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Chapter 4: Business-Level Strategy. Overview: Defining business-level strategy Risks of business-level strategies Differences in business-level strategies 5-Forces Relationship between customers and strategy. Introduction.

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chapter 4 business level strategy
Chapter 4: Business-Level Strategy
  • Overview:
    • Defining business-level strategy
    • Risks of business-level strategies
    • Differences in business-level strategies
    • 5-Forces
    • Relationship between customers and strategy
introduction
Introduction
  • Strategy: Increasingly important to a firm’s success and concerned with making choices among two or more alternatives.
    • Choices dictated by
      • External environment (O and T)
      • Internal resources, capabilities and core competencies (S and W)
  • Business level-strategy: Integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets/industry
  • How we intend to compete in a specific industry
business level strategies
Business-Level Strategies
  • Purpose: To create differences between position of a firm and its competitors
  • Firm must make a deliberate choice to
    • Perform activities differently
    • Perform different activities
  • Impacts how value chain activities will be performed to create unique value
  • No strategy better than others
  • Contingent on internal and external environment
business level strategies4
Business-Level Strategies
  • Two types of competitive advantage firms must choose between
    • Cost (Are our costs LOWER than rivals costs?)
    • Uniqueness (Are we DIFFERENT than rivals?)
  • Two types of ‘competitive scope’ firms must choose between
    • Broad target
    • Narrow target
  • These combine to yield 5 different generic business level strategies
    • Can potentially be used by any organization competing in any industry
types of business level strategies
Types of Business-Level Strategies
  • Cost Leadership Strategy
    • Competitive advantage: THE low-cost leader and operates with margins greater than competitors
    • Competitive scope: Broad
    • Integrated set of actions designed to produce or deliver goods or services with features that are acceptable to customers at the lowest cost, relative to competitors
    • No-frills, standardized or commodity-like product
    • Must have competitive levels of quality, service, and other features and lowest overall costs
    • Continuously reduce the costs / increase the efficiency of value chain activities
types of business level strategies8
Types of Business-Level Strategies
  • Cost Leadership Strategy
    • In relationship to the 5 Forces:
      • Existing Rivalry
        • Rivals hesitate to compete on the basis of price
      • Bargaining Power of Buyers (Customers)
        • Powerful buyers can force cost leader to reduce prices up to a point
      • Bargaining Power of Suppliers
        • Cost leaders can absorb suppliers price increases
      • Potential Entrants
        • Efficiency can serve as a barrier to entry
      • Product Substitutes
        • Can reduce prices when faced with substitutes
    • Thus built in defense against all 5 forces
types of business level strategies9
Types of Business-Level Strategies
  • Cost Leadership Strategy
    • Competitive Risks
      • Innovations by competitors can quickly eliminate cost advantage
      • Too much focus on cost reduction versus competitive levels of differentiation
      • Competitors may learn how to successfully imitate a cost leader’s strategy
types of business level strategies10
Types of Business-Level Strategies
  • Differentiation
    • Competitive advantage: Differentiation/uniqueness
    • Competitive scope: Broad
    • Integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different/unique in ways that are important to them
    • Targeted customers perceive product value
    • Customized products – differentiating on as many features as possible
    • Can differentiate in many ways and in many value chain areas
types of business level strategies12
Types of Business-Level Strategies
  • Differentiation
    • In relationship to the 5 Forces:
      • Existing Rivalry
        • Customers are loyal purchasers of differentiated products
      • Bargaining Power of Buyers (Customers)
        • Uniqueness and loyalty reduces customer’s sensitivity to price increases
      • Bargaining Power of Suppliers
        • Provide high quality components, driving up firm’s costs
        • Cost may be passed on to customer
      • Potential Entrants
        • Substantial barriers (see above) and would require significant resource investment
      • Product Substitutes
        • Customer loyalty effectively positions firm against product substitutes
types of business level strategies13
Types of Business-Level Strategies
  • Differentiation
    • Risks
      • Can charge too high of a price premium
      • Differentiation theme no longer valuable to customers
      • Over-differentiating
        • Customer experience shows differentiation not worth the cost
      • Counterfeiting
types of business level strategies14
Types of Business-Level Strategies
  • Focus strategies
    • Competitive advantage: Cost Leadership or Differentiation
    • Competitive scope: Narrow
    • An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment
    • Attractive when:
      • Firm lacks resources to compete in the broader market
      • Firm may be able to more effectively serve a narrow market segment than larger industry-wide competitors
      • Niche is attractive
      • Large firms may overlook small niches
types of business level strategies15
Types of Business-Level Strategies
  • Focus strategy examples
    • Buyer groups
      • Youths/senior citizens
    • Product line segments
      • Professional painter groups
    • Geographic markets
      • West vs. East coast
types of business level strategies16
Types of Business-Level Strategies
  • Focused Cost Leadership
    • Competitive advantage: Low-cost
    • Competitive scope: Narrow industry segment
      • Motel 6, Kia
  • Focused Differentiation
    • Competitive advantage: Differentiation
    • Competitive scope: Narrow industry segment
      • Ritz-Carlton, Apple, Rolls Royce
types of business level strategies17
Types of Business-Level Strategies
  • Focus strategies
    • Risks
      • Same basic risks as broad cost leadership or broad differentiation plus:
      • A competitor may be able to focus on a more narrowly defined competitive segment and "outfocus” the focuser
      • A company competing on an industry-wide basis may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit
      • Customer needs within a narrow competitive segment may become more similar to those of industry-wide customers as a whole
types of business level strategies18
Types of Business-Level Strategies
  • Integrated Cost Leadership/Differentiation
    • Efficiently produce products with differentiated attributes
      • Efficiency: Sources of low cost
      • Differentiation: Source of unique value
    • Involves engaging in primary and support activities that allow a firm to simultaneously pursue low cost and differentiation
    • Low price with somewhat highly differentiated features
    • More value for the money
    • Often called best-cost strategy
    • Examples: Toyota, Target
types of business level strategies19
Types of Business-Level Strategies
  • Integrated Cost Leadership/Differentiation
    • Risks of Integrated Strategies
      • Harder to implement than other strategies
      • Must simultaneously reduce costs while increasing differentiation
      • Can get ‘stuck in the middle’ resulting in no advantages and poor performance
other business level strategies
Other Business-Level Strategies
  • Strategic Alliances and Partnerships (Chapter 9)
  • Mergers and Acquisitions (Chapter 7)
  • Vertical Integration (Chapter 6)
  • Outsourcing (Chapter 3)
  • Offensive and Defensive Strategies (Chapter 5)
  • First-Mover Advantages and Disadvantages (Chapter 5)
customers and their relationship with business level strategies
Customers and their Relationship with Business-Level Strategies
  • Strategic competitiveness results when firm can satisfy customers by using its competitive advantages
  • Five components in customer relationships
    • Effectively managing relationships w/ customers
        • Deliver superior value and build customer loyalty
    • Reach, richness and affiliation
        • Access and connection to customers, depth and detail of information, and facilitating interactions with customers
    • Who: Determining the customers to serve
    • What: Determining which customer needs to satisfy
    • How: Determining core competencies necessary to satisfy customer needs