Competing For Advantage

1
Competing For Advantage

• Part III Creating Competitive Advantage
• Chapter 5 Business-Level Strategy

2
The Strategic Management Process
3
Business-Level Strategy

• Key Terms
• Business-Level Strategy integrated and
  coordinated set of commitments and actions the
  firm uses to gain a competitive advantage by
  exploiting core competencies in specific product
  markets

4
Types of Business-Level Strategy
5
Features of the Five Business-Level Strategies

• Generic, can be used across industries
• Two distinct types of competitive advantage
• Low Cost
• Differentiation
• Choice of scope
• Broad
• Narrow (niche)
• Effectiveness depends upon external environment
  and internal resources and capabilities

6
Serving Customers

• Key Terms
• Market Segmentation process of clustering
  people with similar needs into individual and
  identifiable groups to determine which customer
  segments to target

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Decisions About Serving Customers

• Who (which customers) will be served Market
  segmentation
• What customer needs will be satisfied Low cost
  vs. differentiation
• How those needs will be satisfied Core
  competencies

8
Strategy and Structure

• Key Terms
• Organizational Structure specifies the firm's
  formal reporting relationships, procedures,
  controls, and authority and decision-making
  processes

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Strategy and Structure

• Key Terms (cont.)
• Simple Structure owner-manager makes all major
  decisions and monitors all activities, while
  staff acts as extension of manager's supervisory
  authority
• Functional Structure CEO and a limited
  corporate staff make all decisions, with
  functional line managers in dominant
  organizational areas
• Multidivisional Structure operating divisions
  each represent a separate business or profit
  center in which the top corporate officer
  delegates responsibilities for day-to-day
  operations and business-unit strategies to
  division managers

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Cost Leadership Strategy

• Key Terms
• Cost Leadership Strategy integrated set of
  actions designed to produce or deliver goods or
  services with features that are acceptable to
  customers at the lowest cost, relative to
  competitors

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Cost Leadership Strategy Implementation

• No-frill, standardized goods
• Continuously reduce costs of value chain
  activities

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Value-Creating Activities Associated with Cost
Leadership Strategy
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Cost Leadership Strategy and the Five Forces of
Competition

• Low-cost position is a valuable defense against
  rivals
• Powerful customers can demand reduced prices
• Costs leaders are in a position to absorb
  supplier price increases and relationship
  demands, and to force suppliers to hold down
  their prices
• Continuously improving levels of efficiency and
  cost reduction can be difficult to replicate and
  serve as significant entry barriers to potential
  competitors
• Cost leaders hold an attractive position in terms
  of product substitutes, with the flexibility to
  lower prices to retain customers

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Strategy and Organizational Structure

• Specialization
• Centralization
• Formalization

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Cost Leadership Strategy and the Functional
Structure
16
Cost Leadership Strategy and the Functional
Structure

• Simple reporting relationships
• Few decision-making and authority layers
• Centralized corporate staff
• Strong operational focus on process improvements
• Low-cost culture
• Centralized staff decision-making authority
• Jobs specialization
• Highly formalized rules and procedures

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Risks of Cost Leadership Strategy

• Processes can become obsolete
• Focus on cost reductions can come at the expense
  of understanding customer perceptions and needs
• Strategy could be imitated, requiring the firm to
  increase the value offered to retain customers

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Differentiation Strategy

• Key Terms
• Differentiation Strategy integrated set of
  actions designed by a firm to produce or deliver
  goods or services at an acceptable cost that
  customers perceive as being different in ways
  that are important to them

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Differentiation Strategy Implementation

• Target customers perceived product value
• Customized products differentiating on as many
  features as possible

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Differentiation Strategy Implementation (cont.)

• Perceived prestige and status
• Different tastes
• Engineering design
• Performance

• Unusual features
• Responsive customer service
• Rapid product innovations
• Technological leadership

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Value-Creating Activities Associated with the
Differentiation Strategy
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Differentiation Strategy and the Five Forces of
Competition

• Customer loyalty provides the most valuable
  defense against rivals
• Uniqueness products reduce customer sensitivity
  to raised prices
• High margins (for differentiated products)
  insulate from supplier influence
• Customer loyalty and product uniqueness serve as
  significant entry barriers
• Firms with customers loyal to their products are
  positioned effectively against product
  substitutes

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Differentiation Strategy and the Functional
Structure
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Differentiation Strategy and the Functional
Structure

• Complex and flexible reporting relationships
• Cross-functional product development teams
• Strong focus on marketing and product RD
• Development-oriented culture
• Decentralized decision making
• Broad job descriptions
• Informal rules and procedures

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Risks of Differentiation Strategy

