BUSINESS LEVEL STRATEGY

1. BUSINESS LEVEL STRATEGY STRATEGIC MANAGEMENT BUAD 4980

2. BUSINESS LEVEL STRATEGY Three Generic Strategies • Overall cost leadership • Low cost producer relative to a firm’s peers • Drive costs down throughout value chain • Differentiation • Products and/or services that are unique and valued accordingly • Non-price attributes for which customers will pay a premium STRATEGIC MANAGEMENT – BUAD 4980 2

3. BUSINESS LEVEL STRATEGY Three Generic Strategies • Focus strategy • Narrow product lines, buyer segments, or targeted geographic markets • Attain advantages either through differentiation or cost leadership in the focus markets STRATEGIC MANAGEMENT – BUAD 4980 3

4. BUSINESS LEVEL STRATEGY Three Generic Strategies STRATEGIC MANAGEMENT – BUAD 4980 4

5. BUSINESS LEVEL STRATEGY Three Generic Strategies: Company Examples • Overall Cost leadership strategy • McDonalds • Wal-Mart • Differentiation strategy • Harley Davison • Apple • Focus strategy • Rolex • Lamborghini STRATEGIC MANAGEMENT – BUAD 4980 5

6. BUSINESS LEVEL STRATEGY Three Generic Strategies STRATEGIC MANAGEMENT – BUAD 4980 6

7. BUSINESS LEVEL STRATEGY Overall Cost Leadership • Interrelated tactics that include: • Development of efficiently scaled and modernized facilities • Tight cost and overhead control • Avoidance of marginal customer accounts • Cost minimization in all activities in the firm’s value chain STRATEGIC MANAGEMENT – BUAD 4980 7

8. BUSINESS LEVEL STRATEGY Overall Cost Leadership • Experience curve • Businesses “learn” to lower costs as they gain experience with production processes • Unit costs of production decline as output increases in most industries STRATEGIC MANAGEMENT – BUAD 4980 8

9. BUSINESS LEVEL STRATEGY Overall Cost Leadership • Cost differentiation vs. competitors • Permits a cost leader to translate cost advantages directly into higher profits than competitors • Allows low cost producer to earn above-average profits STRATEGIC MANAGEMENT – BUAD 4980 9

10. BUSINESS LEVEL STRATEGY Overall Cost Leadership STRATEGIC MANAGEMENT – BUAD 4980 10

11. BUSINESS LEVEL STRATEGY Overall Cost Leadership Strategies vis-à-vis Porter’s Five Forces Model • Protects a firm against rivalry from higher cost competitors • Protects a firm against powerful buyers due to ability to adjust prices and maintain reasonable margins • Provides more flexibility to accommodate input cost pressure from powerful suppliers while maintaining reasonable margins • Provides substantial entry barriers from economies of scale and cost advantages that competitors can’t duplicate easily • Puts the firm in a favorable position with respect to substitute products STRATEGIC MANAGEMENT – BUAD 4980 11

12. BUSINESS LEVEL STRATEGY Pitfalls of Overall Cost Leadership Strategies • Too much focus on one or a few value-chain activities • All rivals share a common input or raw material • The strategy is imitated too easily • Product differentiation must be minimal • Margin reduction by adjusting sale prices too readily to perceived market threats STRATEGIC MANAGEMENT – BUAD 4980 12

13. BUSINESS LEVEL STRATEGY Differentiation • Prestige or brand image • Technological superiority • Innovation / new on the market • Value-added Features • Customer service • Dealer / distribution network STRATEGIC MANAGEMENT – BUAD 4980 13

14. BUSINESS LEVEL STRATEGY Differentiation • Firms may differentiate along several dimensions at once • Successful differentiation requires integration with all parts of a firm’s value chain • An important aspect of differentiation is speed or quick response (first out of the box) STRATEGIC MANAGEMENT – BUAD 4980 14

15. BUSINESS LEVEL STRATEGY Differentiation Strategies vis-à-vis Porter’s Five Forces Model • Creates higher entry barriers due to customer preference for product attributes • Provides higher margins that enable the firm to deal with supplier power • Establishes customer loyalty and hence less threat from substitutes STRATEGIC MANAGEMENT – BUAD 4980 15

16. BUSINESS LEVEL STRATEGY Pitfalls of Differentiation Strategies • Uniqueness that is not valuable to customers • Too much differentiation (not all customers value all features) • Too high a price premium • Differentiation that is easily imitated by competition STRATEGIC MANAGEMENT – BUAD 4980 16

17. BUSINESS LEVEL STRATEGY Focus • Based on the choice of a narrow competitive scope within an industry • Firm selects a segment or group of segments (niche) and tailors its strategy to serve them • Firm achieves competitive advantages by dedicating itself to these segments exclusively STRATEGIC MANAGEMENT – BUAD 4980 17

