Business Level StrategyBusiness Level Strategy

Business Level StrategyBusiness Level StrategyA Business Level Strategy is an integrated and

coordinated set of commitments & actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific individual product markets

Three Issues:– Whom it will serve – What needs target customers have that it will

satisfy – How those needs will be satisfied through

implementation of given strategy

Types of Business-Level Types of Business-Level StrategiesStrategies

Business-level strategies are intended to create Business-level strategies are intended to create differences between the firm’s position relative to differences between the firm’s position relative to those of its rivalsthose of its rivals

To position itself, the firm must decide whether it To position itself, the firm must decide whether it intends to perform activities differently or to intends to perform activities differently or to perform different activities as compared to its perform different activities as compared to its rivalsrivals

Five Generic StrategiesFive Generic StrategiesCompetitive AdvantageCompetitive Advantage

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CostCost UniquenessUniqueness

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Cost Cost LeadershipLeadership

DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Focused Focused DifferentiationDifferentiation

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

Types of Business Level StrategiesTypes of Business Level Strategies Cost Leadership Differentiation Focus Strategy Cost Leadership:

– Integrated set of actions designed to produce or deliver goods or services at lower cost

– Focus on driving costs lower relative to competitors cost

– Features that are acceptable to customers

Cost Leadership StrategyCost Leadership StrategyCost saving actions required by this 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

How to Obtain a Cost How to Obtain a Cost AdvantageAdvantage

Cost DriversCost Drivers Value ChainValue Chain

Determine and Determine and controlcontrol

Reconfigure, if Reconfigure, if neededneeded

• Alter production process• Change in automation• New distribution channel

• Direct sales in place of indirect sales

• New advertising media

• New raw material

• Backward integration• Forward integration

• Change location relative to suppliers or buyers

Major Risks of Cost Major Risks of Cost Leadership StrategyLeadership Strategy

Dramatic technological change could take away Dramatic technological change could take away your cost advantageyour cost advantage

Competitors may learn how to imitate value chainCompetitors may learn how to imitate value chain Focus on efficiency could cause cost leader to Focus on efficiency could cause cost leader to

overlook changes in customer preferencesoverlook changes in customer preferences

Differentiation Differentiation Unique attributes & characteristics of a firm’s

product provide value to customers Premium prices due to unique need satisfaction Firms must be truly be unique at something to be

perceived as unique Unusual Features, Responsive Customer Service,

Rapid Product Innovations, Different Status , Engineering Designs, Prestige & Status

Anything to create real or perceived value Challenge to identify features that create value

for customers

Factors That Drive Factors That Drive DifferentiationDifferentiation

Unique product featuresUnique product features Unique product performanceUnique product performance Exceptional services Exceptional services New technologiesNew technologies Quality of inputsQuality of inputs Exceptional skill or experienceExceptional skill or experience Detailed informationDetailed information

Focus StrategyFocus StrategyIntegrated set of actions designed to produce

goods or services that serve the needs of a particular competitive segment

A particular Buyer group, A different segment of a product line, different geographic market

Focused Cost Leadership or focused Differentiation

Firms have the core competencies required to provide value to a narrow competitive segment that exceeds the value available from firms serving customers on industry wide basis

Focused Business-Level StrategiesFocused Business-Level Strategies A focus strategy must exploit a narrow target’s A focus strategy must exploit a narrow target’s differences from the balance of the industry by:differences from the balance of the industry by:– isolating a particular buyer groupisolating a particular buyer group– isolating a unique segment of a product lineisolating a unique segment of a product line– concentrating on a particular geographic marketconcentrating on a particular geographic market– finding their “niche”finding their “niche”

Factors That May Drive Focused StrategiesFactors That May Drive Focused Strategies

Large firms may overlook small nichesLarge firms may overlook small nichesFirm may lack resources to compete in the Firm may lack resources to compete in the

broader marketbroader marketMay be able to serve a narrow market segment May be able to serve a narrow market segment

more effectively than can larger industry-wide more effectively than can larger industry-wide competitorscompetitors

Focus may allow the firm to direct resources to Focus may allow the firm to direct resources to certain value chain activities to build certain value chain activities to build competitive advantagecompetitive advantage

