Presentation on theme: "Business-Level Strategy"— Presentation transcript:
1 Business-Level Strategy Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
2 Core Competencies and Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivalsCorecompetenciesAn integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantageStrategyActions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product marketsBusiness-levelstrategy
3 Strategy Fundamental constraints Scope Value chain What good or service to offer, to which customersValue chainHow and where to create the good or serviceHow to distribute the good or service in the marketplace(s)
4 Recall our value creation model Costs represent specific investment choices that generate value
5 Broad or narrow scope? Consumer Markets Consumer Markets DemographicConsumerMarketsPer.Dem.SocioeconomicCon.Soc.GeographicPsychologicalPsy.Geo.Consumption patternsPerceptual factorsImplications for configuration of value chain??
6 Broad or narrow scope? Business Markets Industrial Markets End-useIndustrialMarketsSizeEndProduct segmentsGeog segmentsBuy.Pro.Geo.Common buying factorsCustomer size segmentsImplications for configuration of value chain??
7 Source of competitive advantage - Value chains Strategies create differences between the firm’s position and its rivalsSources of differences? - perform activities differently; perform different activitiesTwo value-adding configurations (Porter, 1985)Low costDifferentiated
8 Comparing Scope and Source of Advantage Competitive AdvantageCostUniquenessCost LeaderDifferentiatorBroad targetIntegrated CostLeader/DifferentiatorCompetitive ScopeNarrow targetFocused CostFocused Differentiator
9 Cost Leadership Strategy An integrated set of actions designed to produce or deliver goods or services at the lowest cost relative to competitors with features that are acceptable to customersrelatively standardized productsfeatures acceptable to many customerslowest competitive price
10 Cost Leadership Strategy Cost saving actions required by this strategy:building efficient facilitiestightly controlling production costs and overheadminimizing costs of sales, R&D and servicebuilding efficient manufacturing facilitiesmonitoring costs of activities provided by outsiderssimplifying production processes
11 Cost Drivers Implications? Major Cost Drivers Economies of scale Learning/SpilloversCapacity utilizationIntegrationVertical LinkagesTimingLocationPolitical/regulatoryInterrelationships (corporate)Discretionary decisionsProduct features, performanceMix & variety of productsService levelsSmall vs. large buyersProcess technologyWage levelsProduct featuresHiring, training, motivationES: (a) Indivisibilities - Inputs are lumpy or non-rival in consumption their costs can be spread over a larger level of output resulting in lower unit costs. Such inputs include R&D and advertising. (b) Specialization - When scale increases, opportunities for specialization become available. (c) Lower input costs – e.g., volume discounts, lower transaction costs, reduced inventories and other similar cost efficiencies resulting from large scale of operations. (d) Automation - scale makes more efficient methods possible, e.g., production and distribution . (e) Learning - available in production and distribution processes involving high degrees of tacit knowledge.DS: increased costs from increased scale, e.g., (a) Complexity - costs of coordination may increase more than proportionately or effectiveness may decrease. (b) Marketing and distribution - as scale increases, marketing and distributing goods in increasingly diverse and geographically dispersed markets may be necessaryLearning – high rate of spillover = industry advantage; low rate = firm advantageIntegration – implicit or explicit evaluation of make vs. buy decisions.Linkages – interactions among activities ↑costa → ↓costb (invest in UPS scheduling/routing)Timing – first mover advantage from lower brand diff. costs; late mover advantage from avoiding high mkt/prod dev costsImplications?
13 Questions Leading to Lower Costs 1. How can an activity be performed differently, eliminated, externalized?2. How can linked value activities be regrouped or reordered?3. How can upstream/downstream collaboration lower costs?
