04[2] strategy at the business level - ridwaniskandar … at the business level ... the purpose of a...

©© 2007 Thomson/South2007 Thomson/South--Western.Western.All rights reserved.All rights reserved.

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic ManagementStrategic ManagementCompetitiveness and Globalization:Competitiveness and Globalization:Concepts and CasesConcepts and Cases

Michael A. Hitt •R. Duane Ireland •Robert E. Hoskisson

Seventh edition

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

CHAPTER 4CHAPTER 4

Strategy at the BusinessStrategy at the BusinessLevelLevel

Management of StrategyManagement of StrategyConcepts and CasesConcepts and Cases

© 2007 Thomson/South-Western. All rights reserved. 4–2

KKNOWLEDGENOWLEDGE OOBJECTIVESBJECTIVES

1.1. Define businessDefine business--level strategy.level strategy.2.2. Discuss the relationship between customers andDiscuss the relationship between customers and

businessbusiness--level strategies in terms of who, what, andlevel strategies in terms of who, what, andhow.how.

3.3. Explain the differences among businessExplain the differences among business--levellevelstrategies.strategies.

4.4. Use the five forces of competition model to explain howUse the five forces of competition model to explain howaboveabove--average returns can be earned through eachaverage returns can be earned through eachbusinessbusiness--level strategy.level strategy.

5.5. Describe the risks of using each of the businessDescribe the risks of using each of the business--levellevelstrategies.strategies.

Studying this chapter should provide you with the strategicmanagement knowledge needed to:


BusinessBusiness--Level Strategy (Defined)Level Strategy (Defined)

••An integrated and coordinated set ofAn integrated and coordinated set ofcommitments and actions the firm uses to gain acommitments and actions the firm uses to gain acompetitive advantage by exploiting corecompetitive advantage by exploiting corecompetencies in specific product markets.competencies in specific product markets.


Core Competencies and StrategyCore Competencies and Strategy

Resources and superior capabilities that aresources of competitive advantage over afirm’s rivals

Providing value to customers and gainingcompetitive advantage by exploiting corecompetencies in individual product markets

CoreCoreCompetenciesCompetencies

StrategyStrategy

BusinessBusiness--levellevelStrategyStrategy

An integrated and coordinated set ofactions taken to exploit core competenciesand gain competitive advantage


Customers: Their Relationship to BusinessCustomers: Their Relationship to Business--Level StrategiesLevel Strategies

Key IssuesKey Issuesinin

BusinessBusiness--levellevelStrategyStrategy

Who will beWho will beserved?served?

What needs willWhat needs willbe satisfied?be satisfied?

How will thoseHow will thoseneeds be satisfied?needs be satisfied?


Effectively Managing Relationships withEffectively Managing Relationships withCustomersCustomers••Firms must manage all aspects of theirFirms must manage all aspects of their

relationship with customers.relationship with customers.

Reach:Reach: firmfirm’’s success and connection to customerss success and connection to customers

Richness:Richness: depth and detail of twodepth and detail of two--way flow ofway flow ofinformation between the firm and the customerinformation between the firm and the customer

Affiliation:Affiliation: facilitation of useful interactions withfacilitation of useful interactions withcustomerscustomers


Who:Who: Determining the Customers to ServeDetermining the Customers to Serve

••Market segmentationMarket segmentationA process used to cluster people with similar needsA process used to cluster people with similar needs

into individual and identifiable groups.into individual and identifiable groups.

All CustomersAll Customers

IndustrialIndustrialMarketsMarkets

ConsumerConsumerMarketsMarkets


Market SegmentationMarket Segmentation

••Consumer MarketsConsumer Markets

Demographic factorsDemographic factors

Socioeconomic factorsSocioeconomic factors

Geographic factorsGeographic factors

Psychological factorsPsychological factors

Consumption patternsConsumption patterns

Perceptual factorsPerceptual factors

••Industrial MarketsIndustrial Markets

EndEnd--use segmentsuse segments

Product segmentsProduct segments

Geographic segmentsGeographic segments

Common buying factorCommon buying factorsegmentssegments

Customer sizeCustomer sizesegmentssegments


TABLETABLE 4.14.1 Basis for Customer SegmentationBasis for Customer Segmentation

Consumer Markets• Demographic factors (age, income, sex, etc.)• Socioeconomic factors (social class, stage in the family life cycle)• Geographic factors (cultural, regional, and national differences)• Psychological factors (lifestyle, personality traits)• Consumption patterns (heavy, moderate, and light users)• Perceptual factors (benefit segmentation, perceptual mapping)

