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IRELAND | HOSKISSON | HITT THE MANAGEMENT OF STRATEGY CONCEPTS AND CASES 10E. CHAPTER 4: BUSINESS-LEVEL STRATEGY. THE STRATEGIC MANAGEMENT PROCESS. KNOWLEDGE OBJECTIVES. BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY.

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CHAPTER 4: BUSINESS-LEVEL STRATEGY

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Chapter 4 business level strategy

IRELAND | HOSKISSON | HITT

THE MANAGEMENT OF STRATEGY

CONCEPTS AND CASES 10E

CHAPTER 4:BUSINESS-LEVEL STRATEGY


The strategic management process

THE STRATEGIC MANAGEMENT PROCESS


Chapter 4 business level strategy

KNOWLEDGE OBJECTIVES


Business level strategy how to compete in a specific industry

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


Chapter 4 business level strategy

BUSINESS-LEVEL STRATEGY


Chapter 4 business level strategy

CORE COMPETENCIES AND STRATEGY

Core Competencies

Strategy

Business-level Strategy

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

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

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


Chapter 4 business level strategy

CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES

How will those needs be satisfied?

What needs will be satisfied?

Who will be served?

KEY ISSUESinBUSINESS-

LEVEL

STRATEGY


Chapter 4 business level strategy

BUSINESS-LEVEL STRATEGIES

VALUE CHAIN

ACTIVITIES

RISKS for each Strategy

Effective STRUCTURE

for each Strategy

FIVE COMPETITIVE FORCES

GENERIC:

Applicable

to any

organization in

any

industry


Chapter 4 business level strategy

CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES

  • SATISFYING 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


Chapter 4 business level strategy

MARKET SEGMENTATIONA process used to cluster people with similar needs into individual and identifiable groups

WHO: DETERMINING THE CUSTOMERS TO SERVE

Industrial

Markets

Consumer

Markets


Chapter 4 business level strategy

MARKET SEGMENTATION:

CONSUMER MARKETS

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)


Chapter 4 business level strategy

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


Chapter 4 business level strategy

CUSTOMERS:

HOW ● WHAT ● WHO

WHO:

Target Group of Customers

WHAT:

Satisfy Customer

Needs


Chapter 4 business level strategy

BUSINESS-LEVEL STRATEGY

PURPOSE

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

● Perform different activities as compared to its rivals


Chapter 4 business level strategy

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


Chapter 4 business level strategy

BUSINESS-LEVEL STRATEGY

PURPOSE

Southwest Airlines Activity System


Chapter 4 business level strategy

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


Chapter 4 business level strategy

FIVE GENERIC BUSINESS-LEVEL STRATEGIES

Five Business Level Strategies


Chapter 4 business level strategy

TARGET MARKETS


Chapter 4 business level strategy

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


Chapter 4 business level strategy

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


Chapter 4 business level strategy

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]


Chapter 4 business level strategy

COST LEADERSHIP STRATEGY:

VALUE CHAIN ACTIVITIES

Examples of Value-Creating Activities Associated with the Cost-Leadership Strategy


Chapter 4 business level 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

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

VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP

RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE


Chapter 4 business level strategy

VALUE-CREATING ACTIVITIES FOR COST LEADERSHIP

RECONFIGURE THE VALUE CHAIN FOR A COST ADVANTAGE

  • Alter production process

  • New raw material

  • Change in automation

  • Forward integration

  • New distribution channel

  • Backward integration

  • Change location relative to suppliers or buyers

  • New advertising media

  • Direct sales in place of indirect sales


Chapter 4 business level 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


Chapter 4 business level strategy

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


Chapter 4 business level strategy

DIFFERENTIATION STRATEGY:

VALUE CHAIN ACTIVITIES

Examples of Value-Creating Activities Associated with the Differentiation Strategy


Chapter 4 business level 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

High quality replacement parts

Superior handling of incoming raw materials

Attractive products

Rapid response to customer specifications

Order-processing procedures

Customer credit

Personal relationships

VALUE-CREATING ACTIVITIES FOR DIFFERENTIATION

RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS


Chapter 4 business level strategy

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


Chapter 4 business level strategy

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)


Chapter 4 business level strategy

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


Chapter 4 business level strategy

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


Chapter 4 business level strategy

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


Chapter 4 business level strategy

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


Chapter 4 business level strategy

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


Chapter 4 business level strategy

INTEGRATED COST LEADERSHIP/

DIFFERENTIATION STRATEGY

Efficiently produce products with differentiated attributes:

  • EFFICIENCY: SOURCES OF LOW COST

  • DIFFERENTIATION: SOURCE OF UNIQUE VALUE

  • ■ Readilyadapts to external environmental changes

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

  • ■ Competence and flexibility required in several value chain activities


  • Chapter 4 business level strategy

    INTEGRATED COST LEADERSHIP/

    DIFFERENTIATION STRATEGY

    • Three sources of flexibility useful for this strategy:

  • ■ Flexible manufacturing systems (FMS)

  • ■ Information networks

  • ■ Total quality management (TQM) systems


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