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Chapter 4: Business-Level Strategy

Overview: Defining business-level strategy Risks of business-level strategies Differences in business-level strategies 5-Forces Relationship between customers and strategy

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Introduction

Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives. Choices dictated by

External environment (O and T) Internal resources, capabilities and core competencies (S and W)

Business level-strategy: Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets/industry

How we intend to compete in a specific industry or product market

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Business-Level Strategies

Purpose: To create differences between position of a firm and its competitors Positioning and strategic group mapping

Firm must make a deliberate choice to Perform activities differently Perform different activities

This choice impacts how value chain activities are performed to create unique value

No single strategy is better than others Contingent on internal and external environment

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Business-Level Strategies

Two types of competitive advantage firms must choose between Low Cost (Are our costs LOWER than rivals costs?) Distinctiveness (Are we DIFFERENT than rivals?)

Two types of ‘competitive scope’ firms must choose between Broad target Narrow target

The combination of competitive advantage and competitive scope yield 5 major strategic options at the business level Each strategy can potentially be used by any organization

competing in any industry

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Five Business-Level Strategies

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Types of Business-Level Strategies

Cost Leadership Strategy Competitive advantage: THE low-cost leader and

operates with margins greater than competitors Competitive scope: Broad Integrated set of actions designed to produce or deliver

goods or services with features that are acceptable to customers at the lowest cost, relative to competitors

No-frills, standardized or commodity-like product Must have competitive levels of quality, service, and

other features and lowest overall costs Continuously reduce the costs of and increase the

efficiency of value chain activities

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Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

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Types of Business-Level Strategies

Cost Leadership Strategy In relationship to the 5 competitive forces:

Existing Rivalry Rivals hesitate to compete on the basis of price

Bargaining Power of Buyers (Customers) Powerful buyers are limited in their ability to force the cost

leader to reduce prices Bargaining Power of Suppliers

Cost leaders can absorb supplier price increases Potential Entrants

Efficiency can serve as a barrier to entry Product Substitutes

Can reduce prices when faced with substitutes Thus built in defense against all 5 competitive forces Also ability to compete based on costs and prices

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Types of Business-Level Strategies

Cost Leadership Strategy Competitive Risks

Innovations by competitors can quickly eliminate cost advantage

Too much focus on cost reduction versus competitive levels of differentiation

Competitors may learn how to successfully imitate a cost leader’s strategy

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Types of Business-Level Strategies

Differentiation Competitive advantage: Differentiation/uniqueness Competitive scope: Broad Integrated set of actions designed by a firm to produce

or deliver goods or services at an acceptable cost that customers perceive as being different/unique in ways that are important to them

Targeted customers perceive product value Customized products – differentiating on as many

features as possible Can differentiate in many ways and in many value chain

areas

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Examples of Value-Creating Activities Associated with the Differentiation Strategy

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Types of Business-Level Strategies

Differentiation In relationship to the 5 Forces:

Existing Rivalry Customers loyalty to differentiated products reduces their sensitivity to

price increases Bargaining Power of Buyers (Customers)

Uniqueness and loyalty reduces customer’s sensitivity to price increases

Bargaining Power of Suppliers Because of higher margins supplier price increases can be passed on

the to the customer Potential Entrants

Customer loyalty and uniqueness can serve as substantial barriers to new entry

Product Substitutes Customer loyalty effectively positions firm against substitute products

Again built in defense against 5 competitive forces

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Types of Business-Level Strategies

Differentiation Risks

Can charge too high of a price premium Differentiation theme no longer valuable to

customers Over-differentiating

Customer experience shows differentiation not worth the cost

Counterfeiting

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Types of Business-Level Strategies

Focus strategies Competitive advantage: Cost Leadership or

Differentiation Competitive scope: Narrow An integrated set of actions taken to produce goods or

services that serve the needs of a particular competitive segment

Attractive when: Firm lacks resources to compete in the broader market Firm may be able to more effectively serve a narrow market

segment than larger industry-wide competitors Firm has resources well suited to the niche Niche is attractive Large firms may overlook small niches

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Types of Business-Level Strategies

Focus strategy examples Particular buyer groups

Youths vs. senior citizens Men vs. women

Different segment of a product line Professional vs. do-it-yourself painters Luxury vs. sport cars

Geographic markets West coast vs. East coast North America vs. Europe

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Types of Business-Level Strategies

Focused Cost Leadership Competitive advantage: Low-cost Competitive scope: Narrow industry segment

Motel 6, Kia

Focused Differentiation Competitive advantage: Differentiation Competitive scope: Narrow industry segment

Ritz-Carlton, Apple, Rolls Royce

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Types of Business-Level Strategies

Focus strategies Risks

Same basic risks as broad cost leadership or broad differentiation plus:

A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser

A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit

Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole

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Types of Business-Level Strategies

Integrated Cost Leadership/Differentiation Efficiently produce products with differentiated attributes

Efficiency: Sources of low cost Differentiation: Source of unique value

Involves engaging in primary and support activities that allow a firm to simultaneously pursue low cost and differentiation

Low price with somewhat highly differentiated features More value for the money Often called best-cost or a hybrid strategy Examples: Toyota, Target

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Types of Business-Level Strategies

Integrated Cost Leadership/Differentiation Risks of Integrated Strategies

Harder to implement than other strategies Must simultaneously reduce costs while increasing

differentiation Can get ‘stuck in the middle’ resulting in no advantages

and poor performance

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Types of Business-Level Strategies

The Relative Nature of Business-Level Strategies Competitive advantages are always relative to other

firms As are the competencies and capabilities they are based

on To be successful

Low cost firms must have the lowest overall costs Differentiated firms must have higher levels of differentiation

Having the same level of costs and/or differentiated features as a competitor is unlikely to lead to a competitive advantage over them

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Other Business-Level Strategies

Strategic Alliances and Partnerships (Chapter 9) Mergers and Acquisitions (Chapter 7) Vertical Integration (Chapter 6) Outsourcing (Chapter 3) Offensive and Defensive Strategies (Chapter 5) First-Mover Advantages and Disadvantages (Chapter 5) Business Model Functional Area Strategies

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Customers and their Relationship with Business-Level Strategies

Strategic competitiveness results when firm can satisfy customers by using its competitive advantages

Five components in customer relationships Effectively managing relationships w/ customers

Deliver superior value and build customer loyalty

Reach, richness and affiliation Access and connection to customers, depth and detail of

information, and facilitating interactions with customers

Who: Determining the customers to serve What: Determining which customer needs to satisfy How: Determining core competencies necessary to

satisfy customer needs