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 StrategiesCore Competencies and Strategy Core The resources and capabilities that have been determined to be a source of competitive advantage competencies for a firm over its rivals An integrated and coordinated set of actions taken Strategy to exploit core competencies and gain a competitive advantageBusiness-level Actions taken to provide value to customers and gain a competitive advantage by exploiting core strategy competencies in specific, individual product markets
Business-Level StrategiesPurpose: To create differences betweenposition of a firm and its competitorsFirm must make a deliberate choice to Perform activities differently Perform different activitiesHow activities will be performed to create valueNo strategy better than othersContingent on internal and external environment 4
Business-Level StrategiesTwo types of competitive advantage firmsmust choose between Cost (Are we LOWER than others?) Uniqueness (Are we DIFFERENT? How?)Two types of ‘competitive scope’ firms mustchoose between Broad target Narrow targetThese combine to yield 5 different genericbusiness level strategies Can be used by any organization competing in any 5 industry
Business Level StrategiesCost Leadership Strategies: Firms must offer relatively standardized products with features or characteristics that are acceptable to customers at the lowest competitive price. Firms must consider their value chain of primary and secondary activities and link those activities to implement a cost leadership strategy.
Business Level StrategiesCost Leadership Strategies: Alternative cost reduction strategies include: • Building efficient scale facilities. • Cost reductions through experience. • Establish tight cost and overhead controls. • Avoidance of marginal customer accounts. • Cost minimization in R&D, service, and sales forces. Requirements for usage: • High relative market share (economies of purchasing). • Favorable access to raw materials. • Design of products towards ease of manufacturing. • High margins are reinvested to maintain cost leadership. • Examples: Emerson Electronics, Texas Instruments, and Black & Decker.
Business Level StrategiesCost Leadership Strategies: Defense against 5 competitive forces: • Competitors - Low cost position allows return after competitors have competed away their profits. • Suppliers - Allows more flexibility to cope with input cost increases. • Buyers - Buyers can at best force your prices down to that of the next lowest competitor (if they exit leaves firm as primary supplier). • New-entrants - Scale economies or cost advantages usually provide substantial barriers to entry. • Substitutes - Low cost position allows reduction in prices to maintain price/value relationship.
Examples of Value-Creating Activities Associated with the Cost Leadership Strategy
Business Level StrategiesCost Leadership Strategies: Competitive risks: • Myopic viewpoint toward cost reduction (overlook buyer wants and needs). • Rivals may successfully imitate the low-cost strategy. • Technology changes can result in cost or process breakthroughs that nullify gains. • Heavy investment into a low-cost approach can lock a firm into this strategy (vulnerability toward change). When to use: • When firm is the market or cost leader (good strategy during a price war). • If widespread competition exists, using low-cost strategies allows winning the war of attrition.
Business Level StrategiesDifferentiation Strategies: Goal is to provide value to customers through unique features and characteristics of a firm’s products. Differentiators focus or concentrate on product innovation and developing product features that customers value. Products generally cost more (offset cost of differentiation). Can’t completely ignore costs.
Business Level StrategiesDifferentiation Strategies: Can differentiate based on: • Superior quality (John Deere, Mercedes) • Customer service (IBM or Caterpillar) • Engineering design (Hewlett-Packard) • Unique features • Image of prestige or exclusivity (L’Oreal Cosmetics, Mercedes) • Package design (Arizona Iced Tea) Requirements for usage: • Use may require a high market share initially. • Implies a trade-off with low-cost (i.e., costs to differentiate). • Generally leads to a lower market share than in the low-cost approach.
Business Level StrategiesDifferentiation Strategies: Defense against 5 competitive forces: • Competitors - Decreases rivalry due to brand loyalty and resulting lower sensitivity to price. • Suppliers - Allows an increase in price margins (customers willing to pay more, can withstand supplier price changes). • Buyers - Removes buyer power due to a lack of comparative alternatives. • New-entrants & Substitutes - Requires others to overcome customer loyalty and product uniqueness.
Examples of Value-Creating Activities Associated with the Differentiation Strategy 15
Business Level StrategiesDifferentiation Strategies: Competitive risks: • If selling price is too high buyers may become price sensitive despite customer loyalty or uniqueness (price differential between standardized and differentiated product is too high). • Buyers may decide they don’t need the special features (means of differentiation no longer provides value). • Rival firms may imitate the product thereby decreasing product uniqueness. When to use: • When ways exist to differentiate the product which buyers perceive to have value. • When uses of the item are diverse. • When not many rivals are using the same strategy.
Business Level StrategiesFocus Strategies: Firms can also use core competencies to serve a narrow segment of the market or a particular customer group. Primary goals of a focused strategy: • Focus on a particular buyer group, segment of the market, etc. • To serve a narrow target or market segment more effectively than broad-based competitors can due to core competencies. • Select target segments which are the least vulnerable to substitutes or where competitors are the weakest.
Business Level StrategiesFocus Strategies: Two primary focused strategies: • Focused differentiation Strategy: Requirements for usage similar to differentiation strategies. Defense against the five forces similar to differentiation strategies. Examples: Rolls Royce, Fort Howard Paper. - Rolls Royce (prestige, quality, engineering design). - Fort Howard Paper (specialty lens paper).
Business Level StrategiesFocus Strategies: • Focused Cost Leadership strategies: Requirements for usage similar to low-cost strategies. Defense against the five forces similar to differentiation strategies. Examples: Rally’s, Martin Brower, White Castle. - Rally’s (no frills service, limited menu, no dine-in). - Martin Brower- 3rd largest food supplier, serves fast food chains by: Gearing to their purchasing cycles. Locating warehouse locations based on their locations. Stocking products only for these 8 firms Meeting their specialized needs.
Business Level StrategiesFocus Strategies: Competitive risks: • Broad range competitors may find ways to match focused firms services. • Shifts in buyer preferences and needs. • A competitor may find a smaller segment within the target segment (out-focus the focuser). When to use: • When no rivals are in the same segment. • Resources don’t permit operation in wide segments. • When their are different groups of buyers who use the product in different ways. • When industry segments differ widely in size, growth, or profitability.
Integrated CostLeadership/Differentiation Efficiently produce products with differentiated attributes Efficiency: Sources of low cost Differentiation: Source of unique value Can adapt to new technology and rapid changes in external environment Simultaneously concentrate on TWO sources of competitive advantage: cost and differentiation – consequently… …must be competent in many of the primary and support activities
Flexible manufacturing SystemsInformation NetworkTotal Quality Management Systems
Integrated CostLeadership/Differentiation Risks of Integrated Strategies Harder to implement than other strategies Must simultaneously reduce costs while increasing differentiation Can get ‘stuck in the middle’ resulting in no advantages and poor performance