Business Level Strategy

Business Level Strategy A Business Level Strategy is an integrated and coordinated set of commitments & actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific individual product markets Three Issues: Whom it will serve What needs target customers have that it will satisfy How those needs will be satisfied through implementation of given strategy

A Business Level Strategy is an integrated and coordinated set of commitments & actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific individual product markets

Three Issues:

Whom it will serve

What needs target customers have that it will satisfy

How those needs will be satisfied through implementation of given strategy

Types of Business-Level Strategies Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals

To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

Five Generic Strategies Competitive Advantage Competitive Scope Cost Uniqueness Broad target Narrow target Cost Leadership Differentiation Focused Cost Leadership Focused Differentiation Integrated Cost Leadership/ Differentiation

Types of Business Level Strategies Cost Leadership Differentiation Focus Strategy Cost Leadership: Integrated set of actions designed to produce or deliver goods or services at lower cost Focus on driving costs lower relative to competitors cost Features that are acceptable to customers

Cost Leadership

Differentiation

Focus Strategy

Cost Leadership:

Integrated set of actions designed to produce or deliver goods or services at lower cost

Focus on driving costs lower relative to competitors cost

Features that are acceptable to customers

Cost Leadership Strategy Cost saving actions required by this strategy: building efficient scale 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

Cost saving actions required by this strategy:

building efficient scale 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

How to Obtain a Cost Advantage Cost Drivers Value Chain Determine and control Reconfigure, if needed Alter production process Change in automation New distribution channel Direct sales in place of indirect sales New advertising media New raw material Backward integration Forward integration Change location relative to suppliers or buyers

Alter production process

Change in automation

New distribution channel

Direct sales in place of indirect sales

New advertising media

New raw material

Backward integration

Forward integration

Change location relative to suppliers or buyers

Major Risks of Cost Leadership Strategy Dramatic technological change could take away your cost advantage Competitors may learn how to imitate value chain Focus on efficiency could cause cost leader to overlook changes in customer preferences

Dramatic technological change could take away your cost advantage

Competitors may learn how to imitate value chain

Focus on efficiency could cause cost leader to overlook changes in customer preferences

Differentiation Unique attributes & characteristics of a firm’s product provide value to customers Premium prices due to unique need satisfaction Firms must be truly be unique at something to be perceived as unique Unusual Features, Responsive Customer Service, Rapid Product Innovations, Different Status , Engineering Designs, Prestige & Status Anything to create real or perceived value Challenge to identify features that create value for customers

Unique attributes & characteristics of a firm’s product provide value to customers

Premium prices due to unique need satisfaction

Firms must be truly be unique at something to be perceived as unique

Unusual Features, Responsive Customer Service, Rapid Product Innovations, Different Status , Engineering Designs, Prestige & Status

Anything to create real or perceived value

Challenge to identify features that create value for customers

Factors That Drive Differentiation Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Detailed information

Unique product features

Unique product performance

Exceptional services

New technologies

Quality of inputs

Exceptional skill or experience

Detailed information

Focus Strategy Integrated set of actions designed to produce goods or services that serve the needs of a particular competitive segment A particular Buyer group, A different segment of a product line, different geographic market Focused Cost Leadership or focused Differentiation Firms have the core competencies required to provide value to a narrow competitive segment that exceeds the value available from firms serving customers on industry wide basis

Integrated set of actions designed to produce goods or services that serve the needs of a particular competitive segment

A particular Buyer group, A different segment of a product line, different geographic market

Focused Cost Leadership or focused Differentiation

Firms have the core competencies required to provide value to a narrow competitive segment that exceeds the value available from firms serving customers on industry wide basis

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”

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”

Factors That May Drive Focused Strategies Large firms may 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

Large firms may 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

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

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

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

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

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)

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)

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

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

Functional Strategies The short-term goal-directed decisions and actions of an organization’s functional departments. All organizations perform 3 basic functions as they create and deliver goods and services: Marketing (to assess and establish product demand then market and deliver the product after production) Production and operations (to create the product/service) Financial and accounting ( to get payment for the product/service and information on performance results) These three basic functions typically expand into: Production-Operations-Manufacturing Strategies Marketing Strategies Human Resource Management Strategies Research and Development Strategies Information System Strategies Financial-Accounting Strategies

The short-term goal-directed decisions and actions of an organization’s functional departments.

