PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

Authored by:Marta Szabo White, Ph.DGeorgia State University

PART 2: STRATEGIC ACTIONS:STRATEGY

FORMULATION

CHAPTER 4:BUSINESS-LEVEL STRATEGY

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THE STRATEGIC MANAGEMENT PROCESS


KNOWLEDGE

OBJECTIVES● Define business-level strategy.

● Discuss the relationship between customers and business-level strategies in terms of who, what, and how.

● Explain the differences among business-level strategies.

● Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy.

● Describe the risks of using each of the business-level strategies.


MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS

■ With the 2008 global financial crisis and competitors, e.g., McDonald’s gaining market share, consumers were less willing to pay the high prices for premium coffee, leading to a reduction in store sales for the first time in Starbucks’ history.

■ Starbucks appeared to be unable to control the quality of the “experience” and began losing its differentiation advantage.

OPENING CASE


MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS (cont’d)

■ CEO Howard Schultz closed 900 poorly performing stores in the United States and refocused on innovation.

■ By 2011, with its 40th anniversary, a new logo, innovation such as VIA and customers paying for their purchases with their iPhones, environmental consciousness, employee health insurance, and a global focus on emerging markets such as China and India, Starbucks was once again differentiating itself.

OPENING CASE


BUSINESS–LEVEL STRATEGY: HOW

TO COMPETE IN A SPECIFIC INDUSTRY■ An integrated and coordinated set of

commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

■ It is the core strategy

■ Every firm must form and use a business-level strategy for each one of its businesses

■ Business-level strategy choices matter because long-term performance is linked to a firm’s strategies

IMPORTANT DEFINITION


BUSINESS-LEVEL STRATEGY

• A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy identifying what or which industry the firm will compete in

ONE BUSINESS-

LEVEL STRATEGY

• A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity

SEVERAL BUSINESS-

LEVEL STRATEGIES


CORE COMPETENCIES AND STRATEGY

Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Strategy

Business-level

Strategy

An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

Core Competencie

s

Resources and superior capabilities that are sources of competitive advantage over a firm’s rivals


CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL

STRATEGIES

KEY ISSUESin

BUSINESS-LEVEL

STRATEGY

Who will be served?

What needs will be satisfied?

How will those needs be satisfied?



STRATEGIES

EFFECTIVE GLOBAL

COMPETITORS

Adept at identifying customer needs across cultures and geography

Quickly and successfully adapt products/services

to meet those needs


BUSINESS-LEVEL STRATEGIES

GENERIC:Applicable

to any organization in

any industry

FIVE COMPETITIVE FORCES

VALUE CHAIN ACTIVITIES

RISKS for each Strategy

Effective STRUCTURE for each Strategy



STRATEGIESSATISFYING CUSTOMERS IS THE FOUNDATION OF SUCCESSFUL

BUSINESS STRATEGIES

• Managing relationships with customers

• Reach, richness, affiliation• Who will be served• What needs will be satisfied• How those needs will be satisfied



STRATEGIES

EFFECTIVELY MANAGING

RELATIONSHIPS WITH

CUSTOMERS

REACH Access and Connection

to Customers

RICHNESSDepth and Detail of Two-Way Flow

of Information Between the Firm and Customer

AFFILIATIONFacilitating Useful Interactions

With Customers


MARKET SEGMENTATIONA PROCESS USED TO CLUSTER PEOPLE WITH SIMILAR NEEDS INTO INDIVIDUAL

AND IDENTIFIABLE GROUPS

WHO: DETERMINING THE CUSTOMERS TO SERVE

ConsumerMarkets

IndustrialMarkets


MARKET SEGMENTATION:CONSUMER MARKETS

1.DEMOGRAPHIC FACTORS (age, income, sex, etc.)2. SOCIOECONOMIC FACTORS (social class, stage in the family life cycle)3. GEOGRAPHIC FACTORS (cultural, regional, and national differences)4. PSYCHOLOGICAL FACTORS (lifestyle, personality traits)5. CONSUMPTION PATTERNS (heavy, moderate, and light users)6. PERCEPTUAL FACTORS (benefit segmentation, perceptual mapping)


MARKET SEGMENTATION:INDUSTRIAL MARKETS

1. END-USE SEGMENTS (identified by SIC code)2. PRODUCT SEGMENTS (based on technological differences or production economics)3. GEOGRAPHIC SEGMENTS (defined by boundaries between countries or by regional differences within them)4. COMMON BUYING FACTOR SEGMENTS (cut across product market and geographic segments)5. CUSTOMER SIZE SEGMENTS


