CHAPTER 5 BUSINESS-AND FUNCTIONAL- LEVEL STRATEGY

Learning Objectives After studying this chapter, you should be able to explain: –Porter’s Five Forces model. –Business-level strategies. –Global versus multi-domestic strategies. –Functional strategies. –Quality management.

Porter’s Five Forces Model Business-level strategy refers to how a specific business will operate in order to succeed in that specific marketplace. Before developing business-level strategy, the business must understand what forces determine the profits in an industry Porter’s Five Forces model is a tool used to get an understanding of what forces determine the profits in an industry.

Porter’s Five Forces Model The Five Forces Model is based on Industrial Organization (IO) economics. Industrial Organization economics argues that all firms in a particular industry face forces within their industry that significantly affect profitability.

Porter’s Five Forces Model Bargaining power of buyers –Individuals or firms who actually purchase the output of the industry are the buyers –The characteristics that determine if the bargaining power of buyers is high include concentration of buyers, ability to switch among different suppliers in the industry, and impact of goods from the industry on buyer’s output.

Porter’s Five Forces Model Bargaining power of suppliers –Suppliers are those firms or individuals that provide input into the creation of the industry’s output. –The factors that make suppliers powerful are demand for suppliers products, whether quality and performance of inputs are differentiated, and ability of the industry to vertically integrate.

Porter’s Five Forces Model New entrants –Ease of entry into an industry comes from the industry structure. The structural characteristics include: Obtaining economies of scale. The relationship between size and capital costs. Discouraging industries having many differentiated products. Limitation on access to distribution channels. Patents and proprietary knowledge also limits entry.

Porter’s Five Forces Model Substitute products –Factors impacting the power of substitutes include: Ability of customers to compare quality, performance, and price of one product with another. Ability of a product to bring good-enough performance criteria to the customer. The cost of switching from one product to another similar product.

Porter’s Five Forces Model Rivalry and complementors –One of the key factors affecting rivalry is differentiation. –The other factors include number of competitors, growing demand for the product, increasing payoff from successful strategic moves, and exit barriers. –Complementors are products which sell well with another product or those that complement a product to make it easier to buy or use.

Business-level strategies Once managers have completed their analysis of the five forces, they can use that information to understand how to compete effectively. Thus, a firm should develop its strategy based on its understanding of the forces in its industry.

Business-Level Strategies  Business-level strategy can be viewed by using a two-by-two matrix, which describes four generic business-level strategies.  The generic-strategies matrix is useful for analyzing firms that are competing in the same product-market in a relevant geographic domain.

Business-Level Strategies Cost and uniqueness –Low-cost strategy is where a business seeks to sell a product at or near the lowest possible price in the firm’s chosen market segment. –Differentiation strategy provides some aspect of a product or service that differs from that of competitors, such as higher quality, to increase the likelihood of customers paying a premium price for the product.

Business-Level Strategies Competitive scope –Competitive scope is the breadth of the market a firm will target, such as the range of customers and/or distributors sold to, and the geographic region the firm covers. –The key to understanding competitive scope is, if a firm tries to serve a broad range of customers with a broad range of needs, or targets a particular distributor, customer group, or geographic regions.

Business-Level Strategies Connecting low cost/differentiation and competitive edge –Firms may choose to pursue either a low-cost or differentiation strategy, employing a more narrow scope, sometimes also known as a ‘‘focus strategy.’’ –With a focused strategy, a firm will try to serve a particular type of customer, a particular distribution channel, and a geographic region, often with only one product.

