Chapter 4

1. Chapter 4 Business-Level Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing

2. Chapter 2 External Environment Sustainable Competitive Advantage Chapter 3 Internal Environment Chapter 4 Business Level Strategy

3. The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Core Competency

4. The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Core Competency An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Strategy

5. The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals. Core Competency An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Business Level Strategy

6. Source of Competitive Advantage Cost Uniqueness Cost Leadership Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market Generic Business Level Strategies

7. Relatively standardized products Features acceptable to many customers Lowest competitive price Cost Leadership Business Level Strategy Key Criteria:

8. Building efficient scale facilities Tight control of production costs and overhead Minimizing costs of sales, R&D and service State of the art manufacturing facilities Monitoring costs of activities provided by outsiders Simplification of processes Cost Leadership Business Level Strategy Requirements: Constant effort to reduce costs through:

9. Value Creating Activities Common to a Cost LeadershipBusiness Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities

10. Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Firm Infrastructure Cost Effective MIS Systems Effective Training Programs to Improve Worker Efficiency and Effectiveness Human Resource Management Consistent Policies to Reduce Turnover Costs MARGIN Value Creating Activities Common to a Cost LeadershipBusiness Level Strategy Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Technological Development Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Procurement Frequent Evaluation Processes to Monitor Suppliers’ Performances Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Efficient Plant Scale to Minimize Manufacturing Costs Delivery Schedule that Reduces Costs Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Service Selection of Low Cost Transport Carriers Products Priced to Generate Sales Volume Inbound Logistics Outbound Logistics Marketing & Sales Timing of Asset Purchases Operations MARGIN Located in Close Proximity with Suppliers Policy Choice of Plant Technology Efficient Order Sizes National Scale Advertising Organizational Learning Interrelationships with Sister Units Support Activities Primary Activities

11. Alter production process New raw material Change in automation Forward integration New distribution channel Backward integration New advertising media Change location relative to suppliers or buyers Direct sales in place of indirect sales How to Obtain a Cost Advantage 1. Determine and Control Cost Drivers 2. Reconfigure the Value Chain as needed

12. Ship “on the Hoof” to Rail Center (Chicago) Slaughter into sides of beef Old Way: Ranch Cattle “Boxed Cuts” at Markets Locate large automated plants near ranches Ship cuts already “Boxed” to Markets New Way New Way: Process into “Boxed Cuts” at plants Reconfiguring the Value Chain of Iowa Beef Packers (IBP) Save on shipping and cattle weight loss Utilize cheaper non-union rural labor

13. Economies of scale Product features Asset utilization Performance Mix & variety of products Capacity utilization pattern - Seasonal, cyclical Service levels Interrelationships Small vs. large buyers - Order processing and distribution Process technology Wage levels Value chain linkages - Advertising & Sales Product features - Logistics & Operations Hiring, training, motivation Choices That Drive Costs

14. Three Key Questions How can an activity be performed differently or even eliminated? 1. 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs? Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors

15. Effective Cost Leaders can remain profitable even when the Five Forcesappear unattractive

16. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can frighten off New Entrants due to the need to: Enter at large scale to be Cost Competitive * * Take time to move down the “Learning Curve”

17. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Can mitigate Buyer Power by: Driving prices far below competitors may cause exit and shift power back to firm * Threat of New Entrants Bargaining Power of Buyers

18. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: Threat of Substitute Products Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Well positioned relative toSubstitutes in order to: Make investments to create substitutes first * Buy patents developed by potential substitutes * Lower prices to maintain value position * Threat of New Entrants Bargaining Power of Buyers Can mitigate Buyer Power by: Driving prices far below competitors which may cause exit and shift power back to firm

19. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Well positioned relative to Substitutes in order to: Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position * Threat of New Entrants Bargaining Power of Suppliers Can mitigate Supplier Power by: Bargaining Power of Buyers Low cost position makes them better able to absorb cost increases * Can mitigate Buyer Power by: More likely to make very large purchases which reduces chance of supplier power * Driving prices far below competitors which may cause exit and shift power back to firm Threat of Substitute Products

20. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry Can mitigate Supplier Power by: Can frighten off New Entrants due to the need to: Low cost position makes them better able to absorb cost increases * Enter at Large Scale to be Cost Competitive * More likely to make very large purchases which reduces chance of supplier power * Take time to move down the “Learning Curve” * Well positioned relative to Substitutes in order to: Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position * Threat of New Entrants Rivalry Among Competing Firms in Industry Bargaining Power of Suppliers Bargaining Power of Buyers Can mitigate Buyer Power by: Driving prices far below competitors which may cause exit and shift power back to firm Threat of Substitute Products