WHAT: DETERMINING WHICH CUSTOMER NEEDS

TO SATISFY ■ Customer needs are related to a product’s benefits and features■ Customer needs are neither right nor wrong, good nor bad■ Customer needs represent desires in terms of features and performance capabilities ■ Successful firms learn how to deliver to customers what they want, when they want it Customers are the lifeblood of a firm


HOW: DETERMINING CORE COMPETENCIES NECESSARY TO

SATISFY CUSTOMER NEEDS

■ Firms use core competencies to implement value creating strategies that satisfy customers’ needs

■ Value means goods or services that provide either low cost with acceptable features or highly differentiated features with acceptable costs

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


CUSTOMERS:HOW ● WHAT ● WHO

WHAT:Satisfy

CustomerNeeds

WHO:Target Group

of Customers


BUSINESS-LEVEL STRATEGY PURPOSEBUSINESS-LEVEL

STRATEGIESare 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● Perform different activities as compared to its rivals


BUSINESS-LEVEL STRATEGY PURPOSE

BUSINESS-LEVEL STRATEGY

is a deliberate choice about how the firm will perform the

value chain activities to create unique value

Southwest’s Competitive Advantages (rivals unable to imitate):

● Tight integration among activities ● Cost leadership strategy ● Unique culture and customer service


BUSINESS-LEVEL STRATEGY PURPOSEFIGURE 4.1

Southwest Airlines Activity System


SOURCES OF COMPETITIVE ADVANTAGE

■ Achieving LOWER OVERALL COSTS than rivals

■ Performing activities differently (reducing process costs)

■ Providing a low cost product that customers deem as ACCEPTABLE

■ Possessing the capability TO DIFFERENTIATE the firm’s product or service and command a premium price

■ Performing MORE HIGHLY VALUED activities


FIVE GENERIC BUSINESS-LEVEL STRATEGIES FIGURE 4.2

Five Business

Level Strategies


TARGET MARKETS

BROAD• Firms serving a broad market

seek to use their capabilities to create value for customers on an industry-wide basis; competing in many customer segments

NARROW

• A narrow market segment means that the firm intends to serve the needs of a narrow customer group; tailoring its strategy to serving them at the exclusion of others


BUSINESS-LEVEL STRATEGY EFFECTIVENESS

■ None of the five business-level strategies is inherently or universally superior to the others

■ The effectiveness of each strategy is contingent upon: ● External opportunities/threats ● Internal strengths/weaknesses

■ KEY: A successful business-level strategy must match external opportunities/threats with internal strengths, i.e., its core competencies


COST LEADERSHIP STRATEGY An integrated set of actions taken to

produce goods or services with features that are acceptable to customers at the lowest cost,

relative to that of competitors with features that are acceptable to

customers

■ Relatively standardized products

■ Features acceptable to many customers

■ Lowest competitive price


COST LEADERSHIP STRATEGY:

VALUE CHAIN ACTIVITIES ■ Value chain analysis identifies the parts of a firm’s operations that create value and those that do not

■ A competitive advantage in logistics creates more value for a cost leadership strategy than for a differentiation strategy

Inbound logistics [materials handling, warehousing, and inventory control]

Outbound logistics [collecting, storing, and distribution]



COST SAVING ACTIONS ■ Employing process innovations that facilitate efficient production and distribution methods

■ Building efficient scale facilities

■ Tightly controlling production costs and overhead

■ Minimizing costs of sales, R&D, and service

■ Building efficient manufacturing facilities

■ Monitoring costs of activities provided by outsiders

■ Simplifying production processes



VALUE CHAIN ACTIVITIES FIGURE 4.3

Examples of Value-

Creating Activities

Associated with the

Cost-Leadership Strategy


• Cost-effective MIS

• Few management layers

• Simplified planning

• Consistent policies

• Effecting training

• Easy-to-use manufacturing technologies

• Investments in technologies

• Finding low cost raw materials

VALUE-CREATING ACTIVITIES FOR COST

LEADERSHIP

• Monitor suppliers’ performances

• Link suppliers’ products to production processes

• Economies of scale

• Efficient-scale facilities

• Effective delivery schedules

• Low-cost transportation

• Highly trained sales force

• Proper pricing

RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE


VALUE-CREATING ACTIVITIES FOR COST

LEADERSHIP RECONFIGURE THE VALUE CHAIN FOR A

COST ADVANTAGE

Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales

New raw material Forward integration Backward integration Change location relative to suppliers or buyers



STRATEGIC FOCUS WALMART, DOLLAR STORES, AND AMAZON: WHO IS BUYING WHOSE

LUNCH?

■ Walmart deviated from its cost-leadership strategy designed to take market share away from Target by introducing organic foods, remodeling some stores, and reducing the variety of products offered, thereby increasing prices on some goods.

