BUSINESS-LEVEL STRATEGY

Business 189

Spring 2007

Dr. Mark Fruin

WHAT IS BUSINESS-LEVEL STRATEGY?

• A FIRM-SPECIFIC PLAN OF ACTION FOR GAINING COMPETITIVE ADVANTAGE IN A MARKET OR INDUSTRY (TAKE BUSINESS AWAY FROM RIVALS)

• IMPLEMENT B-L STRATEGIES THAT MAKE FULL USE OF FUNCTIONAL LEVEL STRATEGIES

• INDUSTRIES = PRODUCT/MARKET SEGMENTS• BASED ON

– PRODUCT DIFFERENCES– CUSTOMER GROUPS OR MARKET SEGMENTS– LOCATION (SEGMENTS OFTEN DIFFER BY LOCATION)– HAVING DISTINCTIVE COMPETENCES

• FOLLOWING PORTER, EITHER COST LEADERSHIP OR DIFFERENTIATION ADVANTAGES/THESE ARE PRODUCT STRAT

BL & FL STRATEGIES• DISTINGUISH BETWEEN BUSINESS LEVEL &

FUNCTIONAL LEVEL STRATEGIES– IS ONE TYPE OF STRATEGY MORE

APPROPRIATE AT CERTAIN TIMES & STAGES?– CAN BOTH BE PURSUED SIMULTANEOUSLY?– IS THE COMPETITION BETWEEN GM & TOYOTA

TO BE THE LARGEST AUTO MAKER IN THE WORLD, A BL OR FL COMPETITON?

COMPETITIVE POSITIONING• TO BE IN A POSITION OF COMPETITIVE

ADVANTAGE, A FIRM MUST MAKE CHOICES• WHAT PRODUCT FEATURES?• WHAT CUSTOMER CHARACTERISTICS OR

CUSTOMER GROUPINGS• WHERE (WHEN & HOW)• WILL PRODUCT BE COMPETITIVELY

POSITIONED ACCORDING TO– COST LEADERSHIP?– DIFFERENTIATION?

SEGMENTATION STRATEGIES

• FIGURE 5.2 (SEE FIGURE 5.1 AS WELL)– NO MARKET SEGMENTATION - THE MARKET

TAKEN AS AN UNDIFFERENTIATED WHOLE– HIGH MARKET SEGMENTATION - LOTS OF

DIFFERENT PRODUCT/MARKET SEGMENTS– FOCUSED MARKET SEGMENTATION - A FEW

SEGMENTS ARE SELECTIVELY TARGETED

SEGMENTATION AND THE BUSINESS MODEL

• CHAPTER TALKS A LOT ABOUT BUSINESS MODELS RATHER THAN STRATEGIES

• WHAT’S THE DIFFERENCE AGAIN?

• BM IS HOW ARE WE GOING TO MAKE MONEY

• STRATEGY IS HOW ARE WE GOING TO IMPLEMENT/EFFECT BM

WAL-MART’S BUSINESS MODEL

• WAL-MART’S BUSINESS MODEL ON P. 157, FIGURE 5.3

• BALOONS ARE ACTIVITIES/CAPABILITIES THAT DISTINGUISH W-M’S BUSINESS MODEL AND PROD/MKT SEGMENTATION

• HOW ARE W-M’S CAPABILITIES IMPLEMENTED/PUT INTO PLAY???– FUNCTIONAL LEVEL STRATEGIES– GENERIC COMPETITIVE STRATEGIES

FIGURES 5.5, 5.6, 5.8, 5.9 & 5.10

• ILLUSTRATE WHAT WE HAVE JUST SAID• BUSINESS-LEVEL STRATEGIES REQUIRE

– TARGET SEGMENTS (MAKE CHOICES)– CARRY OUT FUNCTIONAL LEVEL

STRATEGIES (STRATEGY STACK IN ACTION)– DEVELOP ACTIVITIES/CAPABILITIES THAT

IMPLEMENT TARGETED SEGMENTS– EXCEL IN ONE OR ANOTHER GENERIC

COMPETITIVE STRATEGY (MAKE CHOICES)

GENERIC STRATEGIES

• COST LEADERSHIP (VALUE PROPOSITION STRATEGY)– BROAD– NARROW

• DIFFERENTIATION (PRICE PREMIUM STRATEGY)– BROAD – NARROW (FOCUS DIFFERENTIATION)

CUSTOMER GROUPS & MARKET SEGMENTATION

• HOW MUCH ARE CUSTOMERS WILLING TO PAY VERSUS WHAT CUSTOMERS ARE BEING SERVED?

• THREE ALTERNATIVE STRATEGIES– FOCUS ON “AVERAGE” CUSTOMER

– SEGMENT MARKET INTO MANY DIFFERENT CONSTITUENCIES/CLUSTERS

– CONCENTRATE ON “NICHES” ONLY• WHY DO THIS?

CAN A FIRM OFFER TOO MANY PRODUCTS?

• HOW MANY PRODUCTS ARE THE “RIGHT” NUMBER OF PRODUCTS?

• INDUSTRY CYCLE EFFECTS

• MACROECONOMIC EFFECTS

• SIGNALS & SIGNS OF TOO FEW OR TOO MANY PRODUCTS?

ADVANTAGES & DISADVANTAGES OF C.L.

• ADVANTAGES– USING 5 FORCES MODEL: COST LEADER HAS

• MORE POWER RELATIVE TO SUPPLIERS• MORE POWER RELATIVE TO BUYERS• BETTER ABLE TO DETER ENTRY OF NEW COMPETITORS &

BATTLE SUBSTITUTE PRODUCTS (BY LOWERING PRICES)

• DISADVANTAGES– MORE LIKELY STUCK IN PARTICULAR TECH/SEGMNT

• WHY?

