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Business-Level Strategy

Business-level strategy: anintegrated and coordinated setof commitments and actions thefirm uses to gain a competitive

advantage by exploiting corecompetencies in specific productmarkets

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Core Competencies and

StrategyThe resourcesand capabilitiesthat havebeen determined to be a source of

competitive advantage for a firm over its

rivals

An integrated and coordinated set of

actions taken to exploit core competencies

and gain a competitive advantage

Actions taken to provide value to customers

and gain a competitive advantage by

exploiting core competencies in specific,

individual product markets

Business-levelBusiness-level

strategystrategy

StrategyStrategy

CoreCore

competenciescompetencies

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Strategy

Fundamental constraints

Scope

What good or service to offer, to whichcustomers

Value chain

ow and where to create the good orservice

ow to distribute the good or service in themarketplace!s"

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Recall our valuecreation model

Costs representspecific investment

choices thatgenerate value

Costs representspecific investment

choices that

generate value

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Consumer Markets#emographic

ConsumerMarkets

$ocioeconomic

%eographic

&sychological

'onsumption patterns

&erceptual factors

Dem.

Soc.

Geo.Psy.

Con.

Per.

Broad or narro scope!

"mplications for configuration ofvalue chain!!

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Business Markets

"ndustrialMarkets

#nd$use

Product segments

Geog segments

Common %uying factors

Customer si&e segments

#nd

Pro.

Geo.

Buy.

Si&e

Broad or narro scope!

"mplications for configuration ofvalue chain!!

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Source of competitive

advantage - Value chains $trategies create differences between the

firm(s position and its rivals

$ources of differences) - perform activities

differently* perform different activities

+wo value-adding configurations !&orter,

./"'o cost

Differentiated

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Comparing Scope and Sourceof Advantage

Competitive Advantage

Compe

titiveSco

pe

Cost Uniqueness

Bro

ad

target

Narrow

target

Cost 'eader Differentiator

FocusedCost

FocusedDifferentiator

"ntegratedCost

'eader(Differentiator

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Cost Leadership Strategy

0n integrated set of actions designed toproduce or deliver goods or services at the

loest costrelative tocompetitorswith features that areacceptable to customers

relatively standardi1ed products

features acceptable to many customers

lowest competitive price

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Cost Leadership Strategy

'ost saving actions re2uired by this strategy:

building efficient facilities

tightly controlling production costs andoverhead

minimi1ing costs of sales, 34# and service

building efficient manufacturing facilities

monitoring costs of activities provided byoutsiders

simplifying production processes

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Discretionary decisions Product features,

performance Mix & variety of

products Service eves Sma vs! arge "uyers Process tec#noogy

$age eves Product features %iring, training,

motivation

Cost Drivers

Major Cost Drivers conomies of scae 'earning(Spiovers

Capacity utii)ation *ntegration +ertica 'inages -iming 'ocation Poitica(reguatory *nterreations#ips

.corporate/

Implications?Implications?

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Value-Chain eample!Cost Leader

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"uestions Leading to

Lo#er Costs5 ow can an activity be performeddifferently, eliminated, externali1ed)

65 ow can linked value activities beregrouped or reordered)

75 ow can upstream8downstreamcollaboration lower costs)

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Implementation $itfalls

9xclusive focus on fg

isunderstand drivers !0B' useful"

;ailure to recogni1e8exploitlinkages !e5g5, across the board costreductions"

'ontradictions !e5g5, gain mkt sharethrough 9$ but allow product clutter* crosssubsidies"

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Cost Leadership and

the %ive %orces 3ivalry - competitors avoid price wars with

cost leaders

Buyers shift demand to you, increasemarket power

$uppliers increased market power, absorbcost increases !low cost position"

9ntrants entry barriers !scale, learning" $ubstitutes reinvest econ profit to

maintain advantage

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&a'or Ris(s of Cost

Leadership Strategy +here can only be one cost leader

+echnological change can eliminatecost advantage

$pillovers lead to imitation

9fficiency focus may create blindspots re: customer preferences

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Differentiation Strategy

0n integrated set of actions designed by afirm to produce or deliver goods or

services that customers perceive asadding value

price may exceed what the firm(s targetcustomers are willing to pay

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Some Differentiation )hemes

Unique taste #r5 &epper

Multiple features

icrosoft Windows and =ffice Wide selection and one-stop shopping

ome #epot and 0ma1on5com

Reliable, superior service

;ed9x, 3it1-'arlton Spare parts availabilit

'aterpillar

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)hemes

!restige 3olex

"ualit manufacturing, fe# defects

onda, +oyota $echnological leadership

7 'orporation, >ntel

$op-of-the-line image

3alph ?auren, @iton

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Differentiation Strategy

)dd donstream value

loer %uyer cost

raise %uyer performance

Cost 0dd value to buyer(s value: reduce

downstream processing time, search time,transaction costs, defect rates, direct costs,learning curves, labor, space, installation,etc5 !e5g5, '3 software"

