Copyright Guy Harley 2004 Technology & Organisational Change Business Level Strategy Week 4.

Copyright Guy Harley 2004

Technology & Organisational Change

Business Level Strategy

Week 4


Outline

Customers, Who, What and How? Types of business level strategy

Cost leadership Differentiation Focused cost leadership Focused Differentiation Cost leadership\differentiation


Strategic Competitiveness

To achieve strategic competitiveness, firms must: Identify who their customers are Determine customer needs/preferences Focus on satisfying the needs of some group of

customers Select a strategy that enables them to satisfy

customer needs


Internet Competitive Advantage

In the Internet age, firms can maintain competitive

advantage by: Thinking continuously about accessing &

connecting with customers (reach) Maintaining info with depth & detail for and from

customers (richness) Determining how to build relationships with

customers (relationship)


Determining which customers to serve

Need to identify customers on basis of needs or preferences

Firm must determine whether differences in needs/preferences are significant

If not, can offer a standardised product.


Basis for Customer Segmentation

Customer Markets Demographic factors Socio-economic factors Geographic factors Psychological factors Consumption patterns Perceptual factors


Basis for Customer Segmentation (cont.)

Industrial Markets End-use segments Product segments Geographic segments Common buying factor segments Customer Size segments


Standardised Product

When would a firm offer a standardised product? When it can’t easily be customised or

differentiated Or when firm’s core competencies are best

suited to producing standardised products. Typically offer them at lowest competitive price

as they follow a cost leadership strategy.


Increasing segmentation of markets

Availability of sophisticated info processing technologies allows firms to identify unique bundles of customer characteristics and needs

Competitors are becoming adept at identifying small but strategically relevant differences in customer needs

Trend towards smaller and smaller segments


Determining what needs to satisfy

Customers want needs satisfied and they want value

Need to identify key customer groups, needs and preferences.

Thus customer knowledge must be a priority for top level managers since they determine policy, technology etc


Customer knowledge

Becomes more important as firms attempt to perpetuate or sustain competitive advantage. By listening to customers, firms can correctly anticipate their future needs and create product innovations ahead of competitors- first mover advantage


Core Competencies

Determining core Competencies to satisfy

customer needs Need to decide how to bundle resources & core

competencies to satisfy customer needs to by implementing value creating strategies


Core Competencies

This means that: Firms must improve their ability to convert

innovation and new technologies into commercial products

New products should be based on core competencies or technology

New products must meet present or future needs


Generic Strategies Now look at 4 generic strategies, and how they

relate to the 5 competitive forces, the applicability of the value chain, risks associated with each

A firms position in an industry relative to competitors and to the 5 forces of competition Rivalry with existing competitors Bargaining power of suppliers Bargaining power of buyers Potential entrants Product substitutes


Breadth of Competitive Scope

Source of Competitive Advantage

BroadTargetMarket

NarrowTargetMarket

Cost

Focused Differen-

tiation

Focused Differen-

tiation

CostLeadership

CostLeadership

Differen-tiation

Differen-tiation

Focused Low CostFocused

Low Cost

Generic Business-Generic Business-Level StrategiesLevel Strategies

Generic Business-Generic Business-Level StrategiesLevel Strategies Uniqueness


Generic strategy: Cost-leadership

Offers relatively standardised product – minimum differentiation at lowest competitive price

Reducing price is not necessarily a cost leadership strategy- need to give consumer value- includes quality


Cost reduction strategies

Building efficient scale facilities Tight control of production & overhead costs Minimising costs of sales, R&D and service State of the art manufacturing technologies


Critical focus

Efficiency Cost reduction Still can’t ignore sources of differentiation that

customers value- e.g. styling, minimal levels of service, quality


Strategy 1:Cost Leadership

Even when competitive forces are strong, a firm that has cost leadership can still earn above average profits.


