CHAPTER 4:BUSINESS-LEVEL STRATEGY

IRELAND | HOSKISSON | HITT

THE MANAGEMENT OF STRATEGYCONCEPTS AND CASES 10E

THE STRATEGIC MANAGEMENT PROCESS

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 above-average returns can be earned through each business-level strategy.

● Describe the risks of using each of the business-level strategies.

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

IMPORTANT DEFINITION

BUSINESS-LEVEL STRATEGY

• A single-product market/single geographic location firm employs one business-level strategy and one corporate-level strategy identifying what or which industry the firm will compete in

ONE BUSINESS-

LEVEL STRATEGY

• A diversified firm employs a separate business-level strategy for each product market area in which it competes and one or more corporate-level strategies dealing with product and/or geographic diversity

SEVERAL BUSINESS-

LEVEL STRATEGIES

CORE COMPETENCIES AND STRATEGY

Providing value to customers and gaining competitive advantage by exploiting core competencies in individual product markets

Strategy

Business-level

Strategy

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

Core Competencie

s

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

CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL

STRATEGIES

KEY ISSUESin

BUSINESS-LEVEL

STRATEGY

Who will be served?

What needs will be satisfied?

How will those needs be satisfied?

CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL

STRATEGIES

EFFECTIVE GLOBAL

COMPETITORS

Adept at identifying customer needs across cultures and geography

Quickly and successfully adapt products/services

to meet those needs

BUSINESS-LEVEL STRATEGIES

GENERIC:Applicable

to any organization in

any industry

FIVE COMPETITIVE FORCES

VALUE CHAIN ACTIVITIES

RISKS for each Strategy

Effective STRUCTURE for each Strategy

CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL

STRATEGIESSATISFYING CUSTOMERS IS THE FOUNDATION OF SUCCESSFUL

BUSINESS STRATEGIES

• Managing relationships with customers

• Reach, richness, affiliation• Who will be served• What needs will be satisfied• How those needs will be satisfied

CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL

STRATEGIES

EFFECTIVELY MANAGING

RELATIONSHIPS WITH

CUSTOMERS

REACH Access and Connection

to Customers

RICHNESSDepth and Detail of Two-Way Flow

of Information Between the Firm and Customer

AFFILIATIONFacilitating Useful Interactions

With Customers

MARKET SEGMENTATIONA PROCESS USED TO CLUSTER PEOPLE WITH SIMILAR NEEDS INTO INDIVIDUAL

AND IDENTIFIABLE GROUPS

WHO: DETERMINING THE CUSTOMERS TO SERVE

ConsumerMarkets

IndustrialMarkets

MARKET SEGMENTATION:CONSUMER MARKETS

1.DEMOGRAPHIC 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)

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 of a firm

CUSTOMERS:HOW ● WHAT ● WHO

WHAT:Satisfy

CustomerNeeds

WHO:Target Group

of Customers

BUSINESS-LEVEL STRATEGY PURPOSEBUSINESS-LEVEL

STRATEGIESare 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

BUSINESS-LEVEL STRATEGY PURPOSE

BUSINESS-LEVEL STRATEGYis a deliberate choice about how the firm will perform the value

chain activities to create unique value

Southwest’s Competitive Advantages (rivals unable to imitate):

● Tight integration among activities ● Cost leadership strategy ● Unique culture and customer service

BUSINESS-LEVEL STRATEGY PURPOSE

Southwest Airlines Activity System

SOURCES OF COMPETITIVE ADVANTAGE

■ Achieving LOWER OVERALL COSTS than rivals

■ Performing activities differently (reducing process costs)

■ Providing a low cost product that customers deem as ACCEPTABLE

■ Possessing the capability TO DIFFERENTIATE the firm’s product or service and command a premium price

■ Performing MORE HIGHLY VALUED activities

FIVE GENERIC BUSINESS-LEVEL STRATEGIES

Five Business

Level Strategies

TARGET MARKETS

• Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis; competing in many customer segments

