Strategic Management: Concepts and Cases 9e Chapter 4: Business-Level Strategy

Chapter 4: Business-Level Strategy Overview: Five content areas Defining business-level strategy Relationship between customers and strategy Differences in business-level strategies 5-Forces applied to each business level strategy Risks of business-level strategies

Acer Group’s Cost Strategy Four PC brands: Acer Gateway Packard Bell eMachines Elements of Acer’s Low Cost Strategy Sales only through retail/other outlets (no direct sales) Outsource all manufacturing and assembly Tight control of overhead costs Acer overhead-8% of sales; HP–15%; Dell–14% Focus on consumers and small/mid-size businesses

Introduction Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives. Choices dictated by External environment Internal resources, capabilities and core competencies Business level-strategy: Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

Customers: Their Relationship with Business-Level Strategies Strategic competitiveness results when firm can satisfy customers by using its competitive advantages Returns earned are the lifeblood of firm Most successful companies satisfy current customers and/or meet needs of new customers

Customers Satisfying customers is the foundation of successful business strategies Deliver superior value Connection: Reach, richness, affiliation Who will be served What needs will be satisfied How those needs will be satisfied

…Five Components in Customer Relationships 1. Deliver superior value Strong interactive relationships is foundation 2. Connection to Customers Reach: Access and connection to customers Richness: Depth and detail of two-way flow of information between firm and customer Affiliation: Facilitating useful interactions with customers 3. Who: Determining Market segmentation Dividing customers into groups based on differences in needs Process used to cluster people with similar needs into individual and identifiable groups For example, consumer and industrial markets

Customer Segmentation - Consumers Demographic factors (age, income, sex, etc.) Socioeconomic factors (social class, stage in the family life cycle) Geographic factors (cultural, regional, and national differences) Psychological factors (lifestyle, personality traits) Consumption patterns (heavy, moderate, and light users) Perceptual factors (benefit segmentation, perceptual mapping) SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120.

Customer Segmentation - Industrial End-use segments identified by SIC code Product segments based on technological differences or production economics Geographic segments defined by boundaries between countries or by regional differences within them Common buying factor segments cut across product market and geographic segments 5. Customer size segments SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120. Table 4.1

Five components of Customer Relationships 4. What: Determining which customer needs to satisfy Related to a product’s benefits and features Must anticipate and be prepared: (I.e., High-quality? Low price?) Translate into features and performance capabilities of products 5. How: Determining core competencies necessary to satisfy customer needs Firms use core competencies to implement value creating strategies that satisfy customers’ needs Only firms who continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time

Business-Level (BL) Strategies Purpose: To create differences between position of a firm and its competitors Two types of competitive advantage firms must choose between Cost (Are we LOWER than others?) Uniqueness (Are we DIFFERENT? How?) Two types of ‘competitive scope’ firms must choose between Broad target: compete in many customer segments Narrow target: selects a segment, tailors strategy to fit

Five Business-Level Strategies

Cost Leadership Strategy Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors Competitive advantage: THE low-cost leader and operates with margins greater than competitors No-frill, standardized goods Continuously reduce costs of value chain activities Inbound/outbound logistics account for significant cost Low-cost position is a valuable defense against rivals

Cost Leadership Strategy Cost saving actions required by this strategy: Building efficient scale facilities Tightly controlling production costs and overhead Minimizing costs of sales, R&D and service Building efficient manufacturing facilities Monitoring costs of activities provided by outsiders Simplifying production processes

How to Obtain a Cost Advantage Determine and control Reconfigure, if needed Cost Drivers Value Chain 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

Value-Creating Activities for Cost Leadership Cost-effective MIS Few management layers Simplified planning Consistent policies Effecting training Easy-to-use manufacturing technologies Investments in technologies Finding low cost raw materials Monitor suppliers’ performances Link suppliers’ products to production processes Economies of scale Efficient-scale facilities Effective delivery schedules Low-cost transportation Highly trained sales force Proper pricing

Cost Leadership Strategy: Five Forces 1. Cost Leadership: New Entrants Can frighten off new entrants due to: Their need to enter on a large scale in order to be cost competitive The time it takes to move down the learning curve Continuously improving levels of efficiency and cost reduction 2. Cost leadership: Suppliers Absorb supplier price increases and relationship demands Force suppliers to hold down their prices

