Business Level Strategy Chapter 5

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Business Level StrategyChapter 5
Mr Jeff Stambaugh jeff.stambaugh_at_ttu.edu http//ta
.ba.ttu.edu/jstambaugh
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
2
Todays Objectives

• Understand business level strategy
• Understand the generic business level strategies
• Uses
• Risks
• Understand how the internet and industry life
  cycle affect the above

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
3
Understanding the Customer

• How many of you consider yourself brand
  conscious?
• What are some of the brands you are loyal to?
• Why?
• How many of you consider yourself very price
  conscious?
• Are you loyal to any companies based on your
  price consciousness?

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
4
The Beginning of a Strategy

• Who are our customers?
• What needs are we going to meet?
• How will we meet them?
• And how will be do the above better than any of
  our current or future competitors what is our
  competitive advantage?

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
5
Fundamental Questions

• How am we going to create value for our customer
  (or less noblehow are we going to motivate them
  to buy our product / service?)
• By being the cheapest?
• By offering the most desirable features /
  services?
• By serving a niche market?
• By melding low cost and some unique features?
• And how do my competitive advantages play into
  this?

Business-level strategy decisions that describes
how firm will compete in its chosen industry /
market segment
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
6
Generic Strategies

• Cost Leadership
• Differentiation
• Focus

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
7
Overall Cost Leadership

• Comparable (decent) product that you can produce
  cheaper than competitors by .
• Scale-efficient operations
• Cost reductions from experience
• Overall cost control
• Avoid marginal accounts
• Squeeze value chain
• Lower costs same price to consumer higher
  profits (or increased margins higher profits)

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
8
Overall Cost Leadership
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
9
Benefits / Risks of Cost Leadership

• Strong position in Porters Five Forces (p.
  161)
• Volume and price sensitivity are assets
• Whats hard to imitate about this?
• All cost, no customer?

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
10
Differentiation

• Bases for differentiation
• Prestige
• Product features
• Service

Competitive advantage comes when people pay more
for it than it costs you to provide it
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
11
Differentiation
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
12
Benefits / Risks of Differentiation

• Customer loyalty creates
• Barriers to entry
• Switching costs
• Higher margins more flex
• What if customer doesnt perceive the product as
  special
• Wrong differentiation --- features
• Price too high
• Easily imitated

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
13
Focus Strategies

• Geographic
• Demographic
• Income scale (both high and low)
• Unique product requirements
• Risks
• Competitor may out-focus you
• Your niche evaporates
• You over-focus

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
14
Combination Strategy(Integrated Cost and
Differentiation)

• Efficiently provide unique value (hit the
  mid-spectrum)
• Tougher to imitate
• Mass customization
• Pick your point in the profit pool (the 20-80
  rule)
• E-linking value chains

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
15
Risks of Combination Strategy

• You are nothing to everyone
• Stuck in the Middle
• Cant execute (cost reductions arent there or
  cant build loyalty)

Combination strategy is usually the most
difficult to execute because it is a balancing act
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
16
How Well Do They Work?
Competitive Advantage
Differentiation and Cost
Differentiation Focus
Cost Focus
Stuck in the Middle

Differentiation
Cost
Performance
Return on investment () 35.5 32.9 30.2 17.0 23.7
17.8
Sales Growth () 15.1 13.5 13.5 16.4 17.5 12.2
Gain in Market Share () 5.3 5.3 5.5 6.1 6.3 4.4
Sample Size 123 160 100 141 86 105
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
17
What hath the internet wrought?

• Made it easier to cut costs (bidding, paperless,
  more automated services)
• Made niche markets more viable (mass
  customization)
• Customers have more info

Consensus sustainable competitive advantanges
harder to come by in internet era
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
18
Blue Oceans

• Move into new (uncontested) market space by
• Create / Capture New Demand
• Defy the cost-value tradeoffs (low cost-high
  value)
• By
• Eliminating value-less TFG factors
• Raising some factors, lowering others (Reverse
  positioning)
• Creating new, valued factors
• Attracting new customers to the industry
  (Breakaway positioning)

Lower price /higher value to tap into untouched
mass market
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
19
Industry Life Cycle
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
20
Life Cycle Strategies
Stage
Introduction Growth Maturity Decline
Factor
Generic strategies
Differentiation Differentiation Diff / Cost
Cost Ldr Ldr
Market growth rate
Low Very large Low to Negative moderate
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 Low moderate
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
21
Life Cycle Strategies
Stage
Introduction Growth Maturity Decline
Factor
Emphasis on process design
Low Low to High Low moderate
Major functional area(s) of concern
Research and Sales and Production General Developm
ent marketing management and finance
Overall objective
Increase Create Defend Consolidate, market
share consumer market share maintain,
awareness demand and extend harvest, or product
life exit cycles
The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
22
Critique

• Life Cycle is not inevitable
• Sustaining and disrupting innovations
• Mature stage strategies
• Maintaining
• Harvesting
• Exiting
• Consolidation
• Turnaround strategies
• Prune assets (cash), products (get back to
  basics), costs (put it on a diet)

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
23
Summary

• Step One is to figure out how you want to add
  value for the customer
• Generic strategies Combination Blue Ocean
• Beware the Cycle

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005
24
Next Class

• Simulation practice run one laptop per group
  (minimum)!
• Recommend you play with decisions and focus on
  one region
• Decisions due 7 PM Wed night
• CYa

The purpose of business is to create and keep a
customer Drucker
Built by Stambaugh/2005