BROAD

• A narrow market segment means that the firm intends to serve the needs of a narrow customer group; tailoring its strategy to serving them at the exclusion of othersNARROW

BUSINESS-LEVEL STRATEGY EFFECTIVENESS

■ None of the five business-level strategies is inherently or universally superior to the others

■ The effectiveness of each strategy is contingent upon: ● External opportunities/threats ● Internal strengths/weaknesses

■ KEY: A successful business-level strategy must match external opportunities/threats with internal strengths, i.e., its core competencies

COST LEADERSHIP STRATEGY 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 LEADERSHIP STRATEGY:

VALUE CHAIN ACTIVITIES ■ Value chain 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]

COST LEADERSHIP STRATEGY:

VALUE CHAIN ACTIVITIES Examples of Value-

Creating Activities

Associated with the

Cost-Leadership Strategy

• 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

VALUE-CREATING ACTIVITIES FOR COST

LEADERSHIP

• 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

RECONFIGURE THE VALUE CHAIN FOR COST ADVANTAGE

VALUE-CREATING ACTIVITIES FOR COST

LEADERSHIP RECONFIGURE THE VALUE CHAIN FOR A

COST ADVANTAGE

Alter production process Change in automation New distribution channel New advertising media Direct sales in place of indirect sales

New raw material Forward integration Backward integration Change location relative to suppliers or buyers

COST LEADERSHIP STRATEGY:

RISKS• COMPETITIVE RISKS

– OBSOLESCENCE: processes used to produce and distribute goods/services may become obsolete due to competitors’ innovations

– COST REDUCTIONS: too much focus on cost reductions may occur at expense of customers’ perceptions of differentiation

– IMITATION: competitors, using their own core competencies, may successfully imitate the cost leader’s strategy

DIFFERENTIATION STRATEGY

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 non-standardized products

■ Appropriate when customers value differentiated features more than they value low cost

■ Firms must still be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay

DIFFERENTIATION STRATEGY:

DISTINCTIVE ACTIONS Firms seek to be different from

competitors on as many dimensions as possible

Differentiation approaches■ Unusual features■ Responsive customer service

■ Rapid product innovations ■ Technological leadership■ Perceived prestige and status■ Different tastes■ Engineering design and

performance

DIFFERENTIATION STRATEGY:

VALUE CHAIN ACTIVITIES Examples of Value-

Creating Activities

Associated with the

Differentiation Strategy

• Highly developed MIS

• Emphasis on quality

• Worker compensation for creativity/productivity

• Use of subjective performance measures

• Basic research capability

• Technology

• High quality raw materials

• Delivery of products

VALUE-CREATING ACTIVITIES FOR

DIFFERENTIATION

• High quality replacement parts

• Superior handling of incoming raw materials

• Attractive products

• Rapid response to customer specifications

• Order-processing procedures

• Customer credit

• Personal relationships

RECONFIGURE THE VALUE CHAIN FOR DISTINCTIVENESS

VALUE-CREATING ACTIVITIES FOR

DIFFERENTIATION RECONFIGURE THE VALUE CHAIN FOR

DISTINCTIVENESS

Whereas cost leadership targets a specific industry, differentiation creates value by distinguishing products/services

A firm must consistently upgrade differentiated features that customers value and/or create new valuable features (innovate) without significant cost increases

Create sustainability through: Customer perceptions of distinctiveness Customer reluctance to switch to non-

distinctive products

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

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:

■ a Particular buyer group (e.g., youths or senior citizens)

■ Different segment of a product line (e.g., products for professional painters or the do-it-yourself group)

■ Different geographic market (e.g., northern or southern Italy by using a foreign subsidiary)

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

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

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

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

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

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

INTEGRATED COST LEADERSHIP/

DIFFERENTIATION STRATEGY

Three sources of flexibility useful for this strategy:

■ Flexible manufacturing systems (FMS)

■ Information networks

■ Total quality management (TQM) systems

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)