14 Implementation Pitfalls Exclusive focus on MfgMisunderstand drivers (ABC useful)Failure to recognize/exploit linkages (e.g., across the board cost reductions)Contradictions – (e.g., gain mkt share through ES but allow product clutter; cross subsidies)
15 Cost Leadership and the Five Forces Rivalry - competitors avoid price wars with cost leadersBuyers – shift demand to you, increase market powerSuppliers – increased market power, absorb cost increases (low cost position)Entrants – entry barriers (scale, learning)Substitutes – reinvest econ profit to maintain advantage
16 Major Risks of Cost Leadership Strategy There can only be one cost leaderTechnological change can eliminate cost advantageSpillovers lead to imitationEfficiency focus may create blind spots re: customer preferences
17 Differentiation Strategy An integrated set of actions designed by a firm to produce or deliver goods or services that customers perceive as adding valueprice may exceed what the firm’s target customers are willing to payNon-commodity productscustomers value differentiated features more than they value low cost
18 Some Differentiation Themes Unique tasteDr. PepperMultiple featuresMicrosoft Windows and OfficeWide selection and one-stop shoppingHome Depot and Amazon.comReliable, superior serviceFedEx, Ritz-CarltonSpare parts availabilityCaterpillar
19 Themes Prestige Quality manufacturing, few defects RolexQuality manufacturing, few defectsHonda, ToyotaTechnological leadership3M Corporation, IntelTop-of-the-line imageRalph Lauren, Kiton
20 Differentiation Strategy Add downstream valuelower buyer costraise buyer performanceCostAdd value to buyer’s value: reduce downstream processing time, search time, transaction costs, defect rates, direct costs, learning curves, labor, space, installation, etc. (e.g., CRM software)
21 Factors That Drive Differentiation Value: Increase performance of buyer’s value chain (or consumer perception)Unique features, performanceDownstream channels (e.g., Catepillar dealer network)New technologiesQuality of inputsSkill or know-howInformation
22 Differentiation Strategy Some differentiation actions required by this strategy:develop new “systems” and processessignal and shape buyer perceptionsquality focuscapability in R&DImplication - maximize human capital contributions
24 Differentiation and the Five Forces Rivalry - brand loyalty to differentiated products reduces price competitionBuyers – differentiated products less price elasticSuppliers – absorb price increases (higher margins), pass along higher prices (buyer loyalty)Entrants – must surpass proven products or be equivalent at lower priceSubstitutes – diff raises switching costs
25 Pitfalls of Differentiation Strategies Differentiating on characteristics not valued by buyers (e.g., HP)Over-differentiatingPrice premium is too highFailing to signal valueFocusing on product instead of entire value chain
26 Focused Business-Level Strategies A focus strategy must exploit a narrow target’s differences from the balance of the industry by:isolating a particular buyer groupisolating a unique segment of a product lineconcentrating on a particular geographic marketfinding their “niche”
27 Factors Driving Focus Strategies Large firms overlook small nichesFirm may lack resources to compete in the broader marketMay be able to serve a narrow market segment more effectively than can larger industry-wide competitorsFocus may allow the firm to direct resources to certain value chain activities to build competitive advantage
28 Major Risks of Focused Strategies Firm may be “outfocused” by competitorsLarge competitor may set its sights on your niche marketPreferences of niche market may change to match those of broad market
29 Advantages of Integrated Strategy A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:adapt quickly to environmental changeslearn new skills and technologies more quicklyeffectively leverage its core competencies while competing against its rivals
30 Benefits of Integrated Strategy Successful firms using this strategy have above-average returnsFirm offers two types of values to customerssome differentiated features (but less than a true differentiated firm)relatively low cost (but now as low as the cost leader’s price)
31 Major Risks of Integrated Strategy An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy
32 Vertical Power (buyer/seller) Summary: Industry and Firm Effects on ProfitPatentsBrandsRetaliatorycapabilityBarriers to EntryIndustryAttractivenessRivalrySubstitutabilityRate of Profitin Excess of theCompetitive LevelFirm sizeFinancial resourcesVertical Power (buyer/seller)Process technologyPlant sizeLow-cost inputsCostAdvantageCompetitiveAdvantageBrandsProduct technologyMarketingcapabilitiesDifferentiationAdvantage