Business-LevelStrategy

Business-LevelStrategy

Chapter FourChapter Four

BA 495.009BA 495.009

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AgendaAgenda

• IntroductionIntroduction• Customers: Who? What? How?Customers: Who? What? How?• Types of Business-level StrategiesTypes of Business-level Strategies

Cost Leadership StrategiesCost Leadership StrategiesDifferentiation StrategiesDifferentiation StrategiesFocus StrategiesFocus StrategiesIntegrated StrategiesIntegrated Strategies

• Wrap-upWrap-up

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Introduction to Business-level Strategy

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Business-Level Strategy (Defined)Business-Level Strategy (Defined)

• An integrated and coordinated set of An integrated and coordinated set of commitments and actions the firm uses to gain a commitments and actions the firm uses to gain a competitive advantage by exploiting core competitive advantage by exploiting core competencies in specific product markets.competencies in specific product markets.

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Customers

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Customers: Their Relationship to Customers: Their Relationship to Business-Level StrategiesBusiness-Level Strategies

Key IssuesKey Issuesinin

Business-levelBusiness-levelStrategyStrategy

Who will be Who will be served?served?

What needs will What needs will be satisfied?be satisfied?

How will those How will those needs be satisfied?needs be satisfied?

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Who:Who: Determining the Customers to Determining the Customers to ServeServe• Market segmentationMarket segmentation

A process used to cluster people with similar needs A process used to cluster people with similar needs into individual and identifiable groups.into individual and identifiable groups.

All CustomersAll Customers

IndustrialIndustrialMarketsMarkets

ConsumerConsumerMarketsMarkets

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Market Segmentation: Consumer Market Segmentation: Consumer MarketsMarkets• Demographic factorsDemographic factors

• Socioeconomic factorsSocioeconomic factors

• Geographic factorsGeographic factors

• Psychological factorsPsychological factors

• Consumption patternsConsumption patterns

• Perceptual factorsPerceptual factors

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Market Segmentation: Industrial Market Segmentation: Industrial MarketsMarkets

• End-use segmentsEnd-use segments

• Product segmentsProduct segments

• Geographic segmentsGeographic segments

• Common buying factor Common buying factor segmentssegments

• Customer size segmentsCustomer size segments

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What:What: Determining Which Determining Which Customer Needs to SatisfyCustomer Needs to Satisfy

• Customer needs are related to a product’s Customer needs are related to a product’s benefits and features.benefits and features.

• A firm’s ability to meet customer needs creates A firm’s ability to meet customer needs creates VALUE for the customer.VALUE for the customer.

• Two forms of value:Two forms of value: Low costLow cost Unique, or differentiated productUnique, or differentiated product

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How:How: Determining Core Competencies Determining Core Competencies Necessary to Satisfy Customer Necessary to Satisfy Customer NeedsNeeds

• Firms use core competencies to implement Firms use core competencies to implement value-creating strategies that satisfy customers’ value-creating strategies that satisfy customers’ needs.needs.

• Only firms with capacity to continuously Only firms with capacity to continuously improve, improve, innovate and upgrade innovate and upgrade their competencies can their competencies can expect to meet and/or exceed customer expect to meet and/or exceed customer expectations across time.expectations across time.

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Types of Business-level Strategies

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The Purpose of a Business-Level The Purpose of a Business-Level StrategyStrategy• Business-Level StrategiesBusiness-Level Strategies

Are intended to create differences between the firm’s Are intended to create differences between the firm’s position relative to those of its rivals.position relative to those of its rivals.

• To position itself, the firm must decide whether it To position itself, the firm must decide whether it intends to:intends to:

Perform activities differently orPerform activities differently or

Perform different activities as compared to its rivals.Perform different activities as compared to its rivals.

