Miles A. Zachary

MGT 4380

Selecting Business-Level StrategiesChapter 5

Business-level strategy address the question of how a firm will compete in a specific industry

Developing business-level strategies requires not being mesmerized by all the nuanced strategies of firms in an industry

How can executives cut through the mess?Generic Strategies-a general way of positioning

a firm within an industryBest-known generic strategies developed by

Michael Porter of Harvard Business School

Business-Level Strategy

Two competitive dimensionsCompetitive advantage

Involves whether a firm stresses lower costs or uniqueness

Scope of OperationDetermines whether a firm appeals to a general

audience or a focused subset of consumers

Four (4) traditional generic strategiesCost leadershipDifferentiationFocused (niche) cost leadershipFocused (niche) differentiation

Generic Strategies

Generic Strategies

In addition to the four (4) main generic strategies, two sub-strategies existBest-Cost Strategy“Stuck-in-the-middle” Strategy

Different generic strategies offer different value propositions to customers

They also have different value chain configurations

Generic Strategies

Cost leadership firms compete based on price and aim for a broad target marketSell goods for low pricesTarget general consumers

Emphasize efficiency; spend little on advertising, market research, or R&D

Often rely on economies of scaleCost of offering goods decreases as a firm is

able to sell more items; expenses distributed across a greater number of items

Ex.-Wal-Mart, Payless Shoe Source, etc.

Cost Leadership

AdvantagesLow-cost providers better able to withstand

price warsDiscourages new entrantsAdvantage enhanced by high market share

DisadvantagesPeople perceive products and services as low-

qualityHigh volume necessary because low profit

marginsNeed to focus on low cost blinds firms to subtle

environmental trendsEmphasis on efficiency makes it difficult to

change quickly when needed

Cost Leadership

Differentiators compete based on uniqueness and aim at a broad target market

Attempt to convince customers to pay higher prices by providing unique and desirable features

Emphasize that consumers “get what they pay for”

Firms must communicate to consumers why they should pay higher prices—advertising!

Ex.-Nike, FedEx, Ralph Lauren, etc.

Differentiation

AdvantagesStrong margins = firms need less customers to

make a profitEnduring differentiator firms create strong

brand loyalty—less price sensitiveDifficult for new entrants to compete with

brand loyaltyDisadvantages

Customers may not be willing to pay higher prices

Customers may prefer a cheaper alternativeCompetitors may be able to imitate features

such that they are not sufficiently unique

Differentiation

A focused cost leadership strategy entails competing based on price to target a narrow customer market

Not necessarily the lowest price in the industry; it charges low prices relative to other firms that compete within the target market

In other cases, the target market is defined by the sales channel used to reach customersUnique product distribution/retail

Focused Cost Leadership

A focused differentiation strategy requires offering unique features that fulfill the demands of a narrow market

Similar to focused cost leadership strategy, focused differentiation sometimes focus on a particular sales channelOthers target particular demographic groups

Ex.-Whole Foods Market, Ferrari, etc.

Focused Differentiation

AdvantagesHigher prices can be chargedFirms can develop tremendous expertise in

their specific areaDisadvantages

Likely limited demandFocused area may be taken over by other firmsOther firms may provide narrower focus

Focused Strategies: Advantages & Disadvantages

Firms pursuing best-cost strategies charge relatively low prices AND offer substantial differentiation

For firms that want to have their cake and eat it too!

Very difficult to executeSuccessful implementation can lead to a

strong competitive advantageMay face attacks from many different

directionsBest-cost strategies can be easier to achieve

if a firm can lower their overhead/fixed costsEx.- Southwest Airlines, Target, Ikea, etc.

Best-Cost Strategy

Some firms are unable to develop any specific generic strategy

These firms become “stuck in the middle”Non-unique products at higher-than-

warranted pricesFirms fail when they try to please all

consumersFirms that are stuck in the middle are often

put their as a result of being out maneuvered by competitors

Ex.-Circuit City, Kmart, Blockbuster, Arby’s, etc.

Stuck in the Middle