5-1 5-1 Welcome to Class Five!

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Welcome to Class Five!Welcome to Class Five!

Business-level Strategy and

Pro Bowl Debate: Team 1 vs. Team 6

Business-level Strategy and

Pro Bowl Debate: Team 1 vs. Team 6

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The Primary Focus of Business-Level Strategy is:

Creating and Sustaining Creating and Sustaining Competitive AdvantagesCompetitive Advantages

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How does Business-level Strategy Business-level Strategy

differ from Corporate-level strategy?differ from Corporate-level strategy?

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Less concerned with buying and selling products Less concerned with buying and selling products and/or providing servicesand/or providing services More concerned with managing a portfolio of More concerned with managing a portfolio of businesses.businesses. More concerned with strategic acquisitions and More concerned with strategic acquisitions and divestitures.divestitures. Should consider the needs of multiple stakeholdersShould consider the needs of multiple stakeholders Should include providing a satisfactory return to Should include providing a satisfactory return to stockholdersstockholders

Corporate-Level StrategyCorporate-Level Strategy

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Business-Level StrategyBusiness-Level Strategy

Focus is on establishing and sustaining a competitive advantage with products or services (different

from corporate-level strategy). Should consider the needs of

multiple stakeholders (similar to corporate-level strategy).

Should include providing a satisfactory return to stockholders (similar to corporate-level strategy).

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The following are 3 The following are 3 Generic StrategiesGeneric Strategies for achieving and sustaining for achieving and sustaining

Competitive AdvantagesCompetitive Advantages

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1) OVERALL COST LEADERSHIP1) OVERALL COST LEADERSHIP

Continually pinpointing ways to reduce cost in order to be able to sell low.

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2) DIFFERENTIATION

Creating a product or service that is considered as unique, valuable and something for which customers will be willing to pay a premium.

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3) FOCUS or Niche

Finding a little corner in a particular industry and becoming an expert at catering to the needs within that niche.

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Industry Life-Cycle States: Strategic Implications

Life cycle of an industryIntroductionGrowthMaturityDecline

Emphasis on strategies, functional areas, value-creating activities, and overall objectives varies over the course of an industry life cycle

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Introduction Stage

Products are unfamiliar to consumersMarket segments not well definedProduct features not clearly specifiedCompetition tends to be limited

Strategies

• Develop product and get users to try it

• Generate exposure so product becomes “standard”

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Growth StageCharacterized by strong increases in salesAttractive to potential competitorsPrimary key to success is to build consumer preferences for specific brands

Strategies

• Strive for BrandBrand recognition

• Emphasize DifferentiatedDifferentiated products & premium pricing

• Target Financial resourcesTarget Financial resources to support value-chain activities

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Maturity StageAggregate industry demand slowsMarket becomes saturated, few new adoptersDirect competition becomes predominantMarginal competitors begin to exit

Strategies• Focus is on efficient manufacturing operations and process

engineering

• Attempt to keep costs low (customers become price sensitive)

• Frequently key technology no longer has patent protection and experience is not an advantage consequently competition based on price is often a forced reality.

• Important to attempt to compete on the basis of differentiationImportant to attempt to compete on the basis of differentiation

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Decline Stage

Industry sales and profits begin to fallStrategic options become dependent on the actions of rivals

Strategies

• Maintaining the status quo

• Exiting the market (dropping the product or service)

• Harvesting (squeezing as much profit as possible from the business)

• Consolidation (buy the competition)

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Turnaround Strategies in the Life Cycle

Asset and cost surgerySelective product and market pruningPiecemeal productivity improvements

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Please review Slides 18 through 33 for homework.

Very importantVery important!!

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Introducing Debate 1:Introducing Debate 1:The Pro BowlThe Pro Bowl

Presenting TeamsPresenting Teams

1 and 61 and 6!!

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The following is part of your out of class assignment. Please study the

slides carefully.