– MORE LIKELY TO BE IMITATED• WHY?

– MORE LIKELY STUCK IN C.L. STRATEGY (AND POSSIBLY LOSE SIGHT OF CHANGING CUST. TASTES)

• DISCONTINUOUS INNOVATION (CLAY CHRISTENSEN)

BROAD V NARROW COST LEADER

• BROAD COST LEADERSHIP MEANS TAKING ADVANTAGE OF ECONOMIES OF SCALE & SCOPE ON NATIONAL LEVEL

• NARROW COST LEADERSHIP MEANS BEING A LEADER LOCALLY OR IN JUST ONE OR ANOTHER PRODUCT FEATURE– LOCAL PIZZA VS. NATIONAL CHAIN

– CARBON FIBER VS. STEEL, ALUMINUM & TITANIUM MOUNTAIN BIKING FRAMES

ADVANTAGES & DISADVAN-TAGES OF DIFFERENTIATION

• ADVANTAGES– DIFFERENTIATORS TRY TO DIFFERENTIATE IN MANY

DIFFERENT WAYS– HARD TO IMITATE (IF DONE WELL)– BRAND LOYALTY HIGH IF CONVINCE BUYERS OF

“UNIQUENESS,” “UNUSUALNESS,” & “SPECIALNESS”

• DISADVANTAGES– DIFFERENTIATION IS EXPENSIVE– MANY DIFFERENTIATION FACTORS EASILY IMITATED– FOR HOW LONG CAN “UNIQUENESS” BE

SUSTAINED/PROTECTED

FOCUSED DIFFERENTIATION

• FD MEANS CONCENTRATING ON– A PARTICULAR AREA (GEOGRAPHICALLY)– A PARTICULAR CUSTOMER (WELL EDUCATED,

PART. HOUSEHOLD INCOME, ETC.– PARTICULAR MARKET SEGMENT, SUCH AS

DESIGNER CLOTHES, FAST CARS, SMALL FOOTPRINT APPLIANCES, ETC.

GENERIC STRATEGIES• REQUIRE CAREFUL ATTENTION TO

PRODUCT/TECH/MARKET CHOICES– LOOKING FOR THE SWEET SPOTS

• CAN PROTECT FIRMS FROM 5 FORCES RIVALRIES - WHY?

• REQUIRE CONTINUOUS UPGRADING OF INVESMENT CHOICES - WHY?

• CREATE STRATEGIC GROUPINGS (OF FIRMS FOLLOWING SIMILAR STRATEGIES)

STRATEGIC GROUPS• WITHIN MOST INDUSTRIES, STRATEGIC

GROUP EMERGE

• A STRATEGIC GROUP IS DEFINED BY COMPANIES PURSUING THE SAME GENERIC STRATEGY

• MOBILITY BARRIERS INHIBIT THE MOVEMENT OF COMPANIES FROM ONE STRATEGIC GROUP TO ANOTHER

COMPETITIVE ADVANTAGE & INVESTMENT STRATEGY

• WHAT TYPE OF INVESTMENTS MUST FIRMS MAKE TO SUSTAIN COMPETITIVE ADVANTAGE?

• OBVIOUS– HUMAN RESOURCES– FUNCTIONAL-LEVEL STRATEGIES– PURSUIT OF FINANCIAL ADVANTAGE– GLOBALIZATION & OUTSOURCING

• NOT SO OBVIOUS? – INTANGIBLE RESOURCES– TACIT CAPABILITIES– SOCIAL PROCESSES– HIGHER LEVEL HR INVESTMENTS

QUESTIONS

• WHY DOES EACH GENERIC STRATEGY REQUIRE DIFFERENT SETS OF PRODUCT/MARKET/DISTINCTIVE COMPETENCY CHOICES?– EXAMPLES OF FIRM PAIRS MAKING DIFFERENT

CHOICES; ARE THEY IN SAME STRATEGIC GROUP?

• HOW SHOULD DIFFERENTIATION INVESTMENT CHOICES VARY IF YOU ARE IN STRONG OR WEAK COMPETITIVE POSITION?

STUDY GROUP QUESTIONS• WHICH FIRM (OF THE PAIR) PERFORMS BEST IN

TERMS OF FUNCTIONAL-LEVEL STRATEGIES?– FL STRATEGIES INDIVIDUALLY & TOGETHER

• DO THE TWO FIRMS BELONG TO THE SAME STRATEGIC GROUP IN THE INDUSTRY?

• DO BOTH FIRMS PURSUE THE SAME BL STRATEGIES? (TARGET THE SAME CUSTOMERS WITH SIMILAR PRODUCTS?)

• WHICH FIRM IS MORE PROFITABLE & WHY?– ARE FL OR BL STRATEGIES MORE IMPORTANT?

MORE QUESTIONS?

• HOW SHOULD HP/COMPAQ ATTACK DELL - WITH FL OR BL STRATEGIES?

• IN WHAT WAYS ARE FL AND BL STRATEGIES INTERRELATED?– # OF MODELS– PRODUCT DEVELOPMENT LEAD TIMES– DEGREE OF VERTICAL INTEGRATION

VS. OUTSOURCING– OTHER??

IN SUM• WHAT CUSTOMERS WANT IS CHANGING

ALL THE TIME: SEGMENTS ARE DYNAMIC, NOT STATIC

• TO COMPETE, FIRMS MUST MAKE CHOICES, NOT ONLY ABOUT B-L STRATEGIES BUT ALSO ABOUT F-L STRAT

• ULTIMATELY, IN MANY CASES, COMPETITIVE SUCCESS IS SHORT-LASTING– WHICH FIRM HAS BEST RESOURCES &

CAPABILITIES FOR CUSTOMER NEEDS TODAY