Cost Leadership Strategy: Five Forces 3. Cost Leadership: Buyers Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm 4. Cost leadership: Substitutes Flexibility to lower prices to retain customers Examples: Greyhound Bus, Big Lots Inc., Wal-Mart Make investments to be first to create substitutes Buy the patents of potential substitutes 5. Cost Leadership: Rivalry Rivals hesitate to compete on basis of price Lack of price competition leads to greater profits

Risks of the Cost Leadership Strategy Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations Focus on cost reductions may occur at expense of customers’ perceptions of value Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

Differentiation Business-Level Strategy Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them Target customers perceive product value Customized products – differentiating on as many features as possible Examples: Apple’s iPod

How to Obtain a Differentiation Advantage Control if needed Reconfigure to maximize Cost Drivers Value Chain Lower buyers’ costs Raise performance of product or service Create sustainability through: Customer perceptions of uniqueness Customer reluctance to switch to non-unique product or service

Value-Creating Activities and Differentiation Highly developed MIS Emphasis on quality Worker compensation for creativity/productivity Use of subjective performance measures Basic research capability Technology High quality raw materials Delivery of products High quality replacement parts Superior handling of incoming raw materials Attractive products Rapid response to customer specifications Order-processing procedures Customer credit Personal relationships

Differentiation Strategy: Five Forces 1. Differentiation: Potential Entrants New products must surpass proven products New product equal in performance at lower cost would require significant resource investment 2. Differentiation: Suppliers Provide high quality components, driving up firm’s costs Cost may be passed on to customer

Differentiation Strategy: Five Forces 3. Differentiation: Buyers (Customers) Inverse relationship between loyalty/product: As loyalty increases, price sensitivity decreases I.e., Callaway golf clubs 4. Product Substitutes Customer loyalty effectively positions firm Reduces customer testing of new products 5. Rivalry against existing competitors Brand loyalty offsets price compeition I.e., Bose

Risks of the Differentiation Strategy Customers determine that the cost of differentiation is too great The means of differentiation may cease to provide value for which customers are willing to pay Experience can narrow customers’ perceptions of the value of a product’s differentiated features Counterfeit goods replicate differentiated features of the firm’s products

Focus Strategies An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment Particular buyer group (e.g. youths or senior citizens Different segment of a product line (e.g. professional craftsmen versus do-it-yourselfers Different geographic markets (e.g. East coast versus West coast)

Focus Strategies Types of focused strategies Focused cost leadership strategy Focused differentiation strategy To implement a focus strategy, firms must be able to: Complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns

Factors That Drive Focused Strategies Large firms may overlook small niches. A firm may lack resources to compete in the broader market A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

Competitive Risks of Focus Strategies A focusing firm may be “outfocused” by its competitors A large competitor may set its sights on a firm’s niche market Customer preferences in niche market may change to more closely resemble those of the broader market

Integrated Cost Leadership/ Differentiation Strategy A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: Adapt quickly to environmental changes Learn new skills and technologies more quickly Simultaneously concentrate on both cost and differentiation Demonstrate strategic flexibility

Strategic Flexibility Flexible manufacturing systems (FMS) Computer controlled process used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention Goal: eliminate ‘low cost vs. product variety, tradeoff inherent in traditional manufacturing technologies Information networks Using technology to link suppliers, distributors and customers Total Quality Management (TQM) systems Emphasizes firm’s total commitment to the customer and continuous improvement of every process through data-driven, problem-solving approaches based on empowering employees

Risks of the Integrated Cost Leadership/ Differentiation Strategy Often involves compromises Becoming neither the lowest cost nor the most differentiated firm Becoming “stuck in the middle” Lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy

Competitive Risks of Integrated Strategies Although becoming more popular the RISK is getting ‘stuck in the middle’ Cost structure is not low enough for attractive pricing of products and products not sufficiently differentiated to create value for target customer – therefore, fail to successfully implement either low cost or differentiation strategy Result: Don’t earn above-average returns

Value-Creating Activities: Differentiation Strategy

Value-Creating Activities: Cost Leadership Strategy Copyright © 2004 South-Western. All rights reserved.