All organizations perform 3 basic functions as they create and deliver goods and services:

Marketing (to assess and establish product demand then market and deliver the product after production)

Production and operations (to create the product/service)

Financial and accounting ( to get payment for the product/service and information on performance results)

These three basic functions typically expand into:

Production-Operations-Manufacturing Strategies

Marketing Strategies

Human Resource Management Strategies

Research and Development Strategies

Information System Strategies

Financial-Accounting Strategies

MARKETING Building Customer Satisfaction, Value, & Retention Market Oriented Strategic Planning Analyzing Consumer Markets and Buying Behavior Setting the Product & Branding Strategy Developing Price Strategies & Programs Designing & Managing Value Networks and Marketing Channels Managing Integrated Marketing Communications Managing Advertising, Sales Promotion, & PR Direct Marketing Fundamentals

Building Customer Satisfaction, Value, & Retention

Market Oriented Strategic Planning

Analyzing Consumer Markets and Buying Behavior

Setting the Product & Branding Strategy

Developing Price Strategies & Programs

Designing & Managing Value Networks and Marketing Channels

Managing Integrated Marketing Communications

Managing Advertising, Sales Promotion, & PR

Direct Marketing Fundamentals

Financial Management CAPITAL ACQUISITION: Acceptable cost of capital Desired proportion of short term & long term debt; Preferred & common equity Balance b/w Internal & External Funding Appropriate Risk & Ownership structures Levels & Forms of leasing for providing assets

CAPITAL ACQUISITION:

Acceptable cost of capital

Desired proportion of short term & long term debt; Preferred & common equity

Balance b/w Internal & External Funding

Appropriate Risk & Ownership structures

Levels & Forms of leasing for providing assets

Financial Management CAPITAL ALLOCATION Priorities for Capital Allocation Projects Final selection of Projects Capital Allocation by operating Managers w/o approval DIVIDEND & WORKING CAPITAL MANAGEMENT Proportion of earnings as dividends Importance of dividend stability Cash Flow Requirements; Minimum & Maximum Cash balances Liberal/ Conservative Credit Policies Payment timings & Procedures

CAPITAL ALLOCATION

Priorities for Capital Allocation Projects

Final selection of Projects

Capital Allocation by operating Managers w/o approval

DIVIDEND & WORKING CAPITAL MANAGEMENT

Proportion of earnings as dividends

Importance of dividend stability

Cash Flow Requirements; Minimum & Maximum Cash balances

Liberal/ Conservative Credit Policies

Payment timings & Procedures

Financial Management CAPITAL STRUCTURE DECISION: Optimal Capital Structure Debt & Equity Ratio External vs. Internal Financing SOURCES & USES of CASH: Cash Flow Statements

CAPITAL STRUCTURE DECISION:

Optimal Capital Structure

Debt & Equity Ratio

External vs. Internal Financing

SOURCES & USES of CASH:

Cash Flow Statements

Functional Strategies in the R & D Area Research vs. Commercial Development: Emphasis on Innovation & Break Through Emphasis on product development, Refinement & modification Time Horizon: Short Term or Long Term Orientation to support business strategy

Research vs. Commercial Development:

Emphasis on Innovation & Break Through

Emphasis on product development, Refinement & modification

Time Horizon:

Short Term or Long Term

Orientation to support business strategy

Functional Strategies in Personnel Development of Managerial Talent: Employee Recruitment, Selection & Orientation Career Development & Counseling, Training & Development Compensation & Regulatory Concerns: Compensation, Labor/Union Relations Competent & Well Motivated: Discipline, Control & Evaluation Performance Appraisal, 360 degree Feedback

Development of Managerial Talent:

Employee Recruitment, Selection & Orientation

Career Development & Counseling, Training & Development

Compensation & Regulatory Concerns:

Compensation, Labor/Union Relations

Competent & Well Motivated:

Discipline, Control & Evaluation

Performance Appraisal, 360 degree Feedback