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Chapter 4
Business-level Strategies
Diane M. Sullivan, Ph.D. 2011
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 CengageSections modified from Gentner (2009)
The Strategic Management Process
Insert figure 1.1 graphic After collecting
information about the internal and external environment, firms can select their business-level strategy
Business-level Strategy Definition: integrated and coordinated set of commitments and
actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets
In selecting a business-level strategy, a firm must determine Who are the customer groups to be served
What needs those customers have that the firm seeks to satisfy
How those needs can be satisfied (e.g., can the firm use core competencies to satisfy customer needs)
Five Business-level Strategies
Cost Leadership Strategy Definition: An integrated set of actions designed to produce or
deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers
Using a cost leadership strategy, a firm Produces no-frills, standardized products for typical customers Focuses on efficiency so costs are lower than competitors’ costs Generally offers lower cost products with competitive levels of
differentiation
Examples: Greyhound Bus, Big Lots Inc., Wal-Mart
Primary Activities
Su
pp
ort
Act
ivit
ies
MARG
IN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to
Reduce Overhead
Simplified Planning Practices to Reduce
Planning Costs
Consistent Policies to Reduce Turnover Costs
Effective Training Programs to Improve Worker
Efficiency and Effectiveness
Highly Efficient Systems to Link
Suppliers’ Products with the Firm’s Production
Processes
Timing of Asset Purchases
Efficient Plant Scale to Minimize
Manufacturing Costs
Selection of Low Cost Transport
Carriers
Delivery Schedule that Reduces
Costs
National Scale Advertising
Small, Highly Trained Sales
Force
Effective Product Installations to
Reduce Frequency and Severity
of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with
Manufacturing Processes
Systems and Procedures to find the Lowest Cost Producers to Purchase
Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with
Suppliers
Policy Choice of Plant Technology
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Value Creating Activities Common to a Cost Leadership Business-Level Strategy
Risks of Cost Leadership Strategy Competitive risks associated with the cost leadership
strategy include Too much focus on one or a few value-chain activities
All rivals share a common input or raw material
The strategy is imitated too easily
Differentiation Strategy Definition: integrated set of actions designed by a firm to
produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them
Firms using differentiation strategy Provide products with different, valued features sold at a premium price
Hinges on customers valuing differentiated features more than they value low price
Firms should differentiate offerings on as many dimensions as possible
The less similarity to competitors’ products, the more buffered a firm is from competition
Examples: Tiffany Jewelry, Apple, Lexus, Beautifulpeople.com?
MARG
IN
MARGIN
A companywide emphasis on producing high quality products
Highly Developed Information Systems to better understand
customers’ purchasing preferences
Compensation programs intended to encourage worker
creativity and productivity
Extensive use of subjective rather than objective
performance measures
Superior handling of
incoming raw materials to
minimize damage and improve the
quality of the final product
Rapid responses to customers
unique manufacturing specifications
Consistent manufacturing of
attractive products
Accurate and responsive order
processing procedures
Complete field stocking of
replacement parts
Strong capability in
basic research
Investments in technologies that will allow the firm to consistently produce
highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries
to customers
Superior personnel training
Coordination among R&D, product development and
marketing
Extensive personal
relationships with buyers
Strong Coordin-ation among
functions in R&D, Marketing and
Product Development
Premium Pricing
Primary Activities
Su
pp
ort
Act
ivit
ies
Value Creating Activities Common to a Differentiation Business-Level Strategy
Risks of Differentiation Strategy Risks
Customers decide that differences between differentiated and cost leader’s product not worth a higher price
Competitors offer similar products at a lower cost
Too high a price premium
Counterfeiters offer a cheap “knockoff” of a differentiated good or service (e.g., easily imitated)
Too much differentiation
Focus Strategies Definition: The focus strategy is an integrated set of actions taken to produce
goods or services that serve the needs of a particular competitive segment
Firms choose a focus strategy to serve the needs of a specific customer segment or industry segment Examples
A particular buyer group (such as youths or senior citizens)
A different segment of a product line (such as products for professional painters or the do-it-yourself group), or
A different geographic market (such as East or West in the U.S).
