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Key Points:Chapter 4: Business-Level Strategy

• Generic Business-Level Strategies• Differentiate between the five generic strategies

• For each strategy:

• Explain its aims and how these aims can be achieved

• Understand the competitive risks

• Advantages and disadvantages of first and second movers

• Understand how external and internal analysis are used by firms as they decide which generic strategy to use

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Strategy

• Strategy: an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage

• Business-level strategy: an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets

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Business-Level Strategy

• How should I compete in a particular business?• Use existing or develop new core competencies to

gain a competitive advantage

• Consider the general environment, the state of my industry, what my competitors are doing, and my position in the industry

• Create a position that is defensible in the long run so that I can outperform my competitors

• Customers • Who? What needs? How?

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Source of Competitive Advantage

DifferentiationCost

Breadth ofCompetitiveScope

NarrowTarget

BroadTarget

Cost Leadership

Focused Low Cost

FocusedDifferentiation

Differentiation

Figure 4.1: Four Generic Strategies

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Cost Leadership

• Integrated set of actions aimed at attaining low cost (relative to competitors) with acceptable features

• Usually characterized by:• Standardized products aimed at typical customer

• Techniques• Efficient-scale facilities• Vigorous pursuit of cost reductions• Tight cost and overhead control• Minimize costs in areas such as R&D, service, sales,

advertising, etc.BUT, these areas cannot be ignored

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Cost Effective MIS Systems

Relatively Few Management Layers to Reduce Overhead

Simplified Planning Practices to Reduce Planning Costs

Consistent Policies to Reduce Turnover Costs

Effective Training Programs to Improve Worker Efficiency and Effectiveness

Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset

Purchases

Efficient Plant Scale to Minimize Manufacturing Costs

Selection of Low Cost Transport Carriers

Delivery Schedule that Reduces Costs

National Scale Advertising

Products Priced to Generate Sales Volume

Small, Highly Trained Sales Force

Effective Product Installations to Reduce Frequency and Severity of Recalls

Easy-to-Use Manufacturing Technologies

Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes

Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials

Frequent Evaluation Processes to Monitor Suppliers’ Performances

Located in Close Proximity with Suppliers

Policy Choice of Plant Technology

Organizational Learning

Efficient Order Sizes

Interrelationships with Sister Units

Figure 4.2

FirmInfrastructure

Human Res.Management

TechnologyDevelopment

Procurement

InboundLogistics

Operations OutboundLogistics

Marketingand Sales

Service

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Risks of a Cost Leadership Strategy

• Technological innovations by competitors will render manufacturing equipment obsolete

• Miss significant changes in customer needs or competitor moves because too focused on cost savings

• Imitation by other firms

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Differentiation

• Integrated set of actions aimed at producing products that customers view as different in way(s) that are significant to them

• Usually characterized by:• Ability to charge a premium

• Serve several market segments

• Products with unique attributes that provide value

• Design, brand name, features, technology, customer service, dealer network

• Strongest when unique on several dimensions

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Figure 4.3

FirmInfrastructure

Human Res.Management

TechnologyDevelopment

Procurement

InboundLogistics

Operations OutboundLogistics

Marketingand Sales

Service

A companywide emphasis on producing high quality products

Highly Developed Information Systems to better understand customers’ purchasing preferences

Compensation programs intended to encourage worker creativity and productivity

Extensive use of subjective rather than objective performance measures

Superior handling of incoming raw materials to minimize damage and improve the quality of the final product

Rapid responses to customers unique manufacturing specifications

Consistent manufacturing of attractive products

Accurate and responsive order processing procedures

Complete field stocking of replacementparts

Strong capability in basic research

Investments in technologies that will allow the firm to consistently produce highly differentiated products

Systems and procedures used to find the highest quality raw materials

Purchase of highest quality replacement parts

Rapid and timely product deliveries to customers

Superior personnel training

Coordination among R&D, product development and marketing

Extensive personal relationships with buyers

Strong Coordin-ation among functions in R&D, Marketing and Product Development

Premium Pricing

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Risks of a Differentiation Strategy

• Customers decide price premium is too great

• Means of differentiation no longer adds value

• Customer learning narrows perception of the value of differentiated features

• Counterfeiting

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Focus(Focused Low-Cost and Focused Differentiation)

• Integrated set of actions aimed at meeting the needs of a particular competitive segment

• Usually characterized by:• Having a competitive advantage in one particular

segment of the market, but not others

• Serve segment more efficiently or effectively

• Serve segments with unique needs or that are poorly served by others

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Risks of a Focus Strategy

• All those applicable to cost leader or differentiator PLUS

• Another firm outfocuses by concentrating on an even more narrow segment

• Firms serving the entire industry begin to compete heavily in the focuser’s market segment

• Needs of customers in the segment become more similar to the needs of other segments

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Integrated Low-Cost/Differentiation

• Integrated set of actions aimed at attaining both low cost and products that customers view as different in way(s) that are significant to them

• Usually characterized by• Differentiated features (not as many as differentiator)• Relatively low cost (not a low as cost leader)• Multiple sources of competitive advantage

• Techniques• Flexible manufacturing systems• Information networks within and across firms• TQM

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Risks of an Integrated Low Cost/Differentiation Strategy?

• Offers great potential for above-average returns

• BUT, high risk of failure

• Firms may become “stuck in the middle”

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Advantages Disadvantages

FirstMover

SecondMover

LateMover