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Differentiation Strategy

$ome differentiation actions re2uired bythis strategy:

develop new CsystemsD and processes

signal and shape buyer perceptions

2uality focus

capability in 34#

>mplication - maximi1e human capitalcontributions

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0aciities t#atpromote firmimage

Superior M*S1-o integratevaue2creating activities toimprove quaity

$idey respectedC&3 en#ancesfirm reputation

$idey respectedC&3 en#ancesfirm reputation

Provide training andincentives to ensure a strongcustomer service orientation

Programs to attract taentedengineers and scientists

&xceent appicationsengineering support

Superior materia #andingand sorting tec#noogy

Use of most prestigious outetsPurc#ase of #ig#2quaitycomponents to en#anceproduct image

Superiormateria#andingoperationsto minimi)edamage

4uic,transfer ofinputs tomanufactur2ing process

0exi"iityand speed inrespondingto c#angesin manu2facturingspecs

'ow defectrates toimprovequaity

Accurate andresponsiveorderprocessing

&ffectiveproduct

repenis#2ment toreducecustomer5sinventory

Creativeandinnovativeadvertisingprograms

0ostering

of personareation2s#ip wit#,eycustomers

6apid responseto customerservicerequests

Competeinventory of

repacementparts andsuppies

0irminfrastructure

%uman resourcemanagement

-ec#noogydeveopment

Procurement

0irminfrastructure

%uman resourcemanagement

-ec#noogydeveopment

Procurement

*n"oundogistics

3perations 3ut"oundogistics

Mar,etingand saes

Service*n"oundogistics

3perations 3ut"oundogistics

Mar,etingand saes

Service

Value-Chain eample!

Differentiation

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Differentiation and the

%ive %orces 3ivalry - brand loyalty to differentiated

products reduces price competition

Buyers differentiated products less priceelastic

$uppliers absorb price increases !highermargins", pass along higher prices !buyerloyalty"

9ntrants must surpass proven products orbe e2uivalent at lower price

$ubstitutes diff raises switching costs

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$itfalls of Differentiation

Strategies #ifferentiating on characteristics notvalued by buyers !e5g5, &"

=ver-differentiating

&rice premium is too high ;ailing to signal value

;ocusing on product instead of entirevalue chain

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%ocused Business-Level

Strategies0 focus strategy must exploit a narrowtarget(s differences from the balance of

the industry by: isolating a particular buyer group

isolating a uni2ue segment of aproduct line

concentrating on a particulargeographic market

finding their CnicheD

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%actors Driving

%ocus Strategies ?arge firms overlook small niches

;irm may lack resources to compete in

the broader market ay be able to serve a narrow market

segment more effectively than can largerindustry-wide competitors

;ocus may allow the firm to directresources to certain value chain activitiesto build competitive advantage

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&a'or Ris(s of %ocused

Strategies ;irm may be CoutfocusedD by

competitors

?arge competitor may set its sights onyour niche market

&references of niche market maychange to match those of broad market

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Advantages of Integrated

Strategy0 firm that successfully uses an integratedcost leadership8differentiation strategy shouldbe in a better position to:

adapt 2uickly to environmental changes

learn new skills and technologies more2uickly

effectively leverage its core competencieswhile competing against its rivals

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Benefits of Integrated

Strategy $uccessful firms using this strategy

have above-average returns

;irm offers two types of values tocustomers

some differentiated features !but lessthan a true differentiated firm"

relatively low cost !but now as low asthe cost leader(s price"

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&a'or Ris(s of Integrated

Strategy 0n integrated cost8differentiation

business level strategy often involves

compromises !neither the lowest costnor the most differentiated firm"

+he firm may become Cstuck in themiddleD lacking the strong commitment

and expertise that accompanies firmsfollowing either a cost leadership or adifferentiated strategy

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6ate of Profit

in xcess of t#e

Competitive 'eve

*ndustry

Attractiveness

Competitive

Advantage

7ifferentiation

Advantage

Cost

Advantage

+ertica Power

."uyer(seer/

6ivary

Barriers to ntry

Brands

Product tec#noogy

Mareting

capa"iities

Process tec#noogy

Pant si)e

'ow2cost inputs

0irm si)e

0inancia resources

Su"stituta"iity

Patents

Brands

6etaiatory

capa"iity

Summary! Industry and %irmSummary! Industry and %irm

*ffects on $rofit*ffects on $rofit