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© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.All rights reserved.All rights reserved.

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

Seventh edition

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

CHAPTER 4CHAPTER 4

Business-Level Business-Level StrategyStrategy

© 2007 Thomson/South-Western. All rights reserved. 4–2

KKNOWLEDGENOWLEDGE O OBJECTIVESBJECTIVES

1.1. Define business-level strategy.Define business-level strategy.

2.2. Discuss the relationship between customers and Discuss the relationship between customers and business-level strategies in terms of who, what, and how.business-level strategies in terms of who, what, and how.

3.3. Explain the differences among business-level strategies.Explain the differences among business-level strategies.

4.4. Use the five forces of competition model to explain how Use the five forces of competition model to explain how above-average returns can be earned through each above-average returns can be earned through each business-level strategy.business-level strategy.

5.5. Describe the risks of using each of the business-level Describe the risks of using each of the business-level strategies.strategies.

Studying this chapter should provide you with the strategic management knowledge needed to:


Business-Level Strategy (Defined)Business-Level Strategy (Defined)

• An integrated and coordinated set of An integrated and coordinated set of commitments and actions the firm uses to gain a commitments and actions the firm uses to gain a competitive advantage by exploiting core competitive advantage by exploiting core competencies in specific product markets.competencies in specific product markets.


Core Competencies and StrategyCore Competencies and Strategy

Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals

Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Core Core CompetenciesCompetencies

StrategyStrategy

Business-level Business-level StrategyStrategy

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


Customers: Their Relationship to Customers: Their Relationship to Business-Level StrategiesBusiness-Level Strategies

Key IssuesKey Issuesinin

Business-levelBusiness-levelStrategyStrategy

Who will be Who will be served?served?

What needs will What needs will be satisfied?be satisfied?

How will those How will those needs be satisfied?needs be satisfied?


Effectively Managing Relationships with Effectively Managing Relationships with CustomersCustomers• Firms must manage all aspects of their Firms must manage all aspects of their

relationship with customers.relationship with customers.

Reach:Reach: firm’s success and connection to customers firm’s success and connection to customers

Richness:Richness: depth and detail of two-way flow of depth and detail of two-way flow of information between the firm and the customerinformation between the firm and the customer

Affiliation:Affiliation: facilitation of useful interactions with facilitation of useful interactions with customerscustomers


Who:Who: Determining the Customers to Determining the Customers to ServeServe• Market segmentationMarket segmentation

A process used to cluster people with similar needs A process used to cluster people with similar needs into individual and identifiable groups.into individual and identifiable groups.

All CustomersAll Customers

IndustrialIndustrialMarketsMarkets

ConsumerConsumerMarketsMarkets


Market SegmentationMarket Segmentation

• Consumer Markets Consumer Markets

Demographic factorsDemographic factors

Socioeconomic factorsSocioeconomic factors

Geographic factorsGeographic factors

Psychological factorsPsychological factors

Consumption patternsConsumption patterns

Perceptual factorsPerceptual factors

• Industrial MarketsIndustrial Markets

End-use segmentsEnd-use segments

Product segmentsProduct segments

Geographic segmentsGeographic segments

Common buying factor Common buying factor segmentssegments

Customer size Customer size segmentssegments


TABLETABLE 4.14.1 Basis for Customer SegmentationBasis for Customer Segmentation

Consumer Markets

• Demographic factors (age, income, sex, etc.)

• Socioeconomic factors (social class, stage in the family life cycle)

• Geographic factors (cultural, regional, and national differences)

• Psychological factors (lifestyle, personality traits)

• Consumption patterns (heavy, moderate, and light users)

• Perceptual factors (benefit segmentation, perceptual mapping)

Industrial Markets• End-use segments (identified by SIC code)

• Product segments (based on technological differences or production economics)

• Geographic segments (defined by boundaries between countries or by regional differences within them)

• Common buying factor segments (cut across product market and geographic segments)

• Customer size segmentsSource: Adapted from S. C. Jain, 2000, Marketing Planning and Strategy, Cincinnati: South-Western College Publishing, 120.


What:What: Determining Which Determining Which Customer Needs to SatisfyCustomer Needs to Satisfy

• Customer needs are related to a product’s Customer needs are related to a product’s benefits and features.benefits and features.

• Customer needs are neither right nor wrong, Customer needs are neither right nor wrong, good nor bad.good nor bad.

