Copyright © 2004 South-Western. All rights reserved.4–1 Tuesday, February 7, 2006 Review - - strategic management process - I/O and resource-based perspectives

Copyright © 2004 South-Western. All rights reserved. 4–1

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


Chapter 4: Business-Level Strategy

• Strategy

• 5 “generic business-level strategies”

-characteristics

-how to develop

-advantages and disadvantages

• “Stuck-in-the-middle”


Figure 1.1Figure 1.1

Copyright © 2004 South-Western. All rights reserved.

The Strategic

Management Process


Generalized Corporate Structure

P ep si-C o la F r ito -L ay T rop icana

P e ps iC o


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


“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


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


Five Business-Level Strategies

Figure 4.1Figure 4.1

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.


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


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


Ideas for Cost Reduction

Primary Value

Chain Activities

•

•

•

•

Support Activities in the Value Chain

•

•

•

•


How to Obtain a Cost Advantage

Cost DriversCost Drivers Value ChainValue Chain

Determine and control

Reconfigure, if needed

Alter production processAlter production process

Change in automationChange in automation

New distribution channelNew distribution channel

New advertising mediaNew advertising media Outsource or omit some Outsource or omit some

value chain activitiesvalue chain activities

New raw materialNew raw material

Forward integrationForward integration

Backward integrationBackward integration Change location relative Change location relative

to suppliers or buyersto suppliers or buyers JIT - suppliers bear costsJIT - suppliers bear costs


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


Main Advantages of Cost Leadership

• Scale economies

• Efficiency

• Market power

• Ability to attract price sensitive customers

• Ability to withstand price wars


Cost Leadership Strategy

• Competitive Risks

sunk costs

obsolescence

image

internally focused attention

efficiency might dominate effectiveness


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


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


“Relevant sources of valued uniqueness” =

Primary Value

Chain Activities

•

•

•

•

Support Activities of the Value Chain

•

•

•

•


How to Obtain a Differentiation Advantage

Cost DriversCost Drivers Value ChainValue Chain

Control if needed Reconfigure to maximize

Lower buyers’ (maybe non-monetary) costsLower buyers’ (maybe non-monetary) costs

Raise performance of product or serviceRaise performance of product or service

Create sustainability through:Create sustainability through:

Customer perceptions of uniquenessCustomer perceptions of uniqueness Customer reluctance to switch to non-Customer reluctance to switch to non-

unique product or serviceunique product or service


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”


Primary Advantages of Differentiation

• Ability to charge a price premium

• Customer loyalty

• Insulation from pure price competition

• Image


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


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


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.


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?


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!


Risks of the Integrated Cost Leadership/ Differentiation Strategy

• Often involves compromisesBecoming 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


Functional Skill Comparisons

Cost Leadership• efficiency• standardization• mass production• process improvement• reduced service• tight org’l control• stability• cost accounting

Differentiation• effectiveness• customization• shorter production runs• product development• enhanced service• org’l slack is needed• flexibility• marketing


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


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!

Documents

Copyright © 2004 South-Western. All rights reserved.4–1 Tuesday, February 7, 2006 Review - - strategic management process - I/O and resource-based perspectives