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” processCustomer 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 optionValue 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 strategyGeneric means all companies can follow these strategies
5 Cost LeadershipLower the cost structure and increase efficiency – Wal Mart, DellDevelopment of distinctive competencies in different functions –Manufacturing -flexible manufacturing systems,Materials management - efficient materials management techniques,
6 Cost LeadershipSales - capturing large, stable set of customer orders,Human resource - instituting training programs that increases employee productivityR & D – process improvementsService 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 establishedPosition its product to average customer, ignore different market segments
8 Competitive advantages Cost leader is protected by cost advantageLess affected by increase in cost of inputs (powerful suppliers, or price (powerful buyers)Increases its bargaining power over its suppliers due to bulk purchasesWard off substitutes by lowering the priceLow cost advantage acts as a barrier to entry
9 Principal threatsCompetitors ability to pursue new strategies that reduce their cost structures – technological change, lower labour costsCompetitors ability to imitate the cost leader - ChinaSingle 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 lineCompetes 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 scaleOperates at value creating frontier as it has no cost disadvantage in its market segment competing against companies following cost leadership or differentiated strategiesCost 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 environmentRespond 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 priceMercedes Benz, BMW, Rolex watches
15 Differentiation – strategic choices Gains competitive advantage by investing its resourcesExcellent quality – P & GSuperior innovation – SamsungResponsiveness to customer needs – IBM, Godrej, Dell, BMWHigh level of quality of service – FedEx, Lawyer firms, Consultants
16 Differentiation – strategic choices Appeal to customers’ psychological desires (prestige or status) – BMW, RolexDifferentiation can also be tailored to age groups and socio economic groupsDividing its market into many segments and niches _ Toyota, DellDeveloping distinctive competencies in the functions that provide it with competitive advantageControlling the cost structure – Savoy Hotel
17 Differentiation: Competitive advantages and disadvantages Safeguards company against competitors- Brand Loyalty, Patents and first mover advantageSuppliers power – Pass on the price increases to the customers
18 Differentiation: Competitive advantages and disadvantages Buyers – distinct product and brand loyaltyEntry Barriers – Differentiation and brand loyaltySubstitute products – Customer need, Premium price for distinctnessChallenges – 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 servicesWarding off imitation - Design or functionalityFirst movers’ disadvantage
20 Focused differentiation Business model based on differentiation and generic business level strategies – distinctive products in one or more market segmentsSelecting 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 StrategiesCost LeadershipDifferentiationFocusProduct DifferentiationLow (principally by price)High (principally by uniqueness)Low to high (price or uniqueness)Market SegmentationLow (mass market)High (many market segments)Low (one or a few segments)Distinctive CompetencyManufacturing and materials managementResearch and development, sales and marketingAny kind of distinctive competencyTABLE 6.1
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-MartWhy 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 competitorsWhy 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 environmentMiddle of value creation frontier occupied by broad differentiatorsSelecting 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 timeThreat to both cost leaders and differentiators – Toyota – New technologyThe way in which a business model differentiates distrupts the industry competitive equilibriumMass 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 customizationUsing internet and e-commerce to become broad differentiatorDell and AmazonRapidly expanding the range of productsHighly efficient materials management systems
33 Strategic Groups and Business-Level Strategy Implications for business-level strategyImmediate 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 advantageBenefits are first choice of customers and suppliers, setting standards, building entry barriers.
34 Strategic GroupsMap competitors according to the choice of business model and identify the products, market segments and competencies for competitive advantageIdentify the companies in its strategic group which may be close substitutes
35 Strategic GroupsBenchmark against closest rivals on important performance dimensionsFocus 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 positionMarket share is an indicator of competitive strength.Distinctive competencies are competitive tools.Life Cycle EffectsAn industry’s life cycle stage affects its attractiveness to investment prospects.
37 Strategic GroupsMap competitors according to the choice of business model and identify the products, market segments and competencies for competitive advantageIdentify 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 CycleStrong Competitive PositionWeak Competitive PositionEmbryonicShare buildingGrowthMarket concentrationShakeoutShare increasingMarket concentration or harvest/liquidationMaturityHold-and-maintain or profitHarvest or liquidation/divestitureDeclineMarket concentration or harvest (asset reduction)Turnaround, liquidation, or divestitureTABLE 6.2
39 Failures in competiton Fit between business model and strategies required for sustainable competitive advantageCost leader should not strive for high level of market segmentationDifferentiator 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 positionContinuously improve their business modelStrategic business intentFactors for making competitive errorsFocuser may over expand losing control of businessDifferentiators can end up in the middle if focused competitors attack their markets with more low cost or specialized products
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