18. BUSINESS LEVEL STRATEGY Focus • Cost focus • Create a cost advantage in a narrow target market segment • Differentiation focus • Differentiate product in a narrow target market segment STRATEGIC MANAGEMENT – BUAD 4980 18

19. BUSINESS LEVEL STRATEGY Focus Strategies vis-à-vis Porter’s Five Forces Model • Create barriers to entry through either cost leadership, differentiation, or both • Select niches that are least vulnerable to substitutes or where competitors are weakest STRATEGIC MANAGEMENT – BUAD 4980 19

20. BUSINESS LEVEL STRATEGY Pitfalls of Focus Strategies • Erosion of cost advantages within the narrow segment • Focused products and services still subject to competition from new entrants and from imitation • Can become so focused on satisfying buyer needs that the value/cost relationship declines STRATEGIC MANAGEMENT – BUAD 4980 20

21. BUSINESS LEVEL STRATEGY Combination Strategies • Develop automated and flexible manufacturing systems • Exploiting the “profit pool” concept for competitive advantage • Coordinating the “extended” value chain by way of information technology STRATEGIC MANAGEMENT – BUAD 4980 21

22. BUSINESS LEVEL STRATEGY Profit Pool Example: Automobile Industry STRATEGIC MANAGEMENT – BUAD 4980 22

23. BUSINESS LEVEL STRATEGY Combination Strategies vis-à-vis Porter’s Five Forces Model • Creates high entry barriers • Increased bargaining power over suppliers • Reduces power of buyers (fewer competitors) • Low cost / high value position reduces threat from substitute products • Reduces the possibility of head-to-head rivalry STRATEGIC MANAGEMENT – BUAD 4980 23

24. BUSINESS LEVEL STRATEGY Pitfalls of Combination Strategies • Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” • Miscalculating sources of revenue and profit pools in the firm’s industry STRATEGIC MANAGEMENT – BUAD 4980 24

25. BUSINESS LEVEL STRATEGY Impact of the Internet on Strategy Achievement • Overall Cost Leadership • Online bidding and order processing are eliminating the need for personal sales calls and are minimizing sales overhead • Online purchase orders are making many transactions paperless, thus reducing the costs of procurement and office supplies STRATEGIC MANAGEMENT – BUAD 4980 25

26. BUSINESS LEVEL STRATEGY Impact of the Internet on Strategy Achievement • Differentiation • Internet-based management systems link all parts of the organization, shorten response times and accelerate organization learning • Quick online response to service requests, rapid attention to customer feedback, and online product promotions are enhancing marketing efforts STRATEGIC MANAGEMENT – BUAD 4980 26

27. BUSINESS LEVEL STRATEGY Impact of the Internet on Strategy Achievement • Focus • Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices • Niche portals that target specific groups are providing advertisers with access to viewers with specialized interests STRATEGIC MANAGEMENT – BUAD 4980 27

28. BUSINESS LEVEL STRATEGY Industry Life-Cycle • Refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry STRATEGIC MANAGEMENT – BUAD 4980 28

29. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle STRATEGIC MANAGEMENT – BUAD 4980 29

30. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • TheIntroduction Stage • Products are unfamiliar to consumers • Market segments not well defined • Product features not clearly specified • Competition tends to be limited STRATEGIC MANAGEMENT – BUAD 4980 30

31. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • Introduction Stage strategies: • Develop product and get users to try it • Generate exposure so product becomes “standard” STRATEGIC MANAGEMENT – BUAD 4980 31

32. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • TheGrowth Stage • Characterized by strong increases in sales • Attractive to potential competitors STRATEGIC MANAGEMENT – BUAD 4980 32

33. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • Growth Stage strategies: • Focus on brand recognition • Focus on differentiated products • Invest financial resources to support value-chain activities STRATEGIC MANAGEMENT – BUAD 4980 33

34. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • TheMaturity Stage • Aggregate industry demand slows • Market becomes saturated, few new adopters • Direct competition becomes predominant • Marginal competitors begin to exit STRATEGIC MANAGEMENT – BUAD 4980 34

35. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • Maturity Stage strategies: • Efficient manufacturing operations and process engineering • Low costs (customers become price sensitive) STRATEGIC MANAGEMENT – BUAD 4980 35

36. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • TheDecline Stage • Industry sales and profits begin to fall • Strategic options become dependent on the actions of rivals STRATEGIC MANAGEMENT – BUAD 4980 36

37. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • Decline Stage strategies: • Maintaining market share • Exiting the market • Harvesting (cash cow) • Consolidation (acquire competition) STRATEGIC MANAGEMENT – BUAD 4980 37

