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Selecting Business-Level Strategies Chapter 5

Selecting Business-Level Strategies Chapter 5. Miles A. Zachary MGT 4380. Business-Level Strategy. Business-level strategy address the question of how a firm will compete in a specific industry

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Selecting Business-Level Strategies Chapter 5

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  1. Selecting Business-Level StrategiesChapter 5 Miles A. Zachary MGT 4380

  2. Business-Level Strategy • Business-level strategy address the question of how a firm will compete in a specific industry • Developing business-level strategies requires not being mesmerized by all the nuanced strategies of firms in an industry • How can executives cut through the mess? • Generic Strategies-a general way of positioning a firm within an industry • Best-known generic strategies developed by Michael Porter of Harvard Business School

  3. Generic Strategies • Two competitive dimensions • Competitive advantage • Involves whether a firm stresses lower costs or uniqueness • Scope of Operation • Determines whether a firm appeals to a general audience or a focused subset of consumers • Four (4) traditional generic strategies • Cost leadership • Differentiation • Focused (niche) cost leadership • Focused (niche) differentiation

  4. Generic Strategies

  5. Generic Strategies • In addition to the four (4) main generic strategies, two sub-strategies exist • Best-Cost Strategy • “Stuck-in-the-middle” Strategy • Different generic strategies offer different value propositions to customers • They also have different value chain configurations

  6. Cost Leadership • Cost leadership firms compete based on price and aim for a broad target market • Sell goods for low prices • Target general consumers • Emphasize efficiency; spend little on advertising, market research, or R&D • Often rely on economies of scale • Cost of offering goods decreases as a firm is able to sell more items; expenses distributed across a greater number of items • Ex.-Wal-Mart, Payless Shoe Source, etc.

  7. Cost Leadership • Advantages • Low-cost providers better able to withstand price wars • Discourages new entrants • Advantage enhanced by high market share • Disadvantages • People perceive products and services as low-quality • High volume necessary because low profit margins • Need to focus on low cost blinds firms to subtle environmental trends • Emphasis on efficiency makes it difficult to change quickly when needed

  8. Differentiation • Differentiators compete based on uniqueness and aim at a broad target market • Attempt to convince customers to pay higher prices by providing unique and desirable features • Emphasize that consumers “get what they pay for” • Firms must communicate to consumers why they should pay higher prices—advertising! • Ex.-Nike, FedEx, Ralph Lauren, etc.

  9. Differentiation • Advantages • Strong margins = firms need less customers to make a profit • Enduring differentiator firms create strong brand loyalty—less price sensitive • Difficult for new entrants to compete with brand loyalty • Disadvantages • Customers may not be willing to pay higher prices • Customers may prefer a cheaper alternative • Competitors may be able to imitate features such that they are not sufficiently unique

  10. Focused Cost Leadership • A focused cost leadership strategy entails competing based on price to target a narrow customer market • Not necessarily the lowest price in the industry; it charges low prices relative to other firms that compete within the target market • In other cases, the target market is defined by the sales channel used to reach customers • Unique product distribution/retail

  11. Focused Differentiation • A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market • Similar to focused cost leadership strategy, focused differentiation sometimes focus on a particular sales channel • Others target particular demographic groups • Ex.-Whole Foods Market, Ferrari, etc.

  12. Focused Strategies: Advantages & Disadvantages • Advantages • Higher prices can be charged • Firms can develop tremendous expertise in their specific area • Disadvantages • Likely limited demand • Focused area may be taken over by other firms • Other firms may provide narrower focus

  13. Best-Cost Strategy • Firms pursuing best-cost strategies charge relatively low prices AND offer substantial differentiation • For firms that want to have their cake and eat it too! • Very difficult to execute • Successful implementation can lead to a strong competitive advantage • May face attacks from many different directions • Best-cost strategies can be easier to achieve if a firm can lower their overhead/fixed costs • Ex.- Southwest Airlines, Target, Ikea, etc.

  14. Stuck in the Middle • Some firms are unable to develop any specific generic strategy • These firms become “stuck in the middle” • Non-unique products at higher-than-warranted prices • Firms fail when they try to please all consumers • Firms that are stuck in the middle are often put their as a result of being out maneuvered by competitors • Ex.-Circuit City, Kmart, Blockbuster, Arby’s, etc.

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