CHAPTER 4: BUSINESS-LEVEL STRATEGY

1. IRELAND | HOSKISSON | HITT THE MANAGEMENT OF STRATEGY CONCEPTS AND CASES 10E CHAPTER 4:BUSINESS-LEVEL STRATEGY

2. THE STRATEGIC MANAGEMENT PROCESS

3. KNOWLEDGE OBJECTIVES

4. BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY ■ 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 ■ It is the core strategy ■ Every firm must form and use a business-level strategy for each one of its businesses ■ Business-level strategy choices matter because long-term performance is linked to a firm’s strategies IMPORTANT DEFINITION

5. BUSINESS-LEVEL STRATEGY

6. CORE COMPETENCIES AND STRATEGY Core Competencies Strategy Business-level Strategy Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

7. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES How will those needs be satisfied? What needs will be satisfied? Who will be served? KEY ISSUESinBUSINESS- LEVEL STRATEGY

8. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES Quickly and successfully adapt products/services to meet those needs Adept at identifying customer needs across cultures and geography EFFECTIVE GLOBAL COMPETITORS

9. BUSINESS-LEVEL STRATEGIES VALUE CHAIN ACTIVITIES RISKS for each Strategy Effective STRUCTURE for each Strategy FIVE COMPETITIVE FORCES GENERIC: Applicable to any organization in any industry

10. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES • SATISFYING CUSTOMERS IS THE FOUNDATION OF SUCCESSFUL BUSINESS STRATEGIES • Managing relationships with customers • Reach, richness, affiliation • Who will be served • What needs will be satisfied • How those needs will be satisfied

11. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES AFFILIATION Facilitating Useful Interactions With Customers RICHNESS Depth and Detail of Two-Way Flow of Information Between the Firm and Customer REACH Access and Connection to Customers EFFECTIVELY MANAGING RELATIONSHIPS WITH CUSTOMERS

12. MARKET SEGMENTATIONA process used to cluster people with similar needs into individual and identifiable groups WHO: DETERMINING THE CUSTOMERS TO SERVE Industrial Markets Consumer Markets

13. MARKET SEGMENTATION: CONSUMER MARKETS DEMOGRAPHIC FACTORS (age, income, sex, etc.) 2. SOCIOECONOMIC FACTORS (social class, stage in the family life cycle) 3. GEOGRAPHIC FACTORS (cultural, regional, and national differences) 4. PSYCHOLOGICAL FACTORS (lifestyle, personality traits) 5. CONSUMPTION PATTERNS (heavy, moderate, and light users) 6. PERCEPTUAL FACTORS (benefit segmentation, perceptual mapping)

14. WHAT: DETERMINING WHICH CUSTOMER NEEDS TO SATISFY ■ Customer needs are related to a product’s benefits and features ■ Customer needs are neither right nor wrong, good nor bad • ■ Customer needs represent desires in terms of features and performance capabilities • ■ Successful firms learn how to deliver to customers what they want, when they want it • Customers are the lifeblood of a firm

15. CUSTOMERS: HOW ● WHAT ● WHO WHO: Target Group of Customers WHAT: Satisfy Customer Needs

16. BUSINESS-LEVEL STRATEGY PURPOSE BUSINESS-LEVEL STRATEGIES are intended to create differences between the firm’s position relative to those of its rivals To position itself, the firm must decide whether it intends to: ● Perform activities differently, or ● Perform different activities as compared to its rivals

17. BUSINESS-LEVEL STRATEGY PURPOSE BUSINESS-LEVEL STRATEGY • is a deliberate choice about how the firm will perform the value chain activities to create unique value • Southwest’s Competitive Advantages (rivals unable to imitate): • ● Tight integration among activities • ● Cost leadership strategy • ● Unique culture and customer service

18. BUSINESS-LEVEL STRATEGY PURPOSE Southwest Airlines Activity System

19. SOURCES OF COMPETITIVE ADVANTAGE ■Achieving LOWER OVERALL COSTS than rivals ■Performing activities differently (reducing process costs) ■ Providing a low cost product that customers deem as ACCEPTABLE ■ Possessing the capability TO DIFFERENTIATE the firm’s product or service and command a premium price • ■Performing MORE HIGHLY VALUED activities

20. FIVE GENERIC BUSINESS-LEVEL STRATEGIES Five Business Level Strategies

21. TARGET MARKETS

22. BUSINESS-LEVEL STRATEGY EFFECTIVENESS • ■None of the five business-level strategies is inherently or universally superior to the others • ■The effectiveness of each strategy is contingent upon: • ● External opportunities/threats • ● Internal strengths/weaknesses • ■KEY: A successful business-level strategy must match external opportunities/threats with internal strengths, i.e., its core competencies

23. COST LEADERSHIP STRATEGY An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers • ■ Relatively standardized products • ■ Features acceptable to many customers • ■ Lowest competitive price

24. COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES • ■ Value chain analysis identifies the parts of a firm’s operations that create value and those that do not • ■ A competitive advantage in logistics creates more value for a cost leadership strategy than for a differentiation strategy •  Inbound logistics [materials handling, warehousing, and inventory control] • Outbound logistics [collecting, storing, and distribution]

25. COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES Examples of Value-Creating Activities Associated with the Cost-Leadership Strategy

26. Cost-effective MIS Few management layers Simplified planning Consistent policies Effecting training Easy-to-use manufacturing technologies Investments in technologies Finding low cost raw materials Monitor suppliers’ performances Link suppliers’ products to production processes Economies of scale Efficient-scale facilities Effective delivery schedules Low-cost transportation Highly trained sales force Proper pricing VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE

27. VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP RECONFIGURE THE VALUE CHAIN FOR A COST ADVANTAGE • Alter production process • New raw material • Change in automation • Forward integration • New distribution channel • Backward integration • Change location relative to suppliers or buyers • New advertising media • Direct sales in place of indirect sales

28. COST LEADERSHIP STRATEGY: RISKS • COMPETITIVE RISKS • OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations • COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation • IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

29. DIFFERENTIATION STRATEGY • An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them • ■ Focus is on non-standardized products • ■ Appropriate when customers value differentiated features more than they value low cost • ■ Firms must still be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay

30. DIFFERENTIATION STRATEGY: DISTINCTIVE ACTIONS • Firms seek to be different from competitors on as many dimensions as possible • Differentiation approaches • ■ Unusual features • ■ Responsive customer service • ■ Rapid product innovations • ■ Technological leadership • ■ Perceived prestige and status • ■ Different tastes • ■ Engineering design and performance

31. DIFFERENTIATION STRATEGY: VALUE CHAIN ACTIVITIES Examples of Value-Creating Activities Associated with the Differentiation Strategy

32. Highly developed MIS Emphasis on quality Worker compensation for creativity/productivity Use of subjective performance measures Basic research capability Technology High quality raw materials Delivery of products High quality replacement parts Superior handling of incoming raw materials Attractive products Rapid response to customer specifications Order-processing procedures Customer credit Personal relationships VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS

33. VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS • Whereas cost leadership targets a specific industry, differentiation creates value by distinguishing products/services • A firm must consistently upgrade differentiated features that customers value and/or create new valuable features (innovate) without significant cost increases • Create sustainability through: • Customer perceptions of distinctiveness • Customer reluctance to switch to non-distinctive products

34. DIFFERENTIATION STRATEGY: RISKS • COMPETITIVE RISKS • PRICE DIFFERENTIAL: between the differentiator’s and the cost leader’s products becomes too large • VALUE DIMINISHED: Differentiation ceases to provide value for which customers are willing to pay • EXPERIENCE: narrows customers’ perceptions of the value of differentiated features • COUNTERFEIT: goods replicate differentiated features of the firm’s products

35. FOCUSED STRATEGIES • An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment • Target markets include: • ■a Particular buyer group (e.g., youths or senior citizens) • ■ Different segment of a product line (e.g., products for professional painters or the do-it-yourself group) • ■ Different geographic market (e.g., northern or southern Italy by using a foreign subsidiary)

36. FOCUSED STRATEGIES Types of focused strategies: ■Focused cost leadership strategy ■ Focused differentiation strategy To implement a focus strategy, firms must be able to: Complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns

37. FACTORS THAT DRIVE FOCUSED STRATEGIES ■Large firms may overlook small niches ■A firm may lack the resources needed to compete in the broader market ■A firm is able to serve a narrow market segment more effectively than its larger industry-wide competitors can ■Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

38. FOCUSED COST LEADERSHIP STRATEGY • A firm focuses on a niche market, adding value by leveraging value chain activities that allow value-creation through the cost leadership strategy • ■Competitive advantage: low-cost • ■ Competitive scope: narrow industry segment

39. FOCUSED DIFFERENTIATION STRATEGY • The value chain may be analyzed to determine if a firm is able to link the activities required to create value by using the focused differentiation strategy • ■ Competitive advantage: differentiation • ■ Competitive scope: narrow industry segment

40. FOCUS STRATEGIES: RISKS • COMPETITIVE RISKS • OUTFOCUSED: a focusing firm may be “outfocused” by its competitors • COMPETITION: a large competitor may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit • CHANGING PREFERENCES:customer preferences in the niche market may change to more closely resemble those of the broader market

41. INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY Efficiently produce products with differentiated attributes: • EFFICIENCY: SOURCES OF LOW COST • DIFFERENTIATION: SOURCE OF UNIQUE VALUE • ■ Readilyadapts to external environmental changes • ■ Concentrates simultaneously on TWO sources of competitive advantage: cost and differentiation • ■ Competence and flexibility required in several value chain activities

42. INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY • Three sources of flexibility useful for this strategy: • ■ Flexible manufacturing systems (FMS) • ■ Information networks • ■ Total quality management (TQM) systems

43. INFORMATION NETWORKS • Links companies electronically with their suppliers, distributors, and customers • ■ Facilitates efforts to satisfy customer expectations in terms of product quality and delivery speed • ■ Improves flow of work among employees in the firm and their counterpart suppliers and distributors • ■ Requires customer relationship management (CRM)