61244039 Business Level Strategy

7/29/2019 61244039 Business Level Strategy

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Chapter 4

Business-Level Strategy

Michael A. HittR. Duane IrelandRobert E. Hoskisson

2000 South-Western College Publishing


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Chapter 3

Internal

Environment

Chapter 2

External

EnvironmentThe StrategicManagement

Process

Strategic Intent

Strategic Mission

Strategic

Competitiveness

Above Average

ReturnsFeedback

Strategy Formulation

Chapter 4

Business-Level

Strategy

Chapter 5

Competitive

Dynamics

Chapter 6

Corporate-Level

Strategy

Chapter 8

International

Strategy

Chapter 9

Cooperative

Strategies

Chapter 7

Acquisitions &

Restructuring

Strategy Implementation

Chapter 10

Corporate

Governance

Chapter 11

Structure

& Control

Chapter 12

Strategic

Leadership

Chapter 13

Entrepreneurship& Innovation

S t r a

t e g i c

I n p u

t s

S t r a

t e g i c

A c t

i o n s

S t r a

t e g i c

O u t c o m e s


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Chapter 4

Business LevelStrategy

SustainableCompetitiveAdvantage

Chapter 2

External Environment

Chapter 3

Internal Environment


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CoreCompetency

The resources and capabilities that have been determined to

be a source of competitiveadvantage for a firm over itsrivals.


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Strategy

An integrated and coordinatedset of actions taken to exploitcore competencies and gain acompetitive advantage.

CoreCompetency

The resources and capabilities that have beendetermined to be a source of competitiveadvantage for a firm over its rivals.


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StrategyAn integrated and coordinated set of actions taken to exploit core competencies

and gain a competitive advantage.

BusinessLevelStrategy

Actions taken to provide value tocustomers and gain a competitiveadvantage by exploiting corecompetencies in specific,

individual product markets.

CoreCompetency

The resources and capabilities that have beendetermined to be a source of competitiveadvantage for a firm over its rivals.


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Basis for Customer SegmentationConsumer Markets 1. Demographic factors (age, income, sex, etc.)2. Socioeconomic factors

(social class, stage in the family life cycle)

3. Geographic factors(culture, region or country differences)

4. Psychological factors (lifestyle, personality traits)

5. Consumption patterns

(heavy, moderate, and light users)6. Perceptual factors

(benefit segmentation, perceptual mapping)

7. Brand loyalty patterns


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Basis for Customer Segmentation Industrial Markets 1. End use segments

2. Product segments (based on technologicaldifferences or production economics)

3. Geographic segments (defined by boundaries between countries or by regional differences withinthem)

4. Common buying factor segments (cut across product/market and geographic segments)

5. Customer size segments


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Generic Business Level Strategies

Cost Uniqueness

Source of Competitive Advantage

Breadth of Competitive

Scope

BroadTargetMarket

NarrowTargetMarket

FocusedDifferen-

tiation

CostLeadership

Differen-tiation

FocusedLow Cost

CostLeadership


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Key Criteria:

Cost Leadership Business Level Strategy

Relatively standardized products

Features acceptable to many customers

Lowest competitive price


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Requirements:Constant effort to reduce costs through:

Building efficient scale facilities

State of the art manufacturing facilities

Simplification of processes

Minimizing costs of sales, R&D and service

Monitoring costs of activities provided by outsiders

Tight control of production costs and overhead

Cost Leadership Business Level Strategy


12/68Primary Activities

S u p p o r

t

A c t

i v i t i e s

Technological Development

Human Resource ManagementFirm Infrastructure

Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Value Creating Activities Common to aCost Leadership Business Level Strategy



S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Cost EffectiveMIS Systems

Relatively Few

Management Layers toReduce Overhead

Simplified Planning

Practices to ReducePlanning Costs

Consistent Policies toReduce Turnover Costs

Effective Training Programsto Improve WorkerEfficiency and Effectiveness

Highly EfficientSystems to Link SuppliersProducts with the

Firms ProductionProcesses Timing of AssetPurchases

Efficient PlantScale to MinimizeManufacturingCosts

Selection of LowCost TransportCarriers

Delivery Schedulethat ReducesCosts

National ScaleAdvertising

Products Priced toGenerate SalesVolume

Small, HighlyTrained SalesForce

Effective ProductInstallations toReduce Frequencyand Severity

of Recalls

Easy-to-Use ManufacturingTechnologies

Investments in Technology in orderto Reduce Costs Associated withManufacturing Processes

