1 BUSINESS LEVEL STRATEGY STRATEGIC MANAGEMENT BUAD 4980

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BUSINESS LEVEL STRATEGY

BUSINESS LEVEL STRATEGY

STRATEGIC MANAGEMENT BUAD 4980

STRATEGIC MANAGEMENT BUAD 4980

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BUSINESS LEVEL STRATEGYBUSINESS LEVEL STRATEGY

Three Generic StrategiesThree Generic Strategies

1. Overall cost leadership

Low cost producer relative to a firm’s peers

Drive costs down throughout value chain

2. Differentiation

Products and/or services that are unique and valued accordingly

Non-price attributes for which customers will pay a premium

STRATEGIC MANAGEMENT – BUAD 4980STRATEGIC MANAGEMENT – BUAD 4980

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3. Focus strategy

Narrow product lines, buyer segments, or targeted geographic markets

Attain advantages either through differentiation or cost leadership in the focus markets


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Three Generic Strategies: Company Examples

Three Generic Strategies: Company Examples

Overall Cost leadership strategy

McDonalds

Wal-Mart

Differentiation strategy

Harley Davison

Apple

Focus strategy

Rolex

Lamborghini


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Overall Cost LeadershipOverall Cost Leadership

Interrelated tactics that include:

Development of efficiently scaled and modernized facilities

Tight cost and overhead control

Avoidance of marginal customer accounts

Cost minimization in all activities in the firm’s value chain


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Experience curve

Businesses “learn” to lower costs as they gain experience with production processes

Unit costs of production decline as output increases in most industries


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Cost differentiation vs. competitors

Permits a cost leader to translate cost advantages directly into higher profits than competitors

Allows low cost producer to earn above-average profits


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Overall Cost Leadership Strategies vis-à-vis Porter’s Five Forces ModelOverall Cost Leadership Strategies vis-à-vis Porter’s Five Forces Model Protects a firm against rivalry from higher cost competitors

Protects a firm against powerful buyers due to ability to adjust prices and maintain reasonable margins

Provides more flexibility to accommodate input cost pressure from powerful suppliers while maintaining reasonable margins

Provides substantial entry barriers from economies of scale and cost advantages that competitors can’t duplicate easily

Puts the firm in a favorable position with respect to substitute products


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Pitfalls of Overall Cost Leadership Strategies

Pitfalls of Overall Cost Leadership Strategies

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

Product differentiation must be minimal

Margin reduction by adjusting sale prices too readily to perceived market threats


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DifferentiationDifferentiation

Prestige or brand image

Technological superiority

Innovation / new on the market

Value-added Features

Customer service

Dealer / distribution network


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DifferentiationDifferentiation

Firms may differentiate along several dimensions at once

Successful differentiation requires integration with all parts of a firm’s value chain

An important aspect of differentiation is speed or quick response (first out of the box)


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Creates higher entry barriers due to customer preference for product attributes

Provides higher margins that enable the firm to deal with supplier power

Establishes customer loyalty and hence less threat from substitutes

Differentiation Strategies vis-à-vis Porter’s Five Forces Model

Differentiation Strategies vis-à-vis Porter’s Five Forces Model


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Uniqueness that is not valuable to customers

Too much differentiation (not all customers value all features)

Too high a price premium

Differentiation that is easily imitated by competition

Pitfalls of Differentiation StrategiesPitfalls of Differentiation Strategies


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Based on the choice of a narrow competitive scope within an industry

Firm selects a segment or group of segments (niche) and tailors its strategy to serve them

Firm achieves competitive advantages by dedicating itself to these segments exclusively

FocusFocus


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Cost focus

Create a cost advantage in a narrow target market segment

Differentiation focus

Differentiate product in a narrow target market segment

FocusFocus


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Focus Strategies vis-à-vis Porter’s Five Forces Model

Focus Strategies vis-à-vis Porter’s Five Forces Model

Create barriers to entry through either cost leadership, differentiation, or both

Select niches that are least vulnerable to substitutes or where competitors are weakest


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Pitfalls of Focus StrategiesPitfalls of Focus Strategies

Erosion of cost advantages within the narrow segment

Focused products and services still subject to competition from new entrants and from imitation

Can become so focused on satisfying buyer needs that the value/cost relationship declines


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Combination StrategiesCombination Strategies

Develop automated and flexible manufacturing systems

Exploiting the “profit pool” concept for competitive advantage

Coordinating the “extended” value chain by way of information technology


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Profit Pool Example: Automobile Industry

Profit Pool Example: Automobile Industry


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Creates high entry barriers

Increased bargaining power over suppliers

Reduces power of buyers (fewer competitors)

Low cost / high value position reduces threat from substitute products

Reduces the possibility of head-to-head rivalry

Combination Strategies vis-à-vis Porter’s Five Forces Model

Combination Strategies vis-à-vis Porter’s Five Forces Model


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Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”

Miscalculating sources of revenue and profit pools in the firm’s industry

Pitfalls of Combination StrategiesPitfalls of Combination Strategies


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Overall Cost Leadership

Online bidding and order processing are eliminating the need for personal sales calls and are minimizing sales overhead

Online purchase orders are making many transactions paperless, thus reducing the costs of procurement and office supplies

Impact of the Internet on Strategy Achievement



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Differentiation

Internet-based management systems link all parts of the organization, shorten response times and accelerate organization learning

Quick online response to service requests, rapid attention to customer feedback, and online product promotions are enhancing marketing efforts




