Transcript Slide 1
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
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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 or product
market
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Business-Level Strategies
Purpose: To create differences between position
of a firm and its competitors
Positioning and strategic group mapping
Firm must make a deliberate choice to
Perform activities differently
Perform different activities
This choice impacts how value chain activities are
performed to create unique value
No single strategy is better than others
Contingent on internal and external environment
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Business-Level Strategies
Two types of competitive advantage firms must
choose between
Low Cost (Are our costs LOWER than rivals costs?)
Distinctiveness (Are we DIFFERENT than rivals?)
Two types of ‘competitive scope’ firms must
choose between
Broad target
Narrow target
The combination of competitive advantage and
competitive scope yield 5 major strategic options
at the business level
Each strategy can potentially be used by any organization 4
competing in any industry
Five Business-Level Strategies
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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 of and increase the
efficiency of value chain activities
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Examples of Value-Creating Activities
Associated with the Cost Leadership Strategy
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Types of Business-Level Strategies
Cost Leadership Strategy
In relationship to the 5 competitive forces:
Existing Rivalry
Rivals hesitate to compete on the basis of price
Bargaining Power of Buyers (Customers)
Powerful buyers are limited in their ability to force the cost
leader to reduce prices
Bargaining Power of Suppliers
Cost leaders can absorb supplier 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 competitive forces
Also ability to compete based on costs and prices
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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
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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
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Examples of Value-Creating Activities Associated
with the Differentiation Strategy
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Types of Business-Level Strategies
Differentiation
In relationship to the 5 Forces:
Existing Rivalry
Customers loyalty to differentiated products reduces their sensitivity to
price increases
Bargaining Power of Buyers (Customers)
Uniqueness and loyalty reduces customer’s sensitivity to price
increases
Bargaining Power of Suppliers
Because of higher margins supplier price increases can be passed on
the to the customer
Potential Entrants
Customer loyalty and uniqueness can serve as substantial barriers to
new entry
Product Substitutes
Customer loyalty effectively positions firm against substitute products
Again built in defense against 5 competitive forces
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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
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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
Firm has resources well suited to the niche
Niche is attractive
Large firms may overlook small niches
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Types of Business-Level Strategies
Focus strategy examples
Particular buyer groups
Different segment of a product line
Youths vs. senior citizens
Men vs. women
Professional vs. do-it-yourself painters
Luxury vs. sport cars
Geographic markets
West coast vs. East coast
North America vs. Europe
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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
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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
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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 or a hybrid strategy
Examples: Toyota, Target
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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
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Types of Business-Level Strategies
The Relative Nature of Business-Level Strategies
Competitive advantages are always relative to other
firms
As are the competencies and capabilities they are based
on
To be successful
Low cost firms must have the lowest overall costs
Differentiated firms must have higher levels of differentiation
Having the same level of costs and/or differentiated
features as a competitor is unlikely to lead to a
competitive advantage over them
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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)
Business Model
Functional Area Strategies
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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
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