Business-Level Strategy Chapter Five

Strategic Management Process The Strategy Formulation Chapter 4 Internal Environment Chapter 3 External Strat . Intent . Mission Strategic Inputs Strategic The . Management . Process Strategy Formulation Strategy Implementation Strategic Actions Chapter 5 Bus. – Level Strategy Chapter 5 Chapter 6 Chapter 7 Chapter 11 Chapter 12 Bus. - Level Competitive Corp. - Level Corporate Structure Strategy Dynamics Strategy Governance & Control Chapter 8 Chapter 9 Chapter 10 Chapter 13 Chapter 14 Acquisitions & International Cooperative Strategic Entrepreneurship Restructuring Strategy Strategies Leadership & Innovation Strategic Outcomes Feedback Above Average Returns Chapter 2 Strategic Competitiveness Chapter 1 Strategic Competitiveness Chapter 1

The Central Role of Customers In selecting a business-level strategy, the firm determines 1. Who it will serve. 2. What needs those target customers have that it will satisfy. 3. How those needs will be satisfied. © 2006 by Nelson, a division of Thomson Canada Limited.

Core Competency, Strategy and Business Level Strategy The resources and capabilities that are determined to be a source of competitive advantage for a firm over its rivals. An integrated & coordinated set of actions taken to exploit core competencies & gain a competitive advantage. Strategy Actions taken to provide customers value and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Business Level Strategy 7

Three Generic Strategies Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Competitive Advantage and Business Performance Differentiation and Cost Differentiation Focus Cost 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 Adapted from Exhibit5.2 Competitive advantage and business performance McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

How to Obtain a Cost Advantage 1 Determine and Control Cost Drivers 2 Reconfigure the as needed Value Chain Alter production process Change in automation New raw material New distribution channel New advertising media Direct sales in place of indirect sales Forward integration Backward integration Alter location relative to suppliers or buyers 36

Value-Chain Activities: Overall Cost Leadership Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter. McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Cost Leadership Strategy and the Five Forces of Competition Rivalry with Existing Competitors Can use cost leadership strategy to advantage since: competitors avoid price wars with cost leaders, creating higher profits for the entire industry Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition

Cost Leadership Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Bargaining Power of Buyers (Customers) Can mitigate buyers’ power by: Driving prices far below competitors and cause exit and shift power back to firm.

Cost Leadership Strategy and the Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: being able to absorb cost increases due to low cost position being able to make very large purchases, reducing chance of supplier using power Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition

Cost Leadership Strategy and the Five Forces of Competition Threat of 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 Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition

Value-Chain Activities: Differentiation Exhibit 5.5 Value-Chain Activities: Examples of Differentiation Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter. McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Threat of Substitute Products Well positioned relative to substitutes because: brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands.

Major Risks of Cost Leadership Business Level Strategy Dramatic technological change could take away your cost advantage. Competitors may learn how to imitate Value Chain. Focus on efficiency could cause Cost Leader to overlook changes in customer preferences.

Generic Business Level Strategies Source of Competitive Advantage Cost Uniqueness Breadth of Competitive Scope Broad Target Market Narrow Cost Leadership Differentiation 52

Differentiation strategy “An integrated set of actions designed by a firm to produce or deliver goods or services that customers perceive as being different in ways that are important to them.”

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

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Can defend against competition because: brand loyalty to differentiated product offsets price competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Bargaining Power of Buyers Can mitigate buyer power because: well differentiated products reduce customer sensitivity to price increases

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: absorbing price increases due to higher margins passing along higher supplier prices because buyers are loyal to differentiated brand

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Threat of New Entrants Can defend against new entrants because: new products must surpass proven products or, new products must be at least equal to performance of proven products, but offered at lower prices

Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Substitute Products Threat of Five Forces of Competition Threat of Substitute Products Well positioned relative to substitutes because: brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands

Major Risks of a Differentiation Business Level Strategy Customers may decide that the differentiation between the differentiator’s product and the cost leaders price is too large. A firm’s means of differentiation may cease to provide value for which customers are willing to pay. The means of uniqueness may no longer be valued by customers.

Focus Strategies Focus strategies are an integrated set of actions designed to produce or deliver goods or services that serve the needs of a particular competitive segment.