Rivalry with existing competitors

Achieving the lowest cost position means that competitors will hesitate to compete on basis of price because in a price war, the low cost firm will continue to earn profits after competitors have competed away their profits


Bargaining power of buyers

Achieving low cost position provides some protection against powerful customers who attempt to drive down prices

If customers drive prices below the cost of the next most efficient firm, the firm might choose to exit the market, leaving the low cost firm in a monopoly position


Bargaining power of suppliers

Cost leadership strategy enables a firm to absorb greater amount of cost increases fro powerful suppliers before it must raise prices

If has dominant market share, might be able to force suppliers to lower prices


Potential Entrants

Firms generally must produce & sell in large volumes to have cost leadership- this acts as a barrier to entry why?


Product substitutes

To retain customers the low cost leader can more easily reduce prices to maintain the price-value relationship and maintain customers


Cost Leadership

Competitive risks of the cost leadership strategy: Tech innovations by competitors could eliminate

advantage Over focus on efficiency might cause lack of

focus on consumer preferences Competitors might imitate low cost leaders value

chain configuration


Strategy 2: Differentiation

Value is provided through the unique features of the product

Can charge premium price Price charged must exceed the cost of the

differentiation Focus on product innovation and product

features


Means of differentiation Superior quality Unusual or unique features More responsive customer service Rapid product innovation Advanced technological features Engineering design Additional features Image of prestige


Achieving above average returns

Even when competitive forces are strong


Rivalry with existing competitors

Brand loyalty means that customers will be less sensitive to price increases. As long as the firm satisfies the differential needs of customers it may be insulated from price base competition


Bargaining power of buyers

Product considered unique Reduces customer sensitivity to price


Bargaining power of suppliers

Differentiator can absorb a greater level of cost increase from powerful suppliers through its higher margins


Potential entrants

Principal barrier is customers loyalty


Product substitutes

Brand loyalty insulates differentiated products


Differentiation Strategy

Competitive risks of differentiation strategy: Customers may decide the cost of uniqueness is

too high Firms means of differentiation no longer of value

to customers Customer learning may influence customer

perception of value counterfeiting


Strategy 3: focus

Firms focus on small segments or niches Why follow a focus strategy?

Able to serve niche more effectively Needs are so special that industry wide

competitors choose not to meet them Can be based on cost leadership or

differentiation


Focused cost leadership strategy

Generally targets the smallest buyers in the industry


Focused differentiation strategy

Customised products for small segments Successful when quantities involved are too

small for industry wide competitors, or when the degree of customisation requested is beyond capabilities of the industry wide differentiator


Competitive risks of focus strategies

Competitors may successfully focus on an even smaller segment of the market

Industry-wide competitor may recognise the attractiveness of the segment

Preferences of the narrow segment may become similar to those of the wider market


Integrated cost-leadership/differentiation

Integrating generic strategies may enable them to: Adapt quickly to environmental change Learn new skills and technology More effectively leverage core competencies

across business units and product lines Produce differentiated products at a relatively

low cost


Integrated cost leadership/differentiation

Benefits Differentiation enables firm to charge premium

price Cost leadership allows firm to charge lowest

price



Products from integrated cost

leadership/differentiation strategy are: Less differentiated than if firm pursued just a

differentiation strategy and Costs not as low as if pursued cost leadership

strategy



To overcome Competitive Risks must be able to: Focus consistently on reducing costs Add differentiated features that customers value

and for which they are willing to pay a higher price

Avoid becoming ‘stuck in the middle’ by failing to consistently pay attention to the competitive requirements of either or both generic strategies.


Competitive dynamics


Outline

Increased rivalry Model of competitive dynamics & rivalry Likelihood of attack Likelihood of response Firms abilities to take action and respond Outcomes of inter-firm rivalry


New ways of competing

Bring new products to the market more quickly Use of new technology Diversifying product line Shifting product emphasis Consolidation of industries Combining on-line selling with traditional


Changing Competitive Environment

Reasons for changing competitive environment Attention on global market Advances in ICTs- more info, faster decision

making Innovation Cooperation between former competitors in

development of new technology or formation of strategic alliances


Competitive dynamics

When one firm takes action, so do others


Model of competitive dynamics & rivalry

Competitive rivalry exists when firms jockey with one another in pursuit of advantageous market position

Exists because of competitive asymmetry- i.e. firms differ in terms of resources, capabilities, core competencies & the opportunities and threats in their environments

Competition results in mutual interdependence

Actions and responses shape the

competitive positions of each firm’s business-level

strategy

Actions and responses shape the

competitive positions of each firm’s business-level

strategy

Actions taken by one firm elicit responses from competitors

Actions taken by one firm elicit responses from competitors

A firm’s strategic conduct

is dynamic in nature

A firm’s strategic conduct

is dynamic in nature

Competitive responses lead

to additional actions from the

firm that acted originally

Competitive responses lead

to additional actions from the

firm that acted originally

Competitive Dynamics

Competitive Dynamics


Model of Inter-firm Rivalry

Awareness- whether the attacking/responding firm is aware of a potential attacker or respondent.

