Transcript Business-Level Strategy

Business-Level Strategy
Business-level strategy: 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
1
Core Competencies and
Strategy
Core
competencies
The resources and capabilities that have
been determined to be a source of
competitive advantage for a firm over its
rivals
Strategy
An integrated and coordinated set of
actions taken to exploit core competencies
and gain a competitive advantage
Business-level
strategy
Actions taken to provide value to customers
and gain a competitive advantage by
exploiting core competencies in specific,
individual product markets
2
Strategy
Fundamental constraints
• Scope
– What good or service to offer, to which
customers
• Value chain
– How and where to create the good or
service
– How to distribute the good or service in the
marketplace(s)
3
Recall our value
creation model
Costs represent
specific investment
choices that
4
generate value
Broad or narrow scope?
Consumer Markets
Demographic
Per.
Dem.
Consumer
Con.
Soc.
Markets
Psy.
Geo.
Socioeconomic
Geographic
Psychological
Consumption patterns
Perceptual factors
Implications for configuration of
5
value chain??
Broad or narrow scope?
Business Markets
End-use
Product segments
Size
End
Common buying factors
Industrial
MarketsPro.
Buy.
Customer size segments
Geo.
Geog segments
Implications for configuration of
6
value chain??
Source of competitive
advantage - Value chains
• Strategies create differences between the
firm’s position and its rivals
• Sources of differences? - perform activities
differently; perform different activities
• Two value-adding configurations (Porter,
1985)
– Low cost
– Differentiated
7
Comparing Scope and Source
of Advantage
Competitive Advantage
Broad
target
Narrow
target
Competitive Scope
Cost
Cost Leader
Uniqueness
Differentiator
Integrated
Cost
Leader/
Differentiator
Focused
Cost
Focused
Differentiator
8
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at
the lowest cost relative to
competitors with features that are
acceptable to customers
– relatively standardized products
– features acceptable to many
customers
– lowest competitive price
9
Cost Leadership Strategy
Cost saving actions required by this strategy:
– building efficient 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
10
Cost Drivers
Major Cost Drivers
 Economies of scale
 Learning/Spillovers
 Capacity utilization
 Integration
 Vertical Linkages
 Timing
 Location
 Political/regulatory
 Interrelationships
(corporate)
Discretionary decisions
 Product features,
performance
 Mix & variety of
products
 Service levels
 Small vs. large buyers
 Process technology
 Wage levels
 Product features
 Hiring, training,
motivation
Implications?
11
Value-Chain example:
Cost Leader
12
Questions Leading to
Lower Costs
1. How can an activity be performed
differently, eliminated, externalized?
2. How can linked value activities be
regrouped or reordered?
3. How can upstream/downstream
collaboration lower costs?