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Two Choices for Business Level Two Choices for Business Level StrategiesStrategies• Types of potential competitive advantageTypes of potential competitive advantage

Achieving Achieving lower overall costslower overall costs than rivals than rivals

Possessing the capability Possessing the capability to differentiateto differentiate the firm’s the firm’s product or service and command a premium priceproduct or service and command a premium price

• Types of competitive scopeTypes of competitive scope

Broad scopeBroad scope

Narrow scopeNarrow scope

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Types of Business-Level StrategiesTypes of Business-Level Strategies

CostCost UniquenessUniqueness

DifferentiationDifferentiationCost LeadershipCost Leadership

Focused Focused DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Integrated Cost Integrated Cost Leadership/ Leadership/

DifferentiationDifferentiation

BroadBroadTargetTarget

NarrowNarrowTargetTarget

Competitive AdvantageCompetitive Advantage

CompetitiveCompetitiveScopeScope

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Cost Leadership Strategy

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Cost Leadership StrategyCost Leadership Strategy

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services with features that are goods or services with features that are acceptable to customers at the lowest cost, acceptable to customers at the lowest cost, relative to that of competitors with features that relative to that of competitors with features that are acceptable to customers.are acceptable to customers.

Relatively standardized productsRelatively standardized products

Features acceptable to many customersFeatures acceptable to many customers

Lowest competitive priceLowest competitive price

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SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.

Cost Leadership Value ChainCost Leadership Value Chain

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Internal Success in Cost LeadershipInternal Success in Cost Leadership• Each value-creating activity Each value-creating activity

must be based on the must be based on the following:following:Simplification of Simplification of

processes and processes and proceduresprocedures

Achieving efficiency and Achieving efficiency and effectivenesseffectiveness

Reducing costs (of Reducing costs (of activities done both activities done both internally and externally)internally and externally)

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Cost Leadership Strategy: Cost Leadership Strategy: CompetitorsCompetitors

• Due to cost leader’s Due to cost leader’s advantageous position advantageous position rivals hesitate to compete rivals hesitate to compete on basis of price.on basis of price.

• Lack of price competition Lack of price competition leads to greater profits.leads to greater profits.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Rivalry with Existing Competitors

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Cost Leadership Strategy: Cost Leadership Strategy: BuyersBuyers

• Customers already Customers already value firm’s low-price value firm’s low-price positionposition

• Can mitigate buyers’ Can mitigate buyers’ power by:power by: Driving prices far below Driving prices far below

competitors, causing competitors, causing them to exit, thus them to exit, thus shifting power with shifting power with buyers back to the firm.buyers back to the firm.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Powerof Buyers

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Cost Leadership Strategy: Cost Leadership Strategy: SuppliersSuppliers

• Can mitigate suppliers’ Can mitigate suppliers’ power by:power by:

Being able to absorb Being able to absorb cost increases due to cost increases due to low cost position.low cost position.

Being able to make very Being able to make very large purchases, large purchases, reducing chance of reducing chance of supplier using power.supplier using power.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Power of Suppliers

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Cost Leadership Strategy: Cost Leadership Strategy: New EntrantsNew Entrants

• Can frighten off new Can frighten off new entrants due to:entrants due to:

Their need to enter on a Their need to enter on a large scale in order to be large scale in order to be cost competitive.cost competitive.

The time it takes to move The time it takes to move down the learning curve.down the learning curve.

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

The Threat of The Threat of Potential EntrantsPotential Entrants

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Cost Leadership Strategy: Cost Leadership Strategy: SubstitutesSubstitutes

• Cost leader is well Cost leader is well positioned to lower positioned to lower prices in order to prices in order to maintain value position.maintain value position.

• Need to be aware of Need to be aware of disruptive technology or disruptive technology or other non-traditional other non-traditional substitutes.substitutes.

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

ProductProductSubstitutesSubstitutes

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Risks of Cost Leadership StrategyRisks of Cost Leadership Strategy

• Processes used to produce and distribute good Processes used to produce and distribute good or service may become obsolete due to or service may become obsolete due to competitors’ innovationscompetitors’ innovations

• Focus on cost reductions may occur at expense Focus on cost reductions may occur at expense of customers’ perceptions of differentiationof customers’ perceptions of differentiation

• Competitors, using their own core competencies, Competitors, using their own core competencies, may successfully imitate the cost leader’s may successfully imitate the cost leader’s strategystrategy

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Differentiation Strategy

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Differentiation StrategyDifferentiation Strategy

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services (at an acceptable cost) that goods or services (at an acceptable cost) that customers perceive as being different in ways customers perceive as being different in ways that are important to them.that are important to them.

