Understanding Business Strategy

1. Understanding Business Strategy Part 3: Strategy Chapter 5: Business-Level Strategy

2. Less partnershipsmore relationships

3. Business-Level Strategies • A business-level strategy is an action plan the firm develops to describe how it will compete in its chosen industry or market segment. • How to compete day-to-day • Wal-Mart • An effective business-level strategy has a clear statement of the value to be created for customers.

4. Types of Business-Level Strategies

5. Types of Business-Level Strategies • Firms choose from five, generic, business-level strategies • Cost leadership • Differentiation • Focused cost leadership • Focused differentiation • Integrated cost leadership/differentiation Two key dimensions: competitive advantage & competitive scope

6. Types of Business-Level Strategies • A firm’s capabilities and core competencies enable it either to produce standardized products at lower costs than those of their competitors or to produce unique products that differ from competitors’ products that create value for customers. • Examples: Procter & Gamble’s Tide and Porsche’s 911 Carrera

7. Types of Business-Level Strategies • By standardized products, we mean products that are widely available and have a large customer demand. • E.g. automotive tires • Unique products have features different from or in addition to the standardized product’s features. • E.g. Guinness Beer

8. Cost Leadership Strategy • an action plan the firm develops to produce goods or services at the lowest cost • Price its product lower than competitors • Gain a larger share of its target market • Firms using a cost leadership strategy commonly have economies of scale because of the large quantities of standardized products produced.

10. Rivalry with Existing Competitors • Competitors find it extremely difficult to compete against the cost leader on the basis of price. • Reduce profit margins • Less capital to invest to improve operational efficiency • Rivals compete across markets including product markets and geographic markets

11. Bargaining Power of Buyers • Customers exercise power under several conditions • Purchasing a large quantity of the cost leader’s output • E.g. Wal-Mart • Cost leaders independence occurs by selling to a large number of buyers

12. Bargaining Power of Suppliers • A supplier can exercise power over the cost leader if it provides a significant amount of a key input to the cost leader’s production process • Firms dependent on key natural resources to produce their products when sources of supply are limited may have to pay higher prices

13. Potential Entrants & Product Substitutes • cost leader’s ability to continuously drive its costs lower and lower while still satisfying customers’ needs makes it difficult for potential entrants • A product substitute is a product that can replace the focal product • The successfully positioned cost leader commonly responds to product substitutes by reducing the purchase price of its product

14. Competitive Risks • Competitors’ innovations may enable them to produce their good or service at a cost that is lower than that of the cost leader • Concentrating too much on reducing costs may eventually find the cost leader offering a product at low prices to customers who are less inclined to purchase it

15. Differentiation Strategy • An action plan the firm develops to produce goods or services that customers perceive as being unique in ways that are important to them: • Physical sources: product durability, ease of repair • Psychological differentiation: perceptions of quality, courtesy of salespeople

16. Differentiation Strategy • Serves customers who want to buy a good or service that is different from the good or service purchased by an industry’s average customer • Different tastes, • Responsive customer service • Product design • Alternative distribution methods, and • Customer loyalty programs

17. Differentiation Strategy • Emphasizes Innovation • Continuously introduces new and unique products that provide value • Firms want to develop core competencies in one or more of the primary and support activities • The more unique value created for customers, the more successful

19. Five Forces & Differentiation • Firms using the differentiation strategy do everything they can to increase the loyalty of their customers by providing them greater benefits than do rivals. • Firms using the differentiation strategy continuously stress the uniqueness of their products to customers (often through advertising campaigns) to reduce customers’ sensitivity to price

20. Five Forces & Differentiation • The firm using the differentiation strategy typically pays a premium price for the raw materials used to make its product • Customer loyalty and the need to provide customers with more value than an existing firm’s product provides to them are strong challenges for potential rivals

21. Five Forces & Differentiation • Firms also try to establish barriers to entry to reduce the number of potential entrants • E.g. Patents • Perceived unique value is difficult to replace, even when a product substitute has a better performance-to-price ratio that favors substitution • E.g. Customer loyalty

22. Competitive Risks • Customers may decide that the price they are paying for a product’s differentiated features is too high. • The source of differentiation being provided by the firm may cease to create value for the target customers.

23. Competitive Risks • The customer may conclude that the cost of the differentiation isn’t acceptable • Differentiated products run the risk of being somewhat effectively counterfeited allowing customers to question why they should pay a higher price for the “real thing”

24. Focused Strategies • An action plan the firm develops to produce goods or services that serve the needs of a specific market segment • Firms using the focus strategy intend to serve the needs of a narrow customer segment better than their needs can be met by the firm targeting its products to the broad market

25. Focused Strategies • The focused cost leadership strategy is an action plan the firm develops to produce goods or services for a narrow market segment at the lowest cost • The focused differentiation strategy is an action plan the firm develops to produce goods or services that a narrow group of customers perceive as being unique in ways that are important to them

26. Focused Strategies • To successfully use either focus strategy, a firm must perform many of the value chain’s primary and support activities in ways that enable it to create more value than competitors can create for a narrow group of target customers

27. Competitive Risks • A competitor may learn how to “outfocus” the focusing firm • A company serving the broad target market may decide that the target market being served by the focusing firm is attractive • The needs of the narrow target customer may change and become similar to those of the broad market

28. Integrated Cost Leadership/Differentiation Strategy • An action plan the firm develops to produce goods or services, with strong emphasis on both differentiation and low cost • Broad or narrow target market • Firms must develop flexibility to provide service to both kinds of markets • The possibility of being “neither fish nor fowl” is the main risk of using the integrated cost leadership/differentiation strategy

29. Implementing Business-Level Strategies • Matching the right structure with the chosen strategy enhances firm performance. • Simple Structure • Functional Structure • Multidivisional Structure

31. Implementing Business-Level Strategies • Firms implementing the cost leadership strategy use a functional structure with highly centralized authority in the corporate staff • Jobs are highly specialized and organized into homogenous subgroups and highly formalized rules and procedures are established

32. Implementing Business-Level Strategies • The operations function is emphasized in this structure to ensure that the firm’s product is being produced at low costs

33. Implementing Business-Level Strategies • The functional structure used by firms implementing the differentiation strategy differs from the one used by firms implementing the cost leadership strategy • R&D and marketing functions are more important • Authority is decentralized in this structure so employees closest to the customer can decide how to appropriately differentiate the firm’s products

34. Implementing Business-Level Strategies • When firms following a focus strategy have only a single product line and operate in a single geographic market, a simple structure is effective for implementing the strategy • A focused cost leadership strategy – centralized functional structure emphasizing efficiency • A focused differentiation strategy - functional decentralized structure encouraging cross functional interaction to create innovation

36. Implementing Business-Level Strategies • An integrated cost leadership/differentiation strategy is difficult to implement • Decisions must be partly centralized and partly decentralized • Jobs are semispecialized • Some formal rules and procedures are needed • efficient processes maintain lower costs • The ability to change is also important in order to develop and maintain differentiated goods or services

37. Business-Level Across Time • The firm must continuously evaluate its business level strategy and change it as needed to create more value for customers or bring the firm back on course • E.g. Hershey • E.g. Sam Walton & his customers

38. Strategy Toolbox • The Pareto principle, or the 80/20 rule, can be applied to the analysis of customers targeted and served by a company • At a given point in time, many companies find that 80% of the profit is derived from 20% of the customers • This knowledge can help inform the viability of a particular business-level strategy for each particular segment