLE EFFECTS • MACROECONOMIC EFFECTS • SIGNALS & SIGNS OF TOO FEW OR TOO MANY PRODUCTS? • HOW MANY MODELS DO BOEING AND AIRBUS OFFER? • TOO MANY/TOO FEW & WHY? • RECENTLY GM REDUCED # OF MODELS OFFERED • A GOOD MOVE OR NOT & WHY?

13. ADVANTAGES & DISADVANTAGES OF C.L. • ADVANTAGES • USING 5 FORCES MODEL: COST LEADER HAS • MORE POWER RELATIVE TO SUPPLIERS • MORE POWER RELATIVE TO BUYERS • BETTER ABLE TO DETER ENTRY OF NEW COMPETITORS & BATTLE SUBSTITUTE PRODUCTS (BY LOWERING PRICES) • DISADVANTAGES • MORE LIKELY STUCK IN PARTICULAR TECH/SEGMNT • WHY? • MORE LIKELY TO BE IMITATED • WHY? • MORE LIKELY STUCK IN C.L. STRATEGY (AND POSSIBLY LOSE SIGHT OF CHANGING CUST. TASTES) • DISTRUPTIVE/DISCONTINUOUS INNOVATION (C. CHRISTENSEN)

14. ADVANTAGES & DISADVAN-TAGES OF DIFFERENTIATION • ADVANTAGES • DIFFERENTIATORS TRY TO DIFFERENTIATE IN MANY DIFFERENT WAYS • HARD TO IMITATE (IF DONE WELL) • BRAND LOYALTY HIGH IF CONVINCE BUYERS OF “UNIQUENESS,” “UNUSUALNESS,” & “SPECIALNESS” • DISADVANTAGES • DIFFERENTIATION IS EXPENSIVE • MANY DIFFERENTIATION FACTORS ARE EASILY IMITATED • FOR HOW LONG CAN “UNIQUENESS” BE SUSTAINED/PROTECTED

15. FOCUSED DIFFERENTIATION • FD MEANS CONCENTRATING ON • A PARTICULAR AREA (GEOGRAPHICALLY) • A PARTICULAR CUSTOMER (WELL EDUCATED, PART. HOUSEHOLD INCOME, ETC. • PARTICULAR MARKET SEGMENT, SUCH AS DESIGNER CLOTHES, FAST CARS, SMALL FOOTPRINT APPLIANCES, ETC.

16. GENERIC STRATEGIES • REQUIRE CAREFUL ATTENTION TO PRODUCT/TECH/MARKET CHOICES • LOOKING FOR THE SWEET SPOTS • CAN PROTECT FIRMS FROM 5 FORCES RIVALRIES - WHY? • REQUIRE CONTINUOUS UPGRADING OF INVESMENT CHOICES - WHY? • CREATE STRATEGIC GROUPINGS (OF FIRMS FOLLOWING SAME STRATEGIES)

17. STRATEGIC GROUPS • WITHIN MOST INDUSTRIES, STRATEGIC GROUP EMERGE • A STRATEGIC GROUP IS DEFINED BY COMPANIES PURSUING THE SAME GENERIC STRATEGY • MOBILITY BARRIERS INHIBIT THE MOVEMENT OF COMPANIES FROM ONE STRATEGIC GROUP TO ANOTHER

18. COMPETITIVE ADVANTAGE & INVESTMENT STRATEGY • WHAT TYPE OF INVESTMENTS MUST FIRMS MAKE TO SUSTAIN COMPETITIVE ADVANTAGE? • OBVIOUS • HUMAN RESOURCES, IT INVESTMENTS • FUNCTIONAL-LEVEL STRATEGIES • PURSUIT OF FINANCIAL ADVANTAGE • GLOBALIZATION & OUTSOURCING • NOT SO OBVIOUS? • INTANGIBLE RESOURCES • TACIT CAPABILITIES • SOCIAL PROCESSES • HIGHER LEVEL HR INVESTMENTS

19. BUSINESS LEVEL INVESTMENT STRATEGIES • COMPETITIVE POSITION BASED ON • MARKET SHARE • STRENGTH OF DISTINCTIVE COMPETENCIES • (PRODUCT) LIFE CYCLE EFFECTS • EMBRYONIC, GROWTH, MATURE, DECLINE • INDUSTRY CYCLE EFFECTS • EMBRYONIC, GROWTH, MATURE, DECLINE

20. INDUSTRIES NOT GOVERNED BY 5 FORCES & POSSIBLY LIFE-CYCLE EFFECTS? • WHERE THERE ARE NO ECONOMIES OF SCALE AND SCOPE • WHERE NO INDUSTRY CONCENTRATION • CONCENTRATION RATIOS IN MATURE INDUSTRIES • SO-CALLED FRAGMENTED “INDUSTRIES” • HAIRCUT, DRY CLEAN, NAIL SALON, SALOON, POSSIBLY OTHER CONVENIENCE & SERVICE- ORIENTED BUSINESSES

21. GROWTH CYCLES(CONFUSION?) • EMBRYONIC MAY INCLUDE EMBRYONIC AND EARLY EMERGING • GROWTH MAY INCLUDE PLAIN OLD GROWTH (SOMETIMES CALLED EMERGING) AND SHAKEOUT GROWTH • MATURE MAY INCLUDE PRODUCT DIFFERENTIATION & PROLIFERATION • DECLINE ALSO INCLUDES CONSOLIDATION, CONCENTRATION & HARVEST (INCLUDE CASH COW STRAT) • ALSO, ANDY GROVE’S “CROSSING THE CHASM”

22. INVESTMENT STRATEGY TYPES (MATCHED TO LIFE CYLE MODEL) • TYPICAL STRATEGIES PURSUED AT DIFFERENT STAGES OF ILC • GROWTH • SHARE BUILDING • GROWTH • SHARE INCREASING • MATURE • HOLD-AND-MAINTAIN • PROFIT • MARKET CONCENTRATION • DECLINING • ASSET REDUCTION • HARVEST • TURNAROUND • LIQUIDATE • DIVESTITURE

23. QUESTIONS • IN WHAT WAYS ARE FL & BL STRATS RELATED? • # OF MODELS • PRODUCT DEVELOPMENT LEAD TIMES • DEGREE OF VERTICAL INTEGRATION & OUTSOURCING • OTHER?? • WHY DOES EACH GENERIC STRATEGY REQUIRE DIFFERENT SETS OF PRODUCT/MARKET/ DISTINCTIVE COMPETENCY CHOICES? • EXAMPLES OF FIRM PAIRS MAKING DIFFERENT CHOICES; ARE THEY IN SAME STRATEGIC GROUP? • HONDA VS. TOYOTA • FORD VS GM • HOW SHOULD INVESTMENT CHOICES VARY IF YOU ARE IN STRONG OR WEAK COMPETITIVE POSITION WHEN PURSUING C.L. & DIFF STRATS

24. STUDY GROUP QUESTIONS • WHICH FIRM (OF THE PAIR) PERFORMS BEST IN TERMS OF FUNCTIONAL-LEVEL STRATEGIES? • FL STRATEGIES INDIVIDUALLY & TOGETHER • DO THE TWO FIRMS BELONG TO THE SAME STRATEGIC GROUP IN THE INDUSTRY? • DO BOTH FIRMS PURSUE THE SAME BL STRATEGIES? (TARGET THE SAME CUSTOMERS WITH SIMILAR PRODUCTS?) • WHICH FIRM IS MORE PROFITABLE & WHY? • ARE FL OR BL STRATEGIES MORE IMPORTANT? • USE “DUPONT” ROI FORMULA, pp. 94-95