21. Dramatictechnological change could take away your cost advantage Competitors may learn how toimitate Value Chain Focus on efficiency could cause Cost Leader tooverlook changes in customer preferences Major Risks of Cost Leadership Business Level Strategy

22. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Broad Target Market Breadth of Competitive Scope Narrow Target Market

23. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Narrow Target Market

24. Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation Differentiation Business Level Strategy Key Criteria:

25. Constant effort to differentiate products through: Developing new systems and processes Shaping perceptions through advertising Quality focus Capability in R&D Maximize Human Resource contributions through low turnover and high motivation Differentiation Business Level Strategy Requirements:

26. Value Creating Activities Common to a DifferentiationBusiness Level Strategy Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities

27. Highly Developed Information Systems to better understand customers’ purchasing preferences A companywide emphasis on producing high quality products Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior personnel training Value Creating Activities Common to a DifferentiationBusiness Level Strategy Coordination among R&D, product development and marketing Investments in technologies that will allow the firm to consistently produce highly differentiated products Strong capability in basic research Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Strong Coordin-ation among functions in R&D, Marketing and Product Development Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Rapid responses to customers unique manufacturing specifications Extensive personal relationships with buyers Rapid and timely product deliveries to customers Premium Pricing Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations MARGIN Primary Activities

28. Heineken beer Raw materials Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship Intel microprocessors Technological superiority Caterpillar tractors Service buyers’ needs quickly anywhere in the world Differentiation Business Level Strategy Effectiveness with Differentiation grows out of Value Chain activities Examples:

29. Create Value with Differentiation by: Lowering Buyers’ Costs Raising Buyers’ Performance Creating Sustainability through: • Creating barriers by perceptions of uniqueness • Creating switching costs through differentiation

30. Examples: Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information Drivers of Differentiation

31. Effective Differentiators can remain profitable even when the Five Forcesappear unattractive

32. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices *

33. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Can mitigate Buyer Power because: Bargaining Power of Buyers Well differentiated products reduce customer sensitivity to price increases Threat of New Entrants

34. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Well positioned relative toSubstitutes because: Brand loyalty tends to reduce new product trial and brand switching * Threat of Substitute Products Threat of New Entrants Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases

35. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can fend offNew Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Bargaining Power of Suppliers Can mitigate Supplier Power by: Absorbing price increases due to higher margins * Well positioned relative toSubstitutes because: Passing on higher supplier prices because buyers are brand loyal * Brand loyalty tends to reduce new product trial and brand switching * Threat of New Entrants Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Threat of Substitute Products

36. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can fend off New Entrants because: Can mitigate Supplier Power by: Brand loyalty overcomes much price competition New products must surpass proven products Absorbing price increases due to higher margins * * Or be equal to performance at lower prices * * Passing on higher supplier prices because buyers are brand loyal Rivalry Among Competing Firms in Industry Well positioned relative toSubstitutes because: Brand loyalty tends to reduce new product trial and brand switching * Threat of New Entrants Bargaining Power of Buyers Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Threat of Substitute Products

37. Customers may decide that the cost of “uniqueness” is too great Competitors may learn how to imitate Value Chain The means of uniqueness mayno longer be valued by customers Major Risks of a Differentiation Business Level Strategy

38. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Narrow Target Market

39. Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market

40. Large firms may overlook small niches Firm may lack resources to compete industry-wide May be able to serve a narrow market segment more effectively than industrywide competitors Focus can allow you to direct resources to certain value chain activities to build competitive advantage Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because:

41. May be able to retrofit old factories to keep costs down Minimize R&D costs by copying innovators Bang & Olufsen Upscale electronic components Snap-on tools High quality mechanics’ tools Iams Company Premium pet foods Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Examples:

42. Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market Preferencesof niche marketmay change to match those of broad market Major Risks Involved With a Focused Differentiation Business Level Strategy

43. IntegratedLow Cost/ Differentiation Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Cost Leadership Differen- tiation Broad Target Market Breadth of Competitive Scope Focused Differen- tiation Focused Low Cost Narrow Target Market

44. Adapt more quickly Learn new skills and technologies Utilize Flexible Manufacturing Systems to create differentiated products at low costs Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs Integrated Low Cost/Differentiation Strategy Firms using an Integrated Strategy may:

45. Integrated Low Cost/Differentiation Strategy Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become “Stuck in the Middle”lacking a strong commitment to or expertise with either type of generic strategy

46. Low Cost Differentiation Use a single aircraft model (Boeing 737) Focus on customer satisfaction Use secondary airports High level of employee dedication Fly short routes No meals New flight services for business travelers (phones and faxes) 15 minute turnaround time No reserved seats No travel agent reservations Integrated Low Cost/Differentiation Strategy Southwest Airlines