bs l10 busines-level strategies

8/9/2019 BS L10 Busines-level Strategies

1/20

BUSINESS-LEVELSTRATEGIES

Prof.Dr.Dr.Dr.H.C. Constant in Brat ianu

Facul ty of Bu siness Adm inis t rat ion

Academy of Econom ic Studies

Buch arest , Romania


2/20

MEANING

Business-level strategies are strategies developed atthe level of Strategic Business Units (SBU).

A SBU is a component of a company that is able to puton the market a product and to compete against other

companies for that product. A SBU supplies goods or services for a distinct domain

of activity. More specifically, a SBU refers to a distinctbusiness within a large diversified corporation. Withinsuch a complex corporation, a SBU has theresponsibility of designing and implementing its ownstrategies.

SBUs may be considered in some companies as beingdivisions or profit centers.


3/20

GENERIC STRATEGIES

Business-level strategies have as the main characteristicthe control of production costs.

Generic strategies:

- Overall cost leadership strategies- Differentiation strategies

- Focus cost strategies

- Focus differentiation strategies


4/20

Low cost Differentiation

Competitive advantage

Industrywide

Particularsegment

only

Strategic

target

Generic Strategies

Overall costleadership Differentiation

Focus costleadership

Focusdifferentiation


5/20

Overall cost leadership strategy

Cost leadership can be achieved for one or a groupof products, by:

- Aggressive construction of efficient facilities

- Vigorous pursuit of cost reductions by using

the experience curve and standardization ofprocesses and of products and services

- Tight cost and overhead control

- Cost minimization in all activities in the firms

value chain- Outsourcing production activities in countrieswith a lower level of workers salaries (China,Taiwan, India)


6/20

Cost leadership strategy

Efficiency curve / Learning curve

Cost/unit

Volume of soldproducts

VA VB

CA

CB

E=CA - CB


7/20

Examples

Henry Ford Model T car

- mass production

- costs reductions (inclusive colours)

- $3000 >>> $900 / car

IKEA Furniture company

- Good quality at low price

- Furniture at prices that are generally 30% to 50%below that of competitors

Toyota management system

- kanban / Just in time (JIT) logic

- reducing any kind of stock and waste


8/20

Toyota system (I)

General formula for efficiency

Process result = work + waste (muda)

The problem of increasing efficiency is transformedinto the problem of reducing waste:

- waste of time

- waste of space

- waste of energy

- waste of transportation

- waste as overproduction

- waste as stocks


9/20

Toyota system (II)

The management is based on 2 principles:

- Just In Time (JIT)

- team work

The working method is called kanban.Kanban is a sheet of paper, as a template, containing

information about the technological processsequences necessary for each mechanical piece to

be realized.

Kanban system uses an inverse management logic,since the working flux is controlled backward.


10/20

Differentiation strategy

The strategy of differentiation consists of creatingdifferences in the firms product or service offering by

creating something that is perceived industry wide asunique and valued by customers

Successful differentiation can be obtain:

(a) setting prices at industry average and getmarket shares because consumers will choose higherquality at the same price, and

(b) raise prices over those of competitors and get

benefits of higher prices BMW is known for its high prestige, superior

engineering, and high-quality automobiles

Harley-Davidson differentiates on image and dealer

services


11/20

Stuck in the middle

Michael Porter claims that managers must make a clearchoice between these generic strategies. Otherwisethey will be stuck in the middle, which is not a winningposition.

For a competitor having the lowest cost product on themarket it makes no sense to add extra costs to hisproducts to take advantage of some differentiation.

For a competitor following a differentiation strategy itmakes no sense to cut costs since the quality of the

product may decrease. However, Porters argument for pure strategies is

controversial. There are companies with SBU that haveadopted different strategies.


12/20

Focus strategy

Focus strategy is based on the choice of a narrowcompetitive scope within an industry

A firm following this strategy selects a segment or

group of segments and tailors its strategy to servethem

The firm achieves a competitive advantage by

dedicating itself to these segments exclusively

Focus requires that a firm either have a low-costposition with its strategic target, high differentiation,

or both


13/20

Focus strategy - examples

Focused cost leadership strategy: JetBlue is a relatively recent entry on the commercial-

airline market, following Southwest Airlines model.

Focused differentiation strategy: Montague focuses on the niche market of folding

bikes

Rolls-Royce and Ferrari in car industry

Harley-Davidson in motorcycle industry


14/20

Drivers for generic strategies

Low cost strategy

- Economy of scale

- Economy of scope

-Learning

- Superior technology

- Superior productdesign

- Standardization

Differentiation strategy

- Premium brand image

- Customization

-Unique styling

- Speed

- Convenient access

- Unusually high quality


15/20

Threats for generic strategies

Low cost

- New technology

- Inferior quality

-Social, political andeconomic risk ofoutsourcing

- Changing the needs or

customers

Differentiation

- Failing to increasebuyers willingness to

pay higher prices- Underestimating costs

of differentiation

- Overfilling buyers

needs- Lower-cost imitation


16/20

Integrated strategies

In reality, few firms choose well defined strategieslike being only low-cost leader or differentiator

In many firms there is an integration of thesestrategies that mean elements of one type ofstrategy strongly support another strategy. Forinstance, elements of differentiation may support alow-cost strategy.

Many low-cost firms invest in branding whichmeans differentiation (McDonalds)


17/20

Strategies for different phases ofindustry life cycle

Embryonic stage

- Staying local

- Internal development

- Target basic needs and minimal differentiation- Strategies to gain early footholds

- Costs are high. Focus is on securing additionalcapital to fund growth phase


18/20


Maturity stage

- Globalizing and diversifying

- Mergers and acquisitions for consolidation

- Choices of international markets and new industrydiversification need rational sequencing

-Declining growth demands cost containment andrationalization of operations

- Implementing TQM strategy


19/20


Decline stage

- Abandoning some markets if decline is severe

- Focusing on segments that provide the most

profitability- Divestiture enable some competitors to exit andothers to consolidate larger shares of the market

- Fewer competitors result in less pressure for

differentiation- Timing of exit from selected segments or business


20/20

Testing the quality of your strategy

1. Does your strategy exploit your key resources ?

2. Does your strategy fit with current industrycondition?

3. Will your differentiation be sustainable ?

4. Are the elements of your strategy consistent andaligned with your strategic position?

5. Can your strategy be implemented?

bs l10 busines-level strategies

Documents