1. Strategic Management: Concepts and Cases 9e
Chapter 4: Business-Level Strategy

2. Chapter 4: Business-Level Strategy
Overview: Five content areas
Defining business-level strategy
Relationship between customers and strategy
Differences in business-level strategies
5-Forces applied to each business level strategy
Risks of business-level strategies

3. Acer Group’s Cost Strategy
Four PC brands:
Acer
Gateway
Packard Bell
eMachines
Elements of Acer’s Low Cost Strategy
Sales only through retail/other outlets (no direct sales)
Outsource all manufacturing and assembly
Tight control of overhead costs
Acer overhead-8% of sales; HP–15%; Dell–14%
Focus on consumers and small/mid-size businesses

4. Introduction
Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives.
Choices dictated by
External environment
Internal resources, capabilities and core competencies
Business level-strategy: Integrated and coordinated set of commitments and actions the firm uses
to gain a competitive advantage
by exploiting core competencies
in specific product markets

5. Customers: Their Relationship with Business-Level Strategies
Strategic competitiveness results when firm can satisfy customers by using its competitive advantages
Returns earned are the lifeblood of firm
Most successful companies satisfy current customers and/or meet needs of new customers

6. Customers
Satisfying customers is the foundation of successful business strategies
Deliver superior value
Connection: Reach, richness, affiliation
Who will be served
What needs will be satisfied
How those needs will be satisfied

7. …Five Components in Customer Relationships
1. Deliver superior value
Strong interactive relationships is foundation
2. Connection to Customers
Reach: Access and connection to customers
Richness: Depth and detail of two-way flow of information between firm and customer
Affiliation: Facilitating useful interactions with customers
3. Who: Determining Market segmentation
Dividing customers into groups based on differences in needs
Process used to cluster people with similar needs into individual and identifiable groups
For example, consumer and industrial markets

8. Customer Segmentation - Consumers
Demographic factors
(age, income, sex, etc.)
Socioeconomic factors
(social class, stage in the family life cycle)
Geographic factors
(cultural, regional, and national differences)
Psychological factors
(lifestyle, personality traits)
Consumption patterns
(heavy, moderate, and light users)
Perceptual factors
(benefit segmentation, perceptual mapping)
SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120.

9. Customer Segmentation - Industrial
End-use segments
identified by SIC code
Product segments
based on technological differences or production economics
Geographic segments
defined by boundaries between countries or by regional differences within them
Common buying factor segments
cut across product market and geographic segments
5. Customer size segments
SOURCE: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120.
Table 4.1

10. Five components of Customer Relationships
4. What: Determining which customer needs to satisfy
Related to a product’s benefits and features
Must anticipate and be prepared: (I.e., High-quality? Low price?)
Translate into features and performance capabilities of products
5. How: Determining core competencies necessary to satisfy customer needs
Firms use core competencies to implement value creating strategies that satisfy customers’ needs
Only firms who continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time

11. Business-Level (BL) Strategies
Purpose:
To create differences between position of a firm and its competitors
Two types of competitive advantage firms must choose between
Cost (Are we LOWER than others?)
Uniqueness (Are we DIFFERENT? How?)
Two types of ‘competitive scope’ firms must choose between
Broad target: compete in many customer segments
Narrow target: selects a segment, tailors strategy to fit

12. Five Business-Level Strategies

13. Cost Leadership Strategy
Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors
Competitive advantage: THE low-cost leader and operates with margins greater than competitors
No-frill, standardized goods
Continuously reduce costs of value chain activities
Inbound/outbound logistics account for significant cost
Low-cost position is a valuable defense against rivals

14. 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

15. How to Obtain a Cost Advantage
Determine and control
Reconfigure, if needed
Cost Drivers
Value Chain
Alter production process
New raw material
Change in automation
Forward integration
New distribution channel
Backward integration
New advertising media
Change location relative to suppliers or buyers
Direct sales in place of indirect sales

16. Value-Creating Activities for Cost Leadership
Cost-effective MIS
Few management layers
Simplified planning
Consistent policies
Effecting training
Easy-to-use manufacturing technologies
Investments in technologies
Finding low cost raw materials
Monitor suppliers’ performances
Link suppliers’ products to production processes
Economies of scale
Efficient-scale facilities
Effective delivery schedules
Low-cost transportation
Highly trained sales force
Proper pricing

