PART 2: STRATEGIC ACTIONS: STRATEGY FORMULATION CHAPTER 4: BUSINESS-LEVEL STRATEGY Authored by: Marta Szabo White, Ph.D Georgia State University THE STRATEGIC MANAGEMENT PROCESS ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use KNOWLEDGE OBJECTIVES ● Define 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 aboveaverage returns can be earned through each business-level strategy ● Describe the risks of using each of the business-level strategies ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use OPENING CASE MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS ■ With the 2008 global financial crisis and competitors, e.g., McDonald’s gaining market share, consumers were less willing to pay the high prices for premium coffee, leading to a reduction in store sales for the first time in Starbucks’ history ■ Starbucks appeared to be unable to control the quality of the “experience” and began losing its differentiation advantage ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use OPENING CASE MORNING JOE IN THE AFTERNOON IN CHINA, INDIA, & BEYOND: THE NEW STARBUCKS (cont’d) ■ CEO Howard Schultz closed 900 poorly performing stores in the United States and refocused on innovation ■ By 2011, with its 40 th anniversary, a new logo, innovation such as VIA and customers paying for their purchases with their iPhones, environmental consciousness, employee health insurance, and a global focus on emerging markets such as China and India, Starbucks was once again differentiating itself ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use IMPORTANT DEFINITION BUSINESS–LEVEL STRATEGY: HOW TO COMPETE IN A SPECIFIC INDUSTRY ■ 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 ■ It is the core strategy ■ Every firm must form and use a business-level strategy for each one of its businesses ■ Business-level strategy choices matter because long-term performance is linked to a firm’s strategies ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use BUSINESS-LEVEL STRATEGY ONE • A single-product market/single geographic location firm employs one business-level strategy and one corporate- BUSINESS- level strategy identifying what or which industry the firm will compete in LEVEL STRATEGY • A diversified firm employs a separate business-level strategy for each product market area in which it SEVERAL BUSINESS- competes and one or more corporate-level strategies dealing with product and/or geographic diversity LEVEL STRATEGIES ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use CORE COMPETENCIES AND STRATEGY Resources and superior capabilities that are sources Core Competencies of competitive advantage over a firm’s rivals An integrated and coordinated set of actions taken to Strategy exploit core competencies and gain competitive advantage Providing value to customers and gaining competitive Business-level Strategy advantage by exploiting core competencies in individual product markets ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use CUSTOMERS: THEIR RELATIONSHIP TO BUSINESSLEVEL STRATEGIES Who will be served? KEY ISSUES in BUSINESS- What needs will be satisfied? LEVEL STRATEGY How will those needs be satisfied? ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use CUSTOMERS: THEIR RELATIONSHIP TO BUSINESSLEVEL STRATEGIES Adept at identifying customer needs across cultures and geography EFFECTIVE GLOBAL COMPETITORS Quickly and successfully adapt products/services to meet those needs ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use DIFFERENTIATION STRATEGY: SUBSTITUTES PRODUCT SUBSTITUTES • Well-positioned relative to substitutes because: – Brand loyalty to a differentiated product tends to reduce: Th r ea t of n ew – customers’ testing of new en tr a n ts products Ri va l ry am on g com p eti n g fi r m s Ba r ga i n i n g p ower of s u pp l i ers Th r ea t of s u bs ti tu te Ba r ga i n i n g power of p r od u cts b u y er s – switching brands ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use DIFFERENTIATION STRATEGY: RISKS • COMPETITIVE RISKS – PRICE DIFFERENTIAL: between the differentiator’s and the cost leader’s products becomes too large – VALUE DIMINISHED: 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 firm’s products ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use FOCUSED STRATEGIES An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment Target markets include: ■ Particular buyer group (e.g., youths or senior citizens) ■ Different segment of a product line (e.g., products for professional painters or the do-ityourself group) ■ Different geographic market (e.g., northern or southern Italy by using a foreign subsidiary) a ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use FOCUSED STRATEGIES Types of focused strategies: ■ Focused cost leadership strategy ■ Focused differentiation strategy To implement a focus strategy, firms must be able to: Complete various value chain activities in a competitively superior manner in order to develop and sustain a competitive advantage and earn above-average returns ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use FACTORS THAT DRIVE FOCUSED STRATEGIES ■ Large 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 its larger industry-wide competitors can ■ Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use FOCUSED COST LEADERSHIP STRATEGY A firm focuses on a niche market, adding value by leveraging value chain activities that allow value-creation through the cost leadership strategy ■ Competitive advantage: low-cost ■ Competitive scope: narrow industry segment ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use FOCUSED DIFFERENTIATION STRATEGY The value chain may be analyzed to determine if a firm is able to link the activities required to create value by using the focused differentiation strategy ■ Competitive advantage: differentiation ■ Competitive scope: narrow industry segment ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use FOCUS STRATEGIES: RISKS • COMPETITIVE RISKS – OUTFOCUSED: a focusing firm may be “outfocused” by its competitors – COMPETITION: a large competitor may decide that the market segment served by the focus strategy firm is attractive and worthy of competitive pursuit – CHANGING PREFERENCES: customer preferences in the niche market may change to more closely resemble those of the broader market ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY Efficiently produce products with differentiated attributes: • • EFFICIENCY: SOURCES OF LOW COST DIFFERENTIATION: SOURCE OF UNIQUE VALUE ■ Readily adapts to external environmental changes ■ Concentrates simultaneously on TWO sources of competitive advantage: cost and differentiation ■ Competence and flexibility required in several value chain activities ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY Three sources of flexibility useful for this strategy: ■ Flexible manufacturing systems (FMS) ■ Information networks ■ Total quality management (TQM) systems ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use FLEXIBLE MANUFACTURING SYSTEMS Computer-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 ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use INFORMATION NETWORKS Links companies electronically with their suppliers, distributors, and customers ■ Facilitates efforts to satisfy customer expectations in terms of product quality and delivery speed ■ Improves flow of work among employees in the firm and their counterpart suppliers and distributors ■ Requires customer relationship management (CRM) ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use TOTAL QUALITY MANAGEMENT [TQM] SYSTEMS Emphasize total commitment to the customer through continuous improvement using: ■ Problem-solving approaches based on employee empowerment Benefits ■ Increased customer satisfaction ■ Lower costs ■ Reduced time-to-market for innovative products TQM systems help firms maintain competitive parity, but by itself, rarely will it lead to a competitive advantage ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY: RISKS “STUCK in the MIDDLE” Strategy is gaining in popularity… but is RISKY Products not offer sufficient value in terms of either low cost or differentiation ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use INTEGRATED COST LEADERSHIP/ DIFFERENTIATION STRATEGY: RISKS “STUCK in the MIDDLE” Cost structure is not low enough for attractive pricing of products; products not sufficiently differentiated to create value for target customer RESULT: DO NOT EARN ABOVE-AVERAGE RETURNS ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use