Business Level Strategy
BUS489 T08, Seminar 1
07 August 2021
Agenda
• Business level strategy:
– An overview
•
•
•
•
Cost leadership strategy
Differentiation strategy
Focus strategy
Strategic direction for Fabless Semiconductor
Companies
2
Business level strategy
• Business-level strategy is about the competitive position of
a company in an industry
• The key question is: How to compete?
– How do we support the corporate strategy?
– How do we compete in a specific business arena?
• Three types of business level strategies:
– Low-cost producer
– Differentiator
– Focus
• Four key topics for business level strategy
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–
–
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Generate sustainable competitive advantages
Develop and nurture (potentially) valuable capabilities
Respond to environmental changes
Approval of functional level strategies
3
Business level strategy
A successful business model results from business level
strategies that create a competitive advantage over its
rivals
A firm must decide on:
• Customer needs
WHAT is to be satisfied
• Customer groups
WHO is to be satisfied
• Distinctive competencies
HOW customers are to be satisfied
These decisions determine which business level
strategies are formulated and implemented to put
the business model into action.
4
5
Target markets
• Broad:
Firms serving a broad market seek to use their
capabilities to create value for customers on an
industry-wide basis, they are usually competing in
many customer segments (e.g., Walmart)
• Narrow:
A narrow market segment means that the firm
intends to serve the needs of a narrow customer
group; it is tailoring its strategy to serving them at
the exclusion of others (e.g., Vans)
6
Customer Needs and
Product Differentiation
•
Customer needs
The desires that can be satisfied through product attributes
 Customers choose a product based on:
1.
2.
•
The way the product is differentiated from other products of its type
The price of the product
Product differentiation
Designing products to satisfy customers’ needs in ways that
competing products cannot do so:
•
•
•
Different ways to achieve distinctiveness
Balancing differentiation with costs
Ability to charge a higher or premium price
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Customer Needs and Market Segmentation
•
Market Segmentation
The way customers can be grouped based on important differences
in their needs or preferences
•
Main Approaches to Segmenting Markets
1. Ignore differences in customer segments
Make a product for the typical or average customer
2. Recognize differences between customer groups
Make products that meet the needs of all or most customer groups
3. Target specific segments
Choose to focus on and serve just one or two selected segments
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Business level strategy purpose
• Business level strategy is a deliberate choice about
how the firm will perform the value chain activities
to create unique value
• For example, IKEA’s Competitive Advantages (that
rivals are unable to imitate):
– Tight integration among activities
– Cost leadership strategy
– Unique culture and customer service
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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 or actually like
• Possessing the capability to differentiate the firm’s
product or service and command a premium price
• Performing more highly valued activities
10
Core competencies
• Core competencies
Resources and superior capabilities that are
sources of competitive advantage over a firm’s
rivals
• Business level strategy
Provides value to customers. It aims to gain
competitive advantage by exploiting core
competencies in individual product markets
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Resources, capabilities and competitive advantage
COMPETITIVE
ADVANTAGE
STRATEGY
INDUSTRY
KEY
SUCCESS
FACTORS
ORGANIZATIONAL
CAPABILITIES
RESOURCES
Tangible
Intangible
Human
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Strategic capabilities
• They are assets such as industry-specific skills,
relationships and organizational knowledge which
are largely intangible and invisible
• Competences and capabilities will often be
internally generated, but may be obtained by
collaboration with other organizations
• Certain competences are likely common to
competing businesses within a global industry or
strategic group
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Core competences and
distinctive capabilities
• Core competences or distinctive capabilities are
combinations of resources and capabilities which
are unique to a specific organization, and which
are responsible for generating its competitive
advantage
• Kay (1993) identified four potential sources of
Core competences:
–
–
–
–
Reputation
Architecture (i.e., internal and external relationship)
Innovation
Strategic assets
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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
– Relatively standardized products
– Features acceptable to many customers
– The lowest competitive price
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Cost leadership strategy: How to save costs?
