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
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4–1
Chapter 4: Business-Level Strategy
• Strategy
• 5 “generic business-level strategies”
-characteristics
-how to develop
-advantages and disadvantages
• “Stuck-in-the-middle”
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The Strategic
Management
Process
Figure 1.1
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Generalized Corporate Structure
PepsiCo
Pepsi-Cola
Frito-Lay
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Tropicana
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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
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“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
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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
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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
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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
 Generally uses a mass market approach with
little segmentation
 Lowest competitive price
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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
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Ideas for Cost Reduction
Primary Value
Chain Activities
Support Activities in the
Value Chain
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•
•
•
•
•
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•
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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
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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
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Main Advantages of Cost Leadership
• Scale economies
• Efficiency
• Market power
• Ability to attract price sensitive customers
• Ability to withstand price wars
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4–14
Cost Leadership Strategy
• Competitive Risks
 sunk costs
 obsolescence
 image
 internally focused attention
 efficiency might dominate effectiveness
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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
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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
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“Relevant sources of valued uniqueness” =
Primary Value
Chain Activities
Support Activities of the
Value Chain
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•
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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
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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”
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Primary Advantages of Differentiation
• Ability to charge a price premium
• Customer loyalty
• Insulation from pure price competition
• Image
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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
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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
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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.
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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?
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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!
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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
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Functional Skill Comparisons
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•
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Cost Leadership
efficiency
standardization
mass production
process improvement
reduced service
tight org’l control
stability
cost accounting
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•
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Differentiation
effectiveness
customization
shorter production runs
product development
enhanced service
org’l slack is needed
flexibility
marketing
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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
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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!
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