Focus is on nonstandardized productsFocus is on nonstandardized products

Appropriate when customers value differentiated Appropriate when customers value differentiated features more than they value low cost.features more than they value low cost.

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Potential Aspects of DifferentiationPotential Aspects of Differentiation

• Superior qualitySuperior quality• Unusual or unique featuresUnusual or unique features• More responsive customer More responsive customer

serviceservice• Rapid product innovationRapid product innovation• Advanced technological Advanced technological

featuresfeatures• Image of prestige or statusImage of prestige or status

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SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 47. Copyright © 1985, 1998 by Michael E. Porter.

Differentiation Value ChainDifferentiation Value Chain

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Internal Success in DifferentiationInternal Success in Differentiation

• Establishing the Establishing the importance of qualityimportance of quality

• Accuracy, speed and Accuracy, speed and responsivenessresponsiveness

• Understanding and Understanding and meeting customers’ meeting customers’ unique preferencesunique preferences

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Differentiation Strategy: Differentiation Strategy: CompetitorsCompetitors

Defends against Defends against competitors because brand competitors because brand loyalty to differentiated loyalty to differentiated product offsets price product offsets price competition.competition.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Rivalry with Competitors

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Differentiation Strategy: Differentiation Strategy: BuyersBuyers

Can mitigate buyers’ power Can mitigate buyers’ power because well differentiated because well differentiated products reduce customer products reduce customer sensitivity to price increases.sensitivity to price increases.Threat of

new entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Powerof Buyers

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Differentiation Strategy: Differentiation Strategy: SuppliersSuppliers

• Can mitigate suppliers’ Can mitigate suppliers’ power by:power by:

Absorbing price increases Absorbing price increases due to higher margins.due to higher margins.

Passing along higher Passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated brand.differentiated brand.

Threat of new

entrants

Bargaining power of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

Bargaining Power of Suppliers

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Differentiation Strategy: Differentiation Strategy: New EntrantsNew Entrants

• Can defend against new Can defend against new entrants because:entrants because:

Customer loyalty is difficult to Customer loyalty is difficult to disrupt.disrupt.

New products must be at least New products must be at least equal to performance of proven equal to performance of proven products, but offered at lower products, but offered at lower prices.prices.

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

The Threat of The Threat of Potential EntrantsPotential Entrants

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Differentiation Strategy: Differentiation Strategy: SubstitutesSubstitutes

Well positioned relative to Well positioned relative to substitutes because brand substitutes because brand loyalty to a differentiated loyalty to a differentiated product tends to reduce product tends to reduce customers’ testing of new customers’ testing of new products or switching products or switching brands.brands.

Threat of new

entrants

Bargaining power of suppliers

Rivalryamong

competing firms

Bargaining power of buyers

Threat of substitute products

Product Product SubstitutesSubstitutes

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Risks of Differentiation StrategyRisks of Differentiation Strategy

• The price differential between the differentiator’s product The price differential between the differentiator’s product and the cost leader’s product becomes too large.and the cost leader’s product becomes too large.

• Differentiation ceases to provide value for which Differentiation ceases to provide value for which customers are willing to pay.customers are willing to pay.

• Experience narrows customers’ perceptions of the value Experience narrows customers’ perceptions of the value of differentiated features.of differentiated features.

• Counterfeit goods replicate differentiated features of the Counterfeit goods replicate differentiated features of the firm’s products.firm’s products.

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Focus Strategies

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Focus StrategiesFocus Strategies

• An integrated set of actions taken to produce An integrated set of actions taken to produce goods or services that serve the needs of a goods or services that serve the needs of a particular competitive segment.particular competitive segment.

