Building Competitive Advantage through Business Level Strategy Chapter 5
Levels of Strategic Management From Chapter 1
Key Question for Each Level <ul><li>Corporate Strategy – what business(es) should the organization be in? </li></ul><ul><l...
Business-Level Strategy How do we compete in this business?
Business-Level Strategy <ul><li>Developing a firm-specific business model that will allow a company to gain competitive ad...
Customer Needs and Product Differentiation <ul><li>Customer needs </li></ul><ul><ul><li>Desires, wants, or cravings that c...
Customer Groups and Market Segmentation <ul><li>Market segmentation </li></ul><ul><ul><li>The way a company decides to gro...
Customer Groups and Market Segmentation (cont’d) <ul><li>Strategies to market segmentation </li></ul><ul><ul><li>Choose no...
The Dynamics of Business-Level Strategy <ul><li>Make a consistent and compatible set of choices concerning: </li></ul><ul>...
The Dynamics of Business-Level Strategy Source:  Copyright  © C. W. L. Hill and G. R. Jones, “The Dynamics of Business-Lev...
Choosing a Generic Business-Level Strategy <ul><li>Generic strategies </li></ul><ul><ul><li>All businesses can pursue them...
Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies
Generic Business-Level Strategy: Cost Leadership <ul><li>Establish a cost structure that allows the company to provide goo...
Cost Leadership Strategic Choices <ul><li>The cost leader does not try to be the industry innovator </li></ul><ul><li>The ...
Cost Leadership Advantages <ul><li>Protected from industry competitors by cost advantage </li></ul><ul><li>Less affected b...
Cost Leadership Disadvantages <ul><li>Competitors may lower their cost structures </li></ul><ul><li>Competitors may imitat...
Generic Business-Level Strategy: Differentiation <ul><li>Create a product that customers perceive as different or distinct...
Differentiation Strategic Choices <ul><li>Quality, innovation, responsiveness to customer needs </li></ul><ul><li>A differ...
Differentiation Advantages <ul><li>Customers develop brand loyalty </li></ul><ul><li>Powerful suppliers are not a problem ...
Differentiation Disadvantages <ul><li>Difficulty in maintaining long-term distinctness in customers’ eyes </li></ul><ul><u...
Generic Business-Level Strategy:  Cost Leadership and Differentiation  <ul><li>Pursuing the business models of the cost le...
Cost Leadership and Differentiation Strategic Choices <ul><li>Using robots and flexible manufacturing cells reduces costs ...
Generic Business-Level Strategy:  Focus  <ul><li>Serving the needs of a specific market segment </li></ul><ul><ul><li>Geog...
Why Focus Strategies Are Different
Focus Advantages <ul><li>The focuser is protected from rivals to the extent it can provide a product or service they canno...
Focus Disadvantages <ul><li>The focuser is at a disadvantage with regard to powerful suppliers because it buys in small vo...
Exercise <ul><li>Form groups </li></ul><ul><li>What was the generic strategy of _____ and identify functional strategies t...
Business-Level Strategy: Stuck in the Middle <ul><li>Companies that do not do the planning necessary for success in their ...
Competitive Positioning and Business-Level Strategy <ul><li>In every market segment or industry, several companies typical...
Competitive Positioning: Strategic Group Analysis <ul><li>Identifying the strategies that a company’s rivals are pursuing ...
Competitive Positioning: Choosing an Investment Strategy <ul><li>The amount and type of resources that must be invested to...
Stages in the Industry Life Cycle
Choosing an Investment Strategy at the Business Level
Competitive Positioning: Game Theory <ul><li>Companies are players that are simultaneously making choices </li></ul><ul><l...
A Decision Tree for UPS’s Pricing Strategy
Competitive Positioning: Game Theory (cont’d) <ul><li>Know thy rival </li></ul><ul><li>Find the most profitable dominant s...
A Payoff Matrix for GM and Ford
Competitive Positioning: Game Theory (cont’d) <ul><li>Strategy shapes the payoff structure of the game  </li></ul><ul><li>...
Altered Payoff Matrix for GM and Ford
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Ba 469 lecture ch5

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Ba 469 lecture ch5

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

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