2 types of focus strategies: Focused cost leadership strategy
Example: IKEA
Focused differentiation strategy Example: Casketfurniture.com, Babies R Us
Risks of Focus Strategies Competitive risks of focus strategies
A competitor is able to focus on an even more narrowly defined market segment
Industry-wide competitors decide to focus on specific customer segments
The differences are reduced between the needs of a specific market segment and those of the rest of the industry
Integrated Cost Leadership/Differentiation Strategy
Using this strategy, firms Provide relatively low cost products with valued
differentiated features Use primary and support activities to produce differentiated
products at relatively low costs
Risk of this strategy A firm produces products that lack sufficient low cost or
differentiation
14
Southwest Airlines
Integrated Low Cost/Differentiation Strategy
Use a single aircraft model(Boeing 737)
Use secondary airports
Fly short routes
25 minute turnaround time
No meals
No reserved seats
No travel agent reservations
Low Cost
Focus on customer satisfaction
Focus on making the flying experience fun
High level of employee dedication
Differentiation
The Challenge: the integrated strategy is risky
Potential Pitfalls• The firm may become “Stuck-in-the-Middle”
lacking an expertise with either type of generic strategy• When a firm’s products are too expensive to
compete with low cost producer and too undifferentiated to provide the value offered by the differentiated producer
Integrated Low Cost/Differentiation Strategy
Applying Chapters 3 & 4 to CapSim
What capabilities does your strategy require? What are the benefits & limitations of those capabilities? What resources are required to develop those capabilities? Can you obtain an economic payback from developing those capabilities? Timing your Capabilities:
– When will they be required?
– How long to develop?
– How temporal are they? Capabilities & The Competition:
– What capabilities do your competitors have?
– What are they going to have?
– What do they believe they have?
– How will you counter them?
Broad Cost Leader A broad cost leader will attempt to be the low-cost producer in every
segment served Strive for good profit margins on all sales while keeping prices low for price-
sensitive customers.
Firm Profile: – Capacity improvements are unlikely to be undertaken (may run overtime instead)
unless at 200% capacity
– Pursue automation to increase margins in all segments (more automation in slower moving segments versus faster moving segments)
– Low R&D spending, while still keeping pace with the market preferences
– Low labor and material costs
– Prices lower than average
– Spends moderately on promotion and sales
– Investments will be financed primarily via bonds and stock issues as needed
– When cash allows, establish a dividend policy and begin to retire stock
– Focus on Market Share, Profits, ROE and Stock Price
Cost Leader with Low-end Focus
A low-tech focused cost leader will seek to minimize costs through efficiency and expertise.