Connecting low cost/differentiation and competitive edge (cont.): –Narrow positioning can be adopted with either the low-cost or the differentiation strategy. Business-Level Strategies

Changing business strategy –Changing the business-level strategy of a firm is difficult and should be done only with full consideration of the difficulties that can arise. –Business-level strategy is often easier to change when a firm faces a difficult competitive setting. The difficulties facing a firm encourage individuals in that firm to support the change. Business-Level Strategies

Low-cost strategy risks –Competitors may figure out how to offer the same product at a lower cost. –Customers are willing to pay more for a high- quality product. Business-Level Strategies

Differentiation strategy risks –The differentiation may be matched or surpassed by competitors that predict the next technological change or shift in market preference. –A low-cost competitor can figure out an inexpensive way of adding new features to its product. –Differentiation may no longer be valued to the same degree by consumers who are no longer willing to pay the premium associated with the product. Business-Level Strategies

Focus-based strategy risks –Focuser may be attacked by a more broadly positioned firm that is able to serve a range of market segments effectively. Business-Level Strategies

Business-level strategies – Global versus Multi- domestic International firms must decide if they will pursue the chosen business strategy in the same manner in all countries in which they compete. –Global Strategy is used when a firm chooses to compete in the same manner in all the countries. –This strategy helps maintain the quality image of the firm and its products, and obtain maximum benefits from economies of scale. –Economies of scale occur when a firm enjoys declining unit costs as production increases over a relevant range of time. Business-Level Strategies

Business-level strategies (cont.): –Multi-domestic strategy is used when a parent company allows each market to adapt to local conditions and pursue the strategy they choose best in that local market. –The benefits of this strategy include greater ability to match the needs of each market and hire locals to do key advertising and related activities. Business-Level Strategies

Choosing a global or multi-domestic strategy –A global strategy is useful when a firm makes its initial expansion overseas. –Use of global strategy allows strong control over the expansion and ensures that the expansion occurs in a desired manner. –A firm may find that strong control limits its ability to gain market share. Business-Level Strategies

Choosing a global or multi-domestic strategy (cont.): –One way of solving the limits issue is to allow some degree of variation in each given market. –The firm implements the transnational strategy, a strategy that combines aspects of a multi-domestic and global strategy. –A firm pursuing a transnational strategy will determine how much flexibility is to be allowed in a given nation. Business-Level Strategies

Functional Strategies Functional Strategies - Strategies that direct what occurs in individual functional areas like marketing, finance, and accounting. Strategic tactics - Strategic actions that help implement a strategy such as a new promotion program that implements a focus on differentiation business strategy.

Functional Strategies Marketing –Involves designing the firm’s marketing program that encompasses the “4Ps”. –Marketing to businesses is very systematic and focuses on what the given product does and its benefits. –Marketing to consumers is heavily influenced by local culture.

Functional Strategies Accounting –Concerned with maintaining information about the financial status of the firm. –Provides important performance measures on whether a firm is meeting concerns like profitability and inventory turnover.

Functional Strategies Accounting (cont.): –Valuable in helping a firm understand how efficient and effective it is being in different aspects of its business. –Transfer pricing is the pricing of goods and services within a multi-divisional organization that are supplied to other divisions or foreign subsidiaries. –The determination of the transfer prices is governed by the accounting method used and the accounting and tax regulations.

Functional Strategies Finance –The functional finance strategy of a firm principally concerns the means in which the firm funds its chosen activities. –Financing must be consistent with the strategy chosen. –The financing strategy should help a firm identify key areas that can be done more efficiently or cheaply.

Functional Strategies Operations/Production –Should be consistent with the chosen business strategy. –A firm implements turnkey operation when setting up an operation or production in a foreign country. –Turnkey operations is an approach where one part of the company is responsible for setting up the plant and equipment while another operates the plant.

Functional Strategies Research and development –Concerned with ensuring that research is creative, and flow of information happens throughout the organization. –There must be strong control of the information produced.

Functional Strategies Supply chain management – Focuses on: –Inputs to a firm and where the firm ships its output. –How the firm manages and works with its suppliers.

Functional Strategies Quality management –Considered to be a functional concern and is not limited to a single department. –Dr. W. Edwards Deming is one of the founder’s of the quality movement.