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Focus

Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices

Niche portals that target specific groups are providing advertisers with access to viewers with specialized interests




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Refers to the stages of introduction, growth, maturity, and decline that occur over the life of an industry

Industry Life-CycleIndustry Life-Cycle


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Stages of the Industry Life-CycleStages of the Industry Life-Cycle


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The Introduction Stage

Products are unfamiliar to consumers

Market segments not well defined

Product features not clearly specified

Competition tends to be limited



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Introduction Stage strategies:

Develop product and get users to try it

Generate exposure so product becomes “standard”



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The Growth Stage

Characterized by strong increases in sales

Attractive to potential competitors


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Growth Stage strategies:

Focus on brand recognition

Focus on differentiated products

Invest financial resources to support value-chain activities



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The Maturity Stage

Aggregate industry demand slows

Market becomes saturated, few new adopters

Direct competition becomes predominant

Marginal competitors begin to exit


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Maturity Stage strategies:

Efficient manufacturing operations and process engineering

Low costs (customers become price sensitive)



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The Decline Stage

Industry sales and profits begin to fall

Strategic options become dependent on the actions of rivals


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Decline Stage strategies:

Maintaining market share

Exiting the market

Harvesting (cash cow)

Consolidation (acquire competition)



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Turnaround strategies for declining industries:

Reverse a firm’s decline in performance and return it to growth and profitability

Strategic options:

Asset and cost surgery

Selective product and market pruning

Piecemeal productivity improvements



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Case Analysis: The Experience CurveCase Analysis: The Experience Curve The concept of the experience curve was developed in 1968 by

the Boston Consulting Group (BCG)

The fundamental premise of the theory is that as output doubles, costs typically decline by 10% - 30% due to rapid gain in efficiencies achieved by producers

Key factors impacting the experience curve:

1. Most experience curve gains come early in the product life cycle where the most rapid increase in output and process improvement occurs

2. High technology or complex processes offer the greatest experience curve benefits

3. Product sensitivity to price creates greater opportunity to take advantage of the experience curve

4. Competitors with good market position and access to capital can also duplicate experience curve benefits


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Case Analysis: Ryanair – A Highly Effective Overall Cost Leadership Strategy

Case Analysis: Ryanair – A Highly Effective Overall Cost Leadership Strategy

Ryanair is a Dublin-based budget air carrier that has adopted a very different service concept than most other airlines

The airline charges for all extras, allowing it to offer much lower average fares than US budget airlines, such as Southwest

Ryanair achieves over double the margins of Southwest

Most of Ryanair’s tickets are sold online

By charging for checked bags, snacks, bottled water and other extras, and offering retail items such as cameras and MP3 players, Ryanair acts like a retailer – making a profit on everything it sells


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Case Analysis: How Netflix Boosts its Differentiation

Case Analysis: How Netflix Boosts its Differentiation Netflix has grown rapidly as a competitor to other movie rental

companies, using a virtual online store and soliciting movie ratings from subscribers

Customers are asked to rate each movie they watch, and Netflix uses this information to develop a profile of movie preferences so it can tailor its offering to customers

The company also uses “friending” to allow customers to see the movies and recommendations of online friends

This process allows Netflix to get very close to customers, thereby creating loyalty and increased sales


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Case Analysis: Paccar - “Trucking Along” With a Successful Focus Strategy

Case Analysis: Paccar - “Trucking Along” With a Successful Focus Strategy

Paccar is a large semi-trailer truck manufacturer with 20% of the North American market

The company caters to owner-operators who want customized features on their long-haul trucks

At Paccar’s dealer locations, buyers can select customized features online

Custom features include luxurious sleeper cabs, leather driving seats, noise-insulated cabins, custom paint styling, etc…

Paccar makes all its trucks to order

The company offers a roadside assistance program and spare parts logistics software to minimize customer roadside downtime


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Case Analysis: Liberty Mutual’s Electronic Invoice System – Combining Low Cost and

Differentiation Advantages

Case Analysis: Liberty Mutual’s Electronic Invoice System – Combining Low Cost and

Differentiation Advantages Liberty Mutual is the 6th largest property and casualty insurer in

the US

The company pioneered an electronic invoicing system for the legal bills associated with claims

Nearly 70% of the invoices the company receives are processed electronically

The invoicing system saves a substantial amount of overhead cost each year, while speeding the process of claims settlement

Reporting capabilities allow Liberty Mutual to analyze legal bills for excessive or duplicate billing, and benchmark across legal firms to determine cost efficiency


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Case Analysis: Reverse and Breakaway Positioning – How to Avoid Being Held Hostage to

the Life-Cycle Curve



Reverse positioning refers to the practice of stripping down the number of product features to a base-line product, then selectively adding a few high value-added features back

Breakaway positioning refers to the practice of re-associating a product from its former product category to a new product category, reaching a new market segment and competing with a different set of products


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the Life-Cycle Curve Commerce Bank stripped away all of other banks’ service

features and offered low interest rates and only a few, no-charge, basic services – such as more convenient 12/7 hours, on-site debit card creation and free coin counting machines

This has proved to be a very successful strategy, as assets have grown by seven-fold in six years

Swatch markets its watches not as fine jewelry, but as inexpensive fashion accessories, much like costume jewelry

Customers often buy multiple watches, matching each outfit style

Swatch has become the leading watch company in the world and acquired other more traditional watch companies, such as Longines, Omega and Hamilton


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1 BUSINESS LEVEL STRATEGY STRATEGIC MANAGEMENT BUAD 4980