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Business Level Strategy Chapter 5

Business Level Strategy Chapter 5. Jeff Stambaugh Dillard College of Business/Rm 257A jeff.stambaugh@mwsu.edu http://faculty.mwsu.edu/business/jeff.stambaugh. The purpose of business is to create and keep a customer … Drucker. Built by Stambaugh/2009. Today’s Objectives.

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Business Level Strategy Chapter 5

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  1. Business Level StrategyChapter 5 Jeff Stambaugh Dillard College of Business/Rm 257A jeff.stambaugh@mwsu.edu http://faculty.mwsu.edu/business/jeff.stambaugh The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  2. Today’s Objectives • Understand business level strategy • Understand the generic business level strategies • Uses • Risks • Understand how the internet and industry life cycle affect the above The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  3. The Beginning of a Strategy • Who are our customers? • What needs are we going to meet? • How will we meet them? • And how will be do the above better than any of our current or future competitors … what is our competitive advantage? The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  4. Fundamental Questions • How am we going to create value for our customer (or less noble—how are we going to motivate them to buy our product / service?): • By being the cheapest? • By offering the most desirable features / services? • By serving a niche market? • By melding low cost and some unique features? • And how do my competitive advantages play into this? Business-level strategy: decisions that describes how firm will compete in its chosen industry / market segment The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  5. Generic Strategies • Cost Leadership • Differentiation • Focus The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  6. Overall Cost Leadership • Comparable (decent) product that you can produce cheaper than competitors by …. • Scale-efficient operations • Cost reductions from experience • Overall cost control • Avoid marginal accounts • Squeeze value chain • Lower costs + same price to consumer = higher profits (or increased volume = higher profits) The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  7. Overall Cost Leadership Efficiency is key concept The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  8. Benefits / Risks of Cost Leadership • Strong “position” in Porter’s Five Forces (p. 161) • Volume and price sensitivity are assets • What’s hard to imitate about this? • All cost, no customer? The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  9. Differentiation • Bases for differentiation • Prestige • Product features • Service Competitive advantage comes when people pay more for it than it costs you to provide it The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  10. Differentiation Unique Value is key concept The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  11. Benefits / Risks of Differentiation • Customer loyalty creates • Barriers to entry • Switching costs • Higher margins = more flex • What if customer doesn’t perceive the product as special • “Wrong differentiation” --- features • Price too high • Easily imitated The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  12. 0 of 5 Starbucks’ sales growth has been slipping of late. What do you think is the problem • Other places have improved their coffee and its much cheaper • Starbucks prices are just too high • Starbucks doesn’t seem special any more • Starbucks offers stuff I don’t want

  13. Focus Strategies • Geographic • Demographic • Income scale (both high and low) • Unique product requirements • Risks • Competitor may “out-focus” you • Your niche evaporates • You over-focus The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  14. Combination Strategy(Integrated Cost and Differentiation) • Efficiently provide unique value (hit the mid-spectrum) • Tougher to imitate • Mass customization • Pick your point in the profit pool (the 20-80 rule) • E-linking value chains The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  15. Risks of Combination Strategy • You are nothing to everyone • Stuck in the Middle • Can’t execute (cost reductions aren’t there or can’t build loyalty) Combination strategy is usually the most difficult to execute because it is a balancing act The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  16. How Well Do They Work? Competitive Advantage Differentiation and Cost Cost Focus Differentiation Focus Stuck in the Middle Differentiation Cost Performance Return on investment (%) 35.5 32.9 30.2 17.0 23.7 17.8 Sales Growth (%) 15.1 13.5 13.5 16.4 17.5 12.2 Gain in Market Share (%) 5.3 5.3 5.5 6.1 6.3 4.4 Sample Size 123 160 100 141 86 105 The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  17. What hath the internet wrought? • Made it easier to cut costs (bidding, paperless, more automated services) • Made niche markets more viable (mass customization) • Customers have more info Consensus: sustainable competitive advantages harder to come by in internet era The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  18. Blue Oceans • Move into new (uncontested) market space by: • Create / Capture New Demand • Defy the cost-value tradeoffs (low cost-high value) • By • Eliminating “value-less” TFG factors • Raising some factors, lowering others (Reverse positioning) • Creating new, valued factors • Attracting new customers to the industry (Breakaway positioning) Lower price /higher value to tap into untouched mass market The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  19. 0 of 5 What would it take to get you to buy a (or another) video game console? • Own one – better graphics • Own one – better games • Own one – more connections to internet / high tech features • Don’t own one – lower price • Don’t own one – easier to operate • Don’t own one – less cosmic games

  20. Industry Life Cycle The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  21. Life Cycle Strategies Stage Introduction Growth Maturity Decline Factor Generic strategies Differentiation Differentiation Diff / Cost Cost Ldr Ldr Market growth rate Low Very large Low to Negative moderate Number of segments Very few Some Many Few Intensity of competition Low Increasing Very intense Changing Emphasis on product design Very high High Low to Low moderate The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  22. Life Cycle Strategies Stage Introduction Growth Maturity Decline Factor Emphasis on process design Low Low to High Low moderate Major functional area(s) of concern Research and Sales and Production General Development marketing management and finance Overall objective Increase Create Defend Consolidate, market share consumer market share maintain, awareness demand and extend harvest, or product life exit cycles The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  23. 0 of 5 You are a senior manager at Nokia (cell phone) and have just been given an additional $100M to fight back against the iPhone. Where do you spend the money (pick only one) • Increase advertising • Cut price on our product that is closest to iPhone • Spend on R&D to make our product cooler than iPhone • Invest in production equipment to cut our manufacturing costs

  24. Critique • Life Cycle is not inevitable • Sustaining and disrupting innovations • Mature stage strategies • Maintaining • Harvesting • Exiting • Consolidation • Turnaround strategies • Prune assets (cash), products (get back to basics), costs (put it on a diet) The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  25. Summary • Step One is to figure out how you want to add value for the customer • Generic strategies + Combination + Blue Ocean • Beware the Cycle • Compete “smartly” The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

  26. Next Class • Test! • Essay “question pool” online/WebCT (pick 3 of 4) • One essay question based on news article • Just bring enough paper to write your answers (blue books not required) The purpose of business is to create and keep a customer … Drucker Built by Stambaugh/2009

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