• Customer needs represent desires in terms of Customer needs represent desires in terms of features and performance capabilities.features and performance capabilities.


How:How: Determining Core Competencies Determining Core Competencies Necessary to Satisfy Customer Necessary to Satisfy Customer NeedsNeeds

• Firms use core competencies to implement value Firms use core competencies to implement value creating strategies that satisfy customers’ needs.creating strategies that satisfy customers’ needs.

• Only firms with capacity to continuously Only firms with capacity to continuously improve, improve, innovate and upgrade innovate and upgrade their competencies can their competencies can expect to meet and/or exceed customer expect to meet and/or exceed customer expectations across time.expectations across time.


The Purpose of a Business-Level The Purpose of a Business-Level StrategyStrategy• Business-Level StrategiesBusiness-Level Strategies

Are intended to create differences between the firm’s Are intended to create differences between the firm’s position relative to those of its rivals.position relative to those of its rivals.

• To position itself, the firm must decide whether it To position itself, the firm must decide whether it intends to:intends to:

Perform activities differently orPerform activities differently or

Perform different activities as compared to its rivals.Perform different activities as compared to its rivals.


Types of Potential Competitive Types of Potential Competitive AdvantageAdvantage• Achieving Achieving lower overall costslower overall costs than rivals than rivals

Performing activities differently (reducing process Performing activities differently (reducing process costs)costs)

• Possessing the capability Possessing the capability to differentiateto differentiate the the firm’s product or service and command a firm’s product or service and command a premium pricepremium price

Performing different (more highly valued) activities.Performing different (more highly valued) activities.


FIGUREFIGURE 4.14.1 The External EnvironmentThe External Environment


Competitive ScopeCompetitive Scope

• Broad ScopeBroad Scope

The firm competes in many The firm competes in many customer segments.customer segments.

• Narrow ScopeNarrow Scope

The firm selects a segment or The firm selects a segment or group of segments in the group of segments in the industry and tailors its strategy industry and tailors its strategy to serving them at the to serving them at the exclusion of others.exclusion of others.


Types of Business-Level StrategiesTypes of Business-Level Strategies

CostCost UniquenessUniqueness

DifferentiationDifferentiationCost LeadershipCost Leadership

Focused Focused DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Integrated Cost Integrated Cost Leadership/ Leadership/

DifferentiationDifferentiation

BroadBroadTargetTarget

NarrowNarrowTargetTarget

Competitive AdvantageCompetitive Advantage

CompetitiveCompetitiveScopeScope


FIGUREFIGURE 4.24.2 Five Business-Level StrategiesFive Business-Level Strategies

Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 12. Copyright © 1985, 1998 by Michael E. Porter.


Cost Leadership StrategyCost Leadership Strategy

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services with features that are goods or services with features that are acceptable to customers at the lowest cost, acceptable to customers at the lowest cost, relative to that of competitors with features that relative to that of competitors with features that are acceptable to customers.are acceptable to customers.

Relatively standardized productsRelatively standardized products

Features acceptable to many customersFeatures acceptable to many customers

Lowest competitive priceLowest competitive price


Cost Leadership StrategyCost Leadership Strategy

• Cost saving actions required by this strategy:Cost saving actions required by this strategy:

Building efficient scale facilitiesBuilding efficient scale facilities

Tightly controlling production costs and overheadTightly controlling production costs and overhead

Minimizing costs of sales, R&D and serviceMinimizing costs of sales, R&D and service

Building efficient manufacturing facilitiesBuilding efficient manufacturing facilities

Monitoring costs of activities provided by outsidersMonitoring costs of activities provided by outsiders

Simplifying production processesSimplifying production processes


How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage

Determine Determine and control and control Cost DriversCost Drivers

Reconfigure Value Chain Value Chain if needed

Alter production processAlter production process

Change in automationChange in automation

New distribution channelNew distribution channel

New advertising mediaNew advertising media Direct sales in place of Direct sales in place of

indirect salesindirect sales

New raw materialNew raw material

Forward integrationForward integration

Backward integrationBackward integration Change location relative Change location relative

to suppliers or buyersto suppliers or buyers


FIGUREFIGURE 4.34.3 Examples of Value-Creating Activities Examples of Value-Creating Activities Associated with the Cost Leadership StrategyAssociated with the Cost Leadership Strategy

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.