Major Risks of Focused Major Risks of Focused StrategiesStrategies

Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors Large competitor may set its sights on your niche Large competitor may set its sights on your niche

marketmarket Preferences of niche market may change to match Preferences of niche market may change to match

those of broad marketthose of broad market

Advantages of Integrated Advantages of Integrated StrategyStrategy

A firm that successfully uses an integrated cost A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a leadership/differentiation strategy should be in a better position to:better position to:– adapt quickly to environmental changesadapt quickly to environmental changes– learn new skills and technologies more quicklylearn new skills and technologies more quickly– effectively leverage its core competencies while effectively leverage its core competencies while

competing against its rivalscompeting against its rivals

Benefits of Integrated StrategyBenefits of Integrated Strategy

Successful firms using this strategy have above-Successful firms using this strategy have above-average returnsaverage returns

Firm offers two types of values to customersFirm offers two types of values to customers– some differentiated features (but less than a true some differentiated features (but less than a true

differentiated firm)differentiated firm)– relatively low cost (but now as low as the cost relatively low cost (but now as low as the cost

leader’s price)leader’s price)

Major Risks of Integrated Major Risks of Integrated StrategyStrategy

An integrated cost/differentiation business level An integrated cost/differentiation business level strategy often involves compromises (neither the strategy often involves compromises (neither the lowest cost nor the most differentiated firm)lowest cost nor the most differentiated firm)

The firm may become “stuck in the middle” The firm may become “stuck in the middle” lacking the strong commitment and expertise that lacking the strong commitment and expertise that accompanies firms following either a cost accompanies firms following either a cost leadership or a differentiated strategyleadership or a differentiated strategy

Functional StrategiesFunctional Strategies The short-term goal-directed decisions and actions of an organization’s functional

departments.

All organizations perform 3 basic functions as they create and deliver goods and services:

1. Marketing (to assess and establish product demand then market and deliver the product after production)

2. Production and operations (to create the product/service)3. Financial and accounting ( to get payment for the product/service and information on

performance results)

4. These three basic functions typically expand into:- Production-Operations-Manufacturing Strategies- Marketing Strategies- Human Resource Management Strategies- Research and Development Strategies- Information System Strategies- Financial-Accounting Strategies

MARKETING MARKETING Building Customer Satisfaction, Value, & Retention Market Oriented Strategic Planning Analyzing Consumer Markets and Buying Behavior Setting the Product & Branding Strategy Developing Price Strategies & Programs Designing & Managing Value Networks and

Marketing Channels Managing Integrated Marketing Communications Managing Advertising, Sales Promotion, & PR Direct Marketing Fundamentals

Financial ManagementFinancial ManagementCAPITAL ACQUISITION:Acceptable cost of capital Desired proportion of short term & long term

debt; Preferred & common equity Balance b/w Internal & External Funding Appropriate Risk & Ownership structuresLevels & Forms of leasing for providing assets

Financial ManagementFinancial Management CAPITAL ALLOCATION Priorities for Capital Allocation Projects Final selection of Projects Capital Allocation by operating Managers w/o approval DIVIDEND & WORKING CAPITAL MANAGEMENT Proportion of earnings as dividends Importance of dividend stability Cash Flow Requirements; Minimum & Maximum Cash

balances Liberal/ Conservative Credit Policies Payment timings & Procedures

Financial ManagementFinancial ManagementCAPITAL STRUCTURE DECISION:Optimal Capital Structure Debt & Equity Ratio External vs. Internal Financing SOURCES & USES of CASH:Cash Flow Statements

Functional Strategies in the R & D AreaFunctional Strategies in the R & D Area

Research vs. Commercial Development:Emphasis on Innovation & Break Through Emphasis on product development,

Refinement & modification Time Horizon:Short Term or Long Term Orientation to support business strategy

Functional Strategies in PersonnelFunctional Strategies in PersonnelDevelopment of Managerial Talent:

– Employee Recruitment, Selection & Orientation – Career Development & Counseling, Training &

Development Compensation & Regulatory Concerns:

– Compensation, Labor/Union Relations Competent & Well Motivated:

– Discipline, Control & Evaluation – Performance Appraisal, 360 degree Feedback