Chapter 4

2007 Thomson/South-Western. All rights reserved.4*KNOWLEDGE OBJECTIVESDefine business-level strategy.Discuss the relationship between customers and business-level strategies in terms of who, what, and how.Explain the differences among business-level strategies.Use the five forces of competition model to explain how above-average returns can be earned through each business-level strategy.Describe the risks of using each of the business-level strategies.Studying this chapter should provide you with the strategic management knowledge needed to:

2007 Thomson/South-Western. All rights reserved.

2007 Thomson/South-Western. All rights reserved.4*Business-Level Strategy (Defined)An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.


2007 Thomson/South-Western. All rights reserved.4*Core Competencies and StrategyResources and superior capabilities that are sources of competitive advantage over a firms rivalsProviding value to customers and gaining competitive advantage by exploiting core competencies in individual product marketsAn integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage


2007 Thomson/South-Western. All rights reserved.4*Effectively Managing Relationships with CustomersFirms must manage all aspects of their relationship with customers.Reach: firms success and connection to customersRichness: depth and detail of two-way flow of information between the firm and the customerAffiliation: facilitation of useful interactions with customers


2007 Thomson/South-Western. All rights reserved.4*Market SegmentationConsumer Markets Demographic factorsSocioeconomic factorsGeographic factorsPsychological factorsConsumption patternsPerceptual factorsIndustrial MarketsEnd-use segmentsProduct segmentsGeographic segmentsCommon buying factor segmentsCustomer size segments


2007 Thomson/South-Western. All rights reserved.4*What: Determining Which Customer Needs to SatisfyCustomer needs are related to a products benefits and features.Customer needs are neither right nor wrong, good nor bad.Customer needs represent desires in terms of features and performance capabilities.


2007 Thomson/South-Western. All rights reserved.4*How: Determining Core Competencies Necessary to Satisfy Customer NeedsFirms use core competencies to implement value creating strategies that satisfy customers needs.Only firms with capacity to continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time.


2007 Thomson/South-Western. All rights reserved.4*The Purpose of a Business-Level StrategyBusiness-Level StrategiesAre intended to create differences between the firms position relative to those of its rivals.To position itself, the firm must decide whether it intends to:Perform activities differently orPerform different activities as compared to its rivals.


2007 Thomson/South-Western. All rights reserved.4*Types of Potential Competitive AdvantageAchieving lower overall costs than rivalsPerforming activities differently (reducing process costs)Possessing the capability to differentiate the firms product or service and command a premium pricePerforming different (more highly valued) activities.


2007 Thomson/South-Western. All rights reserved.4*Competitive ScopeBroad ScopeThe firm competes in many customer segments.Narrow ScopeThe firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others.


2007 Thomson/South-Western. All rights reserved.4*How to Obtain a Cost AdvantageDetermine and control Cost DriversReconfigure Value Chain if neededAlter production processChange in automationNew distribution channelNew advertising mediaDirect sales in place of indirect salesNew raw materialForward integrationBackward integrationChange location relative to suppliers or buyers


2007 Thomson/South-Western. All rights reserved.4*Value-Creating Activities for Cost LeadershipCost-effective MISFew management layersSimplified planningConsistent policiesEffecting trainingEasy-to-use manufacturing technologiesInvestments in technologiesFinding low cost raw materialsMonitor suppliers performancesLink suppliers products to production processesEconomies of scaleEfficient-scale facilitiesEffective delivery schedulesLow-cost transportationHighly trained sales forceProper pricing


2007 Thomson/South-Western. All rights reserved.4*Cost Leadership Strategy: CompetitorsDue to cost leaders advantageous position:Rivals hesitate to compete on basis of price.Lack of price competition leads to greater profits.Rivalry with Existing Competitors


2007 Thomson/South-Western. All rights reserved.4*Cost Leadership Strategy: BuyersCan mitigate buyers power by:Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm.Bargaining Power of Buyers


2007 Thomson/South-Western. All rights reserved.4*Value-Creating Activities and DifferentiationHighly developed MISEmphasis on qualityWorker compensation for creativity/productivityUse of subjective performance measuresBasic research capabilityTechnologyHigh quality raw materialsDelivery of productsHigh quality replacement partsSuperior handling of incoming raw materialsAttractive productsRapid response to customer specificationsOrder-processing proceduresCustomer creditPersonal relationships


2007 Thomson/South-Western. All rights reserved.4*Competitive Risks of DifferentiationThe price differential between the differentiators product and the cost leaders product becomes too large.Differentiation ceases to provide value for which customers are willing to pay.Experience narrows customers perceptions of the value of differentiated features.Counterfeit goods replicate differentiated features of the firms products.


2007 Thomson/South-Western. All rights reserved.4*Focus StrategiesAn integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment.Particular buyer groupyouths or senior citizensDifferent segment of a product lineprofessional craftsmen versus do-it-yourselfersDifferent geographic marketsEast coast versus West coast


2007 Thomson/South-Western. All rights reserved.4*Focus Strategies (contd)Types of focused strategiesFocused cost leadership strategyFocused differentiation strategyTo implement a focus strategy, firms must be able to:Complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns.


2007 Thomson/South-Western. All rights reserved.4*Factors That Drive Focused StrategiesLarge firms may overlook small niches.A firm may lack the resources needed to compete in the broader market.A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors.Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage.


2007 Thomson/South-Western. All rights reserved.4*Flexible Manufacturing SystemsComputer-controlled processes used to produce a variety of products in moderate, flexible quantities with a minimum of manual intervention.Goal is to eliminate the low-cost-versus-wide product-variety tradeoff.Allows firms to produce large variety of products at relatively low costs.


2007 Thomson/South-Western. All rights reserved.4*Information NetworksLink companies electronically with their suppliers, distributors, and customers.Facilitate efforts to satisfy customer expectations in terms of product quality and delivery speed.Improve flow of work among employees in the firm and their counterparts at suppliers and distributors.Customer relationship management (CRM)


2007 Thomson/South-Western. All rights reserved.4*Total Quality Management (TQM) SystemsEmphasize total commitment to the customer through continuous improvement using:Data-driven, problem-solving approachesEmpowerment of employee groups and teamsBenefitsIncreased customer satisfactionLower costsReduced time-to-market for innovative products


2007 Thomson/South-Western. All rights reserved.4*Risks of the Integrated Cost Leadership/ Differentiation StrategyOften involves compromisesBecoming neither the lowest cost nor the most differentiated firm.Becoming stuck in the middleLacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy.


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Chapter 4