Particular buyer groupParticular buyer group——youths or senior citizensyouths or senior citizens

Different segment of a product lineDifferent segment of a product line——professional professional craftsmen versus do-it-yourselferscraftsmen versus do-it-yourselfers

Different geographic marketsDifferent geographic markets——East coast versus East coast versus West coastWest coast

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Focus StrategiesFocus Strategies

• Types of focused strategiesTypes of focused strategies Focused cost leadership strategyFocused cost leadership strategy Focused differentiation strategyFocused differentiation strategy

• Focused strategies are similar to Focused strategies are similar to their counterparts in larger their counterparts in larger industry:industry: Similar areas of emphasis from Similar areas of emphasis from

analyzing the Value Chainanalyzing the Value Chain Similar analysis of Porter’s Five Similar analysis of Porter’s Five

ForcesForces

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Factors That Drive Focused StrategiesFactors That Drive Focused Strategies

• Large firms may overlook small niches.Large firms may overlook small niches.

• A firm may lack the resources needed to A firm may lack the resources needed to compete in the broader market.compete in the broader market.

• A firm is able to serve a narrow market segment A firm is able to serve a narrow market segment more effectively than can its larger industry-wide more effectively than can its larger industry-wide competitors.competitors.

• Focusing allows the firm to direct its resources to Focusing allows the firm to direct its resources to certain value chain activities to build competitive certain value chain activities to build competitive advantage.advantage.

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Competitive Risks of Focus StrategiesCompetitive Risks of Focus Strategies• A focusing firm may be “outfocused” by its A focusing firm may be “outfocused” by its

competitors.competitors.

• A large competitor may set its sights on a firm’s niche A large competitor may set its sights on a firm’s niche market.market.

• Customer preferences in niche market may change to Customer preferences in niche market may change to more closely resemble those of the broader market.more closely resemble those of the broader market.

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Integrated Strategies

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Integrated Cost Leadership/ Integrated Cost Leadership/ Differentiation StrategyDifferentiation Strategy

• Firms performing value chain activities in ways Firms performing value chain activities in ways that allow them to simultaneously pursue low that allow them to simultaneously pursue low cost and differentiation.cost and differentiation.

• A firm that successfully uses an integrated cost A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a leadership/differentiation strategy should be in a better position to:better position to:

Adapt quickly to environmental changes.Adapt quickly to environmental changes.

Learn new skills and technologies more quickly.Learn new skills and technologies more quickly.

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Risks of the Integrated Cost Risks of the Integrated Cost Leadership/ Differentiation StrategyLeadership/ Differentiation Strategy

• Often involves compromisesOften involves compromises Becoming neither the lowest cost nor the most Becoming neither the lowest cost nor the most

differentiated firm.differentiated firm.

• Becoming “stuck in the middle”Becoming “stuck in the middle” Firm engages in economics such that it cannot Firm engages in economics such that it cannot

achieve benefit of premium pricing from differentiation achieve benefit of premium pricing from differentiation nor cost savings from cost leadership.nor cost savings from cost leadership.

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Wrap-up

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Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 12. Copyright © 1985, 1998 by Michael E. Porter.

Business StrategiesBusiness Strategies

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Implementing Business Level StrategiesImplementing Business Level Strategies

These are key initiatives that allow the firm to implement its business-level strategy effectively.

These are basis for measuring your success in each of the key initiatives. Success in your initiatives will deliver success in your business-level strategy.

Key InitiativesKey Initiatives

TacticsTactics

MetricsMetrics

These are specific tactics that support each initiative.

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Wrap-upWrap-up

• IntroductionIntroduction• Customers: Who? What? How?Customers: Who? What? How?• Types of Business-level StrategiesTypes of Business-level Strategies

Cost Leadership StrategiesCost Leadership StrategiesDifferentiation StrategiesDifferentiation StrategiesFocus StrategiesFocus StrategiesIntegrated StrategiesIntegrated Strategies

• QuestionsQuestions