7 Business-Level Strategies

Front 1

Business-level strategies

Back 1

• A term for strategic approaches at the highest, most straightforward level

Front 2

Choice of competitive scope

Back 2

• Broad—many customer segments; geographic breadth and scale; product & service variety
• Narrow—tailoring to specific customer segments; local geography; limited product & service

Front 3

Low cost

Back 3

• One of the generic strategies available to companies; it implies a broad market approach where the company rigorously reduces costs and expenses in an effort to lower the overall cost of operations below their competitors

Front 4

Differentiation

Back 4

• One of the generic strategies available to companies; it implies a broad market approach where activities performed by the company provide sufficiently differentiated value to allow the company to obtain economic returns, generally through higher pricing

Front 5

Low-cost leadership

Back 5

• Of the companies that pursue a low-cost generic strategy, one company will enjoy the lowest cost structure; this company has the strongest competitive position among low-cost strategists, since it enjoys greater pricing flexibility and can more easily weather industry conditions that compress profit margins

Front 6

Stuck-in-the-middle

Back 6

• A condition where a company simultaneously pursues both a differentiation and a low-cost strategy; the result is more often expenses that are too high and a product that does command a premium price

Front 7

Market scope

Back 7

• The degree to which a company competes broadly or narrowly within an industry; differences in geography, customer segments, and user needs

Front 8

Parity

Back 8

o Though companies compete on cost or some dimension of differentiation, they must maintain relative equality with other companies on other dimensions that are valued in the marketplace; without reasonable parity on other valued conditions, the lowest-cost competitor or most effective differentiation on some dimension may not succeed

Front 9

Caveats

Back 9

• Parity
• Evolution of customer expectations
• Evolution of competition

Front 10

Low-cost strategy

Back 10

• Rivalry
o When there are few opportunities to differentiate one’s product or service offering, then standardization of product/service features is accompanied by highly competitive pricing
o When there is standardization of products of services among competitive rivals, the low-cost competitor will tend to fare better because the company with the low-cost structure will enjoy a higher profit margin
• Buyers and suppliers
o When buyers and suppliers have strong bargaining power and are able to exact economic concessions from competitors, the company with the lowest cost structure is able to fare better
o If buyers experience low switching costs, the low-cost competitor has the greatest flexibility to reduce pricing in order to keep and attract buyers
• New entrants and substitutes
o Low-cost position offers flexibility to reduce price and offset any perceived advantages that other companies may offer

Front 11

Drivers of low-cost position

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• Economies of scale
o Realized as unit costs drop while quantities produced each period grow larger
o Able to attain significant cost savings as a result of being able to spread fixed and indirect costs over a greater number of units
o Specialization of activities and the knowledge creation of assembly lines that are possible when seeking to produce large quantities
• Capacity utilization
• Experience curve
• Product/service design
o Simplicity, easy manufacturing, simple sourcing of raw material, inexpensive packaging
• Process innovation
• Internal value chain coordination

Front 12

Risks associated with low-cost strategy

Back 12

• Low-cost strategy vs. low-cost leadership
• Price is not a strategy
o Relatively easy for any competitor to try and use low price as a customer attraction, or to instantly match another company’s price
• Customers do not value the benefits derived from low costs
• Cost positions can be imitated over time

Front 13

Differentiation strategy

Back 13

• Rivalry
o When diversity and variety exists among customers and their needs, then strategic variety is possible within an industry
• Buyers
o If buyer concentration does not exist and consequently buyers have little power, then cost/price relationships may become less influential in the buying process
• Suppliers
o As long as diversity of needs exists among buyers and there is no standardization or commoditization occurring within the industry, higher costs from suppliers may be offset by higher prices charge that support the kind of value chain investments in differentiation
• New entrants and substitutes
o Often shields competitors from new competition presented by new entrants and possible substitutes

Front 14

Drivers of differentiation strategy

Back 14

• Product and service features
o Characteristics that respond to customer needs
o Integrity of the product or service
o The use of quality inputs
• Psychographic and cognitive benefits
o Marketing and advertising
o Responsiveness to customers
o Corporate reputation
• Process innovation (value chain design)
• Internal value chain coordination

Front 15

Risks associated with differentiation strategy

Back 15

• Product differentiation is not a strategy
• Customers do not value the benefits derived from differentiation
• Differentiation positions can be imitated over time

Front 16

Outsourcing

Back 16

• When another organization is employed to perform a business process or service that is part of the company’s value chain
• To enhance strategic position in the marketplace
• To offload activities in which they do not have any special competence and which do not contribute to its strategic position

Front 17

Dangers of outsourcing

Back 17

• Loss of control over costs or differentiation values
• Disruption of coordination and linkages in the value chain
• Hollowing out the core
• Competitive learning