Chapter4_Slides.ppt

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  • Chapter4_Slides.ppt

    1. 1. Chapter 4 Business-Level Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing
    2. 2. Chapter 4 Business Level Strategy Sustainable Competitive Advantage Chapter 2 External Environment Chapter 3 Internal Environment
    3. 3. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
    4. 4. Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
    5. 5. Strategy An integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage. Business Level Strategy Actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. Core Competency The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
    6. 6. Generic Business Level Strategies Cost Uniqueness Source of Competitive Advantage Breadth of Competitive Scope Broad Target Market Narrow Target Market Focused Differen- tiation Cost Leadership Differen- tiation Focused Low Cost Cost Leadership
    7. 7. Key Criteria: Cost Leadership Business Level Strategy Relatively standardized products Features acceptable to many customers Lowest competitive price
    8. 8. Requirements: Constant effort to reduce costs through: Cost Leadership Business Level Strategy Building efficient scale facilities State of the art manufacturing facilities Simplification of processes Minimizing costs of sales, R&D and service Monitoring costs of activities provided by outsiders Tight control of production costs and overhead
    9. 9. Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN MARGIN Value Creating Activities Common to a Cost Leadership Business Level Strategy
    10. 10. Primary Activities Support Activities Value Creating Activities Common to a Cost Leadership Business Level Strategy Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN MARGIN Cost Effective MIS Systems Relatively Few Management Layers to Reduce Overhead Simplified Planning Practices to Reduce Planning Costs Consistent Policies to Reduce Turnover Costs Effective Training Programs to Improve Worker Efficiency and Effectiveness Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset Purchases Efficient Plant Scale to Minimize Manufacturing Costs Selection of Low Cost Transport Carriers Delivery Schedule that Reduces Costs National Scale Advertising Products Priced to Generate Sales Volume Small, Highly Trained Sales Force Effective Product Installations to Reduce Frequency and Severity of Recalls Easy-to-Use Manufacturing Technologies Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials Frequent Evaluation Processes to Monitor Suppliers’ Performances Located in Close Proximity with Suppliers Policy Choice of Plant Technology Organizational Learning Efficient Order Sizes Interrelationships with Sister Units
    11. 11. How to Obtain a Cost Advantage 1. Determine and Control Cost Drivers 2. Reconfigure the Value Chain as 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
    12. 12. Reconfiguring the Value Chain of Iowa Beef Packers (IBP) Save on shipping and cattle weight loss Utilize cheaper non-union rural labor Ranch Cattle Ship “on the Hoof” to Rail Center (Chicago) Slaughter into sides of beef “ Boxed Cuts” at Markets Old Way: New Way New Way: Locate large automated plants near ranches Process into “Boxed Cuts” at plants Ship cuts already “Boxed” to Markets
    13. 13. Choices That Drive Costs Economies of scale Asset utilization Capacity utilization pattern Value chain linkages Interrelationships - Advertising & Sales - Logistics & Operations - Seasonal, cyclical - Order processing and distribution Product features Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Hiring, training, motivation
    14. 14. Three Key Questions 2. How can a group of linked value activities be regrouped or reordered? 3. How might coalitions with other firms lower or eliminate costs? Gallo sold wine through grocery stores rather than liquor stores because they were more efficient distributors 1. How can an activity be performed differently or even eliminated?
    15. 15. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
    16. 16. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: Enter at large scale to be Cost Competitive * Take time to move down the “Learning Curve” * Threat of New Entrants
    17. 17. Bargaining Power of Buyers Threat of New Entrants Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Can mitigate Buyer Power by: * Driving prices far below competitors may cause exit and shift power back to firm
    18. 18. Can mitigate Buyer Power by: Threat of New Entrants Bargaining Power of Buyers Driving prices far below competitors which may cause exit and shift power back to firm Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Well positioned relative to Substitutes in order to: Make investments to create substitutes first * Buy patents developed by potential substitutes * Lower prices to maintain value position * Threat of Substitute Products
    19. 19. Bargaining Power of Suppliers Threat of New Entrants Threat of Substitute Products Can mitigate Buyer Power by: Bargaining Power of Buyers Driving prices far below competitors which may cause exit and shift power back to firm Can mitigate Supplier Power by: Low cost position makes them better able to absorb cost increases * More likely to make very large purchases which reduces chance of supplier power * Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Well positioned relative to Substitutes in order to: Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position *
    20. 20. Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products Rivalry Among Competing Firms in Industry Can mitigate Buyer Power by: Bargaining Power of Buyers Driving prices far below competitors which may cause exit and shift power back to firm Can frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive * Take time to move down the “Learning Curve” * Well positioned relative to Substitutes in order to: Make investments to create substitutes * Can buy patents developed by potential substitutes * Lower prices to maintain value position * Competitors avoid price wars with Cost Leaders, which creates higher profits for entire industry Can mitigate Supplier Power by: Low cost position makes them better able to absorb cost increases * More likely to make very large purchases which reduces chance of supplier power *
    21. 21. Major Risks of Cost Leadership Business Level 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
    22. 22. Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Cost Leadership Uniqueness Generic Business Level Strategies
    23. 23. Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Cost Leadership Differen- tiation Generic Business Level Strategies Uniqueness
    24. 24. Key Criteria: Differentiation Business Level Strategy Value provided by unique features and value characteristics Command premium price Superior quality Rapid innovation Prestige or exclusivity High customer service
    25. 25. Differentiation Business Level Strategy Requirements: Constant effort to differentiate products through: Developing new systems and processes Quality focus Maximize Human Resource contributions through low turnover and high motivation Capability in R&D Shaping perceptions through advertising
    26. 26. Primary Activities Support Activities Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN MARGIN Value Creating Activities Common to a Differentiation Business Level Strategy
