Bus 444 Chapter 4

Front 1

Business-Level Strategy

Back 1

• 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.
• This means that it indicates the choices the firm has made about how it intends to compete in individual product markets.
• Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets.

Front 2

Core Competencies

Back 2

Resources and superior capabilities that are sources of competitive advantage over a firm’s

Front 3

Strategy

Back 3

An integrated and coordinated set of actions taken to exploit core competencies and gain competitive advantage

Front 4

Key Issues in Business-level Strategy:

Back 4

Who will be served? What needs will be satisfied? How will those needs be satisfied?

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Firms must manage all aspects of their relationship with customers.

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 Reach: firm’s success and connection to customers
• (Ex: Barnes & Noble vs Amazon.com: Barnes & Noble carries 200,000 plus titles in over 820 stores but Amazon offers more than 4.5 million titles and is located on tens of millions of computer screens. Amazon’s reach is significantly greater.)
 Richness: depth and detail of two-way flow of information between the firm and the customer
• (Ex: Merrill Lynch & Lehman Brothers now offer online services in order to better manage information exchanges with their customers.)
 Affiliation: facilitation of useful interactions with customers
• (Ex: Microsoft CarPoint helps online clients find and sort information. Prospective buyers can look for cars based on their specifications and once they select a specific car they are linked with dealers that meet the customer’s needs and purchasing requirements.)

Front 6

Who:

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Determining the Customers to Serve
• Market segmentation
 A process used to cluster people with similar needs into individual and identifiable groups.

Front 7

Consumer Markets

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• Demographic factors (age, income, sex, etc.)
• Socioeconomic factors (social class, stage in the family life cycle)
• Geographic factors (cultural, regional, and national differences)
• Psychological factors (lifestyle, personality traits)
• Consumption patterns (heavy, moderate, and light users)
• Perceptual factors (benefit segmentation, perceptual mapping)

Front 8

Industrial Markets

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• End-use segments (identified by SIC code)
• Product segments (based on technological differences or production economics)
• Geographic segments (defined by boundaries between countries or by regional differences within them)
• Common buying factor segments (cut across product market and geographic segments)
• Customer size segments

Front 9

What:

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Determining Which Customer Needs to Satisfy
• Identify the targeted customer group’s needs that its goods or services can 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.

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How:

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Determining Core Competencies Necessary to Satisfy Customer Needs
• Firms use core competencies to implement value creating strategies that satisfy customers’ needs.
• Only firms with capacity to continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time.

Front 11

The Purpose of a Business-Level Strategy

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• Business-Level Strategies
 Are intended to create differences between the firm’s position relative to those of its rivals.
• To position itself, the firm must decide whether it intends to:
 Perform activities differently or
 Perform different activities as compared to its rivals.

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Types of Potential Competitive Advantage

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• Achieving lower overall costs than rivals
 Performing activities differently (reducing process costs)
• Possessing the capability to differentiate the firm’s product or service and command a premium price
 Performing different (more highly valued) activities.

Front 13

Competitive Scope

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• Broad Scope
 The firm competes in many customer segments.
• Narrow Scope
 The firm selects a segment or group of segments in the industry and tailors its strategy to serving them at the exclusion of others.

Front 14

Cost Leadership Strategy

Back 14

• An integrated set of actions taken to produce goods or services with features that are acceptable to customers at the lowest cost, relative to that of competitors with features that are acceptable to customers.
 Relatively standardized products
 Features acceptable to many customers
 Lowest competitive price
• Cost saving actions required by this strategy:
 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 production processes
• (Ex: Big Lots is the largest closeout discount chain in the US. They sell name brand products at prices that are 15 to 35 percent below those of discount retailers and roughly 70 percent below those of traditional retailers. Their buyers travel the country looking through manufacturer overruns and discontinued styles, finding goods prices well below wholesale prices along with buying from overseas suppliers. The customer need that Big Lots satisfies is to access the differentiated features and capabilities of brand-name products, but at a fraction of their initial cost. The tight integration of purchasing and inventory management activities across its full set of stores is the main core competencies.)

Front 15

Value-Creating Activities for Cost Leadership

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• Cost-effective MIS
• Few management layers
• Simplified planning
• Consistent policies
• Effecting training
• Easy-to-use manufacturing technologies
• Investments in technologies
• Finding low cost raw materials
• Monitor suppliers’ performances
• Link suppliers’ products to production processes
• Economies of scale
• Efficient-scale facilities
• Effective delivery schedules
• Low-cost transportation
• Highly trained sales force
• Proper pricing

Front 16

Competitors

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• Having the low-cost position is a valuable defense against rivals.
• Due to cost leader’s advantageous position:
 Rivals hesitate to compete on basis of price.
 Lack of price competition leads to greater profits

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Buyers

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• Can mitigate buyers’ power by:
 Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm.

Front 18

Suppliers

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• Can mitigate suppliers’ power by:
 Being able to absorb cost increases due to low cost position.
 Being able to make very large purchases, reducing chance of supplier using power.
 (Ex: Wal Mart using its power with suppliers to extract lower prices from them.)

Front 19

New Entrants

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• Can frighten off new entrants due to:
 Their need to enter on a large scale in order to be cost competitive.
 The time it takes to move down the learning curve

Front 20

Substitutes

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• Cost leader is well positioned to:
 Make investments to be first to create substitutes.
 Buy patents developed by potential substitutes.
 Lower prices in order to maintain value position.

Front 21

Competitive Risks

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 Processes used to produce and distribute good or service may become obsolete due to competitors’ innovations.
 Focus on cost reductions may occur at expense of customers’ perceptions of differentiation
• (Ex: Cost reducing decision to eliminate differentiated features such as extended shopping hours, a large # of checkouts, would create a loss of value for customers.
 Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy.