Systems and Procedures to find theLowest Cost Products to PurchaseRaw Materials

Frequent Evaluation Processes toMonitor Suppliers Performances

Located in CloseProximity withSuppliers

Policy Choice of Plant Technology

OrganizationalLearning

Efficient OrderSizes

Interrelationshipswith Sister Units



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Primary Activities

S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning













of Recalls










I n b o u n d

L o g

i s t i c s

InboundLogisticsHighly EfficientSystems to Link SuppliersProducts with theFirms Production

ProcessesLocated in CloseProximity withSuppliers


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Primary Activities

S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning













of Recalls










O p e r a t

i o n s

OperationsEfficient Plant

Scale to MinimizeMfg. Costs

Timing of AssetPurchases




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Primary Activities

S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning













of Recalls










O u t

b o u n

d

L o g

i s t i c s

OutboundLogistics


Delivery Schedulethat Reduces Costs

Efficient OrderSizesInterrelationshipswith Sister Units


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Primary Activities

S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning













of Recalls










M a r

k e t i n g

& S a l e s


Products Pricedto Generate SalesVolume

Small, HighlyTrained Sales Force

Marketing& Sales



S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning













of Recalls










S e r v

i c e

ServiceEffective ProductInstallations toReduceRecalls




S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning




Highly EfficientSystems to Link SuppliersProducts with theFirms ProductionProcesses Timing of Asset

Purchases







Effective ProductInstallations toReduce Frequencyand Severityof Recalls










Procurement

Systems and Procedures to Findthe Lowest Cost Products toPurchase Raw Materials

Frequent EvaluationProcesses to MonitorSuppliers Performances

Procurement




S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning





Purchases


















Technological DevelopmentEasy-to-UseManufacturingTechnologies

Investments in Technology inorder to Reduce Costs Associatedwith Manufacturing Processes



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Primary Activities

S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning





Purchases

















Human Resource Management

Human Resource ManagementConsistent Policies toReduce Turnover Costs




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Primary Activities

S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n

d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e


Relatively Few


Simplified Planning





Purchases

















Firm Infrastructure

Firm InfrastructureCost EffectiveMIS Systems

Relatively FewManagement Layersto Reduce Overhead

Simplified PlanningPractices to ReducePlanning Costs



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How to Obtain a Cost Advantage

1. Determine and Control Cost Drivers

2. Reconfigure the Value Chain as needed

Alter production processChange in automation

New distribution channel

Direct sales in place of indirect sales

New advertising media

New raw material

Backward integrationForward integration

Change location relativeto suppliers or buyers


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Choices That Drive Costs

Economies of scaleAsset utilization

Capacity utilization pattern

Value chain linkages

Interrelationships

- Advertising & Sales- Logistics & Operations

- Seasonal, cyclical

- Order processingand distribution

Product features

Product featuresPerformance

Mix & variety of products

Service levelsSmall vs. large buyers

Process technology

Wage levels

Hiring, training, motivation


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Three Key Questions

2. How can a group of linked valueactivities be regrouped or reordered?

3. How might coalitions with other firms lower or eliminate costs?

Gallo sold wine through grocery stores rather than liquor

stores because they were more efficient distributors

1.How can an activity be performeddifferently or even eliminated?


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Effective Cost Leaders can remain profitable even when the

Five Forces appear unattractive

Eff i C L d i fi bl h


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Can frighten off New Entrantsdue to the need to:

Enter at large scale tobe Cost Competitive

*

Take time to move down

the Learning Curve

*

Effective Cost Leaders can remain profitable even whenthe Five Forces appear unattractive

Threat of New

Entrants

Eff i C L d i fi bl h


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Can frighten off New Entrants dueto the need to:

Enter at Large Scale to beCost Competitive

*

Take time to move down theLearning Curve

*

BargainingPower of

Buyers

Threat of New

Entrants

Can mitigate Buyer Power by:

* Driving prices far below competitorsmay cause exit and shift power back to firm


Eff ti C t L d i fit bl h


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*


*


Threat of New

Entrants

BargainingPower of Buyers

Driving prices far belowcompetitors which maycause exit and shift powerback to firm

Well positioned relative to Substitutes in order to:

Make investments to create

substitutes first

*

Buy patents developed bypotential substitutes

*

Lower prices to maintain

value position*

Threat of Substitute

Products




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*


*

Well positioned relative toSubstitutes in order to:

Make investments to create substitutes*

Can buy patents developed bypotential substitutes

*

Lower prices to maintainvalue position

*

BargainingPower of Suppliers

Threat of New

Entrants

Threat of SubstituteProducts




Can mitigate Supplier Power by:

