1. Business-Level Strategy Chapter Four BA 495.009

2. 4–2 Agenda IntroductionIntroduction Customers: Who? What? How?Customers: Who? What? How? Types of Business-level StrategiesTypes of Business-level Strategies  Cost Leadership Strategies  Differentiation Strategies  Focus Strategies  Integrated Strategies Wrap-upWrap-up

3. 4–3 Introduction to Business-level Strategy

4. 4–4 Business-Level Strategy (Defined) 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.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.

5. 4–5 Customers

6. 4–6 Customers: Their Relationship to Business- Level Strategies Key Issues in Business-level Strategy Who will be served? What needs will be satisfied? How will those needs be satisfied?

7. 4–7 Who: Determining the Customers to Serve Market segmentationMarket segmentation  A process used to cluster people with similar needs into individual and identifiable groups. All Customers IndustrialMarkets ConsumerMarkets

8. 4–8 Market Segmentation: Consumer Markets Demographic factorsDemographic factors Socioeconomic factorsSocioeconomic factors Geographic factorsGeographic factors Psychological factorsPsychological factors Consumption patternsConsumption patterns Perceptual factorsPerceptual factors

9. 4–9 Market Segmentation: Industrial Markets End-use segmentsEnd-use segments Product segmentsProduct segments Geographic segmentsGeographic segments Common buying factor segmentsCommon buying factor segments Customer size segmentsCustomer size segments

10. 4–10 What: Determining Which Customer Needs to Satisfy Customer needs are related to a product’s benefits and features.Customer needs are related to a product’s benefits and features. A firm’s ability to meet customer needs creates VALUE for the customer.A firm’s ability to meet customer needs creates VALUE for the customer. Two forms of value:Two forms of value:  Low cost  Unique, or differentiated product

11. 4–11 How: Determining Core Competencies Necessary to Satisfy Customer Needs Firms use core competencies to implement value-creating strategies that satisfy customers’ needs.Firms use core competencies to implement value-creating strategies that satisfy customers’ needs. Only firms with capacity to continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time.Only firms with capacity to continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time.

12. 4–12 Types of Business-level Strategies

13. 4–13 The Purpose of a Business-Level Strategy Business-Level StrategiesBusiness-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:To position itself, the firm must decide whether it intends to:  Perform activities differently or  Perform different activities as compared to its rivals.

14. 4–14 Two Choices for Business Level Strategies Types of potential competitive advantageTypes of potential competitive advantage  Achieving lower overall costs than rivals  Possessing the capability to differentiate the firm’s product or service and command a premium price Types of competitive scopeTypes of competitive scope  Broad scope  Narrow scope

15. 4–15 Types of Business-Level Strategies CostUniqueness Differentiation Cost Leadership Focused Differentiation Focused Cost Leadership Integrated Cost Leadership/ Differentiation BroadTarget NarrowTarget Competitive Advantage CompetitiveScope

16. 4–16 Cost Leadership Strategy

17. 4–17 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.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

18. 4–18 SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter. Cost Leadership Value Chain

19. 4–19 Internal Success in Cost Leadership Each value-creating activity must be based on the following:Each value-creating activity must be based on the following:  Simplification of processes and procedures  Achieving efficiency and effectiveness  Reducing costs (of activities done both internally and externally)

20. 4–20 Cost Leadership Strategy: Competitors Due to cost leader’s advantageous position rivals hesitate to compete on basis of price.Due to cost leader’s advantageous position rivals hesitate to compete on basis of price. Lack of price competition leads to greater profits.Lack of price competition leads to greater profits. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Rivalry with Existing Competitors

21. 4–21 Cost Leadership Strategy: Buyers Customers already value firm’s low-price positionCustomers already value firm’s low-price position Can mitigate buyers’ power by:Can mitigate buyers’ power by:  Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Buyers

22. 4–22 Cost Leadership Strategy: Suppliers Can mitigate suppliers’ power by: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. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Suppliers

23. 4–23 Cost Leadership Strategy: New Entrants Can frighten off new entrants due to: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. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products The Threat of Potential Entrants

24. 4–24 Cost Leadership Strategy: Substitutes Cost leader is well positioned to lower prices in order to maintain value position.Cost leader is well positioned to lower prices in order to maintain value position. Need to be aware of disruptive technology or other non-traditional substitutes.Need to be aware of disruptive technology or other non-traditional substitutes. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Product Substitutes

25. 4–25 Risks of Cost Leadership Strategy Processes used to produce and distribute good or service may become obsolete due to competitors’ innovationsProcesses 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 differentiationFocus on cost reductions may occur at expense of customers’ perceptions of differentiation Competitors, using their own core competencies, may successfully imitate the cost leader’s strategyCompetitors, using their own core competencies, may successfully imitate the cost leader’s strategy

26. 4–26 Differentiation Strategy

27. 4–27 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.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 nonstandardized products  Appropriate when customers value differentiated features more than they value low cost.