Industrial Markets• End-use segments (identified by SIC code)• Product segments (based on technological differences or

production economics)• Geographic segments (defined by boundaries between countries or

by regional differences within them)• Common buying factor segments (cut across product market and

geographic segments)• Customer size segments

Source: Adapted from S. C. Jain, 2000, Marketing Planning andStrategy, Cincinnati: South-Western College Publishing, 120.


What:What: Determining Which CustomerDetermining Which CustomerNeeds to SatisfyNeeds to Satisfy

••Customer needs are related to a productCustomer needs are related to a product’’ssbenefits and features.benefits and features.

••Customer needs are neither right nor wrong,Customer needs are neither right nor wrong,good nor bad.good nor bad.

••Customer needs represent desires in terms ofCustomer needs represent desires in terms offeatures and performance capabilities.features and performance capabilities.


How:How: Determining Core CompetenciesDetermining Core CompetenciesNecessary to Satisfy Customer NeedsNecessary to Satisfy Customer Needs

••Firms use core competencies to implement valueFirms use core competencies to implement valuecreating strategies that satisfy customerscreating strategies that satisfy customers’’needs.needs.

••Only firms with capacity to continuouslyOnly firms with capacity to continuously improve,improve,innovate and upgradeinnovate and upgrade their competencies cantheir competencies canexpect to meet and/or exceed customerexpect to meet and/or exceed customerexpectations across time.expectations across time.


The Purpose of a BusinessThe Purpose of a Business--Level StrategyLevel Strategy

••BusinessBusiness--Level StrategiesLevel Strategies

Are intended to create differences between the firmAre intended to create differences between the firm’’ssposition relative to those of its rivals.position relative to those of its rivals.

••To position itself, the firm must decide whether itTo position itself, the firm must decide whether itintends to:intends to:

Perform activities differently orPerform activities differently or

Perform different activities as compared to its rivals.Perform different activities as compared to its rivals.


Types of Potential Competitive AdvantageTypes of Potential Competitive Advantage

••AchievingAchieving lower overall costslower overall costs than rivalsthan rivals

Performing activities differently (reducing processPerforming activities differently (reducing processcosts)costs)

••Possessing the capabilityPossessing the capability to differentiateto differentiate thethefirmfirm’’s product or service and command as product or service and command apremium pricepremium price

Performing different (more highly valued) activities.Performing different (more highly valued) activities.


FIGUREFIGURE 4.14.1 The External EnvironmentThe External Environment


Competitive ScopeCompetitive Scope

••Broad ScopeBroad Scope

The firm competes in manyThe firm competes in manycustomer segments.customer segments.

••Narrow ScopeNarrow Scope

The firm selects a segment orThe firm selects a segment orgroup of segments in thegroup of segments in theindustry and tailors its strategyindustry and tailors its strategyto serving them at theto serving them at theexclusion of others.exclusion of others.


Types of BusinessTypes of Business--Level StrategiesLevel Strategies

CostCost UniquenessUniqueness

DifferentiationDifferentiationCost LeadershipCost Leadership

FocusedFocusedDifferentiationDifferentiation

Focused CostFocused CostLeadershipLeadership

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

BroadBroadTargetTarget

NarrowNarrowTargetTarget

Competitive AdvantageCompetitive Advantage

CompetitiveCompetitiveScopeScope


FIGUREFIGURE 4.24.2 Five BusinessFive Business--Level StrategiesLevel Strategies

Source: Adapted with thepermission of The Free Press, animprint of Simon & Schuster AdultPublishing Group, from CompetitiveAdvantage: Creating and SustainingSuperior Performance, by Michael E.Porter, 12. Copyright © 1985, 1998by Michael E. Porter.


