Business-Level Strategies[1]

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 serviceMay 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 costs