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Business level strategy

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  • 1. Chapter Outline What is Business Level Strategy? Why Business Level Strategy? Generic StrategiesCost Leadership Differentiation Focus
  • 2. Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies Ch 5 -2
  • 3. Ch 5 -3
  • 4. Generic Strategies Cost Leadership (Type 1 and Type 2) In conjunction with differentiation Economies or diseconomies of scale Capacity utilization achieved Linkages w/ suppliers & distributors Ch 5 -4
  • 5. Cost Leadership • Ways of ensuring total costs across value chain are lower than competitors’ total costs 1. Perform value chain activities more efficiently than rivals and control factors that drive costs 2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities Copyright 2007 Prentice Hall Ch 5 -5
  • 6. Cost Leadership • Steps to minimize cost 1. Appraise each cost creating activity and identify the factors driving the cost of the activity. 2. Identify the controllable & uncontrollable costs 3. Reengineer processes to improve time utilization and minimization of waste. 4. Forged relationships with vendors to minimize costs. 5. Build global capacities Copyright 2007 Prentice Hall Ch 5 -6
  • 7. Cost Leadership • Can be especially effective when: 1. Price competition among rivals is vigorous 2. Rival’s products are identical and supplies are readily available 3. There are few ways to achieve differentiation 4. Most buyers use the product in the same way 5. Buyers have low switching costs 6. Buyers are large and have significant power 7. Industry newcomers use low prices to attract buyers Copyright 2007 Prentice Hall Ch 5 -7
  • 8. Generic Strategies Low Cost Producer Advantage Many price-sensitive buyers Few ways of achieving differentiation Buyers not sensitive to brand differences Large # of buyers w/bargaining power Copyright 2007 Prentice Hall Ch 5 -8
  • 9. Generic Strategies Low Cost Producer Disadvantage  Technological advancement adopted by the rivals may result in cost reduction for rivals multiplying the advantage. Rival firms may initiate the low-cost methods adopted by the lowcost producer, thus making any advantage short-lived.  It would be very hard to the low-cost producer, to introduce changes in product design, Production process etc. Buyers sensitivity to price due to increase in buyer’s income leaves the low-cost behind. Copyright 2007 Prentice Hall Ch 5 -9
  • 10. Generic Strategies Differentiation (Type 3) Greater product flexibility Greater compatibility Lower costs Improved service Greater convenience More features Michael E. Porter explains that customer pay for only those products features they perceive. ( Real value,Prentice Hall Perceived value and Signals of Value ) Copyright 2007 Ch 5 -10
  • 11. Differentiation • Can be especially effective when: 1. There are many ways to differentiate and many buyers perceive the value of the differences 2. Buyer needs and uses are diverse 3. Few rival firms are following a similar differentiation approach 4. Technology change is fast paced and competition revolves around evolving product features Copyright 2007 Prentice Hall Ch 5 -11
  • 12. Differentiation • Advantages of Efficient Differentiation 1. 2. 3. 4. Premium price Increase in Market share Gains greater customer loyalty Enhances the profitability when cost of differentiation is less than extra price of the product. • Disadvantages of Efficient Differentiation 1. When customer don’t value the additional features significant enough to buy the product 2. Cost of differentiation is more than extra price of product. Copyright 2007 Prentice Hall Ch 5 -12
  • 13. Differentiation Approaches to Differentiation A different taste Special features Superior service Spare parts availability Overall value to the customer Engineering design and performance Product reliability Quality manufacturer Technological leadership A full range of services Complete line of products Top the line image and reputation Copyright 2007 Prentice Hall Ch 5 -13
  • 14. Generic Strategies Focused Strategies (Type 4 & 5) Industry segment of sufficient size Good growth potential Not crucial to success of major competitors Copyright 2007 Prentice Hall Ch 5 -14
  • 15. Focused Strategy • Can be especially effective when: 1. The target market niche is large, profitable, and growing 2. Industry leaders do not consider the niche crucial 3. Industry leaders consider the niche too costly or difficult to meet 4. The industry has many different niches and segments 5. Few, if any, other rivals are attempting to specialize in the same target segment Copyright 2007 Prentice Hall Ch 5 -15

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