1. ©2003 Southwestern Publishing Company 1 Business-Level Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Chapter 4

2. 2 Strategy Implementation Chapter 11 Chapter 11 Organizational Structure and Structure and Controls Chapter 10 Chapter 10 Corporate Governance Chapter 12 Chapter 12 Strategic Leadership Strategy Formulation Chapter 4 Chapter 4 Business-Level Strategy Strategic Competitiveness Above-Average Returns Strategic Intent Strategic Intent Strategic Mission Strategic Mission Chapter 2 Chapter 2 The External The External Environment Chapter 3 Chapter 3 The Internal The Internal Environment The Strategic Management Process Feedback Strategic Inputs Strategic Actions Strategic Outcomes Chapter 13 Chapter 13 Strategic Entrepreneurship

3. 3 Business-Level Strategy Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

4. 4 Core Competencies and Strategy The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets Business-levelstrategy Strategy Corecompetencies

5. 5 Key Issues of Business-Level Strategy What good or service to offer customers What good or service to offer customers How to manufacture or create the good or service How to manufacture or create the good or service How to distribute the good or service in the marketplace How to distribute the good or service in the marketplace

6. 6 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

7. 7 Managing Relationships With Customers Customer relationships are strengthened by offering them superior value Customer relationships are strengthened by offering them superior value –help customers to develop a new competitive advantage –enhance the value of existing competitive advantages

8. 8 Managing Relationships With Customers Establish a competitive advantage along these dimensions: Establish a competitive advantage along these dimensions:Reach –the firm’s access and connection to customers Richness –the depth and detail of the two-way flow of information between the firm and customers Affiliation –facilitating useful interactions with customers

9. 9 Customers Market Segmentation ConsumerMarkets IndustrialMarkets

10. 10 Market Segmentation: Consumer Markets Demographic factors ConsumerMarkets Socioeconomic factors Geographic factors Psychological factors Consumption patterns Perceptual factors Dem. Soc. Geo. Psy. Con. Per.

11. 11 Market Segmentation: Industrial Markets IndustrialMarkets End-use segments Product segments Geographic segments Common buying factor segments Customer size segments End Pro. Geo. Buy. Size

12. 12 Types of Business-Level Strategies Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

13. 13 Five Generic Strategies Competitive Advantage Competitive Scope CostUniqueness Broad target Narrow target Cost Leadership Differentiation Focused Cost Leadership Focused Differentiation Integrated Cost Leadership/Differentiation

14. 14 Cost Leadership Strategy An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers –relatively standardized products –features acceptable to many customers –lowest competitive price

15. 15 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

16. 16 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 Direct sales in place of indirect sales New advertising media New raw material Backward integration Forward integration Change location relative to suppliers or buyers

17. 17 l Product features l Performance l Mix & variety of products l Service levels l Small vs. large buyers l Process technology l Wage levels l Product features l Hiring, training, motivation Factors That Drive Costs l Economies of scale l Asset utilization l Capacity utilization pattern Seasonal, cyclical l Interrelationships l Order processing and distribution l Value chain linkages Advertising & sales Logistics & operations

18. 18 Questions Leading to Lower Costs 1.How can an activity be performed differently or even eliminated? 2.How can a group of linked value activities be regrouped or reordered? 3.How might coalitions with other firms lower or eliminate costs?

19. 19 Cost Leadership Strategy and the Five Forces of Competition Rivalry Among Competing Firms Can use cost leadership strategy to advantage since: l 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 Threat of Substitute Products Five Forces of Competition

20. 20 Cost Leadership Strategy and the Five Forces of Competition Bargaining Power of Buyers Can mitigate buyers’ power by: l driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition

21. 21 Cost Leadership Strategy and the Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: l being able to absorb cost increases due to low cost position l 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 Threat of Substitute Products Five Forces of Competition

22. 22 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 Threat of Substitute Products Five Forces of Competition Threat of New Entrants Can frighten off new entrants due to: l their need to enter on a large scale in order to be cost competitive l the time it takes to move down the learning curve