Products will be concentrated in the Traditional and Low-end segments Firm Profile:
Multiple product lines in low-end segments (Traditional and Low-end) Few or no products in other segments (allow products to migrate) Low R&D spending, while still keeping reasonable pace with the market Low labor and material costs Invests in automation (only after products positioned into their “forever”
segments) will help manage labor costs and make it most efficient to run a second shift (which is preferred to capacity expansions)
Prices will be lower than average Spends moderately on promotion and sales Investments will be financed primarily via bonds and stock issues as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Stock Price, ROE, ROS, and Profits
Cost Leader with Product-life Cycle Focus
A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise
Products will be allowed to age and change in appeal from High End, to Traditional, and eventually Low End buyers (then they are retired)
Firm Profile: Minimum presence in “specialty” segments (Size & Performance) Low R&D spending (very little repositioning & new product every 2 years in
high-end segment) Low material costs Low labor costs Invests in automation early in the product’s life-cycle Prices are lower than average Spends moderately on promotion and sales Investments financed through bonds and stock offerings as needed When cash allows, establish a dividend policy and begin to retire stock Focus on Stock Price, ROE, ROS and Profits
Broad Differentiator
A broad differentiator will seek to create maximum awareness and brand equity in every segment
It wants to be well known as a maker of high quality/highly desirable products Firm Profile:
High R&D spending to keep products fresh and at pace with market Maintains presence in all market segments Capacity will be expanded as higher demand is generated, avoiding overtime Modest investments in automation after products well positioned but never at expense
of repositioning Spends heavily on advertising and sales to create maximum awareness and accessibility Prices are above average Investments are financed via stock issues and cash from operations as well as bonds as
needed When cash allows, establish a dividend policy and begin to retire stock Focus on Market Share, Profits, ROA and Stock Price
Differentiator with High-end Focus
A high-tech differentiator seeks to be known as the top producer of the best performing state-of-the-art products in the High-end, Performance and Size segments
Firm Profile: Multiple product lines in high-tech segments (High-end, Performance, & Size) achieved
via harvesting Traditional and Low-end products and new products
High promotion & sales investments to create maximum awareness & accessibility
High R&D expenditures to continually introduce new product lines and keep existing products fresh and with pace of the market
Capacity will be expanded as higher demand is generated, avoiding overtime
Price is above average
Modest investments in automation after products well positioned but never at expense of repositioning
Investments are financed via stock issues and cash from operations and bonds as needed
When cash allows, establish a dividend policy and begin to retire stock
Focus on ROA, Asset Turnover, and ROS
Differentiator with Product Life-cycle Focus
A product life-cycle focused differentiator seeks to be known as the top producer of the best performing state-of-the-art products in High-end, Traditional & Low-end segments
Products will be repositioned into the segments, allowed to drift into the appropriate segments and/or newly created into the segments
Firm Profile: Minimum presence in Size & Performance segments (reposition them to Traditional) High promotion and sales investments to create maximum awareness and accessibility High R&D expenditures to continually introduce new product lines and keep existing
products fresh and with pace of the market Price is above average Capacity will be expanded as higher demand is generated, avoiding overtime Modest investments in automation after products well positioned but never at expense of
repositioning Investments are financed via stock issues and cash from operations as well as bonds as
needed When cash allows, establish a dividend policy and begin to retire stock
Focus on Stock Price, ROS, Asset Turnover, and ROA
Integrated Strategy
A broad cost leader will attempt to be the low-cost producer in every segment of the market. It will have good profit margins on all sales while keeping prices low for price-sensitive customers.
Firm Profile: – More likely to reposition products than
introduce new ones to the market – Capacity improvements are unlikely to
be undertaken (may run overtime instead)
– Automation may be pursued to increase margins
– Investments will be financed with debt and/or stock issues
– Tends to spend less on promotion and sales
– Focus on Market Share, Profits, and Stock Price
A broad differentiator will seek to create maximum awareness and brand equity. It wants to be well known as a maker of high quality/highly desirable products.
Firm Profile: – High R&D spending to keep
products fresh – Maintains a presence in all market
segments – Spends heavily on advertising and
sales to create maximum awareness and accessibility
– Prices tend to be higher – Focus on Market Share, Profits,
and Stock Price
ACHIEVES BOTH
CapSim Business-level Strategies: Investments & Tradeoffs
Segments R&D & Marketing Automation & Capacity
Cost Approaches
Broad Cost Leader T, L, H, P, S
Cost Leader with low-tech focus
T and/or L with > 1 product in each segment
Cost leader with product life-cycle focus H T L
Differentiation Approaches
Broad Differentiator T, L, H, P, S
Differentiator with high-tech focus
H, P, and/or S with > 1 product in segment(s)
Differentiator with product life-cycle focus H T L
Integrated Approaches
Successful integrated ? ? ? ? ?
Stuck-in-the-middle ? ? ? ? ?
Below Avg. Invest
Below Avg. Invest
Above Avg. Invest
Above Avg. Invest