Tuesday, February 7, 2006 • Review - strategic management process - I/O and resource-based perspectives - 4 criteria of distinctive competencies leading to sustainable advantage - value chain analysis - outsourcing • Chapter 4 - Business-level strategies intricate links to the value chain • Case 3 readiness Copyright © 2004 South-Western. All rights reserved. 4–1 Chapter 4: Business-Level Strategy • Strategy • 5 “generic business-level strategies” -characteristics -how to develop -advantages and disadvantages • “Stuck-in-the-middle” Copyright © 2004 South-Western. All rights reserved. 4–2 The Strategic Management Process Figure 1.1 Copyright © 2004 South-Western. All rights reserved. Copyright © 2004 South-Western. All rights reserved. 4–3 Generalized Corporate Structure PepsiCo Pepsi-Cola Frito-Lay Copyright © 2004 South-Western. All rights reserved. Tropicana 4–4 Successful Strategies match the firm’s core competencies with customer needs, paying attention to . . . • careful selection of the target market • insightful knowledge of and effective relationships with the target market • continuous improvement of strategy execution • providing unexpected value Copyright © 2004 South-Western. All rights reserved. 4–5 “Generic Business-Level Strategy” = how a firm intends to compete at the business-unit (division) level, in VERY GENERAL terms . . . . 2 VERY BASIC ways to compete to achieve above-average profits: 1. Price premium to create higher revenues 2. Efficiencies to create lower costs Copyright © 2004 South-Western. All rights reserved. 4–6 Also consider breadth of target markets . . . • Broad scope = the firm competes in many market (customer) segments • Narrow scope = the firm selects one or two market segments Copyright © 2004 South-Western. All rights reserved. 4–7 Five BusinessLevel Strategies SOURCE: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, 12. Copyright © 1985, 1998 by Michael E. Porter. Figure 4.1 Copyright © 2004 South-Western. All rights reserved. 4–8 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 Generally uses a mass market approach with little segmentation Lowest competitive price Copyright © 2004 South-Western. All rights reserved. 4–9 Cost Leadership Strategy Steps to develop: examine value chain for potential cost savings pay extra attention to “cost drivers” (areas of significant costs in the organization) no stone is left unturned! no sacred cows! (but need to maintain product acceptability) look both inside and outside the firm for potential areas of cost savings reconfigure the value chain to accomplish cost savings Copyright © 2004 South-Western. All rights reserved. 4–10 Ideas for Cost Reduction Primary Value Chain Activities Support Activities in the Value Chain • • • • • • • • Copyright © 2004 South-Western. All rights reserved. 4–11 How to Obtain a Cost Advantage Determine and control Reconfigure, if needed Cost Drivers Value Chain Alter production process New raw material Change in automation Forward integration New distribution channel Backward integration Change location relative to suppliers or buyers JIT - suppliers bear costs New advertising media Outsource or omit some value chain activities Copyright © 2004 South-Western. All rights reserved. 4–12 Common Characteristics of Cost Leaders (see value chain example, Fig. 4.2, pg. 116) • cost conscious organizational culture • intense scrutiny of expenses • budget centralization • focus on efficiency • scale economies • process engineering skill • technologically advanced • lean management; limited “perks and frills” • spartan facilities Copyright © 2004 South-Western. All rights reserved. 4–13 Main Advantages of Cost Leadership • Scale economies • Efficiency • Market power • Ability to attract price sensitive customers • Ability to withstand price wars Copyright © 2004 South-Western. All rights reserved. 4–14 Cost Leadership Strategy • Competitive Risks sunk costs obsolescence image internally focused attention efficiency might dominate effectiveness Copyright © 2004 South-Western. All rights reserved. 4–15 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 customers Products are nonstandardized Customers value differentiated features more than they value low cost Generally involves more extensive market segmentation Copyright © 2004 South-Western. All rights reserved. 4–16 Differentiation Strategy Steps to develop: identify the target market, the “real buyers”, and others influential in the buying process determine important buyer purchasing criteria throughout the value chain; understand the buyer’s purchase process (consumer behavior!) develop relevant sources of uniqueness -- as long it is as reasonable in terms of cost lower costs elsewhere in value chain if possible Copyright © 2004 South-Western. All rights reserved. 