23. 23 Cost Leadership Strategy and the Five Forces of Competition Threat of Substitute Products Cost leader is well positioned to: l make investments to be first to create substitutes l buy patents developed by potential substitutes l lower prices in order to maintain value position Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition

24. 24 Major Risks of Cost Leadership Strategy Dramatic technological change could take away your cost advantage Dramatic technological change could take away your cost advantage Competitors may learn how to imitate value chain Competitors may learn how to imitate value chain Focus on efficiency could cause cost leader to overlook changes in customer preferences Focus on efficiency could cause cost leader to overlook changes in customer preferences

25. 25 Differentiation Strategy An 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 –price for product can exceed what the firm’s target customers are willing to pay –nonstandardized products –customers value differentiated features more than they value low cost

26. 26 Differentiation Strategy Value provided by unique features and value characteristics Value provided by unique features and value characteristics Command premium price Command premium price High customer service High customer service Superior quality Superior quality Prestige or exclusivity Prestige or exclusivity Rapid innovation Rapid innovation

27. 27 Differentiation Strategy Differentiation actions required by this strategy: –developing new systems and processes –shaping perceptions through advertising –quality focus –capability in R&D –maximize human resource contributions through low turnover and high motivation

28. 28 How to Obtain a Differentiation Advantage Cost Drivers Value Chain Control if needed Reconfigure to maximize customer perceptions of uniqueness customer reluctance to switch to non-unique product Raise performance of product or serviceRaise performance of product or service Lower buyers’ costsLower buyers’ costs Create sustainability through:Create sustainability through:

29. 29 Factors That Drive Differentiation Unique product features Unique product features Unique product performance Unique product performance Exceptional services Exceptional services New technologies New technologies Quality of inputs Quality of inputs Exceptional skill or experience Exceptional skill or experience Detailed information Detailed information

30. 30 Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms Can defend against competition because: l brand loyalty to differentiated product offsets price competition Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition

31. 31 Differentiation Strategy and the Five Forces of Competition Bargaining Power of Buyers Can mitigate buyer power because: l well differentiated products reduce customer sensitivity to price increases Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition

32. 32 Differentiation Strategy and the Five Forces of Competition Bargaining Power of Suppliers Can mitigate suppliers’ power by: l absorbing price increases due to higher margins l passing along higher supplier prices because buyers are loyal to differentiated brand Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition

33. 33 Differentiation Strategy and the Five Forces of Competition Threat of New Entrants Can defend against new entrants because: l new products must surpass proven products or, l new products must be at least equal to performance of proven products, but offered at lower prices Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition

34. 34 Differentiation Strategy and the Five Forces of Competition Threat of Substitute Products Well positioned relative to substitutes because: l brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands Rivalry Among Competing Firms Bargaining Power of Buyers Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Five Forces of Competition

35. 35 Major Risks of Differentiation Strategy Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large Customers may decide that the price differential between the differentiated product and the cost leader’s product is too large Means of differentiation may cease to provide value for which customers are willing to pay Means of differentiation may cease to provide value for which customers are willing to pay

36. 36 Major Risks of Differentiation Strategy Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s products Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s products

37. 37 Focused Business-Level Strategies A focus strategy must exploit a narrow target’s differences from the balance of the industry by: –isolating a particular buyer group –isolating a unique segment of a product line –concentrating on a particular geographic market –finding their “niche”

38. 38 Factors That May Drive Focused Strategies Large firms may overlook small niches Large firms may overlook small niches Firm may lack resources to compete in the broader market Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industry-wide competitors May be able to serve a narrow market segment more effectively than can larger industry-wide competitors Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage

39. 39 Major Risks of Focused Strategies Firm may be “outfocused” by competitors Firm may be “outfocused” by competitors Large competitor may set its sights on your niche market Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market Preferences of niche market may change to match those of broad market

40. 40 Advantages of Integrated 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 –effectively leverage its core competencies while competing against its rivals

41. 41 Benefits of Integrated Strategy Successful firms using this strategy have above-average returns Successful firms using this strategy have above-average returns Firm offers two types of values to customers Firm offers two types of values to customers –some differentiated features (but less than a true differentiated firm) –relatively low cost (but now as low as the cost leader’s price)

42. 42 Major Risks of Integrated Strategy An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy