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Unit 3 (b) – Business level strategies

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1 Unit 3 (b) – Business level strategies

2 What Is Business-Level Strategy?
A plan of action to use the firm’s resources and distinctive competencies to gain competitive advantage. Abell’s “Business Definition” process Customer needs – product differentiation (what) Customer groups – market segmentation (who) Distinctive competencies – competitive actions (how)

3 Competitive positioning: Generic Business level strategies
With cost leadership and differentiation on two axes we can depict the three issues of differentiation, cost and pricing option Value creation frontier is reached by following one or more of the four building blocks of competitive advantage

4 Competitive positioning: Generic Business level strategies
To reach the value creation frontier the company must follow one or a combination of generic business strategy Generic means all companies can follow these strategies

5 Cost Leadership Lower the cost structure and increase efficiency – Wal Mart, Dell Development of distinctive competencies in different functions – Manufacturing -flexible manufacturing systems, Materials management - efficient materials management techniques,

6 Cost Leadership Sales - capturing large, stable set of customer orders, Human resource - instituting training programs that increases employee productivity R & D – process improvements Service industry – Supply chain management, organizational structure, rigorous use of budgets to reduce production and selling costs

7 Cost Leadership Low to moderate level of differentiation
Wait till the customer need is established Position its product to average customer, ignore different market segments

8 Competitive advantages
Cost leader is protected by cost advantage Less affected by increase in cost of inputs (powerful suppliers, or price (powerful buyers) Increases its bargaining power over its suppliers due to bulk purchases Ward off substitutes by lowering the price Low cost advantage acts as a barrier to entry

9 Principal threats Competitors ability to pursue new strategies that reduce their cost structures – technological change, lower labour costs Competitors ability to imitate the cost leader - China Single minded desire to reduce costs – customer support reduction

10 Focused cost Leadership strategy
Concentrate on Narrow business segments defined by geography, type of customer, or product line Competes with the cost leader, in the segments in which it can operate without cost disadvantage

11 Focused cost Leadership strategy
Producing custom built products that do not lend easily to economies of scale Operates at value creating frontier as it has no cost disadvantage in its market segment competing against companies following cost leadership or differentiated strategies Cost structure will be higher

12 Cost leadership: implications and conclusions
Enormous effort needed to incorporate latest information, material management and manufacturing technologies into their operations to reduce costs

13 Cost leadership: implications and conclusions
Requires on- going strategic thinking to keep business model aligned with changing environment Respond to strategic moves of its differentiated competitors and improve quality and features in the long run

14 Differentiation strategy
Producing a product or service that the customer as different or distinct in some aspects – charge premium price Mercedes Benz, BMW, Rolex watches

15 Differentiation – strategic choices
Gains competitive advantage by investing its resources Excellent quality – P & G Superior innovation – Samsung Responsiveness to customer needs – IBM, Godrej, Dell, BMW High level of quality of service – FedEx, Lawyer firms, Consultants

16 Differentiation – strategic choices
Appeal to customers’ psychological desires (prestige or status) – BMW, Rolex Differentiation can also be tailored to age groups and socio economic groups Dividing its market into many segments and niches _ Toyota, Dell Developing distinctive competencies in the functions that provide it with competitive advantage Controlling the cost structure – Savoy Hotel

17 Differentiation: Competitive advantages and disadvantages
Safeguards company against competitors - Brand Loyalty, Patents and first mover advantage Suppliers power – Pass on the price increases to the customers

18 Differentiation: Competitive advantages and disadvantages
Buyers – distinct product and brand loyalty Entry Barriers – Differentiation and brand loyalty Substitute products – Customer need, Premium price for distinctness Challenges – Sustaining the distinctiveness (imitation), Limited life of patents and first movers’ advantage

19 Implications and conclusions
Strategic choices that reinforces each other and together increase the value of goods or services Warding off imitation - Design or functionality First movers’ disadvantage

20 Focused differentiation
Business model based on differentiation and generic business level strategies – distinctive products in one or more market segments Selecting niche means focusing on one type of customers – very rich or very young. Reaching the value frontier by developing a distinctive product which meets better customer needs in the given market segment

21 Focused differentiation - challenges
Niche disappears over time – technological changes, changes in taste and preferences – and the company cannot move easily to a new niche

22 Choosing a Generic Business-Level Strategy
Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies Cost Leadership Differentiation Focus Product Differentiation Low (principally by price) High (principally by uniqueness) Low to high (price or uniqueness) Market Segmentation Low (mass market) High (many market segments) Low (one or a few segments) Distinctive Competency Manufacturing and materials management Research and development, sales and marketing Any kind of distinctive competency TABLE 6.1

23 Types of Business-Level Strategies

24 Choosing a Business-Level Strategy
Cost-leadership strategy success is affected by: Competitors producing at equal or lower costs. The bargaining strength of suppliers. Powerful buyers demanding lower prices. Substitute products moving into the market. New entrants overcoming entry barriers.