    27. 27. Technological Development Human Resource Management Firm Infrastructure Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales Service MARGIN MARGIN Primary Activities Support Activities Value Creating Activities Common to a Differentiation Business Level Strategy A companywide emphasis on producing high quality products Highly Developed Information Systems to better understand customers’ purchasing preferences Compensation programs intended to encourage worker creativity and productivity Extensive use of subjective rather than objective performance measures Superior handling of incoming raw materials to minimize damage and improve the quality of the final product Rapid responses to customers unique manufacturing specifications Consistent manufacturing of attractive products Accurate and responsive order processing procedures Complete field stocking of replacement parts Strong capability in basic research Investments in technologies that will allow the firm to consistently produce highly differentiated products Systems and procedures used to find the highest quality raw materials Purchase of highest quality replacement parts Rapid and timely product deliveries to customers Superior personnel training Coordination among R&D, product development and marketing Extensive personal relationships with buyers Strong Coordin-ation among functions in R&D, Marketing and Product Development Premium Pricing
    28. 28. Effectiveness with Differentiation grows out of Value Chain activities Examples: Differentiation Business Level Strategy Heineken beer Raw materials Caterpillar tractors Service buyers’ needs quickly anywhere in the world Intel microprocessors Technological superiority Steinway pianos Raw materials & Workmanship Mercedes Benz autos Technology and Workmanship
    29. 29. <ul><li>Creating barriers by perceptions of uniqueness </li></ul><ul><li>Creating switching costs through differentiation </li></ul>Raising Buyers’ Performance Lowering Buyers’ Costs Creating Sustainability through: Create Value with Differentiation by:
    30. 30. Drivers of Differentiation Unique product features Unique product performance Exceptional services Quality of inputs New technologies Exceptional skill or experience Detailed information Examples:
    31. 31. Effective Differentiators can remain profitable even when the Five Forces appear unattractive
    32. 32. Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of New Entrants Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices *
    33. 33. Threat of New Entrants Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can mitigate Buyer Power because: Well differentiated products reduce customer sensitivity to price increases Bargaining Power of Buyers Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices *
    34. 34. Threat of New Entrants Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Effective Differentiators can remain profitable even when the Five Forces appear unattractive Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Well positioned relative to Substitutes because: Brand loyalty tends to reduce new product trial and brand switching * Threat of Substitute Products
    35. 35. Threat of New Entrants Bargaining Power of Suppliers Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Effective Differentiators can remain profitable even when the Five Forces appear unattractive Threat of Substitute Products Bargaining Power of Suppliers Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Well positioned relative to Substitute s because: Brand loyalty tends to reduce new product trial and brand switching * Can mitigate Supplier Power by: Absorbing price increases due to higher margins * Passing on higher supplier prices because buyers are brand loyal *
    36. 36. Threat of New Entrants Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases Effective Differentiators can remain profitable even when the Five Forces appear unattractive Rivalry Among Competing Firms in Industry Well positioned relative to Substitute s because: Brand loyalty tends to reduce new product trial and brand switching * Can mitigate Supplier Power by: * * Absorbing price increases due to higher margins Passing on higher supplier prices because buyers are brand loyal Can fend off New Entrants because: New products must surpass proven products * Or be equal to performance at lower prices * Brand loyalty overcomes much price competition
    37. 37. Major Risks of a Differentiation Business Level Strategy Customers may decide that the cost of “uniqueness” is too great The means of uniqueness may no longer be valued by customers Competitors may learn how to imitate Value Chain
    38. 38. Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Cost Leadership Differen- tiation Uniqueness Generic Business Level Strategies
    39. 39. Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Cost Leadership Differen- tiation Focused Differen- tiation Focused Low Cost Uniqueness Generic Business Level Strategies
    40. 40. Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Focused Business Level Strategies Large firms may overlook small niches Firm may lack resources to compete industry-wide May be able to serve a narrow market segment more effectively than industrywide competitors Focus can allow you to direct resources to certain value chain activities to build competitive advantage
    41. 41. Focused Business Level Strategies Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. However, opportunities may exist because: Examples: Bang & Olufsen Upscale electronic components Iams Company Premium pet foods Snap-on tools High quality mechanics’ tools May be able to retrofit old factories to keep costs down Minimize R&D costs by copying innovators
    42. 42. Major Risks Involved With a Focused Differentiation Business Level Strategy 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
    43. 43. Breadth of Competitive Scope Source of Competitive Advantage Broad Target Market Narrow Target Market Cost Cost Leadership Differen- tiation Generic Business Level Strategies Focused Differen- tiation Focused Low Cost Uniqueness Integrated Low Cost/ Differentiation
    44. 44. Firms using an Integrated Strategy may: Integrated Low Cost/Differentiation Strategy Utilize Flexible Manufacturing Systems to create differentiated products at low costs Adapt more quickly Learn new skills and technologies Leverage core competencies through Information Networks across multiple business units Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs
    45. 45. Recognize that the Integrated Low Cost/ Differentiation business level strategy involves a Compromise The risk is that the firm may become “Stuck in the Middle” lacking a strong commitment to or expertise with either type of generic strategy Integrated Low Cost/Differentiation Strategy
    46. 46. Southwest Airlines Integrated Low Cost/Differentiation Strategy Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes 15 minute turnaround time No meals No reserved seats No travel agent reservations Low Cost Focus on customer satisfaction New flight services for business travelers (phones and faxes) High level of employee dedication Differentiation

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