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 [...]... analysis identifies the parts of a firm’s operations that create value and those that do not ■ A competitive advantage in logistics creates more value for a cost leadership strategy than for a differentiation strategy Inbound logistics [materials handling, warehousing, and inventory control] Outbound logistics [collecting, storing, and distribution] ©2013 Cengage Learning All Rights Reserved May not... STRATEGY: STRATEGIC FOCUS WALMART, DOLLAR STORES, AND AMAZON: WHO IS BUYING WHOSE LUNCH? ■ Walmart deviated from its cost-leadership strategy designed to take market share away from Target by introducing organic foods, remodeling some stores, and reducing the variety of products offered, thereby increasing prices on some goods ■ Recognizing its mistake, Walmart has re-focused on low costs and prices,... product or service and command a premium price ■ Performing MORE HIGHLY VALUED 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 FIVE GENERIC BUSINESS-LEVEL STRATEGIES FIGURE 4. 2 Five Business... otherwise on a passwordprotected website for classroom use CUSTOMERS: THEIR RELATIONSHIP TO BUSINESSLEVEL STRATEGIES REACH Access and Connection EFFECTIVELY MANAGING RELATIONSHIPS WITH CUSTOMERS to Customers RICHNESS Depth and Detail of Two-Way Flow of Information Between the Firm and Customer AFFILIATION Facilitating Useful Interactions With Customers ©2013 Cengage Learning All Rights Reserved May not be... classroom use COST LEADERSHIP STRATEGY: COST SAVING ACTIONS ■ Employing process innovations that facilitate efficient production and distribution methods ■ Building efficient scale facilities ■ Tightly controlling production costs and overhead ■ Minimizing costs of sales, R&D, and service ■ Building efficient manufacturing facilities ■ Monitoring costs of activities provided by outsiders ■ Simplifying... FACTORS (age, income, sex, etc.) 2 SOCIOECONOMIC FACTORS (social class, stage in the family life cycle) 3 GEOGRAPHIC FACTORS (cultural, regional, and national differences) 4 PSYCHOLOGICAL FACTORS (lifestyle, personality traits) 5 CONSUMPTION PATTERNS (heavy, moderate, and light users) 6 PERCEPTUAL FACTORS (benefit segmentation, perceptual mapping) ©2013 Cengage Learning All Rights Reserved May not be copied,... SEGMENTS (based on technological differences or production economics) 3 GEOGRAPHIC SEGMENTS (defined by boundaries between countries or by regional differences within them) 4 COMMON BUYING FACTOR SEGMENTS (cut across product market and geographic segments) 5 CUSTOMER SIZE SEGMENTS ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use... passwordprotected website for classroom use WHAT: DETERMINING WHICH CUSTOMER NEEDS TO SATISFY ■ Customer needs are related to a product’s benefits and features ■ Customer needs are neither right nor wrong, good nor bad ■ Customer needs represent desires in terms of features and performance capabilities ■ Successful firms learn how to deliver to customers what they want, when they want it Customers are the lifeblood... services that provide either low cost with acceptable features or highly differentiated features with acceptable costs ■ Only firms with capacity to continuously improve, innovate, and upgrade their competencies can expect to meet and/ or exceed customer expectations across time ©2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted... Cost leadership strategy ● Unique culture and customer service ©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 PURPOSE FIGURE 4. 1 Southwest Airlines Activity System ©2013 ... 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... 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... STRATEGIES REACH Access and Connection EFFECTIVELY MANAGING RELATIONSHIPS WITH CUSTOMERS to Customers RICHNESS Depth and Detail of Two-Way Flow of Information Between the Firm and Customer AFFILIATION