28. 4–28 Potential Aspects of Differentiation Superior qualitySuperior quality Unusual or unique featuresUnusual or unique features More responsive customer serviceMore responsive customer service Rapid product innovationRapid product innovation Advanced technological featuresAdvanced technological features Image of prestige or statusImage of prestige or status

29. 4–29 SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter. Differentiation Value Chain

30. 4–30 Internal Success in Differentiation Establishing the importance of qualityEstablishing the importance of quality Accuracy, speed and responsivenessAccuracy, speed and responsiveness Understanding and meeting customers’ unique preferencesUnderstanding and meeting customers’ unique preferences

31. 4–31 Differentiation Strategy: Competitors Defends against competitors because brand loyalty to differentiated product offsets price competition. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Rivalry with Competitors

32. 4–32 Differentiation Strategy: Buyers Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Buyers

33. 4–33 Differentiation Strategy: Suppliers Can mitigate suppliers’ power by:Can mitigate suppliers’ power by:  Absorbing price increases due to higher margins.  Passing along higher supplier prices because buyers are loyal to differentiated brand. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Bargaining Power of Suppliers

34. 4–34 Differentiation Strategy: New Entrants Can defend against new entrants because:Can defend against new entrants because:  Customer loyalty is difficult to disrupt.  New products must be at least equal to 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 The Threat of Potential Entrants

35. 4–35 Differentiation Strategy: Substitutes Well positioned relative to substitutes because brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands. Threat of new entrants Bargaining power of suppliers Rivalry among competing firms Bargaining power of buyers Threat of substitute products Product Substitutes

36. 4–36 Risks of Differentiation Strategy The price differential between the differentiator’s product and the cost leader’s product becomes too large.The price differential between the differentiator’s product and the cost leader’s product becomes too large. Differentiation ceases to provide value for which customers are willing to pay.Differentiation ceases to provide value for which customers are willing to pay. Experience narrows customers’ perceptions of the value of differentiated features.Experience narrows customers’ perceptions of the value of differentiated features. Counterfeit goods replicate differentiated features of the firm’s products.Counterfeit goods replicate differentiated features of the firm’s products.

37. 4–37 Focus Strategies

38. 4–38 Focus Strategies An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.  Particular buyer group—youths or senior citizens  Different segment of a product line—professional craftsmen versus do-it-yourselfers  Different geographic markets—East coast versus West coast

39. 4–39 Focus Strategies Types of focused strategiesTypes of focused strategies  Focused cost leadership strategy  Focused differentiation strategy Focused strategies are similar to their counterparts in larger industry:Focused strategies are similar to their counterparts in larger industry:  Similar areas of emphasis from analyzing the Value Chain  Similar analysis of Porter’s Five Forces

40. 4–40 Factors That Drive Focused Strategies Large firms may overlook small niches.Large firms may overlook small niches. A firm may lack the resources needed to compete in the broader market.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 can its larger industry-wide competitors.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.Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.

41. 4–41 Competitive Risks of Focus Strategies A focusing firm may be “outfocused” by its competitors.A focusing firm may be “outfocused” by its competitors. A large competitor may set its sights on a firm’s niche market.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.Customer preferences in niche market may change to more closely resemble those of the broader market.

42. 4–42 Integrated Strategies

43. 4–43 Integrated Cost Leadership/ Differentiation Strategy Firms performing value chain activities in ways that allow them to simultaneously pursue low cost and differentiation.Firms performing value chain activities in ways that allow them to simultaneously pursue low cost and differentiation. A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: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.

44. 4–44 Risks of the Integrated Cost Leadership/ Differentiation Strategy Often involves compromisesOften involves compromises  Becoming neither the lowest cost nor the most differentiated firm. Becoming “stuck in the middle”Becoming “stuck in the middle”  Firm engages in economics such that it cannot achieve benefit of premium pricing from differentiation nor cost savings from cost leadership.

45. 4–45 Wrap-up

46. 4–46 Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 12. Copyright © 1985, 1998 by Michael E. Porter. Business Strategies

47. 4–47 Implementing Business Level Strategies These are key initiatives that allow the firm to implement its business-level strategy effectively. These are basis for measuring your success in each of the key initiatives. Success in your initiatives will deliver success in your business-level strategy. Key Initiatives Tactics Metrics These are specific tactics that support each initiative.

48. 4–48 Wrap-up IntroductionIntroduction Customers: Who? What? How?Customers: Who? What? How? Types of Business-level StrategiesTypes of Business-level Strategies  Cost Leadership Strategies  Differentiation Strategies  Focus Strategies  Integrated Strategies QuestionsQuestions