Value-Creating Activities for Cost Value-Creating Activities for Cost LeadershipLeadership• Cost-effective MISCost-effective MIS

• Few management layersFew management layers

• Simplified planningSimplified planning

• Consistent policiesConsistent policies

• Effecting trainingEffecting training

• Easy-to-use manufacturing Easy-to-use manufacturing technologiestechnologies

• Investments in technologiesInvestments in technologies

• Finding low cost raw materialsFinding low cost raw materials

• Monitor suppliers’ Monitor suppliers’ performancesperformances

• Link suppliers’ products to Link suppliers’ products to production processesproduction processes

• Economies of scaleEconomies of scale

• Efficient-scale facilitiesEfficient-scale facilities

• Effective delivery schedulesEffective delivery schedules

• Low-cost transportationLow-cost transportation

• Highly trained sales forceHighly trained sales force

• Proper pricingProper pricing


Cost Leadership Strategy: Cost Leadership Strategy: CompetitorsCompetitors

• Due to cost leader’s Due to cost leader’s advantageous position:advantageous position:

Rivals hesitate to compete Rivals hesitate to compete on basis of price.on basis of price.

Lack of price competition Lack of price competition leads to greater profits.leads to greater profits.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Rivalry with Existing Competitors


Cost Leadership Strategy: Cost Leadership Strategy: BuyersBuyers

• Can mitigate buyers’ Can mitigate buyers’ power by:power by: Driving prices far below Driving prices far below

competitors, causing competitors, causing them to exit, thus them to exit, thus shifting power with shifting power with buyers back to the firm.buyers back to the firm.

Threat of new

entrants


Rivalry among

competing firms



Bargaining Powerof Buyers


Cost Leadership Strategy: Cost Leadership Strategy: SuppliersSuppliers

• Can mitigate suppliers’ Can mitigate suppliers’ power by:power by:

Being able to absorb Being able to absorb cost increases due to cost increases due to low cost position.low cost position.

Being able to make very Being able to make very large purchases, large purchases, reducing chance of reducing chance of supplier using power.supplier using power.

Threat of new

entrants


Rivalry among

competing firms



Bargaining Power of Suppliers


Cost Leadership Strategy: Cost Leadership Strategy: New EntrantsNew Entrants

• Can frighten off new Can frighten off new entrants due to:entrants due to:

Their need to enter on a Their need to enter on a large scale in order to be large scale in order to be cost competitive.cost competitive.

The time it takes to move The time it takes to move down the learning curve.down the learning curve.

Threat of new

entrants


Rivalryamong

competing firms



The Threat of The Threat of Potential EntrantsPotential Entrants


Cost Leadership Strategy: Cost Leadership Strategy: SubstitutesSubstitutes

• Cost leader is well Cost leader is well positioned to:positioned to:

Make investments to be Make investments to be first to create substitutes.first to create substitutes.

Buy patents developed by Buy patents developed by potential substitutes.potential substitutes.

Lower prices in order to Lower prices in order to maintain value position.maintain value position.

Threat of new

entrants


Rivalryamong

competing firms



ProductProductSubstitutesSubstitutes


Cost Leadership Strategy (cont’d)Cost Leadership Strategy (cont’d)

• Competitive RisksCompetitive Risks

Processes used to produce and distribute good or Processes used to produce and distribute good or service may become obsolete due to competitors’ service may become obsolete due to competitors’ innovations.innovations.

Focus on cost reductions may occur at expense of Focus on cost reductions may occur at expense of customers’ perceptions of differentiationcustomers’ perceptions of differentiation

Competitors, using their own core competencies, may Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy.successfully imitate the cost leader’s strategy.


Differentiation StrategyDifferentiation Strategy

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services (at an acceptable cost) that goods or services (at an acceptable cost) that customers perceive as being different in ways customers perceive as being different in ways that are important to them.that are important to them.

Focus is on nonstandardized productsFocus is on nonstandardized products

Appropriate when customers value differentiated Appropriate when customers value differentiated features more than they value low cost.features more than they value low cost.


How to Obtain a Differentiation How to Obtain a Differentiation AdvantageAdvantage

Control Cost DriversCost Drivers

if needed

Reconfigure Reconfigure Value ChainValue Chain to to maximizemaximize

Lower buyers’ costsLower buyers’ costs

Raise performance of product or serviceRaise performance of product or service

Create sustainability through:Create sustainability through:

Customer perceptions of uniquenessCustomer perceptions of uniqueness Customer reluctance to switch to non-Customer reluctance to switch to non-

unique product or serviceunique product or service


FigureFigure 4.44.4 Examples of Value-Creating Activities Associated Examples of Value-Creating Activities Associated with the Differentiation Strategywith the Differentiation Strategy

SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.