Low cost position makes them better

able to absorb cost increases*

More likely to make very large purchaseswhich reduces chance of supplier power

*




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Threat of New

Entrants





*


*

Well positioned relative toSubstitutes in order to:

Make investments to create substitutes*

Can buy patents developed bypotential substitutes

*

Lower prices to maintainvalue position

*

Competitors avoidprice wars with Cost

Leaders, whichcreates higher profitsfor entire industry

Rivalry AmongCompeting Firms

in Industry




Can mitigate Supplier Power by:Low cost position makes thembetter able to absorb cost increases

*

More likely to make very largepurchases which reduces chanceof supplier power

*


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Major Risks of Cost LeadershipBusiness Level Strategy

Dramatic technological change could takeaway your cost advantage

Competitors may learn how to imitateValue Chain

Focus on efficiency could cause Cost Leaderto overlook changes in customer preferences

G i B i L l S i


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Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

Uniqueness


G i B i L l S i


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Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

Differen-tiation


Uniqueness

Diff i i


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Key Criteria:

Differentiation Business Level Strategy

Value provided by unique featuresand value characteristics

Command premium price

Superior quality

Rapid innovation

Prestige or exclusivity

High customer service

Diff i i


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Differentiation Business Level StrategyRequirements:

Constant effort to differentiate products through:

Developing new systems and processes

Quality focus

Maximize Human Resource contributionsthrough low turnover and high motivation

Capability in R&D

Shaping perceptions through advertising

Val eCreatingActi ities C


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Primary Activities

S u p p o r

t

A c t

i v i t i e s



Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Value Creating Activities Common to aDifferentiation Business Level Strategy

ValueCreatingActivities C t


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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n

d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

A companywideemphasis on producinghigh quality products

Highly Developed InformationSystems to better understandcustomers purchasing preferences

Compensation programsintended to encourage workercreativity and productivity

Extensive use of subjectiverather than objectiveperformance measures

Superiorhandling of incoming rawmaterials tominimizedamage andimprove thequality of thefinal product

Rapid responsesto customersuniquemanufacturingspecifications

Consistentmanufacturing of attractiveproducts

Accurate andresponsive orderprocessingprocedures

Complete fieldstocking of replacement parts

Strongcapability inbasic research

Investments in technologies that willallow the firm to consistently producehighly differentiated products

Systems and procedures used to findthe highest quality raw materials

Purchase of highest qualityreplacement parts

Rapid and timelyproduct deliveriesto customers

Superiorpersonneltraining

Coordination among R&D,product development andmarketing

Extensivepersonalrelationshipswith buyers

Strong Coordin-ation amongfunctions in R&D,Marketing andProductDevelopment

PremiumPricing

Primary Activities

S u p p o r

t

A c t

i v i t i e s



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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Primary Activities

S u p p o r

t

A c t

i v i t i e s



















PremiumPricing

O p e r a t

i o n s

Operations

Rapid responses tocustomers uniquemanufacturingspecifications

Consistent

manufacturing of attractive products



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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n

d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Primary Activities

S u p p o r

t

A c t

i v i t i e s



















PremiumPricing

O u t

b o u n

d

L o g

i s t i c s

OutboundLogistics



ValueCreatingActivities Common to a


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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n

d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Primary Activities

S u p p o r

t

A c t

i v i t i e s



















PremiumPricing

M a r

k e t i n g

& S a l e s

Marketing& Sales

Extensive personalrelationships withbuyers

Strong Coordinationamong functions inR&D, Marketingand ProductDevelopment

PremiumPricing



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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n

d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Primary Activities

S u p p o r

t

A c t

i v i t i e s



















PremiumPricing

S e r v

i c e

ServiceComplete fieldstocking of replacementparts



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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n

d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Primary Activities

S u p p o r

t

A c t

i v i t i e s



















PremiumPricing


Technological DevelopmentStrongcapability inbasic research

Investments in technol-ogies to produce highlydifferentiated products

Coordination amongR&D, marketing andproduct development




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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n

d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Primary Activities

S u p p o r

t

A c t

i v i t i e s



















PremiumPricing

Human Resource Management

Human Resource ManagementCompensation programswhich encourage workercreativity and productivity

Extensive use of subjective performancemeasures





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Procurement

I n b o u n d

L o g

i s t i c s

O p e r a t

i o n s

O u t

b o u n

d

L o g

i s t i c s

M a r

k e t i n g

& S a l e s

S e r v

i c e

Primary Activities

S u p p o r

t

A c t

i v i t i e s



















PremiumPricing

Firm Infrastructure

Firm InfrastructureA companywide emphasison producing high qualityproducts

Highly developed InformationSystems to better understandcustomers purchasing preferences