25 Choosing a Business-Level Strategy
Differentiation strategy success is achieved through: An emphasis on product or service quality. Innovation in providing new features for which customers will pay a premium price. Responsiveness to customers after the sale. Appealing to the psychological desires of customers.

26 Choosing a Business-Level Strategy
Differentiation strategy success is affected by: Competitors imitating features and services. Increases in supplier costs exceeding differentiator’s price premium. Buyers becoming less brand loyal. Substitute products adding similar features. New entrants overcoming entry barriers related to differentiator’s competitive advantage.

27 Choosing a Business-Level Strategy
Focus strategy success is affected by: Competitor entry into focuser’s market segment. Suppliers capable of increasing costs affecting only the focuser. Buyers defecting from market segment. Substitute products attracting customers away from focuser’s segment. New entrants overcoming entry barriers that are the source of the focuser’s competitive advantage.

28 Dynamics of competitive positioning
While some companies are able to develop business model and strategies that allow them to reach the value frontier many other cannot and so achieve only average or below average profits – Toyota, Dell, Wal-Mart Why some companies are able to sustain their competitive advantage?

29 Dynamics of competitive positioning
How the business model puts the company in strategic groups of competitors Why differences in performances are to be expected and why some companies run into competitive problems that threaten their existence?

30 Competitive Positioning for Superior positioning: Broad differentiation
Need to lower cost structure and differentiate in a global competitive environment Middle of value creation frontier occupied by broad differentiators Selecting a level of differentiation giving competitive advantage in the chosen market segment

31 Competitive Positioning for Superior positioning: Broad differentiation
Lowering the cost structure over time Threat to both cost leaders and differentiators – Toyota – New technology The way in which a business model differentiates distrupts the industry competitive equilibrium Mass production days Vs. Lean production days – GM Vs. Toyota

32 Competitive Positioning for Superior positioning: Broad differentiation
Low cost structure is to make product targeted to one market segment and allow limited customization Using internet and e-commerce to become broad differentiator Dell and Amazon Rapidly expanding the range of products Highly efficient materials management systems

33 Strategic Groups and Business-Level Strategy
Implications for business-level strategy Immediate competitors are companies pursuing same strategy within the same strategic group. Different strategic groups can have a different standing with respect to the effects of the five competitive forces. First mover advantage Benefits are first choice of customers and suppliers, setting standards, building entry barriers.

34 Strategic Groups Map competitors according to the choice of business model and identify the products, market segments and competencies for competitive advantage Identify the companies in its strategic group which may be close substitutes

35 Strategic Groups Benchmark against closest rivals on important performance dimensions Focus attention to other strategic groups to determine possible threats

36 Choosing an Investment Strategy at the Business Level
The resources (human, functional, and financial) required to gain sustainable competitive advantage. Competitive position Market share is an indicator of competitive strength. Distinctive competencies are competitive tools. Life Cycle Effects An industry’s life cycle stage affects its attractiveness to investment prospects.

37 Strategic Groups Map competitors according to the choice of business model and identify the products, market segments and competencies for competitive advantage Identify the companies in its strategic group which may be close substitutes

38 Choosing an Investment Strategy at the Business Level
Stage of the Industry Life Cycle Strong Competitive Position Weak Competitive Position Embryonic Share building Growth Market concentration Shakeout Share increasing Market concentration or harvest/liquidation Maturity Hold-and-maintain or profit Harvest or liquidation/divestiture Decline Market concentration or harvest (asset reduction) Turnaround, liquidation, or divestiture TABLE 6.2

39 Failures in competiton
Fit between business model and strategies required for sustainable competitive advantage Cost leader should not strive for high level of market segmentation Differentiator should not try to reduce cost on the base of its differentiation

40 Failures in competiton
Business level strategies should work in harmony and maintain competitive position Continuously improve their business model Strategic business intent Factors for making competitive errors Focuser may over expand losing control of business Differentiators can end up in the middle if focused competitors attack their markets with more low cost or specialized products

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