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Three Generic Strategies (cont)

McGraw-Hill/IrwinStrategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Three generic strategies to overcome the five forces and achieve competitive advantage

Overall cost leadershipLow-cost-position relative to a firm’s peersManage relationships throughout the entire value chain

DifferentiationCreate products and/or services that are unique and valuedNon-price attributes for which customers will pay a premium

Focus strategyNarrow product lines, buyer segments, or targeted geographic marketsAttain advantages either through differentiation or cost leadership

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Overall Cost Leadership


Integrated tacticsAggressive construction of efficient-scale facilitiesVigorous pursuit of cost reductions from experienceTight cost and overhead controlAvoidance of marginal customer accountsCost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and advertising

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Overall Cost Leadership (Cont.)


A firm following an overall cost leadership positionMust attain parity on the basis of differentiation relative to competitorsParity on the basis of differentiation

Permits a cost leader to translate cost advantages directly into higher profits than competitorsAllows firm to earn above-average profits

5-22Overall Cost Leadership: Improving Competitive Position vis-à-vis the Five Forces


An overall low-cost positionProtects a firm against rivalry from competitorsProtects a firm against powerful buyersProvides more flexibility to cope with demands from powerful suppliers for input cost increasesProvides substantial entry barriers from economies of scale and cost advantagesPuts the firm in a favorable position with respect to substitute products

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Pitfalls of Overall Cost Leadership Strategies


Too much focus on one or a few value-chain activitiesAll rivals share a common input or raw materialThe strategy is imitated too easilyA lack of parity on differentiationErosion of cost advantages when the pricing information available to customers increases

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Differentiation


Differentiation can take many formsPrestige or brand imageTechnologyInnovationFeaturesCustomer serviceDealer network

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Differentiation


Firms may differentiate along several dimensions at onceFirms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being uniqueSuccessful differentiation requires integration with all parts of a firm’s value chainAn important aspect of differentiation is speed or quick response

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Uniqueness that is not valuableToo much differentiationToo high a price premiumDifferentiation that is easily imitatedDilution of brand identification through product-line extensionsPerceptions of differentiation may vary between buyers and sellers

Potential Pitfalls of Differentiation Strategies

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Focus


Focus is based on the choice of a narrow competitive scope within an industry

Firm selects a segment or group of segments (niche) and tailors its strategy to serve themFirm achieves competitive advantages by dedicating itself to these segments exclusively

Two variantsCost focusDifferentiation focus

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Pitfalls of Focus Strategies


Erosion of cost advantages within the narrow segmentFocused products and services still subject to competition from new entrants and from imitationFocusers can become too focused to satisfy buyer needs

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Combination Strategies: Integrating Overall Low Cost and Differentiation


Primary benefit of successful integration of low-cost and differentiation strategies is difficulty it poses for competitors to duplicate or imitate strategyGoal of combination strategy is to provide unique value in an efficient manner

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Three Combination Approaches


Automated and flexible manufacturing systemsExploiting the profit pool concept for competitive advantageCoordinating the “extended” value chain by way of information technologyFirms that successfully integrate differentiation and cost strategies obtain advantages of competition from both approaches

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Pitfalls of Combination Strategies


Firms that fail to attain both strategies may end up with neither and become “stuck in the middle”

Underestimating the challenges and expenses associated with coordinating value-creating activities in the extended value chain

Miscalculating sources of revenue and profit pools in the firm’s industry

5-32Stages of the Industry Life Cycle


Generic strategies

Differentiation Differentiation Differentiation Overall costOverall cost leadershipleadership Focus

Market growth rate

Low Very large Low to Negativemoderate

Number of segments

Very few Some Many Few

Intensity of competition

Low Increasing Very intense Changing

Emphasis on product design

Very high High Low to Lowmoderate

StageIntroduction Growth Maturity DeclineFactor

5-33Stages of the Industry Life Cycle


Emphasis on process design

Low Low to High Lowmoderate

Major functional area(s) of concern

Research and Sales and Production GeneralDevelopment marketing management

and finance

Overall objective

Increase Create Defend Consolidate,market share consumer market share maintain, awareness demand and extend harvest, or

product life exitcycles

Stage

Factor Introduction Growth Maturity Decline

Documents

5-1 5-1 Welcome to Class Five!