• Price differential for the differentiated product
  may be perceived as too large
• Firm's means of differentiation may cease to
  provide value for which customers are willing to
  pay (successful rival imitation)
• Experience can narrow customers' perceptions of
  the value of a product's differentiated features
• Counterfeit goods might appear in the marketplace

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Focus Strategy

• Key Terms
• Focus Strategy integrated set of actions
  designed to produce or deliver goods or services
  to a narrow target consumer based on specific
  differences in the market

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Focus Strategy Market Segments

• Buyer group
• Product line segment
• Geographic market

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Focus Strategy Reasons

• Large firms may overlook small niches
• Firms may lack resources to compete in the
  broader market
• Firms may be able to serve a narrow market
  segment more effectively than larger,
  industry-wide competitors
• Firms may direct resources to certain value chain
  activities to build competitive advantage

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Focus Strategy Types

• Focused cost leadership strategy
• Focused differentiation strategy

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Value-Creating Activities Associated with the
Focus Strategy

• Focused cost leadership strategy
• Activities required to use the focused cost
  leadership strategy are identical to those shown
  in Figure 5.2 (slide 13)
• Focused differentiation strategy
• Activities required to use the focused
  differentiation strategy are identical to those
  shown in Figure 5.4 (slide 22)

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Focus Strategy and the Five Forces of Competition

• Focused cost leadership strategy
• Refer to cost leadership Five Forces Analysis
  (slide 14)
• Focused differentiation strategy
• Refer to differentiation Five Forces Analysis
  (slide 23)

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Differentiation Strategy and the Simple Structure

• A firm using a focus strategy may choose a simple
  organizational structure
• A simple structure is matched with focus
  strategies when a firm offers a single product
  line in a single geographic market
• Refer to Figure 5.3 (slide 16)

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Differentiation Strategy and the Simple Structure

• A firm using a focus strategy may choose a
  functional organizational structure
• As a business grows and expands, a functional
  structure is required
• Depending on its focused cost leadership or
  focused differentiation strategy, the functional
  structures presented in Figures 5.3 and 5.5 apply
• Refer to Figure 5.5 (slide 24)

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Risks of Differentiation Strategy

• A competitor may be able to focus on a more
  narrowly defined competitive segment and
  "outfocus the focuser
• A company competing on an industry-wide basis may
  decide that the market segment served by the
  focus strategy firm is attractive and worthy of
  competitive pursuit
• The needs of customers within a narrow
  competitive segment may become more similar to
  those of industry-wide customers as a whole

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Integrated Cost Leadership/Differentiation
Strategy

• Key Terms
• Integrated Cost Leadership/ Differentiation
  Strategy integrated set of actions designed by
  a firm to produce or deliver goods or services at
  an acceptable cost that customers perceive as
  being different in ways that are important to
  them

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Integrated Strategy Advantages

• Improved speed of adapting to environmental
  changes
• Improved speed of learning new skills and
  technologies
• Improved leverage of core competencies while
  competing against rivals

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Integrated Strategy Implementation Benefits

• Evidence suggests a relationship between use of
  an integrated strategy and achieving
  above-average returns
• Businesses that combine multiple forms of
  competitive advantage in low-profit-potential
  industries are shown to outperform businesses
  that compete with a single form

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Value-Creating Activities Associated with the
Integrated Strategy

• Integrating cost leadership and differentiation
  strategies (which emphasize different primary
  and support activities) requires a balance when
  selecting the activities to perform
• A flexible organizational structure is required

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Integrated Strategy and the Flexible Structure

• Commitment to strategic flexibility
• Flexible decision-making patterns, with partial
  centralization
• Less specialized jobs than in a traditional
  functional structureworkers are more sensitive
  to balancing cost and differentiation
• Modular structures to produce modular goods
  create differentiation and simultaneously hold
  down costs

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Balancing Mixed Objectives

• Flexible manufacturing systems
• Information networks
• Total Quality Management (TQM) systems

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Risks of Integrated Strategy

• Failure to establish a leadership position can
  result in a firm being "stuck in the middle,"
  unable to create value, and unable to earn
  above-average returns

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Ethical Questions

• Can a commitment to ethical conduct on issues
  such as the environment, product quality, and
  fulfilling contractual agreements affect a firms
  competitive advantage? If so, how?

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Ethical Questions

• Is there more incentive for differentiators or
  for cost leaders to pursue stronger ethical
  conduct?

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Ethical Questions

• Can an overemphasis on cost leadership or
  differentiation lead to ethical challenges?

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Ethical Questions

• A brand image can help differentiate goods or
  services. However, concerns exist about the
  effect of brand images on consumer behavior (for
  example, the effects of brand images managed by
  tobacco firms on teenage smoking). Should firms
  be concerned about how they form and use brand
  images? Why or why not?

46
Ethical Questions

• To what extent should a manager be concerned
  about the accuracy of the firms claims about its
  products in its advertisements?