• Employing process innovations that facilitate efficient production
and distribution methods
• Tightly controlling production costs and overhead
• Minimizing costs of sales, R&D, and services
• Building efficient manufacturing facilities
• Monitoring the costs of activities provided by outsiders
• Simplifying production processes
• Lower transport costs
• Employee training
• Higher investment in technology
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Porter’s 5 forces for cost leadership strategy
• Rivalry with competitors: Due to the cost leader’s advantageous
position:
– Rivals hesitate to compete on the basis of price
– Lack of price competition leads to greater profits
– Rivalry may be based on factors such as size, resources, location,
market dependence, and prior competitive interactions
• Bargaining power of buyers: Can mitigate buyers’ power by:
– Driving prices far below competitors, causing them to exit, thus
shifting power away from buyers back to the firm
– Powerful customers can force the cost leader to reduce its
prices, but not below the level where the next-most-efficient
industry competitor can earn average returns
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Continued
• Bargaining power of suppliers: Can mitigate suppliers’ power by:
– Being able to absorb cost increases due to a low-cost position
– Being able to make very large purchases, reducing chance of supplier
using power
– Outsourcing, to reduce costs may also require relationship-building
particularly to a foreign supplier
• New entrants: Barriers to potential entrants:
– Their needs to enter on a large scale in order to be cost competitive
– The time it takes to move up the learning curve
– Efficiency of cost leaders through continuous efforts to reduce costs
enhances profit margins and serves as a significant entry barrier
• Substitutes: The 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 the value position
– Be more flexible than its differentiated competitors
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Risks of a cost leadership strategy
• 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
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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 costs
– Firms must still be able to produce differentiated
products at competitive costs to reduce upward
pressure on the price that customers pay
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Competitive advantage for differentiation
Firms seek to be different from competitors on as many
dimensions as possible
Differentiation approaches:
• Unusual features
• Responsive customer services
• Rapid product innovations
• Technological leadership
• Perceived prestige and status
• Different tastes
• Engineering design and performance
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Value creating activities for differentiation strategy
Firms need to reconfigure their value chain for effectiveness and distinctiveness
through:
•
Highly developed MIS
•
•
•
•
Emphasis on quality
Worker compensation for creativity/productivity
Basic research capability
Technology
•
•
•
•
High quality raw materials
Delivery of products
Attractive products
Rapid response to customer specifications
•
•
•
•
Order-processing procedures
Customer credit
Personal relationships
Create sustainability through customer perceptions of distinctiveness and customer
reluctance to switch to non-distinctive products
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Porter’s 5 forces for differentiation strategy
• Rivalry:
• The relationship between brand loyalty and price
sensitivity insulates a firm from competitive rivalry
• Reputation can also sustain the competitive advantage
of firms following a differentiation strategy
• Bargaining power of buyers (customers):
• Can mitigate buyers’ power because well differentiated
products reduce customer sensitivity to price increases
• Customers are willing to accept a price increase when
a product satisfies their perceived unique needs, as
long as they do not think that an acceptable product
alternative exists
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Continued
• Bargaining power of suppliers: Can mitigate suppliers’ power by:
– Absorbing price increases due to higher margins from high-quality
components
– Alternatively, considering buyers’ relative insensitivity to price
increases and their brand loyalty, firms may pass along higher supplier
prices to the buyer
• Threat of new entrants: Substantial barriers to potential entrants:
– Customer loyalty and the need to overcome the uniqueness of a
differentiated product
– New products must surpass proven products
– New products must be at least equal to the performance of proven
products, but offered at lower prices
• Substitutes: Well-positioned relative to substitutes because:
– Brand loyalty to a differentiated product tends to reduce:
– customers’ testing of new products
– switching brands
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Risks of differentiation strategy
•
IF PRICE DIFFERENTIAL between the differentiator’s and
the cost leader’s products becomes too large
•
DIMINISHED VALUE: Differentiation ceases to provide
value for which customers are willing to pay
•
EXPERIENCE: Narrows customers’ perceptions of the
value of differentiated features
•
COUNTERFEITED GOODS: Replicate differentiated
features of the firm’s products (e.g., luxury industry)
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Focus strategy
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)
– Different geographic market (e.g., northern or
southern Italy by using a foreign subsidiary)
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Types of focus strategy
• 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
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Rationale behind focus strategy
• 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 serve
• Focusing allows the firm to direct its resources to
certain value chain activities to build a competitive
advantage
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Why Focus Strategies are different




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Strategic direction for Fabless
Semiconductor Companies
• Competitive advantages can be based on
– Cost of design
– Speed to market
– Product development and differentiation
– Market segmentation
– Resources and capabilities
– Value chain activities