BUSINESS LEVEL STRATEGY & COMPETITIVE ADVANTAGE

1. BUSINESS LEVEL STRATEGY & COMPETITIVE ADVANTAGE Dr. Payne (6)

2. The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. - Gary Hamel and C.K. Prahalad COMPETITIVE ADVANTAGEexists when a firm’s strategy gives it an edge in: Defending against competitive forces and Securing customers …such that the firm earns (or has the potential to earn) a persistently higher rate of profit. Definition of Competitive Advantage

3. Gaining of Competitive Advantage • COMPETITIVE ADVANTAGEcomes with the offering of SUPERIOR VALUE through: • Offering buyers a good product at a lower price and/or with greater efficiency • Offering a better product/service buyers think is worth a premium price “Must perform activities differently than rivals” “Must perform different (and valuable) activities than rivals”

4. (The ability to identify and respond to opportunity lies in the core management capability called Entrepreneurship.)

5. Coordinated set of commitments and actions that the firm uses to gain competitive advantage by exploiting core competencies in a specific market or industry. B-L Strategy involves: What good/service to offer customers How to manufacture or create good/service How to distribute the good/service to the marketplace Business-Level Strategy Who to serve, what needs to satisfy, and how to satisfy them!

6. Mintzberg’s 5 Ps for Strategy Strategy has been used in a number of ways; recognizing these ways can help you navigate the different ways people use the concept/word. • Plan: Intended and purposeful course of action. • Ploy: Specific maneuver or tactic. • Pattern: Realized theme of activities and behaviors. • Position: Fitting business within the context. • Perspective: An ingrained way of perceiving the world.

7. The Decision Logic of Strategy Formulation May be Corporate or Business Strategic Decisions Establishment of mission, vision, values, objectives -- the Directional Strategies Identification, evaluation, and selection of -- the Adaptive Strategies Identification, evaluation, and selection of -- the Market Entry Strategies Identification, evaluation, and selection of -- the Positioning Strategies Implementation through development of -- the Functional &Operational Strategies

8. Delineate how the organization will adapt to changes in the environment or competitive landscape: Adaptive Strategies • Expansion • Diversification • Vertical Integration • Market Development • Product Development • Penetration • Contraction • Divestiture • Liquidation • Harvesting • Retrenchment • Outsourcing • Stabilization • Enhancement • Status Quo Corporate Strategy Decisions Only

9. Market Development-- expand geographic service area or by targeting new market segments within the present area. Building new Home Depot Store in Mansfield near high-growth area Product Development-- introduction of new product/services in present markets, through product/service enhancement and line expansion. X-Box Gaming System with new Games Penetration -- centered on promotional, distribution, and pricing strategies with current products or services. Coca-Cola “1 in 8 wins” promotions Adaptive: Expansion-Market/Product Development & Penetration

10. 22% Stars Question Marks 20% 18% 16% 14% Business Growth Rate 12% 10% Cash Cows Dogs 8% 6% 4% 2% 0.5X 0.4X 0.3X 0.2X 0 4X 10X 1X 0.1X 1.5X 2X Relative Market Share The BCG Portfolio Matrix

11. When past strategies have been viewed as appropriate and few changes are required: Enhancement- when organization just “needs to do things better;” takes forms of CQI, TQM programs, speeding delivery, adding flexibility to service design Status Quo- maintenance of services at the current levels, defending against competitors Adaptive: Stabilization Strategies

12. Carry out the expansion and stabilization strategies through: Purchase Strategies: Acquisition – purchase of new product, unit or organization Licensing – lease technology, product or service Venture Capital Investment – “try out” investment option Cooperation Strategies: Mergers – two organizations come together as one Strategic Alliance – long-term agreement to work together Joint Venture – combined resources to work on common issue of interest Developmental Strategies: Internal Development – uses existing resources or structures Internal Ventures – establishes new entity for developmental purposes Market Entry Strategies May be Corporate Decision if in Different Market

13. Business Level Issues: Position the organization vis-à-vis other organizations within the market These are market oriented and best articulate the competitive advantage within the market May be market-wide (or broad-based) or directed at a particular segment (or niche-focused) Based largely on Generic Business Strategies: Low-Cost Leadership Strategy Broad Differentiation Strategies Best-Cost Provider Strategies Focused Low-Cost Strategies Focused Differentiation Strategies Positioning Strategies

14. “Three” Generic Strategies Competitive Advantage Lower Cost Differentiation Cost Leadership Differentiation Industry-Wide Competitive Scope Focus Single Segment

15. Competitive Advantage Lower Cost Differentiation Cost Leadership Differentiation Broad Target Competitive Scope Cost Focus Differentiation Focus Narrow Target “Four” Generic Strategies

16. Competitive Advantage Lower Cost Differentiation Cost Leadership Differentiation Broad Target Competitive Scope Cost Focus Differentiation Focus Narrow Target “Five” Generic Strategies Best Cost Provider

17. Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to: Under-price rivals and reap market share gains OR Earn higher profit margin selling at going price Make achievement of low-cost relative to rivals the THEME of firm’s business strategy Find ways to drive costs out of business year-after-year Cost conscious corporate culture Employee participation in cost-control efforts Ongoing efforts to benchmark costs Intensive scrutiny of budget requests Programs promoting continuous cost improvement A Low-Cost Leadership Strategy Objective Keys to Success Characteristics