Value-Creating Activities and Value-Creating Activities and DifferentiationDifferentiation• Highly developed MISHighly developed MIS

• Emphasis on qualityEmphasis on quality

• Worker compensation for Worker compensation for creativity/productivitycreativity/productivity

• Use of subjective performance Use of subjective performance measuresmeasures

• Basic research capabilityBasic research capability

• TechnologyTechnology

• High quality raw materialsHigh quality raw materials

• Delivery of productsDelivery of products

• High quality replacement partsHigh quality replacement parts

• Superior handling of incoming Superior handling of incoming raw materialsraw materials

• Attractive productsAttractive products

• Rapid response to customer Rapid response to customer specificationsspecifications

• Order-processing proceduresOrder-processing procedures

• Customer creditCustomer credit

• Personal relationshipsPersonal relationships


Differentiation Strategy: Differentiation Strategy: CompetitorsCompetitors

• Defends against Defends against competitors because brand competitors because brand loyalty to differentiated loyalty to differentiated product offsets price product offsets price competition.competition.

Threat of new

entrants


Rivalry among

competing firms



Rivalry with Competitors


Differentiation Strategy: Differentiation Strategy: BuyersBuyers

• Can mitigate buyers’ power Can mitigate buyers’ power because well differentiated because well differentiated products reduce customer products reduce customer sensitivity to price increases.sensitivity to price increases.Threat of

new entrants


Rivalry among

competing firms



Bargaining Powerof Buyers


Differentiation Strategy: Differentiation Strategy: SuppliersSuppliers

• Can mitigate suppliers’ Can mitigate suppliers’ power by:power by:

Absorbing price increases Absorbing price increases due to higher margins.due to higher margins.

Passing along higher Passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated brand.differentiated brand.

Threat of new

entrants


Rivalry among

competing firms



Bargaining Power of Suppliers


Differentiation Strategy: Differentiation Strategy: New EntrantsNew Entrants

• Can defend against new Can defend against new entrants because:entrants because:

New products must surpass New products must surpass proven products.proven products.

New products must be at least New products must be at least equal to performance of proven equal to performance of proven products, but offered at lower products, but offered at lower prices.prices.

Threat of new

entrants


Rivalryamong

competing firms



The Threat of The Threat of Potential EntrantsPotential Entrants


Differentiation Strategy: Differentiation Strategy: SubstitutesSubstitutes

• Well positioned relative to Well positioned relative to substitutes because:substitutes because:Brand loyalty to a Brand loyalty to a

differentiated product tends differentiated product tends to reduce customers’ testing to reduce customers’ testing of new products or switching of new products or switching brands.brands.

Threat of new

entrants


Rivalryamong

competing firms



Product Product SubstitutesSubstitutes


Competitive Risks of DifferentiationCompetitive Risks of Differentiation• The price differential between the differentiator’s product The price differential between the differentiator’s product

and the cost leader’s product becomes too large.and the cost leader’s product becomes too large.

• Differentiation ceases to provide value for which Differentiation ceases to provide value for which customers are willing to pay.customers are willing to pay.

• Experience narrows customers’ perceptions of the value Experience narrows customers’ perceptions of the value of differentiated features.of differentiated features.

• Counterfeit goods replicate differentiated features of the Counterfeit goods replicate differentiated features of the firm’s products.firm’s products.


Focus StrategiesFocus Strategies

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services that serve the needs of a goods or services that serve the needs of a particular competitive segment.particular competitive segment.

Particular buyer groupParticular buyer group——youths or senior citizensyouths or senior citizens

Different segment of a product lineDifferent segment of a product line——professional professional craftsmen versus do-it-yourselferscraftsmen versus do-it-yourselfers

Different geographic marketsDifferent geographic markets——East coast versus East coast versus West coastWest coast


Focus Strategies (cont’d)Focus Strategies (cont’d)

• Types of focused strategiesTypes of focused strategies Focused cost leadership strategyFocused cost leadership strategy Focused differentiation strategyFocused differentiation strategy

• To implement a focus strategy, firms must be To implement a focus strategy, firms must be able to:able to: Complete various primary and support activities in a Complete various primary and support activities in a

competitively superior manner, in order to develop competitively superior manner, in order to develop and sustain a competitive advantage and earn above-and sustain a competitive advantage and earn above-average returns.average returns.


