Copyright © 2004 South-Western. All rights reserved.4–1 Tuesday, February 7, 2006 Review - - strategic management process - I/O and resource-based perspectives - 4 criteria of distinctive competencies leading to sustainable advantage - value chain analysis - outsourcing Chapter 4 - Business-level strategies - intricate links to the value chain Case 3 readiness

Copyright © 2004 South-Western. All rights reserved.4–2 Chapter 4: Business-Level Strategy Strategy 5 “generic business-level strategies” -characteristics -how to develop -advantages and disadvantages “Stuck-in-the-middle”

Copyright © 2004 South-Western. All rights reserved.4–3 Figure 1.1 Copyright © 2004 South-Western. All rights reserved. The Strategic Management Process

Copyright © 2004 South-Western. All rights reserved.4–4 Generalized Corporate Structure

Copyright © 2004 South-Western. All rights reserved.4–5 Successful Strategies match the firm’s core competencies with customer needs, paying attention to... careful selection of the target market insightful knowledge of and effective relationships with the target market continuous improvement of strategy execution providing unexpected value

Copyright © 2004 South-Western. All rights reserved.4–6 “Generic Business-Level Strategy” = how a firm intends to compete at the business-unit (division) level, in VERY GENERAL terms VERY BASIC ways to compete to achieve above-average profits: 1. Price premium to create higher revenues 2. Efficiencies to create lower costs

Copyright © 2004 South-Western. All rights reserved.4–7 Also consider breadth of target markets... Broad scope = the firm competes in many market (customer) segments Narrow scope = the firm selects one or two market segments

Copyright © 2004 South-Western. All rights reserved.4–8 Five Business- Level Strategies Figure 4.1 SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 12. Copyright © 1985, 1998 by Michael E. Porter.

Copyright © 2004 South-Western. All rights reserved.4–9 Cost Leadership Strategy An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors  Relatively standardized products  Features acceptable to many customers  Generally uses a mass market approach with little segmentation  Lowest competitive price

Copyright © 2004 South-Western. All rights reserved.4–10 Cost Leadership Strategy - Steps to develop:  examine value chain for potential cost savings  pay extra attention to “cost drivers” (areas of significant costs in the organization)  no stone is left unturned! no sacred cows! (but need to maintain product acceptability)  look both inside and outside the firm for potential areas of cost savings  reconfigure the value chain to accomplish cost savings

Copyright © 2004 South-Western. All rights reserved.4–11 Ideas for Cost Reduction Primary Value Chain Activities Support Activities in the Value Chain

Copyright © 2004 South-Western. All rights reserved.4–12 How to Obtain a Cost Advantage Cost Drivers Value Chain Determine and control Reconfigure, if needed  Alter production process  Change in automation  New distribution channel  New advertising media  Outsource or omit some value chain activities  New raw material  Forward integration  Backward integration  Change location relative to suppliers or buyers  JIT - suppliers bear costs

Copyright © 2004 South-Western. All rights reserved.4–13 Common Characteristics of Cost Leaders (see value chain example, Fig. 4.2, pg. 116) cost conscious organizational culture intense scrutiny of expenses budget centralization focus on efficiency scale economies process engineering skill technologically advanced lean management; limited “perks and frills” spartan facilities

Copyright © 2004 South-Western. All rights reserved.4–14 Main Advantages of Cost Leadership Scale economies Efficiency Market power Ability to attract price sensitive customers Ability to withstand price wars

Copyright © 2004 South-Western. All rights reserved.4–15 Cost Leadership Strategy Competitive Risks  sunk costs  obsolescence  image  internally focused attention  efficiency might dominate effectiveness

Copyright © 2004 South-Western. All rights reserved.4–16 Differentiation Strategy An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to customers  Products are nonstandardized  Customers value differentiated features more than they value low cost  Generally involves more extensive market segmentation

