PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

1. PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION CHAPTER 4:BUSINESS-LEVEL STRATEGY

2. THE STRATEGIC MANAGEMENT PROCESS

3. KNOWLEDGE OBJECTIVES

4. MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS OPENING CASE ■With the 2008 global financial crisis and competitors, e.g., McDonald’s gaining market share, consumers were less willing to pay the high prices for premium coffee, leading to a reduction in store sales for the first time in Starbucks’ history. ■ Starbucks appeared to be unable to control the quality of the “experience” and began losing its differentiation advantage.

5. MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS (cont’d) OPENING CASE ■ CEO Howard Schultz closed 900 poorly performing stores in the United States and refocused on innovation. ■ By 2011, with its 40th anniversary, a new logo, innovation such as VIA and customers paying for their purchases with their iPhones, environmental consciousness, employee health insurance, and a global focus on emerging markets such as China and India, Starbucks was once again differentiating itself.

6. 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

7. BUSINESS-LEVEL STRATEGY

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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)

16. MARKET SEGMENTATION: INDUSTRIAL MARKETS END-USE SEGMENTS (identified by SIC code) 2. PRODUCT SEGMENTS (based on technological differences or production economics) 3. GEOGRAPHIC SEGMENTS (defined by boundaries between countries or by regional differences within them) 4. COMMON BUYING FACTOR SEGMENTS (cut across product market and geographic segments) 5. CUSTOMER SIZE SEGMENTS

17. 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

18. HOW: DETERMINING CORE COMPETENCIES NECESSARY TO SATISFY CUSTOMER NEEDS ■ Firms use core competencies to implement value creating strategies that satisfy customers’ needs • ■ Value means goods or services that provide either low cost with acceptable features or highly differentiated features with acceptable costs ■ Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

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

20. 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

21. 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

22. BUSINESS-LEVEL STRATEGY PURPOSE FIGURE 4.1 Southwest Airlines Activity System

23. 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

24. FIVE GENERIC BUSINESS-LEVEL STRATEGIES FIGURE 4.2 Five Business Level Strategies

25. TARGET MARKETS

26. 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

27. 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

28. 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]

29. COST LEADERSHIP STRATEGY: COST SAVING ACTIONS • ■ Employing process innovations that facilitate efficient production and distribution methods ■Building efficient scale facilities ■Tightly controlling production costs and overhead ■Minimizing costs of sales, R&D, and service ■Building efficient manufacturing facilities ■Monitoring costs of activities provided by outsiders ■Simplifying production processes

30. COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES FIGURE 4.3 Examples of Value-Creating Activities Associated with the Cost-Leadership Strategy

31. 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

32. 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

33. COST LEADERSHIP STRATEGY: STRATEGIC FOCUS • WALMART, DOLLAR STORES, AND AMAZON: WHO IS BUYING WHOSE LUNCH? • ■Walmart deviated from its cost-leadership strategy designed to take market share away from Target by introducing organic foods, remodeling some stores, and reducing the variety of products offered, thereby increasing prices on some goods. • ■Recognizing its mistake, Walmart has re-focused on low costs and prices, increased its product diversity, and is opening 40 new express stores. • ■ Will Walmart will be able to recapture its cost leadership position in the market after giving it up to rivals?

34. COST LEADERSHIP STRATEGY: COMPETITORS Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products • Due to cost leader’s advantageous position: • Rivals hesitate to compete on basis of price • Lack of price competition leads to greater profits • Rivalry may be based on factors such as size, resources, location, market dependence, and prior competitive interactions RIVALRY WITH EXISTING COMPETITORS

35. COST LEADERSHIP STRATEGY: BUYERS (CUSTOMERS) Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products • Can mitigate buyers’ power by: • Driving prices far below competitors, causing them to exit, thus shifting power away from buyers back to the firm • Powerful customers can force a cost leader to reduce its prices, but not below the level where the next-most-efficient industry competitor can earn average returns BARGAINING POWER OF BUYERS

36. COST LEADERSHIP STRATEGY: SUPPLIERS Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products BARGAINING POWER OF SUPPLIERS • Can mitigate suppliers’ power by: • Being able to absorb cost increases due to low cost position • Being able to make very large purchases, reducing chance of supplier using power • Outsourcing, to reduce costs may also require relationship-building (Guanxi), particularly to a foreign supplier

37. COST LEADERSHIP STRATEGY: NEW ENTRANTS Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products • Barriers to potential entrants: • Their need to enter on a large scale in order to be cost competitive • The time it takes to move up the learning curve • Efficiency of cost leaders through continuous efforts to reduce costs enhances profit margins and serves as a significant entry barrier THREAT OF POTENTIAL ENTRANTS

38. COST LEADERSHIP STRATEGY: SUBSTITUTES Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products • Cost leader is well positioned to: • Make investments to be first to create substitutes • Buy patents developed by potential substitutes • Lower prices in order to maintain value position • Be more flexible than its differentiated competitors PRODUCT SUBSTITUTES

39. 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

40. 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

41. 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

42. DIFFERENTIATION STRATEGY: VALUE CHAIN ACTIVITIES FIGURE 4.4 Examples of Value-Creating Activities Associated with the Differentiation Strategy

43. 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

44. 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

45. DIFFERENTIATION STRATEGY: COMPETITORS Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products RIVALRY WITH EXISTING COMPETITORS • The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry • Reputation can also sustain the competitive advantage of firms following a differentiation strategy

46. DIFFERENTIATION STRATEGY: BUYERS (CUSTOMERS) Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products BARGAINING POWER OF BUYERS • Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases • Customers are willing to accept a price increase when a product satisfies their perceived unique needs, as long as they do not think that an acceptable product alternative exists

47. DIFFERENTIATION STRATEGY: SUPPLIERS Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products BARGAINING POWER OF SUPPLIERS • Can mitigate suppliers’ power by: • Absorbing price increases due to higher margins from high-quality components • Alternatively, considering buyers’ relative insensitivity to price increases and their brand loyalty, firms may pass along higher supplier prices to the buyer

48. DIFFERENTIATION STRATEGY: NEW ENTRANTS Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products THREAT OF POTENTIAL ENTRANTS • Substantial barriers to potential entrants: • Customer loyalty and the need to overcome the uniqueness of a differentiated product • New products must surpass proven products • New products must be at least equal to the performance of proven products, but offered at lower prices

49. DIFFERENTIATION STRATEGY: SUBSTITUTES Threat of new entrants Rivalry among competing firms Bargaining power of suppliers Bargaining power of buyers Threat of substitute products PRODUCT SUBSTITUTES • Well-positioned relative to substitutes because: • Brand loyalty to a differentiated product tends to reduce: • customers’ testing of new products • switching brands

50. 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