Cost Leadership StrategyCost Leadership Strategy

••An integrated set of actions taken to produceAn integrated set of actions taken to producegoods or services with features that aregoods or services with features that areacceptable to customers at the lowest cost,acceptable to customers at the lowest cost,relative to that of competitors with features thatrelative to that of competitors with features thatare acceptable to customers.are acceptable to customers.

Relatively standardized productsRelatively standardized products

Features acceptable to many customersFeatures acceptable to many customers

Lowest competitive priceLowest competitive price


Cost Leadership StrategyCost Leadership Strategy

••Cost saving actions required by this strategy:Cost saving actions required by this strategy:

Building efficient scale facilitiesBuilding efficient scale facilities

Tightly controlling production costs and overheadTightly controlling production costs and overhead

Minimizing costs of sales, R&D and serviceMinimizing costs of sales, R&D and service

Building efficient manufacturing facilitiesBuilding efficient manufacturing facilities

Monitoring costs of activities provided by outsidersMonitoring costs of activities provided by outsiders

Simplifying production processesSimplifying production processes


How to Obtain a Cost AdvantageHow to Obtain a Cost Advantage

DetermineDetermineand controland controlCost DriversCost Drivers

ReconfigureValue ChainValue Chainif needed

Alter production processAlter production process

Change in automationChange in automation

New distribution channelNew distribution channel

New advertising mediaNew advertising mediaDirect sales in place ofDirect sales in place of

indirect salesindirect sales

New raw materialNew raw material

Forward integrationForward integration

Backward integrationBackward integrationChange location relativeChange location relative

to suppliers or buyersto suppliers or buyers


FIGUREFIGURE 4.34.3 Examples of ValueExamples of Value--Creating Activities AssociatedCreating Activities Associatedwith the Cost Leadership Strategywith the Cost Leadership Strategy

SOURCE: Adapted with the permissionof The Free Press, an imprint of Simon &Schuster Adult Publishing Group, fromCompetitive Advantage: Creating andSustaining Superior Performance, byMichael E. Porter, 47. Copyright © 1985,1998 by Michael E. Porter.


ValueValue--Creating Activities for Cost LeadershipCreating Activities for Cost Leadership

••CostCost--effective MISeffective MIS

••Few management layersFew management layers

••Simplified planningSimplified planning

••Consistent policiesConsistent policies

••Effecting trainingEffecting training

••EasyEasy--toto--use manufacturinguse manufacturingtechnologiestechnologies

•• Investments in technologiesInvestments in technologies

••Finding low cost raw materialsFinding low cost raw materials

••Monitor suppliersMonitor suppliers’’performancesperformances

•• Link suppliersLink suppliers’’products toproducts toproduction processesproduction processes

••Economies of scaleEconomies of scale

••EfficientEfficient--scale facilitiesscale facilities

••Effective delivery schedulesEffective delivery schedules

•• LowLow--cost transportationcost transportation

••Highly trained sales forceHighly trained sales force

••Proper pricingProper pricing


Cost Leadership Strategy:Cost Leadership Strategy: CompetitorsCompetitors

••Due to cost leaderDue to cost leader’’ssadvantageous position:advantageous position:

Rivals hesitate to competeRivals hesitate to competeon basis of price.on basis of price.

Lack of price competitionLack of price competitionleads to greater profits.leads to greater profits.

Threat ofnew

entrants

Bargainingpower ofsuppliers

Rivalryamong

competingfirms

Bargainingpower ofbuyers

Threat ofsubstituteproducts

Rivalry withExisting Competitors


Cost Leadership Strategy:Cost Leadership Strategy: BuyersBuyers

••Can mitigate buyersCan mitigate buyers’’power by:power by:Driving prices far belowDriving prices far below

competitors, causingcompetitors, causingthem to exit, thusthem to exit, thusshifting power withshifting power withbuyers back to the firm.buyers back to the firm.

Threat ofnew

entrants


Rivalryamong

competingfirms



Bargaining Powerof Buyers


Cost Leadership Strategy:Cost Leadership Strategy: SuppliersSuppliers

••Can mitigate suppliersCan mitigate suppliers’’power by:power by:

Being able to absorbBeing able to absorbcost increases due tocost increases due tolow cost position.low cost position.

