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Ba 469 lecture ch5

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  • 1. Building Competitive Advantage through Business Level Strategy Chapter 5
  • 2. Levels of Strategic Management From Chapter 1
  • 3. Key Question for Each Level
    • Corporate Strategy – what business(es) should the organization be in?
    • Business Strategy – how should the organization compete?
    • Functional Strategy – how should the organization’s resources be best employed to support business strategy?
  • 4. Business-Level Strategy How do we compete in this business?
  • 5. Business-Level Strategy
    • Developing a firm-specific business model that will allow a company to gain competitive advantage over its rivals in a market or industry
      • Customers’ needs
      • Customer groups
      • Distinctive competencies (how customers’ need will be satisfied)
  • 6. Customer Needs and Product Differentiation
    • Customer needs
      • Desires, wants, or cravings that can be satisfied through product attributes
    • Product differentiation
      • Designing products to satisfy customers’ needs
        • Balancing differentiation with costs
        • Ability to charge a higher price
        • Different ways to achieve distinctness
  • 7. Customer Groups and Market Segmentation
    • Market segmentation
      • The way a company decides to group customers, based on their different needs or preferences
        • Price
        • Kinds of needs
      • An evolving process
  • 8. Customer Groups and Market Segmentation (cont’d)
    • Strategies to market segmentation
      • Choose not to recognize that different groups of customers have different needs; serve the average customer
      • Segment a market and develop a product to suit the needs of each segment
      • Recognize that the market segments but concentrate on serving only one segment
  • 9. The Dynamics of Business-Level Strategy
    • Make a consistent and compatible set of choices concerning:
      • How to differentiate and price the product
      • When and how much to segment the market to maximize demand
      • Where and how to invest capital in order to create value while keeping cost structures viable (for competitive pricing)
  • 10. The Dynamics of Business-Level Strategy Source: Copyright © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Level Strategy,” (unpublished manuscript, 2002).
  • 11. Choosing a Generic Business-Level Strategy
    • Generic strategies
      • All businesses can pursue them regardless of whether they are manufacturing, service, or nonprofit
      • Can be pursued in different kinds of industry environments
      • Results from a company’s consistent choices on product, market, and distinctive competencies
  • 12. Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies
  • 13. Generic Business-Level Strategy: Cost Leadership
    • Establish a cost structure that allows the company to provide goods and services at lower unit costs than competitors
    • Advantages
      • If rivals charge similar prices, the cost leader achieves superior profitability
      • The cost leader is able to charge a lower price than competitors
  • 14. Cost Leadership Strategic Choices
    • The cost leader does not try to be the industry innovator
    • The cost leader positions its products to appeal to the “average” customer
    • The overriding goal of the cost leader is to increase efficiency and lower its costs relative to its rivals
  • 15. Cost Leadership Advantages
    • Protected from industry competitors by cost advantage
    • Less affected by increased prices of inputs if there are powerful suppliers
    • Less affected by a fall in price of inputs if there are powerful buyers
    • Purchases in large quantities increase bargaining power over suppliers
    • Ability to reduce price to compete with substitute products
    • Low costs and prices are a barrier to entry
  • 16. Cost Leadership Disadvantages
    • Competitors may lower their cost structures
    • Competitors may imitate the cost leader’s methods
    • Cost reductions may affect demand
  • 17. Generic Business-Level Strategy: Differentiation
    • Create a product that customers perceive as different or distinct in an important way
    • Advantages
      • Premium price
      • Increased revenues = superior profitability
  • 18. Differentiation Strategic Choices
    • Quality, innovation, responsiveness to customer needs
    • A differentiator strives to differentiate itself along as many dimensions as possible
    • A differentiator segments its market into many niches
    • A differentiated company concentrates on the organizational functions that provide the source of differentiation advantage
  • 19. Differentiation Advantages
    • Customers develop brand loyalty
    • Powerful suppliers are not a problem because the company is geared more toward the price it can charge than its costs
    • Differentiators can pass price increases on to customers
    • Powerful buyers are not a problem because the product is distinct