Front 22

Differentiation Strategy

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• An integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them.
 Focus is on nonstandardized products
 Appropriate when customers value differentiated features more than they value low cost.
• (Ex: Krispy Kreme uses this strategy to produce premium-quality doughnuts. A unique recipe to produce its products and the doughnut theater are sources of differentiation for them.)
• ! Differentiate yourself from many dimensions, not just a few. Some include service, culture, features, product innovations, technology leadership, and performance.

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Competitive Risks of Differentiation

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• The price differential between the differentiator’s product and the cost leader’s product becomes too large.
• Differentiation ceases to provide value for which customers are willing to pay. (Ex: Disney vs Six Flags, offer same type of experience but Disney continues to reinvest in its operations to more crisply differentiate them from those of its rivals.)
• Experience narrows customers’ perceptions of the value of differentiated features. (Ex: Customers with positive experiences with generic tissues may feel the differentiated features of Kleenex are not worth its cost.)
• Counterfeit goods replicate differentiated features of the firm’s products. (Ex: Callaway Golf’s success has created great demand for counterfeited Callaway equipment.)

Front 24

Focus Strategies

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• An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment. In other words, firms choose a focus strategy when they intend to use their core competencies to serve the needs of a particular industry segment or niche to the exclusion of others.
 Particular buyer group—youths or senior citizens
 Different segment of a product line—professional craftsmen versus do-it-yourselfers
 Different geographic markets—East coast versus West coast
 (EX: Goya foods is the largest US based Hispanic owned food company. Segmenting the Hispanic market into unique groups, Goya offers a total of over 1,000 products to consumers. By successfully using the focus strategy, they gain a competitive advantage in a specific market niches, even though they do not possess an industry-wide competitive advantage.)
• Focused cost leadership strategy:
 Ikea: Young buyers desiring style at a low cost are Ikea’s target customers. The firm says “Low cost is always in focus.” To keep its costs low, instead of relying primarily on third-party manufacturers, the firm’s engineers design low-cost, modular furniture ready for assembly by customers. To eliminate the need for sales associates or decorators, Ikea positions the products in its stores so that customers can view different living combinations in a single room like setting. They also require customers to transport their own purchases rather than providing delivery service. Ikea’s focused cost leadership strategy finds the firm offering some differentiated features with its low-cost products. They include in-store playrooms for children, wheelchairs for customer use, and extended hours.
• Focused differentiation strategy:
 Casketfurniture.com: targets Generation X people who are interested in using the Internet as a shopping vehicle and who want to buy items with multiple purposes. They offer a collection of products, including display cabinets, coffee tables, and entertainment centers, that can be easily converted into coffins if desired.
• To implement a focus strategy, firms must be able to:
 Complete various primary and support activities in a competitively superior manner, in order to develop and sustain a competitive advantage and earn above-average returns.

Front 25

Factors That Drive Focused Strategies

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• 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 can its larger industry-wide competitors.
• Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage

Front 26

Competitive Risks of Focus Strategies

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• A focusing firm may be “outfocused” by its competitors.
• A large competitor may set its sights on a firm’s niche market.
• Customer preferences in niche market may change to more closely resemble those of the broader market.

Front 27

Integrated Cost Leadership/Differentiation Strategy

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• A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to:
 Adapt quickly to environmental changes.
 Learn new skills and technologies more quickly.
 Effectively leverage its core competencies while competing against its rivals.
 (Ex: Target relies on its relationships with Sonia Kashuk in cosmetics, Mossimo in apparel, Eddie Bauer in camping and outdoor gear, and Michael Graves in home, garden, and electronics products to offer differentiated products at discounted prices. Committed to presenting a consistent upscale image, the firm carefully studies trends to find new branded items that it believes can satisfy its customers’ needs.)

• Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/differentiation strategy.
 Flexible manufacturing systems (FMS)
 Information networks
 Total quality management (TQM) systems

Front 28

Risks of the Integrated Cost Leadership/ Differentiation Strategy

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• Often involves compromises
 Becoming neither the lowest cost nor the most differentiated firm.
• ! Becoming “stuck in the middle”
 Lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy.
 (Ex: Hewlett Packard is competing against Dell with a strong low cost position and against IBM which has a strong differentiation strategy based on service.)

Front 29

Flexible Manufacturing Systems

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• 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.
 Firms use an FMS to change quickly and easily from making one product to making another.
 ! Why is FMS so important? – It is more responsive to demand
 ! FMS is not widely used. Why? – Expensive & you have to be committed to it.
 ! How widespread is FMS? Do costs increase or decrease over time? – Increase when 1st introduced but decrease over time due to the learning curve.

Front 30

Information Networks

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• Link companies electronically with their suppliers, distributors, and customers.
 Facilitate efforts to satisfy customer expectations in terms of product quality and delivery speed.
 Improve flow of work among employees in the firm and their counterparts at suppliers and distributors.
 Customer relationship management (CRM)

Front 31

Total Quality Management (TQM) Systems

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• Emphasize total commitment to the customer through continuous improvement using:
 Data-driven, problem-solving approaches
 Empowerment of employee groups and teams
• Benefits
 Increased customer satisfaction
 Lower costs
 Reduced time-to-market for innovative products

Front 32

Frederick Cooper Lamp Company

Back 32

Was focused differentiation business-level strategy: Cooper lamp made expensive products that provided unique value to a small group of customers who were willing to pay a premium to purchase uniqueness. They make hand –sewn lamp shades using unique fabrics.
Now firm’s demise resulting from not successfully implementing its business-level strategy: Sold its name due to declining demand for high-quality handmade products; inefficient, high-cost manufacturing facilities; and cheap imports from other nations that offer customers a reasonable degree of quality at a substantially lower price.