13
Implementation Pitfalls
• Exclusive focus on Mfg
• Misunderstand drivers (ABC useful)
• Failure to recognize/exploit
linkages (e.g., across the board cost
reductions)
• Contradictions –
(e.g., gain mkt share
through ES but allow product clutter; cross
subsidies)
14
Cost Leadership and the
Five Forces
• Rivalry - competitors avoid price wars with
cost leaders
• Buyers – shift demand to you, increase
market power
• Suppliers – increased market power, absorb
cost increases (low cost position)
• Entrants – entry barriers (scale, learning)
• Substitutes – reinvest econ profit to
maintain advantage
15
Major Risks of Cost
Leadership Strategy
• There can only be one cost leader
• Technological change can eliminate
cost advantage
• Spillovers lead to imitation
• Efficiency focus may create blind
spots re: customer preferences
16
Differentiation Strategy
An integrated set of actions designed by a
firm to produce or deliver goods or
services that customers perceive as
adding value
– price may exceed what the firm’s target
customers are willing to pay
– Non-commodity products
– customers value differentiated features
more than they value low cost
17
Some Differentiation Themes
• Unique taste
– Dr. Pepper
• Multiple features
– Microsoft Windows and Office
• Wide selection and one-stop shopping
– Home Depot and Amazon.com
• Reliable, superior service
– FedEx, Ritz-Carlton
• Spare parts availability
– Caterpillar
18
Themes
• Prestige
– Rolex
• Quality manufacturing, few defects
– Honda, Toyota
• Technological leadership
– 3M Corporation, Intel
• Top-of-the-line image
– Ralph Lauren, Kiton
19
Differentiation Strategy
• Add downstream value
– lower buyer cost
– raise buyer performance
• Cost
– Add value to buyer’s value: reduce
downstream processing time, search time,
transaction costs, defect rates, direct costs,
learning curves, labor, space, installation,
etc. (e.g., CRM software)
20
Factors That Drive
Differentiation
Value: Increase performance of buyer’s
value chain (or consumer perception)
• Unique features, performance
• Downstream channels (e.g., Catepillar dealer
network)
• New technologies
• Quality of inputs
• Skill or know-how
• Information
21
Differentiation Strategy
Some differentiation actions required by
this strategy:
– develop new “systems” and processes
– signal and shape buyer perceptions
– quality focus
– capability in R&D
Implication - maximize human capital
contributions
22
Value-Chain example:
Differentiation
23
Differentiation and the
Five Forces
• Rivalry - brand loyalty to differentiated
products reduces price competition
• Buyers – differentiated products less price
elastic
• Suppliers – absorb price increases (higher
margins), pass along higher prices (buyer
loyalty)
• Entrants – must surpass proven products or
be equivalent at lower price
• Substitutes – diff raises switching costs
24
Pitfalls of Differentiation
Strategies
• Differentiating on characteristics not
valued by buyers (e.g., HP)
• Over-differentiating
• Price premium is too high
• Failing to signal value
• Focusing on product instead of entire
value chain
25
Focused Business-Level
Strategies
A focus strategy must exploit a narrow
target’s differences from the balance of
the industry by:
– isolating a particular buyer group
– isolating a unique segment of a
product line
– concentrating on a particular
geographic market
– finding their “niche”
26
Factors Driving
Focus Strategies
• Large firms overlook small niches
• Firm may lack resources to compete in
the broader market
• May be able to serve a narrow market
segment more effectively than can
larger industry-wide competitors
• Focus may allow the firm to direct
resources to certain value chain
activities to build competitive advantage
27
Major Risks of Focused
Strategies
• Firm may be “outfocused” by
competitors
• Large competitor may set its sights on
your niche market
• Preferences of niche market may
change to match those of broad market
28
Advantages of Integrated
Strategy
A firm that successfully uses an integrated
cost leadership/differentiation strategy should
be in a better position to:
– adapt quickly to environmental changes
– learn new skills and technologies more
quickly
– effectively leverage its core competencies
while competing against its rivals
29
Benefits of Integrated
Strategy
• Successful firms using this strategy
have above-average returns
• Firm offers two types of values to
customers
– some differentiated features (but less
than a true differentiated firm)
– relatively low cost (but now as low as
the cost leader’s price)
30
Major Risks of Integrated
Strategy
• An integrated cost/differentiation
business level strategy often involves
compromises (neither the lowest cost
nor the most differentiated firm)
• The firm may become “stuck in the
middle” lacking the strong commitment
and expertise that accompanies firms
following either a cost leadership or a
differentiated strategy
31
Summary: Industry and Firm
Effects on Profit
Barriers to Entry
Industry
Attractiveness
Rate of Profit
in Excess of the
Competitive Level
Rivalry
Vertical Power
(buyer/seller)
Patents
Brands
Retaliatory
capability
Substitutability
Firm size
Financial resources
Cost
Advantage
Process technology
Plant size
Low-cost inputs
Differentiation
Advantage
Brands
Product technology
Marketing
capabilities
Competitive
Advantage
32