Competing for ADVANTAGE

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Chapter 5Business-Level Strategy

PART IIICREATING COMPETITIVE ADVANTAGE

The Strategic Management Process

Business-Level Strategy

Key Terms

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

Five Elements of Strategy

Types of Business-Level Strategy

Business-Level Strategy Dimensions

Competitive advantageSuperior value

Competitive scopeTarget market

Competitive Advantage Dimension

Low CostEfficiency

DifferentiationDistinctiveness

IntegrationCombined approach

Competitive Scope Dimension

Broad marketIndustry-wide customer base

Narrow marketNiche customer baseFocus strategies

Serving Customers

Who will be served

- market segmentation What customer needs will be

satisfied

- low cost vs. differentiation How those needs will be satisfied

- core competencies

Who: Determining the Customers to Serve

Key Terms

Market segmentation

Process of clustering people with similar needs into individual and identifiable groups to determine which customer segments to target

Basis for Customer Segmentation

Strategy and Structure

Key Terms

Organizational structure

Specifies the firm's formal reporting relationships, procedures, controls, and authority and decision-making processes

Strategy and Structure Key Terms (cont.)

Simple structure

Structure in which the owner-manager makes all major decisions and monitors all activities while the staff serves as an extension of the manager's supervisory authority

Functional structure

Structure consisting of a chief executive officer and a limited corporate staff, with functional line managers in dominant organizational areas

Multidivisional structure

Structure consisting of operating divisions, each representing a separate business or profit center in which the top corporate officer delegates responsibilities for day-to-day operations and business-unit strategy to division managers

Cost Leadership Strategy

Key Terms

Cost leadership strategy

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

Cost Leadership Strategy – Implementation

No-frills, standardized goods Acceptable qualities and

features Emphasis on production

efficiency Continuously reduce costs of

value chain activities

Value-Creating Activities Associated with the Cost Leadership Strategy

Cost Leadership Strategy and the Five Forces of Competition

Low cost position is a valuable defense against rivals.

Powerful customers can demand reduced prices. Costs leaders can absorb supplier price

increases or force suppliers to hold down their prices.

Ever-improving levels of efficiency and cost reduction can be difficult to replicate and serve as a significant entry barrier.

Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers.

Using the Functional Organizational Structure to

Implement Strategy

Specialization

Centralization

Formalization

Functional Structure for the Cost Leadership Strategy

Functional Structure for the Cost Leadership Strategy

Simple reporting relationships Few decision-making and authority

layers Centralized corporate staff Strong operational focus on process

improvements Low-cost culture Centralized staff decision-making

authority Job specialization Highly formalized rules and procedures

Competitive Risks of Cost Leadership Strategy

Processes can become obsoleteFocus on cost reductions can be at the expense of understanding customer perceptions and needs

Strategy can be imitatedCost leaders can cut prices too low

Differentiation Strategy

Key Terms

Differentiation strategy

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 in ways that are important to them

Differentiation Strategy – Implementation

Target customers who perceive and value differentiated features

Customize products, differentiating on as many features as possible

Ways to Differentiate

Unusual features

Responsive customer service

Rapid product innovations

Technological leadership

Perceived prestige and status

Different tastes

Engineering design

Performance

Value-Creating Activities Associated with the Differentiation Strategy

Differentiation Strategy and the Five Forces of

Competition Customer loyalty provides the most valuable

defense against rivals. Uniqueness reduces customer sensitivity to

higher prices. High margins can absorb high supplier costs

or price increases can be passed on to willing customers.

Customer loyalty and product uniqueness serve as significant entry barriers.

Firms with customers loyal to their products are positioned effectively against product substitutes.

Functional Structure for the Differentiation Strategy

Functional Structure for the Differentiation Strategy

Complex and flexible reporting relationships

Cross-functional product development teams

Strong focus on marketing and product R&D

Development-oriented culture De-centralized decision-making

authority Broad job descriptions Informal rules and procedures

Competitive Risks of Differentiation Strategy

Price differential seen as too large

Differentiation no longer provides value for which customers will pay

Narrowing perceptions of the value of differentiated features

Counterfeiting

Focus Strategy

Key Terms

Focus strategy

Integrated set of actions designed to produce or deliver goods or services to satisfy the specific needs of a particular competitive segment

Specific Market Segments

Buyer group

Product line segment

Geographic market

Focus Strategy Drivers Large firms may overlook or poorly serve

small niches. Firms may lack resources to compete in

the broader market. Niche firms may be able to better satisfy

the specialized needs of a narrow market segment.

Focus may allow the firm to direct resources to certain value chain activities that deliver a competitive advantage.

Focus Strategies

Focused Cost Leadership Strategy

Focused Differentiation Strategy

Simple Structure for the Focus Strategy

A simple structure is appropriate for focus strategies for firms offering a single product line in a single geographic market.

Functional Structure for the Focus Strategy

A functional structure is appropriate for focus strategies for firms that have grown and expanded beyond offering a single product line in a single geographic market.

Competitive Risks of Focus Strategy

Being “outfocused” Entry of large industry-wide companies into an attractive market segment

Merging of niche customer needs with those of the broader industry

Integrated Cost Leadership/Differentiation Strategy

Key Terms

Integrated cost leadership/differentiation strategy

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 in ways that are important to them

Integration Strategy Advantages

Quick adaptation to environmental changes

Quick learning of new skills and technologies

Efficient leveraging of core competencies

Integration Strategy Difficulties

The integration strategy is difficult to implement.

Difficulty stems from the need to emphasize and balance different value chain activities and support functions to succeed.

Flexible Structure for the Integration Strategy

Commitment to strategic flexibility

Flexible decision-making patterns Partial centralization Less structured jobs Sensitivity to balance of

objectives Modular structures

Tools for Strategic Flexibility

Flexible manufacturing systems

Information networks

Total quality management (TQM) systems

Flexible Manufacturing Systems

Computer controlled Capable of producing multiple products

in moderate, flexible quantities with minimal manual intervention

Enable quick and easy product adjustments

Increase the flexibility of resources needed to produce differentiated products at low costs

Allow quick response to changes in customer needs, while retaining low costs and consistent quality

Information Networks

Facilitate efforts to satisfy quality and speed expectations of customers

Include Customer Relationship Management systems

Include Enterprise Resource Planning systems

Total Quality Management Systems

Focus on doing things right through increased efficiency

Incorporate customer definitions of quality

Guide the firm to the root causes of problems

Customized to fit the firm’s resources and the external environmental context

Competitive Risks of Integration Strategy

Failure to establish a leadership position can result in a firm being "stuck in the middle" and unable to create value or earn above-average returns.

ETHICAL QUESTION

Can a commitment to ethical conduct on issues such as the environment,

product quality, and fulfilling contractual agreements affect a

firm’s competitive advantage? If so, how?

ETHICAL QUESTION

Is there more incentive for differentiators or cost leaders to pursue stronger ethical conduct?

ETHICAL QUESTION

Can an overemphasis on cost leadership or differentiation lead

to ethical challenges?

ETHICAL QUESTION

Creating brand image is one way a firm can differentiate its good or service. However, many questions are now being raised about the effect brand images have on consumer

behavior. For example, considerable concern has arisen about brand images that are

managed by tobacco firms and their effect on the smoking habits of teenagers. Should

firms be concerned about how they form and use brand images? Why or why not?

ETHICAL QUESTION

To what extent should an individual manager be concerned about the

accuracy of the claims the company makes about its products in its

advertisements?