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Business-Level Strategy

Business-level strategy: 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

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Core Competencies and Strategy

The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage

An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage

Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets

Business-levelstrategy

Strategy

Corecompetencies

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Strategy

Fundamental constraints • Scope

– What good or service to offer, to which customers

• Value chain– How and where to create the good or

service– How to distribute the good or service in the

marketplace(s)

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Recall our value creation model

Costs represent specific investment

choices that generate value

Costs represent specific investment

choices that generate value

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Consumer Markets Demographic

ConsumerMarkets

Socioeconomic

Geographic

Psychological

Consumption patterns

Perceptual factors

Dem.

Soc.

Geo.Psy.

Con.

Per.

Broad or narrow scope?Broad or narrow scope?

Implications for configuration of value chain??

Implications for configuration of value chain??

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Business Markets

IndustrialMarkets

End-use

Product segments

Geog segments

Common buying factors

Customer size segments

End

Pro.

Geo.

Buy.

Size

Broad or narrow scope?Broad or narrow scope?

Implications for configuration of value chain??

Implications for configuration of value chain??

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Source of competitive advantage - Value chains

• Strategies create differences between the firm’s position and its rivals

• Sources of differences? - perform activities differently; perform different activities

• Two value-adding configurations (Porter, 1985) – Low cost – Differentiated

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Comparing Scope and Source of Advantage

Competitive Advantage

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Sco

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Cost Uniqueness

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Cost Leader Differentiator

Focused Cost

Focused Differentiator

Integrated Cost

Leader/Differentiator

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Cost Leadership Strategy

An integrated set of actions designed to produce or deliver goods or services at the lowest cost relative to competitors with features that are acceptable to customers

– relatively standardized products– features acceptable to many

customers– lowest competitive price

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Cost Leadership Strategy

Cost saving actions required by this strategy:– building efficient 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

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Discretionary decisions Product features,

performance Mix & variety of

products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training,

motivation

Cost Drivers

Major Cost Drivers Economies of scale Learning/Spillovers Capacity utilization Integration Vertical Linkages Timing Location Political/regulatory Interrelationships

(corporate)

Implications?Implications?

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Value-Chain example: Cost Leader

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Questions Leading to Lower Costs

1. How can an activity be performed differently, eliminated, externalized?

2. How can linked value activities be regrouped or reordered?

3. How can upstream/downstream collaboration lower costs?

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Implementation Pitfalls

• Exclusive focus on Mfg• Misunderstand drivers (ABC useful)• Failure to recognize/exploit

linkages (e.g., across the board cost reductions)

• Contradictions – (e.g., gain mkt share through ES but allow product clutter; cross subsidies)

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Cost Leadership and the Five Forces

• Rivalry - competitors avoid price wars with cost leaders

• Buyers – shift demand to you, increase market power

• Suppliers – increased market power, absorb cost increases (low cost position)

• Entrants – entry barriers (scale, learning)• Substitutes – reinvest econ profit to

maintain advantage

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Major Risks of Cost Leadership Strategy

• There can only be one cost leader• Technological change can

eliminate cost advantage• Spillovers lead to imitation• Efficiency focus may create blind

spots re: customer preferences

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Differentiation Strategy

An integrated set of actions designed by a firm to produce or deliver goods or services that customers perceive as

adding value – price may exceed what the firm’s target

customers are willing to pay– Non-commodity products– customers value differentiated features

more than they value low cost

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Some Differentiation Themes

• Unique taste – Dr. Pepper

• Multiple features – Microsoft Windows and Office

• Wide selection and one-stop shopping– Home Depot and Amazon.com

• Reliable, superior service – FedEx, Ritz-Carlton

• Spare parts availability – Caterpillar

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Themes

• Prestige – Rolex

• Quality manufacturing, few defects – Honda, Toyota

• Technological leadership – 3M Corporation, Intel

• Top-of-the-line image – Ralph Lauren, Kiton

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Differentiation Strategy

• Add downstream value – lower buyer cost – raise buyer performance

• Cost– Add value to buyer’s value: reduce

downstream processing time, search time, transaction costs, defect rates, direct costs, learning curves, labor, space, installation, etc. (e.g., CRM software)

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Factors That Drive Differentiation

Value: Increase performance of buyer’s value chain (or consumer perception)

• Unique features, performance• Downstream channels (e.g., Catepillar dealer

network) • New technologies • Quality of inputs• Skill or know-how• Information

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Differentiation Strategy

Some differentiation actions required by this strategy:– develop new “systems” and processes– signal and shape buyer perceptions – quality focus– capability in R&DImplication - maximize human capital

contributions

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Facilities that promote firm image

Superior MIS—To integrate value-creating activities to improve quality

Widely respected CEO enhances firm reputation

Widely respected CEO enhances firm reputation

Provide training and incentives to ensure a strong customer service orientation

Programs to attract talented engineers and scientists

Excellent applications engineering support

Superior material handling and sorting technology

Use of most prestigious outletsPurchase of high-quality components to enhance product image

Superior material handling operations to minimize damage

Quick transfer of inputs to manufactur-ing process

Flexibility and speed in responding to changes in manu-facturingspecs

Low defect rates to improve quality

Accurate and responsive order processing

Effective product replenish-ment to reduce customer’s inventory

Creative and innovative advertising programs

Fostering of personal relation-ship with key customers

Rapid response to customer service requests

Complete inventory of replacement parts and supplies

Firm infrastructure

Human resource management

Technology development

Procurement

Firm infrastructure

Human resource management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing and sales

ServiceInbound logistics

Operations Outbound logistics

Marketing and sales

Service

Value-Chain example: Differentiation

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Differentiation and the Five Forces

• Rivalry - brand loyalty to differentiated products reduces price competition

• Buyers – differentiated products less price elastic

• Suppliers – absorb price increases (higher margins), pass along higher prices (buyer loyalty)

• Entrants – must surpass proven products or be equivalent at lower price

• Substitutes – diff raises switching costs

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Pitfalls of Differentiation Strategies

• Differentiating on characteristics not valued by buyers (e.g., HP)

• Over-differentiating • Price premium is too high• Failing to signal value• Focusing on product instead of entire

value chain

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Focused Business-Level Strategies

A focus strategy must exploit a narrow target’s differences from the balance of the industry by:– isolating a particular buyer group– isolating a unique segment of a

product line– concentrating on a particular

geographic market– finding their “niche”

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Factors Driving Focus Strategies

• Large firms overlook small niches• Firm may lack resources to compete in

the broader market• May be able to serve a narrow market

segment more effectively than can larger industry-wide competitors

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

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Major Risks of Focused Strategies

• Firm may be “outfocused” by competitors

• Large competitor may set its sights on your niche market

• Preferences of niche market may change to match those of broad market

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Advantages of Integrated Strategy

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– effectively leverage its core competencies

while competing against its rivals

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Benefits of Integrated Strategy

• Successful firms using this strategy have above-average returns

• Firm offers two types of values to customers– some differentiated features (but less

than a true differentiated firm)– relatively low cost (but now as low as

the cost leader’s price)

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Major Risks of Integrated Strategy

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

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

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Rate of Profitin Excess of the

Competitive Level

Industry Attractiveness

CompetitiveAdvantage

DifferentiationAdvantage

CostAdvantage

Vertical Power (buyer/seller)

Rivalry

Barriers to Entry

BrandsProduct technologyMarketing capabilities

Process technologyPlant sizeLow-cost inputs

Firm sizeFinancial resources

Substitutability

PatentsBrandsRetaliatory capability

Summary: Industry and Firm Effects on Profit

Summary: Industry and Firm Effects on Profit