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