1 business-level strategy. 2 business-level strategy: an integrated and coordinated set of...
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Business-Level Strategy
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Business-Level Strategy
Business-level strategy:Business-level strategy: an integrated and coordinated an integrated and coordinated set of commitments and actions the firm uses to gain a set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competitive advantage by exploiting core competencies in specific product marketscompetencies in specific product markets
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Types of Business-Level Strategies
Business-level strategies are intended to create Business-level strategies are intended to create differences between the firm’s position relative to differences between the firm’s position relative to those of its rivalsthose of its rivals
To position itself, the firm must decide whether it To position itself, the firm must decide whether it intends to perform activities differently or to perform intends to perform activities differently or to perform different activities as compared to its rivalsdifferent activities as compared to its rivals
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Five Generic StrategiesCompetitive Advantage
Co
mp
etit
ive
Sco
pe
CostCost UniquenessUniqueness
Bro
ad
Bro
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targ
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rget
Nar
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Cost Cost LeadershipLeadership
DifferentiationDifferentiation
Focused Cost Focused Cost LeadershipLeadership
Focused Focused DifferentiationDifferentiation
Integrated CostIntegrated CostLeadership/Leadership/
DifferentiationDifferentiation
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Cost Leadership Strategy
An integrated set of actions designed to produce or An integrated set of actions designed to produce or deliver goods or services at the deliver goods or services at the lowest cost, relative to lowest cost, relative to competitorscompetitors with features that are acceptable to with features that are acceptable to customerscustomers
relatively standardized productsrelatively standardized products features acceptable to many customersfeatures acceptable to many customers lowest competitive pricelowest competitive price
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Cost Leadership Strategy
Cost saving actions required by this strategy:Cost saving actions required by this strategy: building efficient scale 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
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Questions Leading to Lower Costs
1.1. How can an activity be performed differently or How can an activity be performed differently or even eliminated?even eliminated?
2.2. How can a group of linked value activities be How can a group of linked value activities be regrouped or reordered?regrouped or reordered?
3.3. How might coalitions with other firms lower or How might coalitions with other firms lower or eliminate costs?eliminate costs?
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Cost Leadership Strategy and the Five Forces of Competition
Rivalry Among Competing FirmsCan use cost leadership strategy to advantage since:
competitors avoid price wars with cost leaders, creating higher profits for the entire industry
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
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gain
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uyer
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
ew
Entrants
Entrants
Threat o
f
Threat o
f
Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Cost Leadership Strategy and the Five Forces of Competition
Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyers’ power Can mitigate buyers’ power by:by:
driving prices far below driving prices far below competitors, causing competitors, causing them to exit and shifting them to exit and shifting power with buyers back power with buyers back to the firmto the firm
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
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Pow
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Bar
gain
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Pow
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of B
uyer
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
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Entrants
Entrants
Threat o
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Threat o
f
Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Cost Leadership Strategy and the Five Forces of Competition
Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power by:
being able to absorb cost increases due to low cost position
being able to make very large purchases, reducing chance of supplier using power
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
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Bar
gain
ing
Pow
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of B
uyer
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
ew
Entrants
Entrants
Threat o
f
Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Cost Leadership Strategy and the Five Forces of Competition
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
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of B
uyer
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
ew
Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Threat of New EntrantsThreat of New EntrantsCan frighten off new entrants due to: their need to enter on a
large scale in order to be cost competitive
the time it takes to move down the learning curve
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Cost Leadership Strategy and the Five Forces of Competition
Threat of Substitute ProductsCost leader is well positioned to:
make investments to be first to create substitutes
buy patents developed by potential substitutes
lower prices in order to maintain value position
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
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Bar
gain
ing
Pow
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of B
uyer
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
ew
Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Risks of Cost Leadership Strategy
Processes used by the cost leader to produce and Processes used by the cost leader to produce and distribute its good or service could become distribute its good or service could become obsolete because of competitors’ innovationsobsolete because of competitors’ innovations
Too much focus by the cost leader on cost Too much focus by the cost leader on cost reductions may occur at the expense of trying to reductions may occur at the expense of trying to understand customers’ perceptions of “competitive understand customers’ perceptions of “competitive levels of differentiationlevels of differentiation
Competitors may learn how to successfully imitate Competitors may learn how to successfully imitate the cost leader’s strategythe cost leader’s strategy
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Differentiation Strategy
An integrated set of actions designed by a firm to An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in cost) that customers perceive as being different in ways that are important to themways that are important to them
price for product can exceed what the firm’s target price for product can exceed what the firm’s target customers are willing to paycustomers are willing to pay
nonstandardized productsnonstandardized products customers value differentiated features more than they customers value differentiated features more than they
value low costvalue low cost
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Differentiation Strategy
Value provided by Value provided by unique features and value unique features and value characteristicscharacteristics
