Business level strategy MGMT 619 Prof. Sanjay Jain

Where we are... External Analysis Internal Analysis Competitive Positioning (Business-level strategy formulation)

Business level strategy Actions taken to provide value to customers and gain a competitive advantage (playing offense and defense) How should we compete effectively in the businesses that we are in?

The Distribution of Economic Contribution between a Firm & a Buyer Value V Buyer’s Surplus In competitive markets, buyers capture part of the overall economic contribution a firm produces. A Firm’s Total Economic Contribution Price P Firm’s Surplus or Profit Cost C Value = Willingness to Pay = price a buyer is willing to pay in the absence of a competing product and in the context of other purchasing opportunities. The buyer always determines a product’s value. Buyer’s surplus = Product’s Value to the Buyer - Market Price Firm’s surplus = Market Price - Unit Cost

Value drivers Technology Quality Service Customization Brand/Reputation Complements Delivery

Cost Drivers Economies of scale Economies of scope Learning Curve Low input costs Organizational practices Vertical integration

Human Resource Management MARGIN Technological Development Value Chain Analysis helps to identify which resources and capabilities can add value Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales MARGIN Operations Primary Activities

Isolating mechanisms Property rights Dedicated assets Causal ambiguity (organization specific practices) Switching costs

Creating new market space Typically in an industry, strategies tend to converge along the same basic dimensions of competition Creating new market space involves identifying unoccupied territory that represents a real breakthrough in value (capturing the “best of both worlds”)

Creating new market space From Head-to-head competition to creating new market space Strategy Look Across Substitutes Look Across Strategic Groups Look Across Buyers Look Across Complements Look Across Emotional/Functional Appeal Look Across Time New Market Space Old Market Old Market

Four actions framework: The value curve Reduce The key to discovering a new value curve lies in answering four basic questions What factors should be reduced well below the industry standard? Eliminate What factors that the industry has taken for granted should be eliminated? Create/Add What factors that the industry has never offered should be created or added? Creating new markets: A new value curve Raise What factors should be raised well above the industry standard? Source: Adapted from W.C. Kim and R. Mauborgne, “Blue Ocean Strategy,”

Conventional vs. new market creation strategic mindsets Dimensions of competition Head-to-Head competition New-market creation Emphasizes competitive position within group and segments Emphasizes rivalry Emphasizes better buyer service Emphasizes efficient operation of the model Emphasizes adaptation and capabilities that support competitive retaliation Emphasizes product or service value and offerings within industry definition Looks across groups and segments Emphasizes substitutes across industries Emphasizes redefinition of the buyer and buyer’s preferences Emphasizes rethinking of the industry business model Emphasizes strategic intent-seeking to shape the external environment over time Emphasizes complementary products and services within and across industries Industry Strategic group and industry segments Buyers Product and service offerings Business model Time

Creating shared value Companies are trapped in a narrow vision of value creation - optimize short term financial performance - ignore broader influences of long-term success Assumed tradeoff between economic efficiency and social progress (Friedman view)

Creating shared value Reconceiving products and services Redefining productivity in the value chain Enabling local cluster development

Create a Win-Win for Business and Society Choose which social issues to address Create a social dimension to the company’s value proposition Orchestrate heightened forms of collaboration A more sophisticated form of capitalism

Take-away points Competitive positioning as a synthesis of external/internal analysis; provides an economic logic for organizing firm activities Creating new market-spaces (positions) Creating shared value (economic and social positions)