1. Authored by: Marta Szabo White, Ph.D Georgia State University PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION CHAPTER 4: BUSINESS-LEVEL STRATEGY

2. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. THE STRATEGIC MANAGEMENT PROCESS

3. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. KNOWLEDGE OBJECTIVES ● Define business-level strategy. ● Discuss the relationship between customers and business-level strategies in terms of who, what, and how. ● Explain the differences among business- level strategies. ● Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy. ● Describe the risks of using each of the business-level strategies.

4. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS ■ With the 2008 global financial crisis and competitors, e.g., McDonald’s gaining market share, consumers were less willing to pay the high prices for premium coffee, leading to a reduction in store sales for the first time in Starbucks’ history. ■ Starbucks appeared to be unable to control the quality of the “experience” and began losing its differentiation advantage. OPENING CASE

5. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS (cont’d) ■ CEO Howard Schultz closed 900 poorly performing stores in the United States and refocused on innovation. ■ By 2011, with its 40 th anniversary, a new logo, innovation such as VIA and customers paying for their purchases with their iPhones, environmental consciousness, employee health insurance, and a global focus on emerging markets such as China and India, Starbucks was once again differentiating itself. OPENING CASE

6. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY ■ 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 ■ It is the core strategy ■ Every firm must form and use a business-level strategy for each one of its businesses ■ Business-level strategy choices matter because long-term performance is linked to a firm’s strategies IMPORTANT DEFINITION

7. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BUSINESS-LEVEL STRATEGY A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy identifying what or which industry the firm will compete in ONE BUSINESS- LEVEL STRATEGY A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity SEVERAL BUSINESS- LEVEL STRATEGIES

8. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CORE COMPETENCIES AND STRATEGY Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets Strategy Business-level Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage Core Competencies Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals

9. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES KEY ISSUES in BUSINESS- LEVELSTRATEGY Who will be served? What needs will be satisfied? How will those needs be satisfied?

10. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIESEFFECTIVEGLOBALCOMPETITORS Adept at identifying customer needs across cultures and geography Quickly and successfully adapt products/services to meet those needs

11. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BUSINESS-LEVEL STRATEGIESGENERIC:Applicable to any organization in anyindustry FIVE COMPETITIVE FORCES VALUE CHAIN ACTIVITIES ACTIVITIES RISKS for each Strategy Effective STRUCTURE for each Strategy

12. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES SATISFYING CUSTOMERS IS THE FOUNDATION OF SUCCESSFUL BUSINESS STRATEGIES Managing relationships with customers Reach, richness, affiliation Who will be served What needs will be satisfied How those needs will be satisfied

13. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIESEFFECTIVELYMANAGINGRELATIONSHIPSWITHCUSTOMERS REACH Access and Connection Access and Connection to Customers RICHNESS Depth and Detail of Two-Way Flow of Information Between the Firm and Customer AFFILIATION Facilitating Useful Interactions With Customers

14. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MARKET SEGMENTATION A PROCESS USED TO CLUSTER PEOPLE WITH SIMILAR NEEDS INTO INDIVIDUAL AND IDENTIFIABLE GROUPS WHO: DETERMINING THE CUSTOMERS TO SERVEConsumerMarkets IndustrialMarkets

15. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MARKET SEGMENTATION: CONSUMER MARKETS 1.DEMOGRAPHIC FACTORS (age, income, sex, etc.) 2. SOCIOECONOMIC FACTORS (social class, stage in the family life cycle) 3. GEOGRAPHIC FACTORS (cultural, regional, and national differences) 4. PSYCHOLOGICAL FACTORS (lifestyle, personality traits) 5. CONSUMPTION PATTERNS (heavy, moderate, and light users) 6. PERCEPTUAL FACTORS (benefit segmentation, perceptual mapping)

16. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. MARKET SEGMENTATION: INDUSTRIAL MARKETS 1. END-USE SEGMENTS (identified by SIC code) 2. PRODUCT SEGMENTS (based on technological differences or production economics) 3. GEOGRAPHIC SEGMENTS (defined by boundaries between countries or by regional differences within them) 4. COMMON BUYING FACTOR SEGMENTS (cut across product market and geographic segments) 5. CUSTOMER SIZE SEGMENTS

17. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. WHAT: DETERMINING WHICH CUSTOMER NEEDS TO SATISFY ■ Customer needs are related to a product’s benefits and features ■ Customer needs are neither right nor wrong, good nor bad ■ Customer needs represent desires in terms of features and performance capabilities ■ Successful firms learn how to deliver to customers what they want, when they want it Customers are the lifeblood of a firm

18. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. HOW: DETERMINING CORE COMPETENCIES NECESSARY TO SATISFY CUSTOMER NEEDS ■ Firms use core competencies to implement value creating strategies that satisfy customers’ needs ■ Value means goods or services that provide either low cost with acceptable features or highly differentiated features with acceptable costs ■ Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/or exceed customer expectations across time

19. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CUSTOMERS: HOW ● WHAT ● WHO WHAT: WHAT: Satisfy Customer Needs WHO: Target Group of Customers

20. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BUSINESS-LEVEL STRATEGY PURPOSE 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 ● Perform different activities as compared to its rivals

21. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BUSINESS-LEVEL STRATEGY PURPOSE BUSINESS-LEVEL STRATEGY i s a deliberate choice about how the firm will perform the value chain activities to create unique value Southwest’s Competitive Advantages (rivals unable to imitate): ● Tight integration among activities ● Cost leadership strategy ● Unique culture and customer service

22. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BUSINESS-LEVEL STRATEGY PURPOSE FIGURE 4.1 Southwest Airlines Activity System

23. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. SOURCES OF COMPETITIVE ADVANTAGE ■ Achieving LOWER OVERALL COSTS than rivals ■ Performing activities differently (reducing process costs) ■ Providing a low cost product that customers deem as ACCEPTABLE ■ Possessing the capability TO DIFFERENTIATE the firm’s product or service and command a premium price ■ Performing MORE HIGHLY VALUED activities

24. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FIVE GENERIC BUSINESS-LEVEL STRATEGIES FIGURE 4.2 Five Business Level Strategies

25. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. TARGET MARKETS Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis; competing in many customer segments BROAD A narrow market segment means that the firm intends to serve the needs of a narrow customer group; tailoring its strategy to serving them at the exclusion of others NARROW

26. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BUSINESS-LEVEL STRATEGY EFFECTIVENESS ■ None of the five business-level strategies is inherently or universally superior to the others ■ The effectiveness of each strategy is contingent upon: ● External opportunities/threats ● Internal strengths/weaknesses ■ KEY: A successful business-level strategy must match external opportunities/threats with internal strengths, i.e., its core competencies

27. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 with features that are acceptable to customers ■ Relatively standardized products ■ Features acceptable to many customers ■ Lowest competitive price

28. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES ■ Value chain analysis identifies the parts of a firm’s operations that create value and those that do not ■ A competitive advantage in logistics creates more value for a cost leadership strategy than for a differentiation strategy  Inbound logistics [materials handling, warehousing, and inventory control]  Outbound logistics [collecting, storing, and distribution]

29. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: COST SAVING ACTIONS ■ Employing process innovations that facilitate efficient production and distribution methods ■ 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

30. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: VALUE CHAIN ACTIVITIES FIGURE 4.3 Examples of Value-Creating Activities Associated with the Cost- Leadership Strategy

31. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP 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 RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE

32. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP  Alter production process  Change in automation  New distribution channel  New advertising media  Direct sales in place of indirect sales  New raw material  Forward integration  Backward integration  Change location relative to suppliers or buyers

33. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: STRATEGIC FOCUS WALMART, DOLLAR STORES, AND AMAZON: WHO IS BUYING WHOSE LUNCH? ■ Walmart deviated from its cost-leadership strategy designed to take market share away from Target by introducing organic foods, remodeling some stores, and reducing the variety of products offered, thereby increasing prices on some goods. ■ Recognizing its mistake, Walmart has re-focused on low costs and prices, increased its product diversity, and is opening 40 new express stores. ■ Will Walmart will be able to recapture its cost leadership position in the market after giving it up to rivals?

34. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: COMPETITORS Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products RIVALRY WITH EXISTING COMPETITORS Due to cost leader’s advantageous position: – Rivals hesitate to compete on basis of price – Lack of price competition leads to greater profits – Rivalry may be based on factors such as size, resources, location, market dependence, and prior competitive interactions

35. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: BUYERS (CUSTOMERS) BARGAINING POWER OF BUYERS Can mitigate buyers’ power by: – Driving prices far below competitors, causing them to exit, thus shifting power away from buyers back to the firm – Powerful customers can force a cost leader to reduce its prices, but not below the level where the next-most- efficient industry competitor can earn average returns Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

36. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: SUPPLIERS BARGAINING POWER OF SUPPLIERS Can mitigate suppliers’ power by: – Being able to absorb cost increases due to low cost position – Being able to make very large purchases, reducing chance of supplier using power – Outsourcing, to reduce costs may also require relationship- building (Guanxi), particularly to a foreign supplier Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

37. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: NEW ENTRANTS THREAT OF POTENTIAL ENTRANTS Barriers to potential entrants: – Their need to enter on a large scale in order to be cost competitive – The time it takes to move up the learning curve – Efficiency of cost leaders through continuous efforts to reduce costs enhances profit margins and serves as a significant entry barrier Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

38. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: SUBSTITUTES PRODUCT SUBSTITUTES Cost leader is well positioned to: – Make investments to be first to create substitutes – Buy patents developed by potential substitutes – Lower prices in order to maintain value position – Be more flexible than its differentiated competitors Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products

39. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. COST LEADERSHIP STRATEGY: RISKS COMPETITIVE RISKS – OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations – COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation – IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

40. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 them ■ Focus is on non-standardized products ■ Appropriate when customers value differentiated features more than they value low cost ■ Firms must still be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay

41. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: DISTINCTIVE ACTIONS Firms seek to be different from competitors on as many dimensions as possible Differentiation approaches ■ Unusual features ■ Responsive customer service ■ Rapid product innovations ■ Technological leadership ■ Perceived prestige and status ■ Different tastes ■ Engineering design and performance

42. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: VALUE CHAIN ACTIVITIES FIGURE 4.4 Examples of Value-Creating Activities Associated with the Differentiation Strategy

43. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION High quality replacement parts Superior handling of incoming raw materials Attractive products Rapid response to customer specifications Order-processing procedures Customer credit Personal relationships

44. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS  Whereas cost leadership targets a specific industry, differentiation creates value by distinguishing products/services  A firm must consistently upgrade differentiated features that customers value and/or create new valuable features (innovate) without significant cost increases  Create sustainability through:  Customer perceptions of distinctiveness  Customer reluctance to switch to non-distinctive products

45. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: COMPETITORS The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry Reputation can also sustain the competitive advantage of firms following a differentiation strategy Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products RIVALRY WITH EXISTING COMPETITORS

46. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: BUYERS (CUSTOMERS) Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases Customers are willing to accept a price increase when a product satisfies their perceived unique needs, as long as they do not think that an acceptable product alternative exists Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products BARGAINING POWER OF BUYERS

47. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: SUPPLIERS Can mitigate suppliers’ power by: – Absorbing price increases due to higher margins from high-quality components – Alternatively, considering buyers’ relative insensitivity to price increases and their brand loyalty, firms may pass along higher supplier prices to the buyer Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products BARGAINING POWER OF SUPPLIERS

48. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: NEW ENTRANTS Substantial barriers to potential entrants: – Customer loyalty and the need to overcome the uniqueness of a differentiated product – New products must surpass proven products – New products must be at least equal to the performance of proven products, but offered at lower prices Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products THREAT OF POTENTIAL ENTRANTS

49. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: SUBSTITUTES Well-positioned relative to substitutes because: – Brand loyalty to a differentiated product tends to reduce: – customers’ testing of new products – switching brands Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products PRODUCT SUBSTITUTES

50. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. DIFFERENTIATION STRATEGY: RISKS COMPETITIVE RISKS – PRICE DIFFERENTIAL: between the differentiator’s and the cost leader’s products becomes too large – VALUE DIMINISHED: Differentiation ceases to provide value for which customers are willing to pay – EXPERIENCE: narrows customers’ perceptions of the value of differentiated features – COUNTERFEIT: goods replicate differentiated features of the firm’s products

51. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FOCUSED STRATEGIES An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment Target markets include: ■ a Particular buyer group (e.g., youths or senior citizens) ■ Different segment of a product line (e.g., products for professional painters or the do-it- yourself group) ■ Different geographic market (e.g., northern or southern Italy by using a foreign subsidiary)

52. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FOCUSED STRATEGIES Types of focused strategies: ■ Focused cost leadership strategy ■ Focused differentiation strategy To implement a focus strategy, firms must be able to: Complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns

53. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FACTORS THAT DRIVE FOCUSED STRATEGIES ■ Large firms may overlook small niches ■ A firm may lack the resources needed to compete in the broader market ■ A firm is able to serve a narrow market segment more effectively than its larger industry-wide competitors can ■ Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

54. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FOCUSED COST LEADERSHIP STRATEGY A firm focuses on a niche market, adding value by leveraging value chain activities that allow value- creation through the cost leadership strategy ■ Competitive advantage: low-cost ■ Competitive scope: narrow industry segment

55. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FOCUSED DIFFERENTIATION STRATEGY The value chain may be analyzed to determine if a firm is able to link the activities required to create value by using the focused differentiation strategy ■ Competitive advantage: differentiation ■ Competitive scope: narrow industry segment

56. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FOCUS STRATEGIES: RISKS COMPETITIVE RISKS – OUTFOCUSED: a focusing firm may be “outfocused” by its competitors – COMPETITION: a large competitor may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit – CHANGING PREFERENCES: customer preferences in the niche market may change to more closely resemble those of the broader market

57. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY Efficiently produce products with differentiated attributes: EFFICIENCY: SOURCES OF LOW COST DIFFERENTIATION: SOURCE OF UNIQUE VALUE ■ Readily adapts to external environmental changes ■ Concentrates simultaneously on TWO sources of competitive advantage: cost and differentiation ■ Competence and flexibility required in several value chain activities

58. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY Three sources of flexibility useful for this strategy: ■ Flexible manufacturing systems (FMS) ■ Information networks ■ Total quality management (TQM) systems

59. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. FLEXIBLE MANUFACTURING SYSTEMS Computer-controlled processes used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention ■ Goal is to eliminate the “low cost versus wide product variety” tradeoff ■ Allows firms to produce large variety of products at relatively low costs

60. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. INFORMATION NETWORKS Links companies electronically with their suppliers, distributors, and customers ■ Facilitates efforts to satisfy customer expectations in terms of product quality and delivery speed ■ Improves flow of work among employees in the firm and their counterpart suppliers and distributors ■ Requires customer relationship management (CRM)

61. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. TOTAL QUALITY MANAGEMENT [TQM] SYSTEMS Emphasize total commitment to the customer through continuous improvement using: ■ Problem-solving approaches based on employee empowerment Benefits ■ Increased customer satisfaction ■ Lower costs ■ Reduced time-to-market for innovative products TQM systems help firms maintain competitive parity, but by itself, rarely will it lead to a competitive advantage

62. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. “STUCK in the MIDDLE” Strategy is gaining in popularity… but is RISKY Products do not offer sufficient value in terms of either low cost or differentiation INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY: RISKS

63. ©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. “STUCK in the MIDDLE” Cost structure is not low enough for attractive pricing of products; products not sufficiently differentiated to create value for target customer RESULT: DO NOT EARN ABOVE-AVERAGE RETURNS INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY: RISKS