Motivation- incentives that firm has to attack/respond when attacked

Market commonality- extent to which firms compete in same market


Multipoint competition

When firms overlap in several markets (geographic or product)

High levels of commonality reduce the likelihood of competitive interaction- see Strategic Focus- airlines p163


Resource similarity

Intensity of competition often based on potential for response- attackers are generally not motivated to target a rival that is likely to retaliate

Firms with dissimilar resources are more likely to attack


Likelihood of attack The model tells us that the firm’s motivation and

awareness are developed from competitor analysis of market commonality and resource dissimilarity.

First mover Take an initial competitive action Have the resources, capabilities & core competencies

that to Gain competitive advantage through innovative and entrepreneurial actions


First Mover

First mover hopes to: Gain sustainable competitive advantage Earn above average returns until competitors

respond effectively Gain customer loyalty


First Mover

Disadvantage of first mover Inability to predict success of the action Second movers through imitation can avoid high

development costs


Second Movers

Firms that respond to first movers competitive action

Quick response may allow second mover to: Capture some of the initial customers and

gain a degree of brand loyalty Avoid some of the risks of the first mover Learn from mistakes and successes Avoid market development costs


Late movers

Respond to competitive action after considerable time

Performance generally suffers

Relative SizeSpeed

InnovationQuality

Ability for Ability for Action and Action and ResponseResponse

OutcomesOutcomesDrivers of Drivers of

Competitive Competitive BehaviourBehaviourAwarenessMotivationCapability

Competitor Competitor AnalysisAnalysisMarket

Commonality

ResourceSimilarity

Interfirm Rivalry:Interfirm Rivalry:Attack & ResponseAttack & Response

Likelihood of AttackLikelihood of AttackFirst Mover Incentives

Likelihood of ResponseLikelihood of ResponseType of Competitive

Action

Dependence on theMarket

Resource Availability

Actor’s Reputation

CompetitiveCompetitive

Slow, Standardor Fast Cycle

Market TypesMarket Types

CompetitiveCompetitive

SustainedOutcomesOutcomes

CompetitiveAdvantageTemporaryAdvantageEvolutionaryEvolutionaryOutcomesOutcomes

Entrepreneurial

or Market-PowerGrowth-Oriented

Actions

FeedbackFeedback

Model of Interfirm Rivalry:Model of Interfirm Rivalry:Likelihood of Attack and ResponseLikelihood of Attack and Response

Model of Interfirm Rivalry:Model of Interfirm Rivalry:Likelihood of Attack and ResponseLikelihood of Attack and Response


Likelihood of response

Depends on Type of action Reputation of competitor taking the action Competitors resource availability


Firm’s ability to take action and respond

Relative size of the firm within market Speed of competitive actions and responses Extent of innovation by firms in the industry Quality of firms products


Outcomes of inter-firm rivalry

Slow cycle markets-strongly shielded resource positions (monopoly)

Standard cycle- more closely associated with Porter-oligopoly

Fast cycle- largely impossible to achieve sustained competitive advantage

Competitive dynamics and industry evolution outcomes

ExploitingOpen Niches

(Blind Spots) & Competitive Uncertainty

Exploiting Factors of Production

Firm

Resou

rce & M

arket S

trength

TimeTime

Key Task Key Task

EntrepreneurialActions

Growth-orientedActions

Emerging Stage Growth Stage

Exploiting Market Position

Key Task

Market-powerActions

Mature Stage

RenewalMaintenance

Decline

Key Task

RenewalActions

Elaboration Stage

Copyright Guy Harley 2004 Technology & Organisational Change Business Level Strategy Week 4.

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