18. Economies of Scale Volume of Production Specialization Economies of Learning (i.e., Learning Curve) Increased Dexterity Improved Coordination and Organization Process Technology and Process Design Mechanization and Automation Efficient Utilization of Materials Increased Precision Drivers of Cost Advantage • Product Design • Design for Automation • Designs to Economize on Materials • Input Costs • Location Advantages • Ownership of Low-Cost Inputs • Bargaining Power • Supplier Cooperation • Capacity Utilization • Ratio of Fixed to Variable Costs • Costs of Installing and Closing Capacity • Managerial / Organizational Efficiency • Organizational Slack

19. Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power A Low-Cost Strategy Works Best When:

20. Being overly aggressive in cutting price (revenue erosion of lower price is not offset by gains in sales volume--profits go down, not up) Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used Technological breakthroughs open up cost reductions for rivals A Low-Cost Strategy Fails When: • There are also “Diseconomies of Scale”! • Sources include: • Physical Limits to Efficient Size • Managerial Diseconomies • Worker Motivation • Distance to Markets and Suppliers

21. Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals Find ways to differentiate that CREATE VALUEfor buyers and that are NOT EASILY MATCHED orCHEAPLY COPIEDby rivals Not spending more to achieve differentiation than the price premium that can be charged Uniquenessis achieved in ways that: Buyers perceive as valuable Rivals find hard to match or copy Can be incorporated at a cost well below theprice premium that buyers will pay A Differentiation Strategy Objective Keys to Success Characteristics

22. Examples of Differentiation Themes

23. There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar type of differentiation approach Technological change is fast-paced and competition is focused on evolving product features A Differentiation Strategy Works Best When:

24. Trying to differentiate on a feature buyers do not perceive as lowering their cost or enhancing their well-being Over-differentiating such that product features exceed buyers’ needs Charging a price premium that buyers perceive is too high Failing to signal value Not understanding what buyers want or prefer and differentiating on the “wrong” things A Differentiation Strategy Fails When:

25. Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money Create superior value by MEETING OR EXCEEDINGbuyer expectations on product attributes and BEATING their price expectations Be the low-cost producer of a product with GOOD-TO-EXCELLENT product attributes, then use cost advantage to UNDERPRICEcomparable brands A Best Cost Provider Strategy Objective Keys to Success

26. Involves concentrated attention on a narrowpiece of the total market Serve niche buyers betterthan rivals Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities to serve needs of target buyer segment Achieve LOWER COSTSthan rivals in serving the segment-- A low-cost strategy Offer niche buyers SOMETHING DIFFERENTfrom rivals-- A differentiation strategy A Focus/Niche Strategy Objective Keys to Success Two Types

27. LUSH - www.lush.com - Unique makeup/skin-care with a local “warm and fuzzy” approach. Advocates ethical, handmade production. DIAPERS.com – www.diapers.com - Provided quick, convenient way for parents to buy diapers and other baby products. Quidsi, business name for diapers.com, was acquired for $545 million. Examples of Focus Strategies

28. Costly or difficult for multi-segment rivals to serve specialized needs of target niche No other rivals are concentrating on same segment Firm’s resources do not allow it to go after a bigger piece of market Industry has many different segments, creating more focusing opportunities A Focused Strategy Works Best When:

29. Competitors find effective ways to match a focuser’s capabilities in serving niche Niche buyers’ preferences shift towards product attributes desired by majority of buyers--the niche becomes part of the overall market. A Focused Strategy Fails When: • Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered.

30. Are undertaken to buildnew or stronger market positions and/or create competitive advantage. Can protectcompetitive advantage, but rarelyare the basis for creating advantage. Offensive and Defensive Strategies Offensive Strategies Key Insight: The chances for a successful offensive initiative are improved when it is based on a company’s resource strengths and strongest competencies and capabilities. Defensive Strategies Key Insight:When to make a move is as important as what move to make. Two defenses – 1) Block avenues challengers can take in mounting offensive attacks, 2 ) Make it clear any challenge will be met with strong counterattack

31. Options: Offer equally good product at a lower price Offer a better product at the same price Leapfrog into next-generation technologies Add appealing new features Run comparison ads Construct new plant capacity Offer a wider product line Develop bettercustomer servicecapabilities Attacking Competitor Strengths

32. Basic Approach Concentrate company strengths and resources directly against a rival’s weaknesses Weaknesses to Attack Geographic regionswhere rival is weak Segments rival is neglecting Go after those customers a rival is least equipped to serve Rivals with weaker marketing skills Introduce new modelsexploiting gaps in rivals’ product lines Attacking Competitor Weaknesses

33. Approach Use principles of surprise and hit-and-run to attack in locations and at times where conditions are most favorable to initiator Appeal Well-suited to small challengers with limited resources Options Focus on narrow target weakly defended by rivals Challenge rivals where they are overextended and when they are encountering problems Make random scattered raids on leaders Occasional low-balling on price Intense bursts of promotional activity Legal actions charging antitrust violations, patent infringements, or unfair advertising Guerrilla Offenses

34. Preemptive Strikes • Approach Involves moving first to secure an advantageous position that rivals are foreclosed or discouraged from duplicating! • Options • Expand capacity ahead of demand in hopes of discouraging rivals from following suit • Tie up best or cheapest sources of essential raw materials • Move to secure best geographic locations • Obtain business of prestigious customers • Build an image in buyers’ minds that is unique & hard to copy • Secure exclusive or dominant access to best distributors • Acquire desirable, but struggling, competitor