17. Cost Leadership Strategy: Five Forces
1. Cost Leadership: 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
Continuously improving levels of efficiency and cost reduction
2. Cost leadership: Suppliers
Absorb supplier price increases and relationship demands
Force suppliers to hold down their prices

18. Cost Leadership Strategy: Five Forces
3. Cost Leadership: Buyers
Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm
4. Cost leadership: Substitutes
Flexibility to lower prices to retain customers
Examples: Greyhound Bus, Big Lots Inc., Wal-Mart
Make investments to be first to create substitutes
Buy the patents of potential substitutes
5. Cost Leadership: Rivalry
Rivals hesitate to compete on basis of price
Lack of price competition leads to greater profits

19. Risks of the Cost Leadership Strategy
Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations
Focus on cost reductions may occur at expense of customers’ perceptions of value
Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

20. Differentiation Business-Level Strategy
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
Target customers perceive product value
Customized products – differentiating on as many features as possible
Examples: Apple’s iPod

21. 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 or service

22. Value-Creating Activities and Differentiation
Highly developed MIS
Emphasis on quality
Worker compensation for creativity/productivity
Use of subjective performance measures
Basic research capability
Technology
High quality raw materials
Delivery of products
High quality replacement parts
Superior handling of incoming raw materials
Attractive products
Rapid response to customer specifications
Order-processing procedures
Customer credit
Personal relationships

23. Differentiation Strategy: Five Forces
1. Differentiation: Potential Entrants
New products must surpass proven products
New product equal in performance at lower cost
would require significant resource investment
2. Differentiation: Suppliers
Provide high quality components, driving up firm’s costs
Cost may be passed on to customer

24. Differentiation Strategy: Five Forces
3. Differentiation: Buyers (Customers)
Inverse relationship between loyalty/product: As loyalty increases, price sensitivity decreases
I.e., Callaway golf clubs
4. Product Substitutes
Customer loyalty effectively positions firm
Reduces customer testing of new products
5. Rivalry against existing competitors
Brand loyalty offsets price compeition
I.e., Bose

25. Risks of the Differentiation Strategy
Customers determine that the cost of differentiation is too great
The means of differentiation may cease to provide value for which customers are willing to pay
Experience can narrow customers’ perceptions of the value of a product’s differentiated features
Counterfeit goods replicate differentiated features of the firm’s products

26. Focus Strategies
An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment
Particular buyer group (e.g. youths or senior citizens
Different segment of a product line (e.g. professional craftsmen versus do-it-yourselfers
Different geographic markets (e.g. East coast versus West coast)

27. Focus Strategies Types of focused strategies
Focused cost leadership strategy
Focused differentiation strategy
To implement a focus strategy, firms must be able to:
Complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns

28. Factors That Drive Focused Strategies
Large firms may overlook small niches.
A firm may lack resources to compete in the broader market
A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors
Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

29. Competitive Risks of Focus Strategies
A focusing firm may be “outfocused” by its competitors
A large competitor may set its sights on a firm’s niche market
Customer preferences in niche market may change to more closely resemble those of the broader market

30. Integrated Cost Leadership/ Differentiation 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
Simultaneously concentrate on both cost and differentiation
Demonstrate strategic flexibility

31. Strategic Flexibility
Flexible manufacturing systems (FMS)
Computer controlled process used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention
Goal: eliminate ‘low cost vs. product variety, tradeoff inherent in traditional manufacturing technologies
Information networks
Using technology to link suppliers, distributors and customers
Total Quality Management (TQM) systems
Emphasizes firm’s total commitment to the customer and continuous improvement of every process through data-driven, problem-solving approaches based on empowering employees

32. 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

33. Competitive Risks of Integrated Strategies
Although becoming more popular the RISK is getting ‘stuck in the middle’
Cost structure is not low enough for attractive pricing of products and products not sufficiently differentiated to create value for target customer – therefore, fail to successfully implement either low cost or differentiation strategy
Result: Don’t earn above-average returns

34. Value-Creating Activities: Differentiation Strategy

35. Value-Creating Activities: Cost Leadership Strategy
Copyright © 2004 South-Western. All rights reserved.