Being able to make veryBeing able to make verylarge purchases,large purchases,reducing chance ofreducing chance ofsupplier using power.supplier using power.

Threat ofnew

entrants


Rivalryamong

competingfirms



Bargaining Powerof Suppliers


Cost Leadership Strategy:Cost Leadership Strategy: New EntrantsNew Entrants

••Can frighten off newCan frighten off newentrants due to:entrants due to:

Their need to enter on aTheir need to enter on alarge scale in order to belarge scale in order to becost competitive.cost competitive.

The time it takes to moveThe time it takes to movedown the learning curve.down the learning curve.

Threat ofnew

entrants


Rivalryamong

competingfirms



The Threat ofThe Threat ofPotential EntrantsPotential Entrants


Cost Leadership Strategy:Cost Leadership Strategy: SubstitutesSubstitutes

••Cost leader is wellCost leader is wellpositioned to:positioned to:

Make investments to beMake investments to befirst to create substitutes.first to create substitutes.

Buy patents developed byBuy patents developed bypotential substitutes.potential substitutes.

Lower prices in order toLower prices in order tomaintain value position.maintain value position.

Threat ofnew

entrants


Rivalryamong

competingfirms



ProductProductSubstitutesSubstitutes


Cost Leadership Strategy (contCost Leadership Strategy (cont’’d)d)

••Competitive RisksCompetitive Risks

Processes used to produce and distribute good orProcesses used to produce and distribute good orservice may become obsolete due to competitorsservice may become obsolete due to competitors’’innovations.innovations.

Focus on cost reductions may occur at expense ofFocus on cost reductions may occur at expense ofcustomerscustomers’’perceptions of differentiationperceptions of differentiation

Competitors, using their own core competencies, mayCompetitors, using their own core competencies, maysuccessfully imitate the cost leadersuccessfully imitate the cost leader’’s strategy.s strategy.


Differentiation StrategyDifferentiation Strategy

••An integrated set of actions taken to produceAn integrated set of actions taken to producegoods or services (at an acceptable cost) thatgoods or services (at an acceptable cost) thatcustomers perceive as being different in wayscustomers perceive as being different in waysthat are important to them.that are important to them.

Focus is onFocus is on nonstandardizednonstandardized productsproducts

Appropriate when customers value differentiatedAppropriate when customers value differentiatedfeatures more than they value low cost.features more than they value low cost.


How to Obtain a Differentiation AdvantageHow to Obtain a Differentiation Advantage

ControlCost DriversCost Driversif needed

ReconfigureReconfigureValue ChainValue Chain totomaximizemaximize

Lower buyersLower buyers’’costscosts

Raise performance of product or serviceRaise performance of product or service

Create sustainability through:Create sustainability through:

Customer perceptions of uniquenessCustomer perceptions of uniquenessCustomer reluctance to switch to nonCustomer reluctance to switch to non--

unique product or serviceunique product or service


FigureFigure 4.44.4 Examples of ValueExamples of Value--Creating Activities AssociatedCreating Activities Associatedwith the Differentiation Strategywith the Differentiation Strategy

SOURCE: Adapted with the permissionof The Free Press, an imprint of Simon &Schuster Adult Publishing Group, fromCompetitive Advantage: Creating andSustaining Superior Performance, byMichael E. Porter, 47. Copyright © 1985,1998 by Michael E. Porter.


ValueValue--Creating Activities and DifferentiationCreating Activities and Differentiation••Highly developed MISHighly developed MIS

••Emphasis on qualityEmphasis on quality

••Worker compensation forWorker compensation forcreativity/productivitycreativity/productivity

••Use of subjective performanceUse of subjective performancemeasuresmeasures

••Basic research capabilityBasic research capability

••TechnologyTechnology

••High quality raw materialsHigh quality raw materials

••Delivery of productsDelivery of products

••High quality replacement partsHigh quality replacement parts

••Superior handling of incomingSuperior handling of incomingraw materialsraw materials

••Attractive productsAttractive products

••Rapid response to customerRapid response to customerspecificationsspecifications

••OrderOrder--processing proceduresprocessing procedures

••Customer creditCustomer credit

••Personal relationshipsPersonal relationships


Differentiation Strategy:Differentiation Strategy: CompetitorsCompetitors

••Defends againstDefends againstcompetitors because brandcompetitors because brandloyalty to differentiatedloyalty to differentiatedproduct offsets priceproduct offsets pricecompetition.competition.

Threat ofnew

entrants


Rivalryamong

competingfirms



Rivalry withCompetitors


Differentiation Strategy:Differentiation Strategy: BuyersBuyers

••Can mitigate buyersCan mitigate buyers’’powerpowerbecause well differentiatedbecause well differentiatedproducts reduce customerproducts reduce customersensitivity to price increases.sensitivity to price increases.Threat of

newentrants


Rivalryamong

competingfirms



Bargaining Powerof Buyers


Differentiation Strategy:Differentiation Strategy: SuppliersSuppliers

••Can mitigate suppliersCan mitigate suppliers’’power by:power by:

Absorbing price increasesAbsorbing price increasesdue to higher margins.due to higher margins.

Passing along higherPassing along highersupplier prices becausesupplier prices becausebuyers are loyal tobuyers are loyal todifferentiated brand.differentiated brand.

Threat ofnew

entrants


Rivalryamong

competingfirms



Bargaining Powerof Suppliers


Differentiation Strategy:Differentiation Strategy: New EntrantsNew Entrants

••Can defend against newCan defend against newentrants because:entrants because:

New products must surpassNew products must surpassproven products.proven products.

New products must be at leastNew products must be at leastequal to performance of provenequal to performance of provenproducts, but offered at lowerproducts, but offered at lowerprices.prices.

Threat ofnew

entrants


Rivalryamong

competingfirms



The Threat ofThe Threat ofPotential EntrantsPotential Entrants


Differentiation Strategy:Differentiation Strategy: SubstitutesSubstitutes

••Well positioned relative toWell positioned relative tosubstitutes because:substitutes because:Brand loyalty to aBrand loyalty to a

differentiated product tendsdifferentiated product tendsto reduce customersto reduce customers’’testingtestingof new products or switchingof new products or switchingbrands.brands.

Threat ofnew

entrants


Rivalryamong

competingfirms



ProductProductSubstitutesSubstitutes


Competitive Risks of DifferentiationCompetitive Risks of Differentiation••The price differential between the differentiatorThe price differential between the differentiator’’s products product

and the cost leaderand the cost leader’’s product becomes too large.s product becomes too large.

••Differentiation ceases to provide value for whichDifferentiation ceases to provide value for whichcustomers are willing to pay.customers are willing to pay.

••Experience narrows customersExperience narrows customers’’perceptions of the valueperceptions of the valueof differentiated features.of differentiated features.

••Counterfeit goods replicate differentiated features of theCounterfeit goods replicate differentiated features of thefirmfirm’’s products.s products.


Focus StrategiesFocus Strategies

••An integrated set of actions taken to produceAn integrated set of actions taken to producegoods or services that serve the needs of agoods or services that serve the needs of aparticular competitive segment.particular competitive segment.

Particular buyer groupParticular buyer group——youths or senior citizensyouths or senior citizens

Different segment of a product lineDifferent segment of a product line——professionalprofessionalcraftsmen versus docraftsmen versus do--itit--yourselfersyourselfers

Different geographic marketsDifferent geographic markets——East coast versusEast coast versusWest coastWest coast


Focus Strategies (contFocus Strategies (cont’’d)d)

••Types of focused strategiesTypes of focused strategiesFocused cost leadership strategyFocused cost leadership strategyFocused differentiation strategyFocused differentiation strategy

••To implement a focus strategy, firms must beTo implement a focus strategy, firms must beable to:able to:Complete various primary and support activities in aComplete various primary and support activities in a

competitively superior manner, in order to developcompetitively superior manner, in order to developand sustain a competitive advantage and earn aboveand sustain a competitive advantage and earn above--average returns.average returns.


Factors That Drive Focused StrategiesFactors That Drive Focused Strategies••Large firms may overlook small niches.Large firms may overlook small niches.

••A firm may lack the resources needed to compete in theA firm may lack the resources needed to compete in thebroader market.broader market.

