Business-Level Strategies

Business-Level StrategiesThe Operating Environment–Sustainable Competitive Advantage•Generic Strategies–Type of Advantage–Scope of Advantage•The Value Chain–Primary activities–Support ActivitiesPorter’s Generic StrategiesCompetitive ScopeCompetitive AdvantageLower CostDifferentiationBroad TargetNarrow Target1. Cost leadership2. Differentiation3a. Cost Focus3b. Differentiation FocusRelatively standardized productsFeatures acceptable to many customersLowest competitive priceRequirementsConstant 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 outsidersTight control of production costs and overheadCost LeadershipBusiness Level StrategyOverall Cost LeadershipCommonly Required Skills and ResourcesCommon Organizational RequirementsSustained Capital Investment Access to CapitalTight Cost ControlFrequent, Detailed Control ReportsProcess Engineering SkillsIntense Supervision of LaborStructure Organization & ResponsibilitiesLow-Cost Distribution SystemIncentives Based on Meeting Strict Quantitative TargetsThreat of New EntrantsBargaining Power of SuppliersThreat of Substitute ProductsCan frighten off New Entrants due to the need to: Enter at Large Scale to be Cost Competitive*Take time to move down the “Learning Curve”*Well positioned relative to Substitutes Make investments to create substitutes*Can buy patents developed by potential substitutes*Lower prices to maintain value position*Effective Cost Leaders can remain profitable even when the Five Forcesappear unattractiveRivalry Among Competing Firms in IndustryCan mitigate Buyer Power by:Bargaining Power of BuyersDriving prices far below competitors which may cause exit and shift power back to firmCan mitigate Supplier Power by:Low cost position makes them better able to absorb cost increases*More likely to make very large purchases which reduces chance of supplier power*Threat of New EntrantsBargaining Power of SuppliersThreat of Substitute ProductsWell positioned relative to SubstitutesMake investments to create substitutes*Can buy patents developed by potential substitutes*Lower prices to maintain value position*Effective Cost Leaders can remain profitable even when the Five Forcesappear unattractiveCompetitors avoid price wars with Cost Leaders, which creates higher profits for entire industryRivalry Among Competing Firms in IndustryCan mitigate Buyer Power by:Bargaining Power of BuyersDriving prices far below competitors which may cause exit and shift power back to firmCan mitigate Supplier Power by:Low cost position makes them better able to absorb cost increases*More likely to make very large purchases which reduces chance of supplier power*IN SUMMARY:Cost Leadership + 5 Forces = Economic Rents•May convince rivals not to enter a price war•Protected from customer pressure to lower prices•May be better able to withstand increases in their costs from suppliers•New entrants may not have experience necessary to become efficient•May be in best position to use pricing to compete with substitutesRisks of Low-Cost Leadership•Likely to be an “all-or-nothing” strategy•May lead to loss of desirable product attributes•Tactics may be easily duplicated•Dedication often limits a firm’s abilities to remain competitive in other waysDifferentiationBusiness Level StrategyRequirementsConstant effort to differentiate products through:*Developing new systems and processes*Quality focus**Maximize Human Resource contributions through low turnover and high motivationCapability in R&D*Shaping perceptions through advertisingValue provided by unique features and value characteristicsCommand premium priceSuperior qualityRapid innovationPrestige or exclusivityHigh customer serviceDifferentiationCommonly Required Skills and ResourcesCommon Organizational RequirementsStrong Marketing AbilitiesStrong Coordination Among Functions in R&D, Product Development, & MarketingLong Tradition in the Industry or Unique Combination of SkillsProduct EngineeringCreative FlairSubjective Measurement & IncentivesStrong Capability in Basic ResearchAmenities to Attract Highly Skilled Labor, Scientist, or Creative PeopleCorporate Reputation for Quality or Technological LeadershipStrong Cooperation from ChannelsSome Attributes That Can Differentiate Products•Product Features•After-Sales Service•Desirable Image•Technological Innovation•Reputation•Manufacturing Consistency•Status Symbol Can fend off New Entrants because: New products must surpass proven products*Or be equal to performance at lower prices*Rivalry Among Competing Firms in IndustryThreat of New EntrantsBargaining Power of SuppliersBargaining Power of BuyersThreat of Substitute ProductsWell positioned relative toSubstitutesbecause:Brand loyalty tends to reduce new product trial and brand switching*Can mitigate Supplier Power by:**Absorbing price increases due to higher marginsPassing on higher supplier prices because buyers are brand loyalEffective Differentiators can remain profitable even when the Five Forcesappear unattractiveCan mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increasesCan fend off New Entrants because: New products must surpass proven products*Or be equal to performance at lower prices*Brand loyalty overcomes much price competitionRivalry Among Competing Firms in IndustryThreat of New EntrantsBargaining Power of SuppliersBargaining Power of BuyersThreat of Substitute ProductsWell positioned relative toSubstitutesbecause:Brand loyalty tends to reduce new product trial and brand switching*Can mitigate Supplier Power by:**Absorbing price increases due to higher marginsPassing on higher supplier prices because buyers are brand loyalEffective Differentiators can remain profitable even when the Five Forcesappear unattractiveCan mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases IN SUMMARY:Differentiation Strategy + 5 Forces = Economic Rents•Competitive rivalry may be lessened•Brand-loyal customers are less sensitive to prices•New entrants/product substitutes must overcome barriers to entryRisks in Differentiation Strategy•If several purse similar tactics, may all be perceived as equals•Specialists in niche markets may be more successful at differentiation•Attempts to stay a step ahead of the competition may result in “gold plating”Focus can allow you to direct resources to certain value chain activities to build competitive advantageMay be able to serve a narrow market segment more effectively than industrywide competitorsFirm may lack resources to compete industrywideLarge firms may overlook small nichesHowever.....Opportunities may exist because:****Focused Business Level StrategiesFocused Business Level Strategies involve the same basic approach as Broad Market StrategiesRisks of the Generic StrategiesFocus Strategy•Focus Strategy is imitated•The target segment becomes structurally unattractive:–Segment structure erodes–Demand disappears•Broadly targeted competitors overwhelm the segment–Segment’s differences narrow–Advantages of a broad-line increase•New focusers sub-segment the industryBreadth of Competitive ScopeSource of Competitive AdvantageBroadTargetMarketNarrowTargetMarketCostGeneric Business Level StrategiesIntegratedLow Cost/DifferentiationUniquenessMay utilize Flexible Manufacturing Systems to create differentiated products at low costsFirms using an Integrated Strategy may:Adapt more quicklyLearn new skills and technologiesLeverage core competencies through Information Networks across multiple business unitsIntegrated Low Cost/Differentiation StrategyMay utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costsRecognize that the Integrated Low Cost/Differentiation business level strategy involves a CompromiseThe risk is that the firm may become “Stuck in the Middle”lacking a strong commitment to or expertise with either type of generic strategyIntegrated Low Cost/Differentiation StrategyCostLeadershipDifferentiationFocusHigh (by uniqueness)Low(by price)Low to High (price or uniqueness)Low(mass market)Manufacturing and materials managementHigh(many market segments)Research and development, sales and marketingLow(one or a few segments)Any kind of distinctive competencyDistinctive competencyMarket segmentationProduct differentiation