Business strategy Business level strategy 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 Purpose of business-level strategy •Business-Level Strategies: –are intended to create differences between the firm’s competitive position and those of its competitors. •To position itself, the firm must decide whether it intends to: –perform activities differently or –perform different activities as compared to its rivals. Every firm must develop and implement a business-level strategy. However some firms may not use all the strategies – corporate level, merger and acquisition, international and cooperative. A firm competing in a single-product market in a single geographic location does not need a corporate level strategy regarding product diversity or an international strategy to deal with geographic diversity. 1. Who will be served 2. What needs those target customers have that it will satisfy 3. How those needs will be satisfied Strategic competitiveness results when firm satisfies a group of customers by using its competitive advantages as the basis for competing in individual product markets. Reach richness and affiliation Reach dimension of relationships with consumers is concerned with the firms access and connection to customers o Critical dimension for social networking sites such as facebook Richness is concerned with the depth and detail of the two-way flow of info between firm and customer Affiliation – concerned with facilitating useful interactions with customers – viewing world through customers eyes and seeking to create more value Who: Determining the Customers to Serve Market segmentation –A process used to cluster people with similar needs into individual and identifiable groups Potential components for market segmentation Consumer Markets –Demographic factors –Socioeconomic factors –Geographic factors –Psychological factors –Consumption patterns –Perceptual factors •Industrial Markets –End-use segments –Product segments –Geographic segments –Common buying factor segments –Customer size segments 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 buy product that creates value for them desires changing – keep up with new trends How: Determining core competencies needed to satisfy customer needs •Firms must decide: –who to serve, what customer needs to meet, and how to use core competencies to implement value creating strategies that satisfy target customers’ needs firms must continuously upgrade their capabilities to ensure they maintain advantage over their rivals by providing customers with a superior product emphasise innovation •Only firms with capacity to continuously improve, innovate and upgrade their competencies can expect to meet and/or exceed customer expectations across time purpose of business level strategy is to create differences between the firms position and those of its competitors. Must decide whether to perform activities differently or to perfrom different activities. Types of business-level strategies 1. Cost leadership 2. Differentiation 3. Focused cost leadership 4. Focused differentiation 5. Integrated cost leadership/differentiation Lower costs results from firms ability to perform activities differently than rivals The two types of target markets are broad market and narrow market segments. Broad market seek to capabilities to create value for customers on industry wide basis. A narrow market segment means that the firm intends to serve the needs of a narrow customer group. Can also find an integrated cost leadership/differentiation strategy Types / dimensions of potential competitive advantage •Basis for customer value –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 •Competitive scope: –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 5 business level strategies cost leadership •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 •Product Characteristics –Relatively standardized (commoditized) products –Features broadly acceptable to many customers –Lowest competitive price •Cost saving actions required by this strategy –Building efficient scale facilities –Tightly controlling production and overhead costs –Minimizing costs of sales, R&D and service –Monitoring costs of activities provided by outsiders –Simplifying production processes value-creating activities for cost leaders Competitive Risks –Technological innovations by competitors could eliminate the cost leader’s cost advantage. –Overly focusing on process efficiency may cause the cost leader to overlook needed differentiation features. –Competitors may successfully imitate the low-cost leader’s value chain configuration. Firms may try to form joint ventures to compete. Degree of rivalry is based on many factors like size of rivals and resources and location Can often reduce price of good to retain customers. With lower prices and still competitive levels of differentiation, cost leader increases probability customer chooses. 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 be able to produce differentiated products at competitive costs to reduce upward pressure on the price that customers pay. Differentiation can’t mean so expensive exceeds what customers willing to pay. Produces products – distinctive – customers willing to pay more for this differentiation. Value differentiation more than low cost. Can charge premium prices. Investing in and developing features that differentate product. The less similar possible to rivals. Can be different in many ways – unusual features, responsive customer service, rapid product innovations and technological leadership, perceived prestige and status, different tasted, performance… value creating activities for differentiation Rivalry with existing competitors Loyal customers for product differentiation As loyalty increases, price sensitivity decreases Reputation can sustain CA of businesses bargaining power of buyers Customers accepting to pay more if satisfies unique needs Relatively price insensitive bargaining power of suppliers Suppliers must provide high quality components driving up costs But high margins firms earn partially insulate it from influence of suppliers Firm can pass on increased cost to customers as well But can still be dependent on one supplier potential entrants Customer loyalty and need to overcome uniqueness of differentiated brand create substantial barriers to growth product substitutes Without brand loyalty will face customers switching easily competitive risks of the differentiation strategy •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 •Experience narrows customers’ perceptions of the value of differentiated features •Counterfeit goods replicate the differentiated features of the firm’s products Focus strategies •An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment 1. –Particular buyer group—youths or senior citizens 2. –Different segment of a product line—professional craftsmen versus do-ityourselfers 3. –Different geographic markets—east coast versus west coast very narrow market serve particular segment more effectively than general company can - broad based competitors cant or choose not to compete often •Types of focused strategies –Focused cost leadership strategy –Focused differentiation strategy •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 cost leadership focused IKEA - young buyers, style, at low cost Focus differentiation Factors that drive focused strategies •Large firms may overlook small niches •A firm may lack the resources needed to compete in the broader market •Focusing allows the firm to direct its resources to certain value chain activities to build competitive advantage •A firm is able to serve a narrow market segment more effectively than can its larger industry-wide competitors Competitive risks of focus strategies •A focusing firm may be “out focused” by its competitors •A large competitor may set its sights on a firm’s niche market •Customer preferences in a niche market may change to more closely resemble those of the broader market Integrated cost leadership/differentiation strategy •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 •Commitment to strategic flexibility is necessary for implementation of integrated cost leadership/ differentiation strategy –Flexible manufacturing systems (FMS) –Information networks (CRM) –Total quality management (TQM) systems Risks of an integrated cost leadership/ differentiation strategy •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