Command premium priceCommand premium price High customer serviceHigh customer service Superior qualitySuperior quality Prestige or exclusivityPrestige or exclusivity Rapid innovationRapid innovation
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Differentiation Strategy
Differentiation actions required by this strategy:Differentiation actions required by this strategy: developing new systems and processesdeveloping new systems and processes shaping perceptions through advertisingshaping perceptions through advertising quality focusquality focus capability in R&Dcapability in R&D maximize human resource contributions through low maximize human resource contributions through low
turnover and high motivationturnover and high motivation
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Factors That Drive Differentiation
Unique product featuresUnique product features Unique product performanceUnique product performance Exceptional services Exceptional services New technologiesNew technologies Quality of inputsQuality of inputs Exceptional skill or experienceExceptional skill or experience Detailed informationDetailed information Extensive personal relationships with buyers and Extensive personal relationships with buyers and
supplierssuppliers
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Differentiation Strategy and the Five Forces of Competition
Rivalry Among Competing FirmsCan defend against competition because:
brand loyalty to differentiated product offsets price competition
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
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of B
uyer
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
ew
Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Differentiation Strategy and the Five Forces of Competition
Bargaining Power of BuyersCan mitigate buyer power because:
well differentiated products reduce customer sensitivity to price increases
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
er
of B
uyer
sof
Buy
ers
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
ew
Threat of N
ew
Entrants
Entrants
Threat o
f
Threat o
f
Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Differentiation Strategy and the Five Forces of Competition
Bargaining Power of SuppliersCan mitigate suppliers’ power by:
absorbing price increases due to higher margins
passing along higher supplier prices because buyers are loyal to differentiated brand
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
er
of B
uyer
sof
Buy
ers
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
ew
Threat of N
ew
Entrants
Entrants
Threat o
f
Threat o
f
Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Differentiation Strategy and the Five Forces of Competition
Threat of New EntrantsCan defend against new entrants because:
new products must surpass proven products or,
new products must be at least equal to performance of proven products, but offered at lower prices
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
er
of B
uyer
sof
Buy
ers
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
ew
Threat of N
ew
Entrants
Entrants
Threat o
f
Threat o
f
Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Differentiation Strategy and the Five Forces of Competition
Threat of Substitute ProductsWell positioned relative to substitutes because:
brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
er
of B
uyer
sof
Buy
ers
Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
ew
Threat of N
ew
Entrants
Entrants
Threat o
f
Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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Major Risks of Differentiation Strategy
Customers may decide that the price differential Customers may decide that the price differential between the differentiated product and the cost between the differentiated product and the cost leader’s product is too largeleader’s product is too large
Means of differentiation may cease to provide value Means of differentiation may cease to provide value for which customers are willing to payfor which customers are willing to pay
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Major Risks of Differentiation Strategy
Experience may narrow customer’s perceptions of Experience may narrow customer’s perceptions of the value of differentiated features of the firm’s the value of differentiated features of the firm’s productsproducts
Makers of counterfeit goods may attempt to Makers of counterfeit goods may attempt to replicate differentiated features of the firm’s productsreplicate differentiated features of the firm’s products
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Focused Business-Level Strategies
A focus strategy must exploit a narrow target’s A focus strategy must exploit a narrow target’s differences from the balance of the industry by:differences from the balance of the industry by: isolating a particular buyer groupisolating a particular buyer group isolating a unique segment of a product lineisolating a unique segment of a product line concentrating on a particular geographic marketconcentrating on a particular geographic market finding their “niche”finding their “niche”
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Factors That May Drive Focused Strategies
Large firms may overlook small nichesLarge firms may overlook small niches Firm may lack resources to compete in the broader Firm may lack resources to compete in the broader
marketmarket May be able to serve a narrow market segment May be able to serve a narrow market segment
more effectively than can larger industry-wide more effectively than can larger industry-wide competitorscompetitors
Focus may allow the firm to direct resources to Focus may allow the firm to direct resources to certain value chain activities to build competitive certain value chain activities to build competitive advantageadvantage
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Major Risks of Focused Strategies
Firm may be “outfocused” by competitorsFirm may be “outfocused” by competitors Large competitor may set its sights on your niche Large competitor may set its sights on your niche
marketmarket Preferences of niche market may change to match Preferences of niche market may change to match
those of broad marketthose of broad market
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Advantages of Integrated Strategy
A firm that successfully uses an integrated cost A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a leadership/differentiation strategy should be in a better position to:better position to: adapt quickly to environmental changesadapt quickly to environmental changes learn new skills and technologies more quicklylearn new skills and technologies more quickly effectively leverage its core competencies while effectively leverage its core competencies while
competing against its rivalscompeting against its rivals
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Benefits of Integrated Strategy Successful firms using this strategy have above-Successful firms using this strategy have above-
average returnsaverage returns Firm offers two types of values to customersFirm offers two types of values to customers
some differentiated features (but less than a true some differentiated features (but less than a true differentiated firm)differentiated firm)
relatively low cost (but now as low as the cost relatively low cost (but now as low as the cost leader’s price)leader’s price)
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Major Risks of Integrated Strategy
An integrated cost/differentiation business level An integrated cost/differentiation business level strategy often involves compromises (neither the strategy often involves compromises (neither the lowest cost nor the most differentiated firm)lowest cost nor the most differentiated firm)
The firm may become “stuck in the middle” lacking The firm may become “stuck in the middle” lacking the strong commitment and expertise that the strong commitment and expertise that accompanies firms following either a cost leadership accompanies firms following either a cost leadership or a differentiated strategyor a differentiated strategy