■ Recognizing its mistake, Walmart has re-focused on low costs and prices, increased its product diversity, and is opening 40 new express stores.

■ Will Walmart will be able to recapture its cost leadership position in the market after giving it up to rivals?


COST LEADERSHIP STRATEGY: COMPETITORS

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms

Bargaining power of buyers

Threat of substitute products

RIVALRY WITH EXISTING

COMPETITORS

• Due to cost leader’s advantageous position:

– Rivals hesitate to compete on basis of price

– Lack of price competition leads to greater profits

– Rivalry may be based on factors such as size, resources, location, market dependence, and prior competitive interactions


COST LEADERSHIP STRATEGY: BUYERS

(CUSTOMERS)BARGAINING POWER OF

BUYERS

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

competitors, causing them to exit, thus shifting power away from buyers back to the firm

– Powerful customers can force a cost leader to reduce its prices, but not below the level where the next-most-efficient industry competitor can earn average returns

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms




COST LEADERSHIP STRATEGY: SUPPLIERS

BARGAINING POWER OF SUPPLIERS

• Can mitigate suppliers’ power by:

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

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

– Outsourcing, to reduce costs may also require relationship-building (Guanxi), particularly to a foreign supplier

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms





NEW ENTRANTSTHREAT OF POTENTIAL ENTRANTS

• Barriers to potential entrants:– Their need to enter on a

large scale in order to be cost competitive

– The time it takes to move up the learning curve

– Efficiency of cost leaders through continuous efforts to reduce costs enhances profit margins and serves as a significant entry barrier

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms




COST LEADERSHIP STRATEGY: SUBSTITUTES

PRODUCT SUBSTITUTES

• Cost leader is well positioned to:– Make investments to

be first to create substitutes

– Buy patents developed by potential substitutes

– Lower prices in order to maintain value position

– Be more flexible than its differentiated competitors

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms





RISKS• COMPETITIVE RISKS

– OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations

– COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation

– IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader’s strategy


DIFFERENTIATION STRATEGY

An integrated set of actions taken to produce goods or services (at an

acceptable cost) that customers perceive as being different in ways that are

important to them

■ Focus is on non-standardized products

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

■ Firms must still be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay


DIFFERENTIATION STRATEGY:

DISTINCTIVE ACTIONS Firms seek to be different from

competitors on as many dimensions as possible

Differentiation approaches■ Unusual features■ Responsive customer service

■ Rapid product innovations ■ Technological leadership■ Perceived prestige and status■ Different tastes■ Engineering design and

performance



VALUE CHAIN ACTIVITIES FIGURE 4.4

Examples of Value-

Creating Activities

Associated with the

Differentiation Strategy


• Highly developed MIS

• Emphasis on quality

• Worker compensation for creativity/productivity

• Use of subjective performance measures

• Basic research capability

• Technology

• High quality raw materials

• Delivery of products

VALUE-CREATING ACTIVITIES FOR

DIFFERENTIATION

• High quality replacement parts

• Superior handling of incoming raw materials

• Attractive products

• Rapid response to customer specifications

• Order-processing procedures

• Customer credit

• Personal relationships

RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS


VALUE-CREATING ACTIVITIES FOR

DIFFERENTIATION RECONFIGURE THE VALUE CHAIN FOR

DISTINCTIVENESS

Whereas cost leadership targets a specific industry, differentiation creates value by distinguishing products/services

A firm must consistently upgrade differentiated features that customers value and/or create new valuable features (innovate) without significant cost increases

Create sustainability through: Customer perceptions of distinctiveness Customer reluctance to switch to non-

distinctive products


DIFFERENTIATION STRATEGY: COMPETITORS

• The relationship between brand loyalty and price sensitivity insulates a firm from competitive rivalry

• Reputation can also sustain the competitive advantage of firms following a differentiation strategy

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms



RIVALRY WITH EXISTING

COMPETITORS


DIFFERENTIATION STRATEGY: BUYERS

(CUSTOMERS)• Can mitigate buyers’

power because well differentiated products reduce customer sensitivity to price increases

• Customers are willing to accept a price increase when a product satisfies their perceived unique needs, as long as they do not think that an acceptable product alternative exists

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms



BARGAINING POWER OF

BUYERS


DIFFERENTIATION STRATEGY: SUPPLIERS

• Can mitigate suppliers’ power by:

– Absorbing price increases due to higher margins from high-quality components

– Alternatively, considering buyers’ relative insensitivity to price increases and their brand loyalty, firms may pass along higher supplier prices to the buyer