Factors That Drive Focused StrategiesFactors That Drive Focused Strategies• Large firms may overlook small niches.Large firms may overlook small niches.

• A firm may lack the resources needed to compete in the A firm may lack the resources needed to compete in the broader market.broader market.

• A firm is able to serve a narrow market segment more A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors.effectively than can its larger industry-wide competitors.

• Focusing allows the firm to direct its resources to certain Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.value chain activities to build competitive advantage.


Competitive Risks of Focus StrategiesCompetitive Risks of Focus Strategies• A focusing firm may be “outfocused” by its competitors.A focusing firm may be “outfocused” by its competitors.

• A large competitor may set its sights on a firm’s niche A large competitor may set its sights on a firm’s niche market.market.

• Customer preferences in niche market may change to Customer preferences in niche market may change to more closely resemble those of the broader market.more closely resemble those of the broader market.


Integrated Cost Leadership/ Integrated Cost Leadership/ Differentiation StrategyDifferentiation Strategy

• 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 changes.Adapt quickly to environmental changes.

Learn new skills and technologies more quickly.Learn new skills and technologies more quickly.

Effectively leverage its core competencies while Effectively leverage its core competencies while competing against its rivals.competing against its rivals.


Integrated Cost Leadership/ Integrated Cost Leadership/ Differentiation Strategy (cont’d)Differentiation Strategy (cont’d)

• Commitment to strategic flexibility is necessary Commitment to strategic flexibility is necessary for implementation of integrated cost for implementation of integrated cost leadership/differentiation strategy.leadership/differentiation strategy.

Flexible manufacturing systems (FMS)Flexible manufacturing systems (FMS)

Information networksInformation networks

Total quality management (TQM) systemsTotal quality management (TQM) systems


Flexible Manufacturing SystemsFlexible Manufacturing Systems

• Computer-controlled processes used to produce Computer-controlled processes used to produce a variety of products in moderate, flexible a variety of products in moderate, flexible quantities with a minimum of manual quantities with a minimum of manual intervention.intervention.

Goal is to eliminate the “low-cost-versus-wide Goal is to eliminate the “low-cost-versus-wide product-variety” tradeoff.product-variety” tradeoff.

Allows firms to produce large variety of products at Allows firms to produce large variety of products at relatively low costs.relatively low costs.


Information NetworksInformation Networks

• Link companies electronically with their Link companies electronically with their suppliers, distributors, and customers.suppliers, distributors, and customers.

Facilitate efforts to satisfy customer expectations in Facilitate efforts to satisfy customer expectations in terms of product quality and delivery speed.terms of product quality and delivery speed.

Improve flow of work among employees in the firm Improve flow of work among employees in the firm and their counterparts at suppliers and distributors.and their counterparts at suppliers and distributors.

Customer relationship management (CRM)Customer relationship management (CRM)


Total Quality Management (Total Quality Management (TQMTQM) ) SystemsSystems• Emphasize total commitment to the customer Emphasize total commitment to the customer

through continuous improvement using:through continuous improvement using: Data-driven, problem-solving approachesData-driven, problem-solving approaches Empowerment of employee groups and teamsEmpowerment of employee groups and teams

• BenefitsBenefits Increased customer satisfactionIncreased customer satisfaction Lower costsLower costs Reduced time-to-market for innovative productsReduced time-to-market for innovative products


Risks of the Integrated Cost Risks of the Integrated Cost Leadership/ Differentiation StrategyLeadership/ Differentiation Strategy

• Often involves compromisesOften involves compromises Becoming neither the lowest cost nor the most Becoming neither the lowest cost nor the most

differentiated firm.differentiated firm.

• Becoming “stuck in the middle”Becoming “stuck in the middle” Lacking the strong commitment and expertise that Lacking the strong commitment and expertise that

accompanies firms following either a cost leadership accompanies firms following either a cost leadership or a differentiated strategy.or a differentiated strategy.

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Documents

customer segments

customer needs firms

customers firms

types of business

group of segments

cost leadership strategy

code product segments

strategy resources