BUSINESS-LEVEL STRATEGIC ALTERNATIVES

Payne (5) 1

RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL

How do we make money?

INDUSTRY ATTRACTIVENESS

Which businesses should we be in?

COMPETITIVE ADVANTAGE

How should we compete?

CORPORATE STRATEGY BUSINESS STRATEGY

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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

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Adaptive Strategies

• Delineate how the organization will adapt to changes in the environment or competitive landscape:

Expansion

•Diversification •Vertical Integration •Market Development •Product Development •Penetration

Contraction

•Divestiture •Liquidation •Harvesting •Retrenchment •Outsourcing

Stabilization

•Enhancement •Status Quo

Corporate Strategy Decisions Only

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Remember Ansoff’s Matrix?

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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.

Key Issues:

• What product/service to offer customers?

• How to manufacture or create the product or service?

• How to distribute the product/service in the marketplace?

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RBV: 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 9

Competitive Advantage “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 ADVANTAGE

firm’s strategy gives it an edge in: exists when a – Defending against competitive forces and – Securing customers …such that the firm earns (or has the potential to earn) a persistently higher rate of profit.

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Gaining of Competitive Advantage “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 ADVANTAGE

comes with the offering of SUPERIOR VALUE through: – Offering buyers a good product at a lower price – Offering a better product/service buyers think is worth a premium price 11

Adaptive: Expansion-Market/Product Development & Penetration • Market Development -- expand geographic service area or by targeting new market segments within the present area.

– Building new store near high-growth residential areas • Product Development -- introduction of new product/services in present markets, through product/service enhancement and line expansion.

• Penetration - centered on promotional, distribution, and pricing strategies with current products or services.

– 1 in 12 wins Coca-Cola or “buy one, get one free” for Tinactin.

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The BCG Portfolio Matrix

12% 10% 8% 6% 4% 2% 0 22% 20% 18% 16% 14% Stars Cash Cows Question Marks Dogs Relative Market Share

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Adaptive: Stabilization Strategies

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 14

Market Entry Strategies

May be

• 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

Corporate

Decision if in

– Cooperation Strategies: • Mergers – two organizations come together as one

Different

Market

• Strategic Alliance • Joint Venture – long-term agreement to work together – 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 15

Positioning Strategies

• Business Level Positioning : – 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 Strategy – – Focused Low-Cost Strategy Focused Differentiation Strategy 16

Porter’s Generic Strategies

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A Low-Cost Leadership Strategy

Objective: 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 • • Keys to Success: Make achievement of low-cost relative to rivals the firm’s business strategy

THEME

Find ways to drive costs out of business year-after-year of Characteristics • Cost conscious corporate culture • Efficient scale facilities • • Efficient manufacturing facilities Simplified production processes • Tightly controlled production costs and • Intensive scrutiny of budget overhead • Minimized costs of sales, R&D and service requests 19

Drivers of Cost Advantage

• Economies of Scale – Improved Coordination and • Product Design – Indivisibilities – Increased Dexterity – Design for Automation – Specialization and Division of Labor • Economies of Learning – Designs to Economize on Materials • Input Costs – Location Advantages – Ownership of Low-Cost Inputs Organization – Bargaining Power • Process Technology and – Supplier Cooperation Process Design • Capacity Utilization – Ratio of Fixed to Variable Costs – Mechanization and Automation – Efficient Utilization of Materials – Increased Precision – Costs of Installing and Closing Capacity • Managerial / Organizational Efficiency – Organizational Slack 20

Common Structure for Cost Leadership

• • • • • Operations is main function Process engineering is emphasized over R&D Large centralized staff Formalized procedures Structure is mechanical, job roles highly structured Office of the President Centralized Staff Engineering Marketing Operations Personnel Accounting 21

• • • •

A Differentiation Strategy

Objective Incorporate differentiating features that cause buyers to prefer firm’s product or service over the brands of rivals Keys to Success Find ways to differentiate that

CREATE VALUE

and that are

NOT EASILY MATCHED

or for buyers

CHEAPLY COPIED

by rivals Not spending more to achieve differentiation than the price premium that can be charged Characteristics

Uniqueness

– – – is achieved in ways that: Buyers perceive as

valuable

Rivals find

hard to match or copy

Can be incorporated at a

cost well below the price premium that buyers will pay

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Differentiation Strategy

Differentiation actions required:  Developing new systems and processes    Shaping perceptions through advertising Quality focus Capability in R&D  Maximize human resource contributions through low turnover and high motivation     Factors Driving Differentiation: Unique product features Unique product performance Exceptional services New technologies    Quality of inputs Exceptional skill or experience Detailed information  Extensive personal relationships with buyers and suppliers 23

Common Structure for Differentiation

President and Limited Staff R&D Marketing New Product R&D Marketing Finance Operations Human Resources • • • • • Marketing is the main function for tracking new product ideas New product R&D is emphasized Most functions are decentralized Formalization is limited to foster change and promote new ideas Overall structure is organic; job roles are less structured 24

• • •

Best Cost Provider/Integrative Strategy

Objective 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 Keys to Success Create superior value by

MEETING OR EXCEEDING

buyer 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

UNDERPRICE

comparable brands 25

Major Risk 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 26

A Focus

/

Niche Strategy

• • • • Objective Involves

concentrated

attention on a

narrow

the total market piece of Serve niche buyers

better

than rivals Keys to Success Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs Develop unique capabilities to serve needs of target buyer segment Two Types • Achieve

LOWER COSTS

than rivals in serving the segment--

A low-cost strategy

• Offer niche buyers

SOMETHING DIFFERENT

from rivals--

A differentiation strategy

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IKEA 29