1. Understanding Business Strategy
Part 3: Strategy
Chapter 5: Business-Level Strategy

2. Less partnerships more relationships

3. Business-Level Strategies
A business-level strategy is an action plan the firm develops to describe how it will compete in its chosen industry or market segment.
How to compete day-to-day
Wal-Mart
An effective business-level strategy has a clear statement of the value to be created for customers.

4. Types of Business-Level Strategies

5. Types of Business-Level Strategies
Firms choose from five, generic, business-level strategies
Cost leadership
Differentiation
Focused cost leadership
Focused differentiation
Integrated cost leadership/differentiation
Two key dimensions: competitive advantage & competitive scope

6. Types of Business-Level Strategies
A firm’s capabilities and core competencies enable it either to produce standardized products at lower costs than those of their competitors or to produce unique products that differ from competitors’ products that create value for customers.
Examples: Procter & Gamble’s Tide and Porsche’s 911 Carrera

7. Types of Business-Level Strategies
By standardized products, we mean products that are widely available and have a large customer demand.
E.g. automotive tires
Unique products have features different from or in addition to the standardized product’s features.
E.g. Guinness Beer

8. Cost Leadership Strategy
an action plan the firm develops to produce goods or services at the lowest cost
Price its product lower than competitors
Gain a larger share of its target market
Firms using a cost leadership strategy commonly have economies of scale because of the large quantities of standardized products produced.

10. Rivalry with Existing Competitors
Competitors find it extremely difficult to compete against the cost leader on the basis of price.
Reduce profit margins
Less capital to invest to improve operational efficiency
Rivals compete across markets including product markets and geographic markets

11. Bargaining Power of Buyers
Customers exercise power under several conditions
Purchasing a large quantity of the cost leader’s output
E.g. Wal-Mart
Cost leaders independence occurs by selling to a large number of buyers

12. Bargaining Power of Suppliers
A supplier can exercise power over the cost leader if it provides a significant amount of a key input to the cost leader’s production process
Firms dependent on key natural resources to produce their products when sources of supply are limited may have to pay higher prices

13. Potential Entrants & Product Substitutes
cost leader’s ability to continuously drive its costs lower and lower while still satisfying customers’ needs makes it difficult for potential entrants
A product substitute is a product that can replace the focal product
The successfully positioned cost leader commonly responds to product substitutes by reducing the purchase price of its product

14. Competitive Risks
Competitors’ innovations may enable them to produce their good or service at a cost that is lower than that of the cost leader
Concentrating too much on reducing costs may eventually find the cost leader offering a product at low prices to customers who are less inclined to purchase it

15. Differentiation Strategy
An action plan the firm develops to produce goods or services that customers perceive as being unique in ways that are important to them:
Physical sources: product durability, ease of repair
Psychological differentiation: perceptions of quality, courtesy of salespeople

16. Differentiation Strategy
Serves customers who want to buy a good or service that is different from the good or service purchased by an industry’s average customer
Different tastes,
Responsive customer service
Product design
Alternative distribution methods, and
Customer loyalty programs

17. Differentiation Strategy
Emphasizes Innovation
Continuously introduces new and unique products that provide value
Firms want to develop core competencies in one or more of the primary and support activities
The more unique value created for customers, the more successful

19. Five Forces & Differentiation
Firms using the differentiation strategy do everything they can to increase the loyalty of their customers by providing them greater benefits than do rivals.
Firms using the differentiation strategy continuously stress the uniqueness of their products to customers (often through advertising campaigns) to reduce customers’ sensitivity to price

20. Five Forces & Differentiation
The firm using the differentiation strategy typically pays a premium price for the raw materials used to make its product
Customer loyalty and the need to provide customers with more value than an existing firm’s product provides to them are strong challenges for potential rivals

21. Five Forces & Differentiation
Firms also try to establish barriers to entry to reduce the number of potential entrants
E.g. Patents
Perceived unique value is difficult to replace, even when a product substitute has a better performance-to-price ratio that favors substitution
E.g. Customer loyalty

22. Competitive Risks
Customers may decide that the price they are paying for a product’s differentiated features is too high.
The source of differentiation being provided by the firm may cease to create value for the target customers.

23. Competitive Risks
The customer may conclude that the cost of the differentiation isn’t acceptable
Differentiated products run the risk of being somewhat effectively counterfeited allowing customers to question why they should pay a higher price for the “real thing”

24. Focused Strategies
An action plan the firm develops to produce goods or services that serve the needs of a specific market segment
Firms using the focus strategy intend to serve the needs of a narrow customer segment better than their needs can be met by the firm targeting its products to the broad market

25. Focused Strategies
The focused cost leadership strategy is an action plan the firm develops to produce goods or services for a narrow market segment at the lowest cost
The focused differentiation strategy is an action plan the firm develops to produce goods or services that a narrow group of customers perceive as being unique in ways that are important to them

26. Focused Strategies
To successfully use either focus strategy, a firm must perform many of the value chain’s primary and support activities in ways that enable it to create more value than competitors can create for a narrow group of target customers

27. Competitive Risks
A competitor may learn how to “outfocus” the focusing firm
A company serving the broad target market may decide that the target market being served by the focusing firm is attractive
The needs of the narrow target customer may change and become similar to those of the broad market

28. Integrated Cost Leadership/Differentiation Strategy
An action plan the firm develops to produce goods or services, with strong emphasis on both differentiation and low cost
Broad or narrow target market
Firms must develop flexibility to provide service to both kinds of markets
The possibility of being “neither fish nor fowl” is the main risk of using the integrated cost leadership/differentiation strategy

29. Implementing Business-Level Strategies
Matching the right structure with the chosen strategy enhances firm performance.
Simple Structure
Functional Structure
Multidivisional Structure

31. Implementing Business-Level Strategies
Firms implementing the cost leadership strategy use a functional structure with highly centralized authority in the corporate staff
Jobs are highly specialized and organized into homogenous subgroups and highly formalized rules and procedures are established

32. Implementing Business-Level Strategies
The operations function is emphasized in this structure to ensure that the firm’s product is being produced at low costs

33. Implementing Business-Level Strategies
The functional structure used by firms implementing the differentiation strategy differs from the one used by firms implementing the cost leadership strategy
R&D and marketing functions are more important
Authority is decentralized in this structure so employees closest to the customer can decide how to appropriately differentiate the firm’s products

34. Implementing Business-Level Strategies
When firms following a focus strategy have only a single product line and operate in a single geographic market, a simple structure is effective for implementing the strategy
A focused cost leadership strategy – centralized functional structure emphasizing efficiency
A focused differentiation strategy - functional decentralized structure encouraging cross functional interaction to create innovation

36. Implementing Business-Level Strategies
An integrated cost leadership/differentiation strategy is difficult to implement
Decisions must be partly centralized and partly decentralized
Jobs are semispecialized
Some formal rules and procedures are needed
efficient processes maintain lower costs
The ability to change is also important in order to develop and maintain differentiated goods or services

37. Business-Level Across Time
The firm must continuously evaluate its business level strategy and change it as needed to create more value for customers or bring the firm back on course
E.g. Hershey
E.g. Sam Walton & his customers

38. Strategy Toolbox
The Pareto principle, or the 80/20 rule, can be applied to the analysis of customers targeted and served by a company
At a given point in time, many companies find that 80% of the profit is derived from 20% of the customers
This knowledge can help inform the viability of a particular business-level strategy for each particular segment