38. BUSINESS LEVEL STRATEGY Stages of the Industry Life-Cycle • Turnaround strategies for declining industries: • Reverse a firm’s decline in performance and return it to growth and profitability • Strategic options: • Asset and cost surgery • Selective product and market pruning • Piecemeal productivity improvements STRATEGIC MANAGEMENT – BUAD 4980 38

39. BUSINESS LEVEL STRATEGY Case Analysis: The Experience Curve • The concept of the experience curve was developed in 1968 by the Boston Consulting Group (BCG) • The fundamental premise of the theory is that as output doubles, costs typically decline by 10% - 30% due to rapid gain in efficiencies achieved by producers • Key factors impacting the experience curve: • Most experience curve gains come early in the product life cycle where the most rapid increase in output and process improvement occurs • High technology or complex processes offer the greatest experience curve benefits • Product sensitivity to price creates greater opportunity to take advantage of the experience curve • Competitors with good market position and access to capital can also duplicate experience curve benefits STRATEGIC MANAGEMENT – BUAD 4980 39

40. BUSINESS LEVEL STRATEGY Case Analysis: Ryanair – A Highly Effective Overall Cost Leadership Strategy • Ryanair is a Dublin-based budget air carrier that has adopted a very different service concept than most other airlines • The airline charges for all extras, allowing it to offer much lower average fares than US budget airlines, such as Southwest • Ryanair achieves over double the margins of Southwest • Most of Ryanair’s tickets are sold online • By charging for checked bags, snacks, bottled water and other extras, and offering retail items such as cameras and MP3 players, Ryanair acts like a retailer – making a profit on everything it sells STRATEGIC MANAGEMENT – BUAD 4980 40

41. BUSINESS LEVEL STRATEGY Case Analysis: How Netflix Boosts its Differentiation • Netflix has grown rapidly as a competitor to other movie rental companies, using a virtual online store and soliciting movie ratings from subscribers • Customers are asked to rate each movie they watch, and Netflix uses this information to develop a profile of movie preferences so it can tailor its offering to customers • The company also uses “friending” to allow customers to see the movies and recommendations of online friends • This process allows Netflix to get very close to customers, thereby creating loyalty and increased sales STRATEGIC MANAGEMENT – BUAD 4980 41

42. BUSINESS LEVEL STRATEGY Case Analysis: Paccar - “Trucking Along” With a Successful Focus Strategy • Paccar is a large semi-trailer truck manufacturer with 20% of the North American market • The company caters to owner-operators who want customized features on their long-haul trucks • At Paccar’s dealer locations, buyers can select customized features online • Custom features include luxurious sleeper cabs, leather driving seats, noise-insulated cabins, custom paint styling, etc… • Paccar makes all its trucks to order • The company offers a roadside assistance program and spare parts logistics software to minimize customer roadside downtime STRATEGIC MANAGEMENT – BUAD 4980 42

43. BUSINESS LEVEL STRATEGY Case Analysis: Liberty Mutual’s Electronic Invoice System – Combining Low Cost and Differentiation Advantages • Liberty Mutual is the 6th largest property and casualty insurer in the US • The company pioneered an electronic invoicing system for the legal bills associated with claims • Nearly 70% of the invoices the company receives are processed electronically • The invoicing system saves a substantial amount of overhead cost each year, while speeding the process of claims settlement • Reporting capabilities allow Liberty Mutual to analyze legal bills for excessive or duplicate billing, and benchmark across legal firms to determine cost efficiency STRATEGIC MANAGEMENT – BUAD 4980 43

44. BUSINESS LEVEL STRATEGY Case Analysis: Reverse and Breakaway Positioning – How to Avoid Being Held Hostage to the Life-Cycle Curve • Reverse positioning refers to the practice of stripping down the number of product features to a base-line product, then selectively adding a few high value-added features back • Breakaway positioning refers to the practice of re-associating a product from its former product category to a new product category, reaching a new market segment and competing with a different set of products STRATEGIC MANAGEMENT – BUAD 4980 44

45. BUSINESS LEVEL STRATEGY Case Analysis: Reverse and Breakaway Positioning – How to Avoid Being Held Hostage to the Life-Cycle Curve • Commerce Bank stripped away all of other banks’ service features and offered low interest rates and only a few, no-charge, basic services – such as more convenient 12/7 hours, on-site debit card creation and free coin counting machines • This has proved to be a very successful strategy, as assets have grown by seven-fold in six years • Swatch markets its watches not as fine jewelry, but as inexpensive fashion accessories, much like costume jewelry • Customers often buy multiple watches, matching each outfit style • Swatch has become the leading watch company in the world and acquired other more traditional watch companies, such as Longines, Omega and Hamilton STRATEGIC MANAGEMENT – BUAD 4980 45