••A firm is able to serve a narrow market segment moreA firm is able to serve a narrow market segment moreeffectively than can its larger industryeffectively than can its larger industry--wide competitors.wide competitors.

••Focusing allows the firm to direct its resources to certainFocusing allows the firm to direct its resources to certainvalue chain activities to build competitive advantage.value chain activities to build competitive advantage.


Competitive Risks of Focus StrategiesCompetitive Risks of Focus Strategies••A focusing firm may beA focusing firm may be ““outfocusedoutfocused””by its competitors.by its competitors.

••A large competitor may set its sights on a firmA large competitor may set its sights on a firm’’s niches nichemarket.market.

••Customer preferences in niche market may change toCustomer preferences in niche market may change tomore closely resemble those of the broader market.more closely resemble those of the broader market.


Integrated Cost Leadership/Integrated Cost Leadership/Differentiation StrategyDifferentiation Strategy

••A firm that successfully uses an integrated costA firm that successfully uses an integrated costleadership/differentiation strategy should be in aleadership/differentiation strategy should be in abetter position to:better position to:

Adapt quickly to environmental changes.Adapt quickly to environmental changes.

Learn new skills and technologies more quickly.Learn new skills and technologies more quickly.

Effectively leverage its core competencies whileEffectively leverage its core competencies whilecompeting against its rivals.competing against its rivals.


Integrated Cost Leadership/Integrated Cost Leadership/Differentiation Strategy (contDifferentiation Strategy (cont’’d)d)

••Commitment to strategic flexibility is necessaryCommitment to strategic flexibility is necessaryfor implementation of integrated costfor implementation of integrated costleadership/differentiation strategy.leadership/differentiation strategy.

Flexible manufacturing systems (FMS)Flexible manufacturing systems (FMS)

Information networksInformation networks

Total quality management (TQM) systemsTotal quality management (TQM) systems


Flexible Manufacturing SystemsFlexible Manufacturing Systems

••ComputerComputer--controlled processes used to producecontrolled processes used to producea variety of products in moderate, flexiblea variety of products in moderate, flexiblequantities with a minimum of manualquantities with a minimum of manualintervention.intervention.

Goal is to eliminate theGoal is to eliminate the ““lowlow--costcost--versusversus--widewideproductproduct--varietyvariety””tradeoff.tradeoff.

Allows firms to produce large variety of products atAllows firms to produce large variety of products atrelatively low costs.relatively low costs.


Information NetworksInformation Networks

••Link companies electronically with theirLink companies electronically with theirsuppliers, distributors, and customers.suppliers, distributors, and customers.

Facilitate efforts to satisfy customer expectations inFacilitate efforts to satisfy customer expectations interms of product quality and delivery speed.terms of product quality and delivery speed.

Improve flow of work among employees in the firmImprove flow of work among employees in the firmand their counterparts at suppliers and distributors.and their counterparts at suppliers and distributors.

Customer relationship management (CRM)Customer relationship management (CRM)


Total Quality Management (Total Quality Management (TQMTQM) Systems) Systems

••Emphasize total commitment to the customerEmphasize total commitment to the customerthrough continuous improvement using:through continuous improvement using:DataData--driven, problemdriven, problem--solving approachessolving approachesEmpowerment of employee groups and teamsEmpowerment of employee groups and teams

••BenefitsBenefitsIncreased customer satisfactionIncreased customer satisfactionLower costsLower costsReduced timeReduced time--toto--market for innovative productsmarket for innovative products


Risks of the Integrated Cost Leadership/Risks of the Integrated Cost Leadership/Differentiation StrategyDifferentiation Strategy

••Often involves compromisesOften involves compromisesBecoming neither the lowest cost nor the mostBecoming neither the lowest cost nor the most

differentiated firm.differentiated firm.

••BecomingBecoming ““stuck in the middlestuck in the middle””Lacking the strong commitment and expertise thatLacking the strong commitment and expertise that

accompanies firms following either a cost leadershipaccompanies firms following either a cost leadershipor a differentiated strategy.or a differentiated strategy.

04[2] strategy at the business level - ridwaniskandar … at the business level ... the purpose of a...

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