4–17 “Relevant sources of valued uniqueness” = Primary Value Chain Activities Support Activities of the Value Chain • • • • • • • • Copyright © 2004 South-Western. All rights reserved. 4–18 How to Obtain a Differentiation Advantage Control if needed Cost Drivers Reconfigure to maximize Value Chain Lower buyers’ (maybe non-monetary) costs Raise performance of product or service Create sustainability through: Customer perceptions of uniqueness Customer reluctance to switch to nonunique product or service Copyright © 2004 South-Western. All rights reserved. 4–19 Common Characteristics of Differentiators (see value chain example, Fig. 4.3, pg. 120) • strong emphasis on the marketing functions - market segmentation, marketing research, new product development, promotion . . . . • elaborated product; additional/new features • image/reputation emphasis • tailoring to customer needs/preferences • higher levels of service and/or quality • higher compensation for desired workforce • innovativeness • “organizational slack” Copyright © 2004 South-Western. All rights reserved. 4–20 Primary Advantages of Differentiation • Ability to charge a price premium • Customer loyalty • Insulation from pure price competition • Image Copyright © 2004 South-Western. All rights reserved. 4–21 Competitive Risks of Differentiation • price differential between the differentiator and the cost leader becomes too large • differentiation ceases to provide value for which customers are willing to pay (“benefit erosion”) • “over-differentiation” • counterfeit goods or information asymmetries result in imitation of the differentiated features Copyright © 2004 South-Western. All rights reserved. 4–22 Focus Strategies • An integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment Focus is typically on one or two specific (relatively narrow) market segments Can use either cost leadership or differentiated approach, but the latter is more common Copyright © 2004 South-Western. All rights reserved. 4–23 Factors That Drive Focused Strategies • Large players may overlook small niches. • A smaller/newer player may lack the resources needed to compete in the broader market • An organization is able to serve a narrow market segment more effectively than can its larger industry-wide competitors • Focusing allows the firm to effectively direct its resources to build competitive advantage • Expanding to additional target markets is possible when a strong niche position is established. Copyright © 2004 South-Western. All rights reserved. 4–24 Competitive Risks of Focus Strategies • May be “outfocused” by its competitors • A large competitor may come in • Customer preferences in niche market may change • Are available niches the unattractive “leftover” market segments? Copyright © 2004 South-Western. All rights reserved. 4–25 Integrated Cost Leadership/ Differentiation Strategy • It sounds ideal to be simultaneously the cost leader and a strong differentiator. • Increasingly, firms are trying to blend the two major business-level strategies. • But formulation is easier than implementation! Copyright © 2004 South-Western. All rights reserved. 4–26 Risks of the 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 Copyright © 2004 South-Western. All rights reserved. 4–27 Functional Skill Comparisons • • • • • • • • Cost Leadership efficiency standardization mass production process improvement reduced service tight org’l control stability cost accounting Copyright © 2004 South-Western. All rights reserved. • • • • • • • • Differentiation effectiveness customization shorter production runs product development enhanced service org’l slack is needed flexibility marketing 4–28 Characteristics to Facilitate Successful Implementation of Integrated Cost Leadership/Differentiation Strategy • large (global) market share • economies of scale • learning curve advantages (industry pioneers) • advanced/efficient production capabilities • marketing prowess Copyright © 2004 South-Western. All rights reserved. 4–29 Overall Advice for Business-Level Strategy • Understand your resources, capabilities, and target market(s) • Be true to your distinctive competence -base your strategies on your strengths! • Be as good as possible at activities not primary to your strategy -- without eroding your competitive advantage. • Remember -- strategies must be implemented through value chain activities • Realize that you cannot be all things to all people -- or you will be valuable to none! Copyright © 2004 South-Western. All rights reserved. 4–30