    • Differentiation and brand loyalty are barriers to entry
    • The threat of substitute products depends on competitors’ ability to meet customer needs
  • 20. Differentiation Disadvantages
    • Difficulty in maintaining long-term distinctness in customers’ eyes
      • Agile competitors can quickly imitate
      • Patents and first-mover advantage are limited
    • Difficulty of maintaining premium price
  • 21. Generic Business-Level Strategy: Cost Leadership and Differentiation
    • Pursuing the business models of the cost leader and differentiator simultaneously
  • 22. Cost Leadership and Differentiation Strategic Choices
    • Using robots and flexible manufacturing cells reduces costs while producing different products
    • Standardizing component parts used in different end products can achieve economies of scale
    • Limiting customer options reduces production and marketing costs
    • JIT inventory can reduce costs and improve quality and reliability
    • Using the Internet and e-commerce can provide information to customers and reduce costs
    • Low-cost and differentiated products are often both produced in countries with low labor costs
  • 23. Generic Business-Level Strategy: Focus
    • Serving the needs of a specific market segment
      • Geographic
      • Type of customer
      • Segment of the product line
    • After choosing a market segment, a focused company positions itself using either
      • Low-cost OR differentiation
  • 24. Why Focus Strategies Are Different
  • 25. Focus Advantages
    • The focuser is protected from rivals to the extent it can provide a product or service they cannot
    • The focuser has power over buyers because they cannot get the same thing from anyone else
    • The threat of new entrants is limited by customer loyalty to the focuser
    • Customer loyalty lessens the threat from substitutes
    • The focuser stays close to its customers and their changing needs
  • 26. Focus Disadvantages
    • The focuser is at a disadvantage with regard to powerful suppliers because it buys in small volume (but it may be able to pass costs along to loyal customers)
    • Because of low volume, a focuser may have higher costs than a low-cost company
    • The focuser’s niche may disappear because of technological change or changes in customers’ tastes
    • Differentiators will compete for a focuser’s niche
  • 27. Exercise
    • Form groups
    • What was the generic strategy of _____ and identify functional strategies to implement the generic strategy?
      • Toyota (opening case)?
      • Airborne Express?
  • 28. Business-Level Strategy: Stuck in the Middle
    • Companies that do not do the planning necessary for success in their chosen strategy
      • Product and market choices that have not been able to obtain or sustain competitive advantage
    • Successful generic competitive strategy:
      • Product, market, and distinctive competency decisions must result in a business-level strategy that leads to competitive advantage and superior profitability
      • The environment and competition must be monitored constantly in order to stay in tune with changes
  • 29. Competitive Positioning and Business-Level Strategy
    • In every market segment or industry, several companies typically compete for the same customers
    • The actions of one company have an impact on the others
    • Managers must position their companies competitively with regard to customers and competitors
  • 30. Competitive Positioning: Strategic Group Analysis
    • Identifying the strategies that a company’s rivals are pursuing
    • Strategic groups: companies in an industry that are pursuing a similar generic strategy
  • 31. Competitive Positioning: Choosing an Investment Strategy
    • The amount and type of resources that must be invested to maximize a company’s profitability over time
      • Human
      • Functional
      • Financial
  • 32. Stages in the Industry Life Cycle
  • 33. Choosing an Investment Strategy at the Business Level
  • 34. Competitive Positioning: Game Theory
    • Companies are players that are simultaneously making choices
    • The potential profitability varies depending on the strategy one company selects and the strategies that its rivals select
    • Sequential move and simultaneous move games
    • Look forward and reason back
  • 35. A Decision Tree for UPS’s Pricing Strategy
  • 36. Competitive Positioning: Game Theory (cont’d)
    • Know thy rival
    • Find the most profitable dominant strategy
      • Dominant strategy: one that makes you better off than you would be if you pursued any other strategy, no matter what strategy your opponent uses
  • 37. A Payoff Matrix for GM and Ford
  • 38. Competitive Positioning: Game Theory (cont’d)
    • Strategy shapes the payoff structure of the game
    • By their choice of strategy and business model, companies can alter the payoff structure of the game, alter their dominant strategy, and move away from a prisoner’s dilemma type of game structure
  • 39. Altered Payoff Matrix for GM and Ford