Copyright © 2004 South-Western. All rights reserved.4–17 Differentiation Strategy - Steps to develop:  identify the target market, the “real buyers”, and others influential in the buying process  determine important buyer purchasing criteria throughout the value chain; understand the buyer’s purchase process (consumer behavior!)  develop relevant sources of uniqueness -- as long it is as reasonable in terms of cost  lower costs elsewhere in value chain if possible

Copyright © 2004 South-Western. All rights reserved.4–18 “Relevant sources of valued uniqueness” = Primary Value Chain Activities Support Activities of the Value Chain

Copyright © 2004 South-Western. All rights reserved.4–19 How to Obtain a Differentiation Advantage Cost Drivers Value Chain Control if needed Reconfigure to maximize  Lower buyers’ (maybe non-monetary) costs  Raise performance of product or service  Create sustainability through:  Customer perceptions of uniqueness  Customer reluctance to switch to non- unique product or service

Copyright © 2004 South-Western. All rights reserved.4–20 Common Characteristics of Differentiators (see value chain example, Fig. 4.3, pg. 120) strong emphasis on the marketing functions - market segmentation, marketing research, new product development, promotion.... elaborated product; additional/new features image/reputation emphasis tailoring to customer needs/preferences higher levels of service and/or quality higher compensation for desired workforce innovativeness “organizational slack”

Copyright © 2004 South-Western. All rights reserved.4–21 Primary Advantages of Differentiation Ability to charge a price premium Customer loyalty Insulation from pure price competition Image

Copyright © 2004 South-Western. All rights reserved.4–22 Competitive Risks of Differentiation price differential between the differentiator and the cost leader becomes too large differentiation ceases to provide value for which customers are willing to pay (“benefit erosion”) “over-differentiation” counterfeit goods or information asymmetries result in imitation of the differentiated features

Copyright © 2004 South-Western. All rights reserved.4–23 Focus Strategies An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment  Focus is typically on one or two specific (relatively narrow) market segments  Can use either cost leadership or differentiated approach, but the latter is more common

Copyright © 2004 South-Western. All rights reserved.4–24 Factors That Drive Focused Strategies Large players may overlook small niches. A smaller/newer player may lack the resources needed to compete in the broader market An organization is able to serve a narrow market segment more effectively than can its larger industry-wide competitors Focusing allows the firm to effectively direct its resources to build competitive advantage Expanding to additional target markets is possible when a strong niche position is established.

Copyright © 2004 South-Western. All rights reserved.4–25 Competitive Risks of Focus Strategies May be “outfocused” by its competitors A large competitor may come in Customer preferences in niche market may change Are available niches the unattractive “leftover” market segments?

Copyright © 2004 South-Western. All rights reserved.4–26 Integrated Cost Leadership/ Differentiation Strategy It sounds ideal to be simultaneously the cost leader and a strong differentiator. Increasingly, firms are trying to blend the two major business-level strategies. But formulation is easier than implementation!

Copyright © 2004 South-Western. All rights reserved.4–27 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

Copyright © 2004 South-Western. All rights reserved.4–28 Functional Skill Comparisons Cost Leadership efficiency standardization mass production process improvement reduced service tight org’l control stability cost accounting Differentiation effectiveness customization shorter production runs product development enhanced service org’l slack is needed flexibility marketing

Copyright © 2004 South-Western. All rights reserved.4–29 Characteristics to Facilitate Successful Implementation of Integrated Cost Leadership/Differentiation Strategy large (global) market share economies of scale learning curve advantages (industry pioneers) advanced/efficient production capabilities marketing prowess

Copyright © 2004 South-Western. All rights reserved.4–30 Overall Advice for Business-Level Strategy Understand your resources, capabilities, and target market(s) Be true to your distinctive competence -- base your strategies on your strengths! Be as good as possible at activities not primary to your strategy -- without eroding your competitive advantage. Remember -- strategies must be implemented through value chain activities Realize that you cannot be all things to all people -- or you will be valuable to none!