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms



BARGAINING POWER OF SUPPLIERS


DIFFERENTIATION STRATEGY: NEW

ENTRANTS• Substantial barriers to

potential entrants:

– Customer loyalty and the need to overcome the uniqueness of a differentiated product

– New products must surpass proven products

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

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms



THREAT OF POTENTIAL ENTRANTS


DIFFERENTIATION STRATEGY: SUBSTITUTES

• Well-positioned relative to substitutes because:

– Brand loyalty to a differentiated product tends to reduce:

– customers’ testing of new products

– switching brands

Threat of new

entrants

Bargaining power

of suppliers

Rivalry among

competing firms



PRODUCT SUBSTITUTES



RISKS• COMPETITIVE RISKS– PRICE DIFFERENTIAL: between the

differentiator’s and the cost leader’s products becomes too large

– VALUE DIMINISHED: Differentiation ceases to provide value for which customers are willing to pay

– EXPERIENCE: narrows customers’ perceptions of the value of differentiated features

– COUNTERFEIT: goods replicate differentiated features of the firm’s products


FOCUSED STRATEGIES

An integrated set of actions taken to produce goods or services that serve the

needs of a particular competitive segment

Target markets include:

■ a Particular buyer group (e.g., youths or senior citizens)

■ Different segment of a product line (e.g., products for professional painters or the do-it-yourself group)

■ Different geographic market (e.g., northern or southern Italy by using a foreign subsidiary)


FOCUSED STRATEGIES

Types of focused strategies: ■ Focused cost leadership strategy ■ Focused differentiation strategy

To implement a focus strategy, firms must be able to:Complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns


FACTORS THAT DRIVE FOCUSED STRATEGIES

■ Large firms may overlook small niches■ A firm may lack the resources

needed to compete in the broader market

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

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


FOCUSED COST LEADERSHIP STRATEGY

A firm focuses on a niche market, adding value by

leveraging value chain activities that allow value-creation

through the cost leadership strategy

■ Competitive advantage: low-cost

■ Competitive scope: narrow industry segment


FOCUSED DIFFERENTIATION

STRATEGY The value chain may be

analyzed to determine if a firm is able to link the activities required to create value by

using the focused differentiation strategy

■ Competitive advantage: differentiation

■ Competitive scope: narrow industry segment


FOCUS STRATEGIES: RISKS

• COMPETITIVE RISKS– OUTFOCUSED: a focusing firm may

be “outfocused” by its competitors

– COMPETITION: a large competitor may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit

– CHANGING PREFERENCES: customer preferences in the niche market may change to more closely resemble those of the broader market


INTEGRATED COST LEADERSHIP/


Efficiently produce products with differentiated attributes:

• EFFICIENCY: SOURCES OF LOW COST• DIFFERENTIATION: SOURCE OF UNIQUE

VALUE

■ Readily adapts to external environmental changes

■ Concentrates simultaneously on TWO sources of competitive advantage: cost and differentiation

■ Competence and flexibility required in several value chain activities




Three sources of flexibility useful for this strategy:

■ Flexible manufacturing systems (FMS)

■ Information networks

■ Total quality management (TQM) systems


FLEXIBLE MANUFACTURING

SYSTEMS Computer-controlled processes

used to produce a variety of products in moderate, flexible quantities with a minimum of

manual intervention

■ Goal is to eliminate the “low cost versus wide product variety” tradeoff

■ Allows firms to produce large variety of products at relatively low costs


INFORMATION NETWORKS

Links companies electronically with their suppliers, distributors, and

customers■ Facilitates efforts to satisfy customer expectations in terms of product quality and delivery speed

■ Improves flow of work among employees in the firm and their counterpart suppliers and distributors

■ Requires customer relationship management (CRM)


TOTAL QUALITY MANAGEMENT [TQM]

SYSTEMS Emphasize total commitment to the customer

through continuous improvement using:

■ Problem-solving approaches based on employee empowerment

Benefits■ Increased customer satisfaction■ Lower costs■ Reduced time-to-market for innovative products

TQM systems help firms maintain competitive parity, but by itself, rarely will

it lead to a competitive advantage


“STUCK in the MIDDLE” Strategy is gaining in popularity… but is RISKY

Products do not offer sufficient value in terms of either low cost or differentiation


DIFFERENTIATION STRATEGY: RISKS


“STUCK in the MIDDLE” Cost structure is not low enough for

attractive pricing of products; products not sufficiently

differentiated to create value for target customer

RESULT: DO NOT EARN ABOVE-AVERAGE RETURNS


DIFFERENTIATION STRATEGY: RISKS

PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION

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