Business-Level Strategy

1. Business-Level Strategy Professor: Jade Lo

2. Plan for Today: • HIH Chapter 4: Business-Level Strategy • Defining business-level strategy • Relationship between customers and strategy in terms of who, what, and how. • Identify different business-level strategies • Positioning and 5-Forces • Risks of different business-level strategies

3. Quick Review • Corporate vs. Business-level strategy: • Corporate: deciding which market(s) to compete in • Business: deciding how to compete in a specific market • Regardless of the levels of strategy, strategic choices are jointly dictated by external environments (general, industry, competitors) and internal organization (firm specific resources and capabilities).

4. Group Discussion • Please consider each of the following businesses. • Costco • Harley Davidson • Redbox • (1) What are the success factors of each?E.g. is it because that they are participating in the “right” industry, or because of their superior resources and capabilities, or else? • (2) Who are the target customers? What are the needs of these customers? How do they satisfy these needs?

5. The right Game? or right position?

6. Who? What? How?

7. Central Questions Concerning Business-level Strategies • These examples reveal the importance of positioning. Business-level strategy is about positioning in a market/ industry. • The fundamental question: “how do we position ourselves, relative to our competitors?” • To answer this question, a firm has to determine the who, what and how…

8. CUSTOMERS: THEIR RELATIONSHIP TO BUSINESS-LEVEL STRATEGIES How will those needs be satisfied? What needs will be satisfied? Who will be served? KEY ISSUESinBUSINESS- LEVEL STRATEGY

9. Central Questions Concerning Business-level Strategies • Who to serve • Dividing potential customers into different groups based on their needs (a process called market segmentation), and decide which cluster(s) to serve. • What needs to be satisfied • Identifying the targeted customer groups’ needs. • Howto satisfy those needs • Determining how to exploit core competencies to satisfy customers’ needs, i.e., implementing value-creating activities.

10. Purpose of Business-Level Strategies • Purpose: To create differencesbetween position of a firm and its competitors. • Firms must make deliberate choices to • Perform activities differently, or… • Perform different activities, so they can… • Create value!

11. Types of Business-Level Strategy • Two types of competitive advantage firms have to choose between: • Low Cost (Are we doing things differently so we have lower costs than others?) • Uniqueness/ differentiation (Are we doing different things from others?) • Two types of competitive scope firms have to choose between: • Broad target (serving customers on an industry-wide basis) • Narrow/ focused target (selected market segments by geographic area, type of customer, or segment of product line )

12. The two Main Generic Strategies Cost Leadership Differentiation • Provide low cost at an acceptable quality. • Serving the most “typical” costumer segments. • Provide unique features at an acceptable cost. • Targeting costumers who appreciate distinct product/ service features. • Perceived difference matters more than actual difference!

13. The Two Types of Competitive Scope Broad Focused • Covering an industry-wide costumer basis • Finding the “niche” by: • A particular buyer group, • a unique segment of a product line, or • a particular geographic market.

14. These combine to yield 5 different business-level strategies…

15. Five Generic Strategies Wal*Mart Competitive Advantage Cost Uniqueness Starbucks Cost Leadership Differentiation Broad target Redbox Integrated Cost Leadership/ Differentiation Competitive Scope Harley Davidson Narrow target Costco Focused Cost Leadership Focused Differentiation

16. Five Generic Strategies Which one is the best? Competitive Advantage Cost Uniqueness Cost Leadership Differentiation Broad target Integrated Cost Leadership/ Differentiation Competitive Scope Narrow target Focused Cost Leadership Focused Differentiation

17. BUSINESS-LEVEL STRATEGY EFFECTIVENESS • None of the five business-level strategies is inherently or universally superior to the others • The effectiveness of each strategy is contingent upon: • External opportunities/threats • Internal strengths/weaknesses • KEY: A successful business-level strategy must match external opportunities/threats with internal strengths, i.e., its core competencies

18. How to make the game work for you…?

19. Cost Leadership: Neutralizing the 5 Forces By lowering cost structure, a cost leader may… gain high market share. raises entry barrier. enjoy higher margin than competitors.

20. Differentiation: Neutralizing the 5 Forces By creating perceived difference, a differentiator may… command premium price (higher margin than competitors). achieve prestige or exclusivity. raise entry barrier. .

21. How to Obtain a Cost Advantage Reconfigure if needed Control to minimize Cost Drivers Value Chain • New sources or different types of raw material • Simplifying production process • Forward integration • Backward integration • New distribution channel • Location selection/ change • New marketing policy/ media

22. How to Obtain a Differentiation Advantage Reconfigure to maximize Control if needed Cost Drivers Value Chain • Lower buyers’ “perceived” costs • Raise performance of product or service • Create sustainability through: customer perceptions of uniqueness customer reluctance to switch to non-unique product

23. The Importance of Fit • “Strategic fit among many activities is fundamental not only to competitive advantage, but also to the sustainability of that advantage. It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular salesforce approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities.” ~~Michael Porter

24. Think about HD’s Turnaround Story… • Is it just about marketing? • Advertisement? • Design? • Customer relationship? • What is it to make it successful?

25. No baggage transfers No meals Limited passenger amenities No seat assignments No connections with other airlines Frequent, reliable departures Short-haul, point-to-point routes between midsize cities and secondary airports Limited use of travel agents 15-minute gate turnarounds Standardized fleet of 737 aircraft Automatic ticketing machines Lean, highly productive ground and gate crews Very low ticket prices High compensation of employees High aircraft utilization “Southwest, the low-fare airline” Flexible union contracts High level of employee stock ownership Southwest Airlines’ Activity System: Fit between Activities and Strategic Themes

26. The Art of Balance • Each of these strategies has its pitfall and potential risks… • Cost leadership: • Vulnerable if competitors achieve lower costs (K-Mart); sacrificing quality too much (Yugo: You go, but it doesn’t.) • Differentiation: • Too unique that few appreciates; different but not valuable; price gap too large (brand names vs. private labels) • Focused cost leadership and/or differentiation: • Targeted segment shrinks; being “out-focused” by competitors (Harley vs. Confederate); niche taken by larger, resourceful generalists • Integrated cost leadership/ differentiation: • Stuck in the middle • Achieving strategic balance by maintaining parity on the alternative dimension • “Differentiation parity” for cost leaders • “Cost parity” for even the most unique products

27. Take-away Messages: • Fundamental question: How should we position ourselves, relative to our competitors? The right position is a product of tightly integrated activities across the organization • None of the five business-level strategies is inherently or universally superior. • Rule of thumb: selecting a business-level strategy that is based on a match between the opportunities and threats in a firm’s external environment and the strengths of its internal environment as shown by its core competencies. • Because of the inherent trade-off between different types of generic strategies, it is hard to master all, but a firm should aim to achieve some strategic balance.

28. YOGO Made Time’s List…

29. Market Share-Profitability Relationship:(Porter’s Bucket) High Low Cost Leadership Strategies Differentiation-based Strategies Profitability Stuck-in-the-Middle Low Low High Market Share (Quantity)