Differentiation B i L l St t


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Effectiveness with Differentiation

grows out of Value Chain activitiesExamples:

Heineken beer Raw materials

Caterpillar tractors Service buyers needs quickly

anywhere in the world

Intel microprocessors Technological superiority

Steinway pianos Raw materials & Workmanship

Mercedes Benz autos Technology and Workmanship

Differentiation Business Level Strategy


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Creating barriers by perceptions of uniqueness

Creating switching costs through differentiation

Raising Buyers Performance

Lowering Buyers Costs

Creating Sustainability through:

Create Value with Differentiation by:


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Drivers of Differentiation

Unique product features

Unique product performance

Exceptional services

Quality of inputs

New technologies

Exceptional skill or experience

Detailed information

Examples:


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Effective Differentiators can remain profitable even when the

Five Forces appear unattractive

Effective Differentiators can remain profitable even


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Effective Differentiators can remain profitable evenwhen the Five Forces appear unattractive

Threat of NewEntrants

Can fend off New Entrantsbecause:

New products mustsurpass proven products*

Or be equal to performanceat lower prices

*



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Can mitigate Buyer Power because:

Well differentiated products reducecustomer sensitivity to price increases

BargainingPower of

Buyers

Threat of New

Entrants

Can fend off New Entrants because:New products mustsurpass proven products

*


*




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Threat of New

Entrants


*


*


Well positioned relative to

Substitutes because:Brand loyalty tends toreduce new product trial

and brand switching

*

Threat of Substitute

Products

Can mitigate Buyer Powerbecause well differentiatedproducts reduce customersensitivity to price increases




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Threat of New

Entrants


*


*





Well positioned relative to Substitute s because:

Brand loyalty tends toreduce new product trialand brand switching

*

Can mitigate Supplier Power by:

Absorbing price increases due tohigher margins

*

Passing on higher supplier pricesbecause buyers are brand loyal*



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Rivalry AmongCompeting Firms

in Industry

Threat of New

Entrants




Well positioned relative to Substitute s because:

Brand loyalty tends toreduce new product trialand brand switching

*

Can mitigate Supplier Power by:*

*

Absorbing price increasesdue to higher margins

Passing on higher supplier pricesbecause buyers are brand loyal


pwhen the Five Forces appear unattractive

Can fend off New Entrants because:

New products mustsurpass proven products

*


*

Brand loyaltyovercomes muchprice competition

k f ff


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Customers may decide that thecost of uniqueness is too great

The means of uniqueness may nolonger be valued by customers

Competitors may learn how to imitate Value Chain

Major Risks of a DifferentiationBusiness Level Strategy



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Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

Differen-tiation

Uniqueness




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Scope


BroadTargetMarket

NarrowTargetMarket

Cost

CostLeadership

Differen-tiation

FocusedDifferen-

tiation

FocusedLow Cost

Uniqueness


Focused Business Level Strategies


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Focused Business Level Strategies involve the same basic

approach as Broad Market Strategies.However, opportunities may exist because:


Large firms may overlook small niches

Firm may lack resources to compete industry-wide

May be able to serve a narrow market segment

more effectively than industrywide competitorsFocus can allow you to direct resources to certainvalue chain activities to build competitive advantage



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Bang & Olufsen Upscale electronic components

Iams Company Premium pet foods

Snap-on tools High quality mechanics tools

Focused Business Level StrategiesFocused Business Level Strategies involve the same basic


Examples:

May be able to retrofit old factories to keep costsdown

Minimize R&D costs by copying innovators



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Custom manufacturers of parts for

Harley-Davidson motorcycles

Focused Business Level StrategiesFocused Business Level Strategies involve the same basic


Example:

Focused Differentiators may thrive by selecting asmall market that is underserved by large players

Major Risks Involved With a Focused


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Firm may be outfocused by competitors

Large competitor may set its sights on yourniche market

Preferences of niche market may change tomatch those of broad market

Major Risks Involved With a FocusedDifferentiation Business Level Strategy


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Integrated Low Cost/Differentiation Strategy


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Recognize that the Integrated Low Cost/Differentiation business level strategy involves a

Compromise

The risk is that the firm may become Stuck inthe Middle lacking a strong commitment to or expertise with either type of generic strategy




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Southwest Airlines


Use a single aircraft model(Boeing 737)

Use secondary airports

Fly short routes

15 minute turnaround time No meals

No reserved seats

Low Cost

Focus on customer

satisfaction

New flight services for business travelers(phones and faxes)

High level of employeededication

Differentiation

Documents

61244039 Business Level Strategy